SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended August 27, 2005
Commission File Number 0-6365
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (952) 835-1874
Common Stock $0.33 1/3 Par Value
(Title of each class)
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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of September 30, 2005, 27,883,000 shares of the Registrant’s common stock, par value $0.33 1/3 per share, were outstanding.
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
2
PART I. FINANCIAL INFORMATION
C O N S O L I D A T E D B A L A N C E S H E E T S
(In thousands, except per share data)
Assets
Current assets
Cash and cash equivalents
Receivables, net of allowance for doubtful accounts
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Marketable securities available for sale
Investments in affiliated companies
Assets of discontinued operations
Goodwill
Intangible assets, net of accumulated amortization of $2,245 and $1,583, respectively
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Accrued payroll and related benefits
Accrued self-insurance reserves
Other accrued expenses
Current liabilities of discontinued operations
Billings in excess of costs and earnings on uncompleted contracts
Accrued income taxes
Current installments of long-term debt
Total current liabilities
Long-term debt, less current installments
Long-term self-insurance reserves
Other long-term liabilities
Liabilities of discontinued operations
Commitments and contingent liabilities (Note 13)
Shareholders’ equity
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 27,869,000 and 27,329,000, respectively
Additional paid-in capital
Retained earnings
Common stock held in trust
Deferred compensation obligations
Unearned compensation
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
3
C O N S O L I D A T E D R E S U L T S O F O P E R A T I O N S
(unaudited)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest income
Interest expense
Other income (expense), net
Equity in earnings (loss) of affiliated companies
Earnings from continuing operations before income taxes
Income tax expense
Earnings from continuing operations
Earnings from discontinued operations, net of income taxes
Net earnings
Earnings per share – basic
Earnings from discontinued operations
Earnings per share – diluted
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
Cash dividends declared per common share
4
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
(In thousands)
Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net earnings from discontinued operations
Depreciation and amortization
Deferred income taxes
Equity in (earnings) loss of affiliated companies
Gain on disposal of assets
Other, net
Changes in operating assets and liabilities:
Receivables
Accounts payable and accrued expenses
Refundable and accrued income taxes
Net cash provided by operating activities
Investing Activities
Capital expenditures and acquisition of intangible assets
Proceeds from sales of property, plant and equipment
Investments in equity investments
Purchases of marketable securities
Sales/maturities of marketable securities
Net cash used in investing activities
Financing Activities
Net proceeds from revolving credit agreement
Payments on long-term debt
Payments on debt issue costs
Proceeds from issuance of common stock and exercise of stock options
Repurchase and retirement of common stock
Dividends paid
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
5
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
The consolidated financial statements of Apogee Enterprises, Inc. (the Company) included herein have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements and notes are presented as permitted by the regulations of the Securities and Exchange Commission (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 February 26, 2005. The results of operations for the three and six-month periods ended August 27, 2005 and August 28, 2004 are not necessarily indicative of the results to be expected for the full year.
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 August 27, 2005 and February 26, 2005, and the results of operations for the three and six-month periods ended August 27, 2005 and August 28, 2004 and results of cash flows for six-month periods ended August 27, 2005 and August 28, 2004. Certain prior-year amounts have been reclassified to conform to the current period presentation.
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.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Inventory Pricing. SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. The statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This new standard will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the accounting change will have an effect on its financial position and results of operations.
During December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first fiscal year beginning after June 15, 2005 (as delayed by the Securities and Exchange Commission), with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, a determination must be made regarding the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. SFAS No. 123R permits a prospective or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123. The adoption of SFAS No. 123R is required in the first quarter of fiscal 2007, at which time the Company will begin recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. Under the retrospective options, prior periods may be restated either as of the beginning of the year of adoption, February 26, 2006, or for all periods presented. We have not yet finalized our decision concerning the transition option we will utilize to adopt SFAS No. 123R. The Company has evaluated the requirements of SFAS No. 123R and expects the adoption of SFAS No. 123R to have a negative impact on our annual earnings of approximately $0.05 to $0.07 per share in fiscal 2007.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the Company accounts for activity within its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, the Company does not recognize compensation expense in connection with employee stock option grants because it grants stock options at exercise prices not less than the fair value of its common stock on the date of grant.
6
The following table shows the effect of net earnings and per share data had the Company applied the fair value expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
As reported
Compensation expense, net of income taxes
Pro forma
Weighted average common shares outstanding
Basic
Diluted
The weighted average fair value per option at the date of grant for options granted in fiscal 2006 and fiscal 2005 were $7.11 and $4.99, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants through the second quarter of fiscal 2006 and 2005, respectively.
Dividend yield
Expected volatility
Risk-free interest rate
Expected lives
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share.
Basic earnings per share – weighted common shares outstanding
Weighted common shares assumed upon exercise of stock options
Unvested shares held in trust for deferred compensation plans
Diluted earnings per share – weighted common shares and potential common shares outstanding
There were approximately 375,000 and 1,685,000 stock options excluded in the second quarter of fiscal 2006 and 2005, respectively, from the computation of diluted earnings per share due to their anti-dilutive effect.
7
Raw materials
Work-in-process
Finished goods
Costs and earnings in excess of billings on uncompleted contracts
Total inventories
In fiscal 2001, 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. The Company’s investment in PPG Auto Glass was $16.5 million and $15.1 million at August 27, 2005 and February 26, 2005, respectively. At August 27, 2005 and February 26, 2005, the 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 excess is reported as goodwill.
In connection with the formation of PPG Auto Glass, the Company agreed to a supply agreement to supply the joint venture, through PPG, with most of the Company’s windshield fabrication capacity at agreed upon terms and conditions. The Company’s windshield supply agreement with PPG expired in July 2005 during the Company’s quarter ended August 27, 2005. The Company has transitioned the markets served by its Auto Glass segment to focus on selling to aftermarket manufacturers following the end of its long-term supply agreement with PPG Industries in Q2 Fiscal 2006.
In addition to the above investment, the Company has other equity-method investments totaling $0.4 million.
On December 10, 2004, the Architectural segment completed the asset purchase of Architectural Wall Solutions, Inc. (AWallS) as part of the Company’s strategy to strengthen and grow its architectural installation business. The results of AWallS’ operations have been included in the consolidated financial statements since the acquisition date.
The acquisition cost for this business was $8.2 million, net of cash acquired of $0.9 million. Of the $4.1 million in intangible assets acquired, $2.5 million and $1.6 million were assigned to customer relationships and non-compete agreements, respectively, based on preliminary valuations. As a result of finalizing the valuations of net assets acquired, an adjustment of $0.2 million was made to increase the value of the customer relationships during the first quarter of fiscal 2006. The amortization periods of ten years and five years, respectively, match the useful lives of the customer relationships and non-compete agreements. The resulting goodwill is fully tax deductible. Of this transaction, $1.4 million of payments relating to the non-compete agreements still remain and are payable through fiscal 2009. These non-compete agreements are with the previous owners of AWallS, two of whom are current employees of the Company. Additionally, the purchase price includes an earn-out provision contingent on execution of the acquired backlog at the end of a two-year period and, if required, will be recorded as an adjustment to goodwill at that time.
This transaction was accounted for by the purchase method. Accordingly, the consolidated financial statements include the net assets and results of operations of the acquired businesses from their dates of acquisition.
8
The following consolidated condensed pro forma financial results of operations for the three and six-month periods of fiscal 2006 and 2005 have been prepared for comparative purposes.
Income from continuing operations
Net income
Earnings per share – continuing operations
The pro forma results for fiscal 2005 include certain adjustments, such as increased interest expense on acquisition debt and amortization on the resulting intangible assets and are presented as if the acquisition had been completed at the beginning of the period. They do not reflect the effect of synergies that would have been expected to result from the integration of this acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of fiscal 2005, or of future results of the consolidated entities.
The change in the carrying amount of goodwill, net of accumulated amortization, attributable to each business segment for the six months ended August 27, 2005 was as follows:
Balance at February 26, 2005
Adjustment
Balance at August 27, 2005
The reduction of goodwill reported by the Architectural segment relates to the adjustment of the valuation of the net assets acquired through the purchase of AWallS in the fourth quarter of fiscal 2005. “Corporate and Other” includes the excess of the cost of the investment over the value of the underlying net tangible assets related to the formation of the PPG Auto Glass joint venture.
During the second quarter of fiscal 2006, the Company acquired intellectual property in the form of patents, trademarks and copyrights related to a Large-Scale Optical Technologies (LSO) production process for $0.5 million. The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and are detailed below.
Debt issue costs
Non-compete agreements
Customer relationships
Intellectual property
Total
Amortization expense on these identifiable intangible assets was $0.7 million and $0.2 million for the six months ended August 27, 2005 and August 28, 2004, respectively. At August 27, 2005, the estimated future amortization expense for identifiable intangible assets for the remainder of fiscal 2006 and all of the following four fiscal years is as follows:
Estimated amortization expense
9
During the first quarter of fiscal 2006, the Company initiated a realignment of its window and curtainwall manufacturing operation to better serve the architectural glass products market. The Company incurred severance costs of $0.2 million and $0.6 million during the first and second quarters of fiscal 2006, respectively. The costs incurred to date are included in “Selling, general and administrative expenses” in the Consolidated Results of Operations. The Company does not anticipate any additional costs to be incurred relating to the realignment.
During the first quarter of fiscal 2006, the Company entered into a five-year, unsecured, revolving credit facility, which expires in May 2010 (the Company’s fiscal 2011) in the amount of $100.0 million, with a $75.0 million optional expansion feature. Borrowings of $30.6 million were outstanding as of August 27, 2005. The credit facility requires the Company to maintain a minimum level of net worth based on certain quarterly financial calculations. The minimum net worth calculation at August 27, 2005 was $150.1 million, whereby the Company’s actual net worth computed in accordance with the credit agreement terms was $187.9 million. The credit facility also contains a maximum debt-to-cash flow ratio that is computed daily, based on a rolling twelve-month basis, of less than or equal to 2.75; the Company’s ratio was 0.78 at August 27, 2005. If the Company is not in compliance with either of these ratios, the lender may terminate the commitment and/or declare any loan then outstanding to be immediately due and payable. At August 27, 2005, the Company was in compliance with the financial covenants of the credit facility. This credit facility replaces the Company’s four-year, unsecured, revolving credit facility in the amount of $125.0 million, of which $26.8 million of borrowings were outstanding as of February 26, 2005. The remaining balance of our debt consists primarily of $8.4 million in certain industrial development bonds.
Components of net periodic benefit cost for the Company’s Officers’ Supplemental Executive Retirement Plan (SERP) for the three and six-month periods of fiscal 2006 and 2005 are as follows:
Service cost
Interest cost
Amortization of prior-year service cost
Net periodic benefit cost
On January 2, 2004, the Company completed the cash sale of Harmon AutoGlass, with the selling price subject to a final working capital adjustment. The working capital adjustment was finalized during the second quarter of fiscal 2005, with no effect to the operating results of the Company. During fiscal 2005 and into the first half of fiscal 2006, 16 of the 17 properties that had not been sold with the business and which remained as assets held for sale were sold for net proceeds of $0.2 million and $3.3 million during fiscal 2006 and fiscal 2005, respectively. Estimated reserves have been established for committed future cash flows related to the remaining exit costs and are recorded as liabilities of discontinued operations.
In several transactions in fiscal years 1998 through 2000, the Company completed the sale of its large-scale domestic curtainwall business, the sale of the Company’s detention/security business and its exit from international curtainwall operations. The remaining cash expenditures related to these discontinued operations are recorded as liabilities of discontinued operations and a majority of the remaining cash expenditures related to discontinued operations is expected to be paid within the next three years. The majority of these liabilities relates to the international curtainwall operations, including performance bonds outstanding, 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. The reserve for discontinued operations also covers other liability issues, consisting of warranty issues relating to these and other international construction projects.
10
Condensed Statement of Operations from Discontinued Businesses
Earnings before income taxes
Summary Balance Sheets of Discontinued Businesses
Accounts payable and accrued liabilities
Long-term liabilities
Operating lease commitments. As of August 27, 2005, the Company was obligated under noncancelable operating leases for buildings and equipment. Certain leases provide for increased rentals based upon increases in real estate taxes or operating costs. Future minimum rental payments under noncancelable operating leases are:
Total minimum payments
Bond commitments. In the ordinary course of business, predominantly in our installation business, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of projects that are in process and in our backlog. At August 27, 2005, these bonds totaled $71.4 million. With respect to our current portfolio of businesses, we have never been required to pay on these performance-based bonds.
Guarantees and warranties. The Company accrues for known warranty exposures and claim costs as well as on a percentage of sales based on historical trends. Actual warranty and claim costs are deducted from the accrual when incurred. The Company’s warranty and claim accruals are detailed below.
Balance at beginning of period
Additional accruals
Claims paid
Balance at end of period
Letters of credit. At August 27, 2005, 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 August 27, 2005 was approximately $14.7 million, of which $8.4 million is issued and has reduced our total availability of funds under our $100.0 million credit facility.
Purchase obligations. The Company has purchase obligations for capital related to expansion and upgrades of its Owatonna, MN and Statesboro, GA facilities, as well as a long-term freight commitment. As of August 27, 2005, these obligations totaled $5.5 million.
Non-compete agreements. The Company has entered into a number of non-compete and consulting agreements associated with current and former employees. As of August 27, 2005, future payments of $1.4 million were committed under such agreements.
11
Litigation. 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. The Company has also been subject to litigation arising out of employment practices, workers compensation, general liability and automobile claims. Although it is very difficult to accurately 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 of the Company.
Unrealized gain on derivatives, net of $67, $92, $98 and $334 tax expense, respectively
Unrealized (loss) gain on marketable securities, net of $(14), $104, $24 and $(50) tax (benefit) expense, respectively
Comprehensive earnings
The following table presents sales and operating income data for our three segments, and consolidated, for the three and six months ended August 27, 2005, when compared to the corresponding periods a year ago.
Net Sales
Architectural
Large-Scale Optical
Auto Glass
Intersegment Eliminations
Operating Income (Loss)
Corporate and Other
Operating Income
Due to the varying combinations of individual window systems and curtainwall, the Company has determined that it is impractical to report product and service revenues generated by the Architectural segment by class of product, beyond the segment revenues currently reported.
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 results, based on current information available pertaining to the Company, including the risk factors noted below. 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 Company. Any or all
12
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 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: Operational risks within (A) the Architectural segment: i) competitive, price-sensitive and changing market conditions, including unforeseen delays in project timing and work flow; ii) economic conditions and the cyclical nature of the North American commercial construction industry; iii) product performance, reliability or quality problems that could delay payments, increase costs, impact orders or lead to litigation; iv) the segment’s ability to fully utilize production capacity; v) integration of the AWallS acquisition in a timely and cost-efficient manner; and vi) production ramp-up of the Viracon capacity expansion in Georgia in a timely and cost-efficient manner, and vii) construction and ramp-up to full production of the announced third Viracon plant in a timely and cost-efficient manner; (B) the Large-Scale Optical segment: i) markets that are impacted by consumer confidence; ii) dependence on a relatively small number of customers; and iii) ability to utilize manufacturing facilities; and (C) the Auto Glass segment: i) transition of markets served as Viracon/Curvlite focuses on selling to aftermarket manufacturers following the end of its long-term supply agreement with PPG Industries in Q2 Fiscal 2006; ii) changes in market dynamics; iii) market seasonality; iv) highly competitive, fairly mature industry; and v) performance of the PPG Auto Glass, LLC joint venture. Additional factors include: i) revenue and operating results that are volatile; ii) the possibility of a material product liability event; iii) the costs of compliance with governmental regulations relating to hazardous substances; iv) management of discontinued operations exiting activities; and v) foreign currency risk related to discontinued operations. The Company cautions readers that actual future results could differ materially from those described in the forward-looking statements. For a more detailed explanation of the foregoing and other risks and uncertainties, see the cautionary statement filed as Exhibit 99 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 26, 2005.
The Company wishes 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. The Company undertakes 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 leader in technologies involving the design and development of value-added glass products, services and systems. The Company is organized in three segments: Architectural Products and Services (Architectural), Large-Scale Optical (LSO) and Automotive Replacement Glass and Services (Auto Glass). Our Architectural segment companies design, engineer, fabricate, install, maintain and renovate the walls of glass and windows primarily comprising the outside skin of commercial and institutional buildings. Businesses in this segment are: Viracon, a leading fabricator of coated, high-performance architectural glass for global markets; Harmon, Inc., one of the largest U.S. full-service building glass installation, maintenance and renovation companies; Wausau Window and Wall Systems, a manufacturer of custom aluminum window systems and curtainwall; and Linetec, a paint and anodizing finisher of architectural aluminum and PVC shutters. Our LSO segment consists of Tru Vue, a value-added glass and acrylic manufacturer for the custom framing and pre-framed art markets, and a producer of optical thin film coatings for consumer electronics displays. This segment also provides wall décor, including framed art and mirrors. Our Auto Glass segment consists of Viracon/Curvlite, a U.S. fabricator of aftermarket foreign and domestic car windshields and recreational and bus windshields.
The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended February 26, 2005 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
13
Sales and Earnings
The relationship between various components of operations, stated as a percent of net sales, is illustrated below for the three and six-month periods of the current and past fiscal year.
(Percent of net sales)
Equity in income (loss) of affiliated companies
Effective income tax rate for continuing operations
Highlights of Second Quarter and the First Six Months of Fiscal 2006 Compared to Second Quarter and the First Six Months of Fiscal 2005
14
Segment Analysis
The following table presents sales and operating income data for our three segments and on a consolidated basis for the three and six-month periods ended August 27, 2005, when compared to the corresponding periods a year ago.
NM = Not Meaningful
Architectural Products and Services (Architectural)
15
Large-Scale Optical Technologies (LSO)
Automotive Replacement Glass and Services (Auto Glass)
Consolidated Backlog
Liquidity and Capital Resources
(Cash effect, in thousands)
Capital expenditures and acquisitions of intangible assets
Net increase in borrowings
Operating activities. Cash provided by operating activities was $10.7 million for the first six months of fiscal 2006, as compared to $9.8 million in the prior-year period. The most significant item that contributed to the improvement from the prior-year period was the improvement in net earnings of $2.0 million. Non-cash working capital (current assets less cash and cash equivalents, less current liabilities) increased $6.5 million compared to year-end, primarily due to payments made against payroll-related accruals and increased accounts receivable as a result of increased sales.
Investing Activities. Through the six months of fiscal 2006, investing activities used cash of $12.7 million, compared to $10.9 million in the same period last year, primarily as a result of increased capital expenditures. New capital investment through the six months of fiscal 2006 totaled $12.8 million, which includes spending for our architectural glass capacity expansion in Statesboro, GA. This compares to $10.5 million in the prior-year period.
16
In fiscal 2006, the Company expects to incur capital expenditures to complete the expansion of our Statesboro, GA plant and other architectural glass upgrades, costs as necessary to maintain existing facilities, safety and information systems, as well as some capacity improvements within the LSO segment. On September 13, 2005, the Company announced plans for a new architectural glass plant which is expected to be operational in fiscal 2008 and is expected to cost approximately $25 million, of which, $5 million is expected to be incurred during fiscal 2006. Total capital expenditures for fiscal 2006 are expected to be approximately $30.0 million. This amount does not include any acquisitions.
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, further invest in, fully divest and/or sell parts of our current businesses.
Financing Activities. Total outstanding borrowings increased to $39.0 million at August 27, 2005 from the $35.3 million outstanding at February 26, 2005, due to the timing of capital investments and seasonal working capital changes. The majority of our long-term debt, $30.6 million, consisted of bank borrowings under our new $100.0 million syndicated revolving credit facility. We paid $3.5 million in dividends for the current year and $3.3 million in the prior-year six-month period. Our debt-to-total-capital ratio was 17.2 percent at August 27, 2005, up from 16.5 percent at February 26, 2005.
During fiscal 2004, the Board of Directors authorized a share repurchase program of 1,500,000 shares of Common Stock in the open market at prevailing market prices. The Company has repurchased 285,324 shares under this program, for a total of $3.2 million through February 26, 2005. No share repurchases were made during the first six months of fiscal 2006. We have remaining authority to repurchase 1,214,676 shares under this program. It is our present intention to use the program primarily to offset the dilutive impact of employee stock option exercises and to fund our equity-based compensation plans.
Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity:
Borrowings under credit facility
Industrial revenue bonds
Operating leases (undiscounted)
Purchase obligations
Interest on fixed-rate debt
Other obligations
Total cash obligations
During the first quarter of fiscal 2006, the Company entered into a five-year, unsecured, revolving credit facility, which expires in May 2010 (the Company’s fiscal 2011) in the amount of $100.0 million, with a $75.0 million optional expansion feature. Borrowings of $30.6 million were outstanding as of August 27, 2005. The credit facility requires the Company to maintain a minimum level of net worth based on certain quarterly financial calculations. The minimum net worth calculation at August 27, 2005 was $150.1 million, whereby the Company’s actual net worth computed in accordance with the credit agreement terms was $187.9 million. The credit facility also contains a maximum debt-to-cash flow ratio that is computed daily, based on a rolling twelve-month basis, of less than or equal to 2.75; the Company’s ratio was 0.78 at August 27, 2005. If the Company is not in compliance with either of these ratios, the lender may terminate the commitment and/or declare any loan then outstanding to be immediately due and payable. At August 27, 2005, the Company was in compliance with the financial covenants of the credit facility. This credit facility replaces the Company’s four-year, unsecured, revolving credit facility in the amount of $125.0 million, of which $26.8 million of borrowings were outstanding as of February 26, 2005.
From time to time, we acquire the use of certain assets, such as warehouses, automobiles, forklifts, vehicles, office equipment and some manufacturing equipment through operating leases. 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. The other obligations in the table above relate to non-compete and consulting agreements with current and former employees.
Standby letters of credit
17
In addition to the above standby letters of credit, which are predominantly issued for performance-related bonds in our discontinued European curtainwall business, we are required, in the ordinary course of business, to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of projects that are in process and in our backlog. At August 27, 2005, these bonds totaled $71.4 million. With respect to our current portfolio of businesses, we have never been required to pay on these performance-based bonds.
The Company maintains an interest rate swap agreement that effectively converts $25.0 million of variable rate borrowings into fixed rate obligations. The swap agreement expires in the first quarter of fiscal 2009. The notional value of the swap decreases from $25.0 million at May 28, 2005, to $4.5 million at the expiration of March 29, 2008. The Company receives payments at variable rates while making payments at a fixed rate of 5.01 percent.
We experienced a material increase in our premiums and risk retention for our first-party product liability coverages in fiscal 2003, and although we have been able to continue these coverages through fiscal 2006, the premiums and retention have remained high. A material construction project rework event would have a material adverse effect on our operating results.
For fiscal 2006, we believe that current cash on hand and cash generated from operating activities should be adequate to fund our working capital requirements and planned capital expenditures. If we are unable to generate enough cash through operations to satisfy our working capital requirements and planned capital expenditures, we have available funds from our committed revolving credit facility.
Outlook
The following statements are based on current expectations for full-year fiscal 2006 results. These statements are forward-looking, and actual results may differ materially.
18
Related Party Transactions
As a result of our 34 percent interest in PPG Auto Glass, in which PPG holds the remaining interest, various transactions the Company enters into with PPG and PPG Auto Glass are deemed to be “related party” transactions. Under the terms of a multi-year agreement which expired in the second quarter of fiscal 2006, our autoglass manufacturing business was committed to selling a significant portion of its windshield capacity to PPG. We have transitioned our capacity to directly sell to after market manufacturers, including PPG.
As a result of its acquisition of AWallS, the Company has leased a facility located in Bolingbrook, IL from the former owners, two of whom remain employees of the Company.
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 February 26, 2005.
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 February 26, 2005.
PART II. OTHER INFORMATION
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. The Company has also been subject to litigation arising out of employment practices, workers compensation, general liability and automobile claims. Although it is very difficult to accurately 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 of the Company.
19
The following table provides information with respect to purchases made by the Company of its own stock during the second quarter of fiscal 2006:
Period
May 29, 2005 through June 25, 2005
June 26, 2005 through July 23, 2005
July 24, 2005 through August 27, 2005
Apogee Enterprises, Inc. Annual Meeting of Shareholders was held on June 21, 2005. The number of outstanding shares on the record date for the Annual Meeting were 27,801,050. Eighty-eight percent of the outstanding shares were represented in person or by proxy at the meeting. The three candidates for election as Class I Directors listed in the proxy statement were elected to serve three-year terms, expiring at the 2008 Annual Meeting of Shareholders. The proposals to approve the Amended and Restated Apogee Enterprises, Inc. 2002 Omnibus Stock and Incentive Plan and the Amended and Restated Apogee Enterprises, Inc. Executive Management Incentive Plan were approved. Additionally, the proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors for the Company for the 2006 fiscal year was also approved. The results of these matters voted upon by the shareholders are listed below.
Election of Class I Shareholders
Robert J. Marzec
Stephen C. Mitchell
David E. Weiss
Approval of the Amended and Restated Apogee Enterprises, Inc. 2002 Omnibus Stock and Incentive Plan
Approval of the Amended and Restated Apogee Enterprises, Inc. Executive Management Incentive Plan
Ratification of the appointment of Deloitte & Touche LLP as Independent auditors
20
(a)
21
CONFORMED COPY
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.
Date: October 6, 2005
Chairman, President and
Chief Executive Officer
Vice President of Planning and
Strategy and Interim
Chief Financial Officer
22