Apogee Enterprises (APOG 43.36, -4.86, -10.08%) is trading sharply lower today
after reporting 2Q19 (Aug) earnings last night. Headquartered in Minneapolis,
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 U.S. tall-building sector.
Its range of product choices allows 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 the 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.
Turning to the Q2 (Aug) results, non-GAAP EPS was flat year/year
at $0.75, which was a good bit below market expectations. Revenue rose 5.3%
year/year to $362.1 mln, which was slightly below market expectations. In terms
of FY19 guidance, APOG lowered its non-GAAP EPS guidance to $3.13-3.33 from
$3.48-3.68. Revenue growth was lowered to +8-10% from +10%. Adjusted operating
margin guidance was reduced to 8.6-9.1% from 9.2-9.7%.
APOG said it continued to benefit from strong market conditions and demand in AugQ. However, challenges ramping-up production in Architectural Glass in a tight labor market impacted overall results in the quarter. Apogee's other three business segments delivered solid results, as expected, with Architectural Services achieving over 60% revenue growth and robust margin expansion.
Its Glass segment saw much stronger than expected customer demand, with orders across surging all segments of its market. However, APOG experienced difficulty hiring and training new staff to be sufficiently prepared to meet rapidly rising order volumes. The company reported that it has moved aggressively to address these issues and that it did make improvements as the quarter progressed. APOG expects that during the second half of the fiscal year, the company will be able to fully resolve these issues as its workforce stabilizes and its factories reach higher levels of output and productivity.
The company’s FY19 guidance was lowered mostly due to a reduced second half outlook for Architectural Glass. Looking ahead, APOG remains confident in its long-term direction. It continues to see multiple drivers for continued organic growth, supported by a strong backlog and a positive outlook for the North American construction industry.
Investors are likely disappointed with APOG's AugQ results and FY19 guidance. While the company’s indication that it continues to see a strong demand environment is good news, the company’s difficulty hiring workers at its Architectural Glass segment to handle an associated ramp-up in production does somewhat temper the near-term boons of demand strength. This company tends to be pretty boom or bust around earnings. APOG does not guide on a quarterly basis, so analysts are left a bit in the dark on a quarter-to-quarter basis. With that said, hopefully APOG will be able to match their hopes to ramp up hiring to handle strong demand over the coming months.