Apogee Enterprises (APOG) is trading roughly flat this morning after reporting 2Q18 (Aug) earnings last night. In terms of quick background, APOG is primarily involved in the manufacturing and installation of glass and frames used in window and curtainwall systems of commercial buildings, as well as the aluminum and metal frames comprising the "outside skin" of buildings. A primary driver for its strong growth has been the underlying strength in the US tall-building sector.
Its product choices allow architects to create distinctive looks for office towers, hotels, education facilities and dormitories, health care facilities, government buildings, retail centers and multi-family residential buildings, while meeting functional requirements such as energy efficiency, impact resistance or sound control.
The company is organized into four segments, with three of the segments serving the commercial construction market:
- Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems.
- Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized window, curtainwall, storefront and entrance systems comprising the outside skin of buildings.
- Architectural Services segment provides installation of the walls of glass, windows and other curtainwall products making up the outside skin of buildings.
- Large-Scale Optical Technologies (LSO) segment makes glass and acrylic products for framing and display applications.
In terms of recent acquisitions: In December 2016, APOG acquired Sotawall, a privately-held designer and fabricator of curtainwall systems for commercial construction projects based in the Toronto, Canada area, for approximately $138 mln. Sotawall's results are now included in the Architectural Framing Systems segment. In June 2017, Apogee acquired privately-held EFCO from Pella Corp. for approximately $195 mln. EFCO is a major manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects. The deal expanded APOG's presence in mid-size commercial buildings.
Turning to the Q2 (Aug) results, non-GAAP EPS declined 3% YoY to $0.75, which was a good bit below market expectations. Revenue rose 23.5% year/year to $343.9 mln, which was also below market expectations. In terms of FY18 guidance, APOG is reaffirming prior guidance: revenue growth of 24-26%, adjusted operating margin of 11.0-11.5% and non-GAAP EPS of $3.40-3.60.
Breaking it down by segment, Architectural Framing Systems revenue jumped 105% YoY to $189 mln. Much of this growth was from acquisitions (Sotawall and EFCO). Organic revenue growth was +17%. Adjusted operating margin declined to 10.1% from 14.1% last year. Margins for existing businesses were up substantially, offset by a lower operating margin at EFCO, as expected, and a significant foreign exchange loss at the Canadian curtainwall business.
Architectural Glass revenue was down 2% to $97.4 mln, as double-digit mid-size project growth was somewhat offset by the timing of larger projects. Architectural Services revenue was down 40% YoY to $46.8 mln as the year ago results were particularly strong. Large-Scale Optical Technologies revenue was down 5% to $20.3 mln.
With these recent acquisitions being a big part of this strategy, Apogee has been trying to transform itself for more stable performance throughout an economic cycle and reduce its exposure to boom-bust cycles. The company expects top- and bottom-line growth in FY18, with a strong second half. Looking ahead to fiscal 2019, Apogee anticipates double-digit revenue growth and triple-digit basis-point operating margin improvement, based on bidding, its order pipeline and backlog already booked for the year.
In sum, despite the earnings miss, investors seem to be ok with the AugQ results. A bit of a stumble for a company that just made two large acquisitions is not that unusual. Also, APOG does not guide on a quarterly basis so analysts are a bit in the dark. With all of this as context, investors seem to not be too worried about the miss in AugQ. They are focusing more on how these deals will position the company in the future and reduce its boom-bust exposure.