UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 1, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ____________
Commission File Number 0-6365
APOGEE ENTERPRISES, INC.
---------------------------------------
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0919654
------------------------ ---------------------
(State of Incorporation) (IRS Employer ID No.)
7900 Xerxes Avenue South, Suite 1800, Minneapolis, Minnesota 55431
------------------------------------------------------------ -----
(Address of Principal Executive Offices)
Registrant's Telephone Number (952) 835-1874
---------------
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 ____
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at September 30, 2001
-------------------------------- ------------------------------------
Common Stock, $.33-1/3 Par Value 28,260,602
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 1, 2001
Description Page
----------- ----
PART I Financial Information
------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 1, 2001
and March 3, 2001 3
Consolidated Results of Operations for the
Three Months and Six Months Ended
September 1, 2001 and September 2, 2000 4
Consolidated Statements of Cash Flows for
the Six Months Ended September 1, 2001 and
September 2, 2000 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12-13
PART II Other Information
-------
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit Index 16
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 1, 2001 AND MARCH 3, 2001
(Thousands)
September 1, March 3,
2001 2001
------------ ------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 9,479 $ 4,689
Receivables, net of allowance for doubtful accounts 124,114 121,461
Inventories 38,972 40,434
Deferred tax assets 4,891 4,854
Other current assets 2,330 3,753
------------ ------------
Total current assets 179,786 175,191
------------ ------------
Property, plant and equipment, net 140,663 147,593
Marketable securities available for sale 20,433 24,451
Investments in affiliated companies 32,405 32,530
Intangible assets, at cost less accumulated amortization of
$13,669 and $12,520, respectively 50,687 50,145
Other assets 2,693 2,769
------------ ------------
Total assets $ 426,667 $ 432,679
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 54,443 $ 59,537
Accrued expenses 55,785 57,571
Current liabilities of discontinued operations, net 2,465 2,578
Billings in excess of costs and earnings on uncompleted contracts 8,039 10,330
Accrued income taxes 11,928 7,093
Current installments of long-term debt 661 328
------------ ------------
Total current liabilities 133,321 137,437
------------ ------------
Long-term debt, less current installments 86,456 104,206
Other long-term liabilities 26,187 24,466
Liabilities of discontinued operations, net 19,068 18,278
Commitments and contingent liabilities (Note 6)
Shareholders' equity
Common stock, $.33 1/3 par value; authorized 50,000,000
shares; issued and outstanding 28,261,000 and 27,825,000
shares, respectively 9,420 9,275
Additional paid-in capital 49,461 45,773
Retained earnings 106,295 93,543
Unearned compensation (1,939) (757)
Accumulated other comprehensive (loss) income (1,602) 458
------------ ------------
Total shareholders' equity 161,635 148,292
------------ ------------
Total liabilities and shareholders' equity $ 426,667 $ 432,679
============ ============
See accompanying notes to consolidated financial statements.
3
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 1, 2001 and SEPTEMBER 2, 2000
(Thousands except Per Share Amounts)
(unaudited)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
September 1, September 2, September 1, September 2,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 210,233 $ 236,364 $ 413,839 $ 473,617
Cost of sales 158,833 189,308 317,135 378,647
-------------- -------------- -------------- --------------
Gross profit 51,400 47,056 96,704 94,970
Selling, general and administrative expenses 35,476 36,391 72,807 77,351
-------------- -------------- -------------- --------------
Operating income 15,924 10,665 23,897 17,619
Interest expense, net 1,234 3,180 3,156 5,962
Equity in income (loss) of affiliated companies 297 (665) 2,365 (1,356)
-------------- -------------- -------------- --------------
Earnings from continuing operations
before income taxes 14,987 6,820 23,106 10,301
Income taxes 4,646 2,620 7,163 4,080
-------------- -------------- -------------- --------------
Earnings from continuing operations 10,341 4,200 15,943 6,221
Earnings from discontinued operations,
net of income taxes - - - -
-------------- -------------- -------------- --------------
Net earnings $ 10,341 $ 4,200 $ 15,943 $ 6,221
============== ============== ============== ==============
Earnings per share - basic
Continuing operations $ 0.37 $ 0.15 $ 0.57 $ 0.22
Discontinued operations - - - -
-------------- -------------- -------------- --------------
Net earnings $ 0.37 $ 0.15 $ 0.57 $ 0.22
============== ============== ============== ==============
Earnings per share - diluted
Continuing operations $ 0.36 $ 0.15 $ 0.56 $ 0.22
Discontinued operations - - - -
-------------- -------------- -------------- --------------
Net earnings $ 0.36 $ 0.15 $ 0.56 $ 0.22
============== ============== ============== ==============
Weighted average basic shares outstanding 28,267 27,852 28,126 27,827
Weighted average diluted shares outstanding 28,889 27,853 28,604 27,827
See accompanying notes to consolidated financial statements.
4
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 1, 2001 AND SEPTEMBER 2, 2000
(Thousands)
(unaudited)
September 1, September 2,
2001 2000
-------------- --------------
OPERATING ACTIVITIES
Net earnings $ 15,943 $ 6,221
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 13,482 19,027
Deferred income tax benefit (170) (621)
Equity in net income of affiliated companies
less than dividends received 214 17
Other, net (376) (100)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Receivables (2,653) (14,831)
Inventories 1,589 7,530
Accounts payable and accrued expenses (6,946) 8,639
Accrued and refundable income taxes 4,835 (2,352)
Other, net (2,033) 6,883
-------------- --------------
Net cash provided by operating activities 23,885 30,413
-------------- --------------
INVESTING ACTIVITIES
Capital expenditures (5,488) (9,714)
Acquisition of businesses, net of cash acquired (247) (1,383)
Purchases of marketable securities - (5,872)
Sales/maturities of marketable securities 4,399 5,673
-------------- --------------
Net cash used in investing activities (1,336) (11,296)
-------------- --------------
FINANCING ACTIVITIES
Decrease in net borrowings under revolving credit
agreement (18,200) (18,000)
Proceeds from issuance of other long-term debt 2,000 -
Payments on other long-term debt (2,717) (147)
Increase in deferred debt expenses (161) (521)
Proceeds from issuance of common stock 3,891 517
Repurchase and retirement of common stock (284) (319)
Dividends paid (2,965) (2,912)
-------------- --------------
Net cash used for financing activities (18,436) (21,382)
-------------- --------------
Cash provided by discontinued operations 677 1,333
-------------- --------------
Increase (decrease) in cash and cash equivalents 4,790 (932)
Cash and cash equivalents at beginning of period 4,689 7,192
-------------- --------------
Cash and cash equivalents at end of period $ 9,479 $ 6,260
============== ==============
Supplemental schedule of non-cash investing activities:
Net assets contributed to PPG Auto Glass, LLC (see Note 3) - $30,844
============== ==============
See accompanying notes to consolidated financial statements.
5
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
------------------------------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of September 1, 2001 and September 2, 2000, the results of operations
for the three months and six months ended September 1, 2001 and
September 2, 2000, and cash flows for the six months ended September 1,
2001 and September 2, 2000. Certain prior-year amounts have been
reclassified to conform to the current period presentation.
The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's
annual consolidated 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 March 3,
2001. The results of operations for the three months and six months
ended September 1, 2001 and September 2, 2000 are not necessarily
indicative of the results to be expected for the full year.
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. The fiscal 2002 six-month period,
ended September 1, 2001, contains 26 weeks whereas the fiscal 2001
six-month period contains 27 weeks.
2. Inventories
-----------
September 1, March 3,
(Thousands) 2001 2001
------------------- -------------------
Raw materials $19,350 $20,124
Work-in process 6,135 6,259
Finished goods 11,774 12,406
Cost and earnings in excess of billings on
uncompleted contracts 1,713 1,645
-------------------- --------------------
Total inventories $38,972 $40,434
==================== ====================
3. Investments
-----------
The Company has acquired, through joint ventures, investments that are
accounted for by the equity method. The nature and extent of these
investments change over time.
In July 2000, the Company and PPG Industries combined their U.S.
automotive replacement glass distribution businesses into the joint
venture, PPG Auto Glass, LLC (PPG Auto Glass), of which the Company has
a 34% interest. On September 1, 2002, the Company's investment in PPG
Auto Glass was $32.0 million, of which $7.4 million represents the
unamortized excess of the cost of the investment over the value of the
underlying net tangible assets when the joint venture was formed. This
excess is being amortized over a life of 20 years. In connection with
the formation of PPG Auto Glass, the Company agreed to supply the joint
venture, through PPG Industries, with most of its windshield fabrication
capacity on market-based terms and conditions. During the second quarter
of fiscal 2002, the Company, PPG Industries and PPG Auto Glass amended
the windshield supply agreements to permanently adjust pricing for the
windshields manufactured and sold to more accurately reflect market
pricing. As a result of these amendments, a portion of earnings that may
have previously been reported in equity in income from affiliated
companies were reported in operating income in the Auto Glass segment
for the current quarter. The impact on the current quarter results was
an increase to operating income of $3.0 million with an offset to income
from affiliated companies. Additionally, $1.8 million was recorded as a
one-time net increase to
6
operating income in the quarter as a result of these changes. In
addition, the Company's automobile windshield repair and replacement
business agreed to purchase most of its windshield needs from PPG Auto
Glass on market-based terms and conditions.
The Company's investment in TerraSun LLC relates to a research and
development joint venture of which the Company has a 50 percent
interest. As of late September, the Company has decided to discontinue
funding TerraSun operations. TerraSun has commenced winding down its
operations and intends to sell its tangible and intangible assets.
The Company's share of earnings for its affiliated companies is before
income taxes and includes amortization of the excess cost over the value
of the underlying net tangible assets and expenses retained by the
Company.
4. Discontinued Operations
-----------------------
During fiscal 2001, the Company completed the sale of substantially all
of the assets of VIS'N Service Corporation (VIS'N), a non-auto glass
focused, third-party administered claims processor, in two separate
transactions. This transaction effectively removed the Company from the
third-party administered claims processing business. This business is
presented as discontinued operations in the consolidated financial
statements and notes.
In fiscal 2000, the Company completed the sale of 100% of the stock of
its large-scale domestic curtainwall business, Harmon, Ltd. In fiscal
1999, the Company executed the sale of its detention/security business.
Combined with the fiscal 1998 exit from international curtainwall
operations, these transactions effectively removed the Company from the
large-scale construction business. These businesses are presented as
discontinued operations in the consolidated financial statements and
notes.
At September 1, 2001, accruals totaling $21.5 million represented the
remaining estimated (net) future cash outflows associated with the exit
from discontinued operations. The majority of these cash expenditures
are expected to be made within the next two to three years. The primary
components of the accruals relate to the finalization of certain
international construction projects, legal costs and other costs
associated with the proceedings noted above.
5. Earnings Per Share
------------------
The following table presents a reconciliation of the denominators used
in the computation of basic and diluted earnings per share.
Three Months Ended Six Months Ended
----------------------------------- --------------------------------
September 1, September 2, September 1, September 2,
(Thousands) 2001 2000 2001 2000
-------------------------------- --------------------------------
Basic earnings per
share-weighted common
shares outstanding 28,267 27,852 28,126 27,827
Weighted common shares
assumed upon exercise
of stock options 622 1 478 -
-------------------------------- --------------------------------
Diluted earnings per
share-weighted common
shares and common
shares equivalent
outstanding 28,889 27,853 28,604 27,827
================================ ================================
6. Commitments and Contingent Liabilities
--------------------------------------
At September 1, 2001, the Company had ongoing letters of credit related
to its risk management programs, construction contracts and certain
industrial development bonds. The total value of
7
letters of credit under which the Company was obligated as of September
1, 2001 was approximately $13.9 million.
The Company has also entered into a number of noncompete agreements for
the benefit of the Company. As of September 1, 2001, we were committed
to make future payments of $1.0 million under such agreements.
The Company has been party to various legal proceedings incidental to
its normal operating activities. In particular, like others in the
construction industry, the Company's construction businesses are
routinely involved in various disputes and claims arising out of
construction projects, sometimes involving significant monetary damages.
Although it is impossible to predict the outcome of such proceedings,
the Company believes, based on facts currently available, that none of
such claims will result in losses that would have a material adverse
effect on its financial condition.
7. Comprehensive Earnings
----------------------
Three Months Ended Six Months Ended
--------------------------------- --------------------------------
(Thousands) September 1, September 2, September 1, September 2,
2001 2000 2001 2000
--------------------------------- --------------------------------
Net earnings $10,341 $4,200 $15,943 $6,221
Transition adjustment related to
change in accounting for
derivative instruments and
hedging activities - - (1,780) -
Unrealized loss on qualifying
cash flow hedges (415) - (528) -
Unrealized gains on
marketable securities, net of
$111, $226, $133 and
$211, tax expense 206 420 248 393
------------------------------- -----------------------------------
Comprehensive earnings $10,132 $4,620 $13,883 $6,614
=============================== ===================================
8. New Accounting Standards
------------------------
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133 regarding accounting for
derivative instruments and hedging activities. SFAS No. 133, as amended
by SFAS No. 137 and No. 138, establishes accounting and reporting
standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet either as an asset or liability measured at fair value.
SFAS No. 133 requires changes in the derivative's fair value to be
recognized in earnings or, for derivatives that hedge market risk
related to future cash flows, in accumulated other comprehensive
loss/income, unless specific hedge accounting criteria are met. The
Company adopted SFAS No. 133 on March 4, 2001 and determined its
derivative instruments, consisting of interest rate swap agreements,
qualify for hedge accounting treatment. The adoption resulted in the
Company recording the fair value of their interest rate swap agreements
as a liability with an offsetting adjustment to other comprehensive
earnings of $1.8 million. The net present liability associated with
these interest rate swap agreements was $2.3 million at September 1,
2001.
In June 2001, FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. Under SFAS No.
142, amortization of goodwill and indefinite-lived intangible assets
will cease and instead the carrying value of these assets will be
evaluated for impairment by applying a fair-value based test on at
least an annual basis. The Company must adopt SFAS No. 142 on March 3,
2002. The
8
Company is evaluating the impact of these standards and has not yet
determined the effect of adoption on its financial position and results
of operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
The following selected financial data should be read in conjunction with the
Company's Form 10-K for the year ended March 3, 2001 and the consolidated
financial statements, including the notes to consolidated financial statements,
included therein.
Sales and Earnings
------------------
Consolidated net sales for the second quarter ended September 1, 2001 were
$210.2 million, compared to $236.4 million in the same period last year.
Revenues were down 3% compared to the second quarter of last year after being
adjusted for the formation of the PPG Auto Glass, LLC joint venture in July
2000. Second quarter earnings were $0.36 diluted earnings per share, or $10.3
million, versus $0.15 diluted earnings per share, or $4.2 million, in the fiscal
2001 period.
Fiscal 2002 year-to-date figures include one less week compared to the
year-to-date period a year ago. Fiscal 2002 year-to-date net sales decreased
13%, to $413.8 million, compared to $473.6 million a year ago, while net
earnings increased 156% to $15.9 million, or $0.56 per share diluted, from $6.2
million, or $0.22 per share diluted, in the prior year. Fiscal 2002 year-to-date
net sales decreased 2%, compared to a year ago, after being adjusted for the
formation of the PPG Auto Glass, LLC joint venture.
Second Quarter Fiscal 2002 Compared to Second Quarter Fiscal 2001
-----------------------------------------------------------------
The following table compares three and six month results with corresponding
periods a year ago, as a percentage of sales, for each period.
Percentage of Net Sales
-----------------------------------------------------
Three Months Ended Six Months Ended
------------------------- -------------------------
Sept. 1, Sept. 2, Sept. 1, Sept. 2,
2001 2000 2001 2000
------------------------- -------------------------
Net sales 100.0 100.0 100.0 100.0
Cost of sales 75.6 80.1 76.6 79.9
------------------------- -------------------------
Gross profit 24.4 19.9 23.4 20.1
Selling, general and administrative expenses 16.8 15.4 17.6 16.4
------------------------- -------------------------
Operating income 7.6 4.5 5.8 3.7
Interest expense, net 0.6 1.3 0.8 1.2
Equity in income (loss) of affiliated companies 0.1 (0.3) 0.6 (0.3)
------------------------- -------------------------
Earnings from continuing operations before
income taxes 7.1 2.9 5.6 2.2
Income taxes 2.2 1.1 1.7 0.9
------------------------- -------------------------
Earnings from continuing operations 4.9 1.8 3.9 1.3
Earnings from discontinued operations - - - -
------------------------- -------------------------
Net earnings 4.9 1.8 3.9 1.3
========================= =========================
Effective tax rate 31.0% 38.4% 31.0% 39.6%
Second quarter consolidated gross profit, as a percentage of net sales was
24.4%, up from 19.9% in the prior year second quarter. The primary factors
underlying the resulting increase in gross profit percentage were improved
manufacturing performance and improved volume and mix within the Architectural
segment, as well as cost reduction initiatives within the Automotive Replacement
Glass segment, offset by decreased margins at the Large-Scale Optical segment.
9
Second quarter selling, general and administrative (SG&A) expenses fell slightly
compared to the prior year quarter, but increased as a percent of net sales to
16.8% from 15.4%. Key components within the decrease in SG&A expenses are
decreased depreciation expense, offset by increased incentive accruals.
Net interest expense decreased 61%, compared to the prior-year quarter, as a
result of significantly lower borrowing levels and interest rates.
The Company's equity in income from affiliated companies was $0.3 million in the
second quarter of fiscal 2002 versus an equity in loss of $0.7 million in the
prior-year quarter. The current year results include the Company's portion of
the results of the PPG Auto Glass joint venture formed in July 2000, offset by
continued funding of the TerraSun joint venture (see note 3 above). In late
September, the Company decided to discontinue funding TerraSun operations.
TerraSun has commenced winding down its operations and intends to sell its
tangible and intangible assets. The discontinuance of TerraSun operations is not
anticipated to have an adverse impact on the Company's operations or outlook for
the balance of fiscal 2002 or fiscal 2003.
The effective income tax rate of 31.0% decreased from the effective rate of
38.4% a year ago. The reduction is due to the relationship of book and tax
differences as a percentage of pre-tax income.
In the second quarter of fiscal 2002, as expected, the Company made various
payments totaling $0.9 million toward discontinued operation items. These
payments, offset by minimal cash receipts, reduced the reserves for the quarter.
The Company believes its reserves for discontinued operations are adequate.
In the second quarter of fiscal 2002, the Company reported earnings from
continuing operations of $10.3 million, or $0.36 diluted earnings per share.
This compared to earnings from continuing operations of $4.2 million, or $0.15
diluted earnings per share, in the second quarter of fiscal 2001. The return on
average shareholders' equity was 6.6% in the second quarter of fiscal 2002 and
3.0% in the second quarter of fiscal 2001.
Segment Analysis
----------------
During fiscal 2001, the Company realigned its operating business units into
three reporting segments. The following table presents sales and operating
income for the Company's three segments and on a consolidated basis for three
and six months compared to the corresponding periods a year ago. Operating
results are discussed below.
Three Months Ended Six Months Ended
----------------------------------------------------------------------
Sept. 1, Sept. 2, % Sept. 1, Sept. 2, %
(Thousands) 2001 2000 Chg 2001 2000 Chg
-------------------------------------------------------------------------
Net Sales
Architectural $120,059 $113,110 6% $236,285 $224,117 5%
Large-scale optical 14,980 21,638 (31) 35,487 41,280 (14)
Auto Glass 75,197 101,713 (26) 142,073 208,492 (32)
Intersegment elimination (3) (97) 97 (6) (272) 98
-------------------------------------------------------------------------
Net sales $210,233 $236,364 (11)% $413,839 $473,617 (13)%
=========================================================================
Operating Income
Architectural $9,000 $5,993 50% $16,021 $12,327 30%
Large-scale optical (1,475) 1,376 N/M (1,491) 319 N/M
Auto Glass 8,919 3,427 160 10,381 6,217 67
Corporate and other (520) (131) (297) (1,014) (1,244) 18
-------------------------------------------------------------------------
Operating income $15,924 $10,665 49% $23,897 $17,619 36%
=========================================================================
N/M=Not meaningful
10
Architectural Products and Services (Architectural)
---------------------------------------------------
Net sales for the Architectural segment grew 6 percent to $120.0 million,
compared to $113.1 million in the prior-year quarter. Operating income increased
50 percent to $9.0 million, from $6.0 million a year ago. The majority of the
improvement in operating income was driven by strong sales mix changes to higher
margin products and efficiencies in manufacturing in the glass fabricating
group, partially offset by slightly lower margins in the installation side of
the business due to the timing of completion of jobs.
The Architectural segment backlog, at September 1, 2001, remained at record
levels of $190.4 million. This is an increase of 7% compared to the second
quarter of fiscal 2001.
Large-Scale Optical Technologies (LSO)
--------------------------------------
Second quarter net sales for LSO were $15.0 million, compared to $21.6 million
in the prior-year period. The segment reported an operating loss of $1.5
million, compared to operating income of $1.4 million in the same period last
year. The segment's performance has been significantly impacted by the severe
downturn in the PC industry and a slowdown in retail markets.
Automotive Replacement Glass and Services (Auto Glass)
------------------------------------------------------
Net sales at the Auto Glass segment declined 26% to $75.2 million from $101.7
million a year ago. Segment revenues, which decreased 9 percent compared to the
second quarter of last year after being adjusted for the PPG Auto Glass joint
venture, continue to be impacted by strategies initiated last year to reduce
low-margin business.
The Auto Glass segment reported operating income of $8.9 million, compared to
$3.4 million in the same period last year. Approximately 70 percent of the
improvement resulted from the amendments made to the supply agreements related
to the PPG Auto Glass joint venture, owned 34 percent by the Company and 66
percent by PPG Industries, and approximately one-third was a one-time net
increase. These amendments permanently adjusted pricing for the Company's
windshield manufacturing business, resulting in higher operating income for the
segment in the current quarter and in future quarters. These amendments led to
lower earnings during the current quarter and into the future for PPG Auto
Glass, which is reported in equity in income of affiliated companies. The
remainder of the increase was the result of operational improvements and cost
reductions implemented at our retail facilities beginning late last year.
Consolidated Backlog
--------------------
On September 1, 2001, the Company's consolidated backlog was $196.4 million,
which remained steady from the same period a year ago. The backlog of the
Architectural segment, which remained constant from year-end, represented 97
percent of the Company's consolidated backlog. Backlog at the LSO segment fell
$4.6 million from year-end, mainly as a result of closing the Viratec San Diego
facility in the first quarter of fiscal 2002.
Liquidity and Capital Resources
-------------------------------
Financial Condition
-------------------
Net cash provided by operating activities
Cash provided by operating activities for the six months ended September 1, 2001
totaled $23.9 million compared to $30.4 million in the same prior-year period.
The decrease is due to the timing of collections of receivables and payments on
expenditures, offset by higher net earnings and timing of tax payments.
Net cash used in investing activities
New capital investment through the first six months of fiscal 2002 totaled $5.5
million, versus $9.7 million in the same period a year ago. For fiscal 2002, the
Company expects to incur capital expenditures as necessary to maintain existing
facilities. Fiscal 2002 capital expenditures are expected to be approximately
$20 million.
11
Net cash provided by financing activities
Bank borrowings were $87.1 million at September 1, 2001, down from the $104.5
million outstanding at March 3, 2001. The majority of the Company's long-term
debt consisted of bank borrowings under a revolving credit agreement. Cash
provided by operating activities was sufficient to finance the period's
investing activities and cash dividend requirements. At September 1, 2001, the
Company's debt-to-total capital ratio declined to 35 percent, a significant
improvement from 51 percent at the end of last year's second quarter.
Effective June 1, 2000, the Company amended its revolving credit agreement in
conjunction with the pending joint venture with PPG that subsequently closed in
July 2000. The amendment resulted in a decrease in borrowing capacity from $253
million to $200 million.
The Company anticipates outstanding borrowings to decline over the course of the
year. The Company believes that cash from operating activities and the available
credit facility will provide adequate liquidity for the remainder of the fiscal
year.
Shareholders' Equity
--------------------
At September 1, 2001, Apogee's shareholders' equity was $161.6 million. Book
value per share was $5.72, up from $5.33 per share at March 3, 2001, with
outstanding common shares increasing nominally during the period. Net earnings
and proceeds from common stock issued in connection with the Company's
stock-based compensation plans accounted for the increase, slightly reduced by
dividends paid.
Outlook
-------
Despite the softness in the LSO segment markets and minor project delays in the
Architectural segment, the Company anticipates earnings from continuing
operations to be significantly better than last year's earnings. Fiscal 2001
diluted net earnings per share were $0.54, of which $0.48 was from continuing
operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The Company's principal market risk is sensitivity to interest rates, which is
the risk that changes in interest rates will reduce net earnings of the Company.
To manage the Company's direct risk from changes in market interest rates,
management actively monitors the interest sensitive components of the Company's
balance sheet, primarily debt obligations, as well as market interest rates in
order to minimize the impact of changes in interest rates on net earnings and
cash flow.
The primary measure of interest rate risk is the simulation of net income under
different interest rate environments. The approach used to quantify interest
rate risk is a sensitivity analysis. This approach calculates the impact on net
earnings, relative to a base case scenario, of rates increasing or decreasing
gradually over the next 12 months by 200 basis points. The aforementioned
changes in interest rates affecting the Company's financial instruments would
result in approximately a $300,000 impact to net earnings. As interest rates
increase, net earnings decrease; as interest rates decrease, net earnings
increase.
The Company uses interest swaps to fix a portion of its variable rate borrowings
from fluctuations in interest rates. As of September 1, 2001, the Company has
interest swaps covering $35 million of variable rate debt. The net present
liability associated with these swaps is $2.3 million at September 1, 2001.
The Company has a policy of using forward exchange contracts to hedge its net
exposures, by currency, related to the foreign currency-denominated monetary
assets and liabilities, and future firm commitments of its operations. Forward
exchange contracts are also used from time to time to manage near-term foreign
currency cash requirements. The primary objective of these hedging activities is
to maintain an approximately balanced position in foreign currencies so that
exchange gains and losses resulting from exchange rate changes, net of related
tax effects, are minimized.
12
Given the Company's balanced foreign exchange position described above, a 10%
adverse change in foreign exchange rates upon which these contracts are based
would result in exchange losses from these contracts that would, in all material
respects, be fully offset by exchange gains on the underlying net monetary
exposures for which the contracts are designated as hedges. As of September 1,
2001, the Company did not have any forward contracts outstanding.
Cautionary Statement
--------------------
This discussion contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements reflect the
Company's current views with respect to future events and financial performance.
The words "believe," "expect," "anticipate," "intends," "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 near-term results, based on current
information available pertaining to the Company, including the risk factors
noted below.
The Company wishes to caution investors that any 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, those
noted below. There can be no assurances given that the ongoing reorganization
and realignment of Harmon AutoGlass will lead to successful operating results
now or in the future. There can be no assurances that PPG Auto Glass, Apogee's
automotive replacement glass distribution joint venture with PPG Industries,
will achieve favorable long-term operating results. In addition, there can be no
assurances that Apogee's expected Architectural segment growth due to its
strength serving high-end markets with value-added products will not be impacted
by the slowing economy. There also can be no assurances that there will not be
further erosion in the Large-Scale Optical segment revenues due to the dramatic
slump in the PC industry and a slowdown in the picture-framing and pre-framed
art retail markets.
A number of other factors should be considered in conjunction with this report's
forward-looking statements, any discussion of operations or results by the
Company or its representatives and any forward-looking discussion, as well as
comments contained in press releases, presentations to securities analysts or
investors, or other communications by the Company. These other factors are set
forth in the cautionary statement filed as Exhibit 99 to the Company's Annual
Report on Form 10-K, and include, without limitation, cautionary statements
regarding changes in economic and market conditions, factors related to
competitive pricing, commercial building market conditions, management of growth
of business units, greater than expected costs or difficulties related to the
operation of the businesses, the impact of foreign currency markets, the
integration of acquisitions, the realization of expected economies gained
through expansion and information systems technology updates. New factors emerge
from time to time and 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.
13
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Apogee Enterprises, Inc. Annual Meeting of Shareholders was held on June 19,
2001. The number of outstanding shares on the record date for the Annual Meeting
was 27,809,606. Eighty-eight percent of the outstanding shares were represented
in person or by proxy at the meeting.
The four candidates for election as Class III Directors listed in the proxy
statement were elected to serve three-year terms, expiring at the 2004 Annual
Meeting of Shareholders. The proposal to amend the 1987 Apogee Enterprises, Inc.
Partnership Plan, an incentive compensation plan, was approved. The proposal to
ratify the appointment of Arthur Andersen LLP as independent auditors for the
Company for the 2002 fiscal year was also approved. The results of these matters
voted upon by the shareholders are listed below.
Number of Shares
----------------------------------------------------------------
In Favor Withheld/Against Abstained/Unvoted
----------------- ------------------ ---------------------
Election of Class III Directors
Donald W. Goldfus 24,274,942 184,630
James L. Martineau 24,291,223 168,349
Ray C. Richelsen 24,261,814 197,758
Michael E. Shannon 24,252,208 207,364
Amendment of 1987 Apogee
Enterprises, Inc. Partnership
Plan 23,365,872 982,660 111,040
Ratification of the appointment
of Arthur Andersen LLP
as independent auditors 24,150,462 225,166 83,944
ITEM 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
---------
Exhibit 10.1 Conditional Waiver, Amendment No. 5 to Credit
Agreement and Amendment No. 1 to Security Agreement
(b) Reports on Form 8-K:
--------------------
The Company's Current Report on Form 8-K filed July 27, 2001, related
to Rights Agreement, dated as of October 19, 1990, and amended as of
June 28, 1995, February 22, 1999, December 7, 1999, and July 2, 2001
between the Company and The Bank of New York.
14
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.
APOGEE ENTERPRISES, INC.
Date: October 10, 2001 /s/Russell Huffer
--------------
Russell Huffer
Chairman, President and
Chief Executive Officer
Date: October 10, 2001 /s/Michael B. Clauer
-----------------
Michael B. Clauer
Executive Vice President and Chief
Financial Officer
15
EXHIBIT INDEX
Exhibit
-------
Exhibit 10.1 Conditional Waiver, Amendment No. 5 to Credit Agreement
and Amendment No. 1 to Security Agreement
16
Exhibit 10.1
CONDITIONAL WAIVER, AMENDMENT NO. 5 TO CREDIT AGREEMENT AND
AMENDMENT NO. 1 TO SECURITY AGREEMENT
CONDITIONAL WAIVER AND AMENDMENT NO. 5, dated as of August 22,
2001 (this "Waiver and Amendment"), to the CREDIT AGREEMENT, dated as of May 21,
1998, among Apogee Enterprises, Inc., a Minnesota corporation (the "Borrower"),
each of the lenders from time to time parties thereto (collectively, the
"Lenders"), and The Bank of New York, as L/C Issuer, Administrative Agent for
the Lenders and Swing Line Lender, as such Credit Agreement has been amended
from time to time (the "Credit Agreement").
AMENDMENT NO. 1, dated as of August 22, 2001 to the SECURITY
AGREEMENT, dated as of June 13, 2000, among the Borrower, the Debtors parties
thereto, and The Bank of New York, as Administrative Agent and Collateral Agent
(the "Security Agreement").
RECITALS
--------
A. The Borrower has requested an amendment of the Credit Agreement and
Security Agreement to clarify provisions related to the release of collateral
and has requested a waiver under certain provisions of the Credit Agreement in
order to undertake certain transactions described in this Waiver and Amendment.
B. The Lenders desire to clarify the provisions related to the release
of collateral and to grant a conditional waiver for the transactions described
in this Waiver and Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Amendment to Credit Agreement.
-----------------------------
Pursuant to Section 11.05 of the Credit Agreement, Section
11.05(a) of the Credit Agreement shall be amended to read in its entirety as
follows:
"(a) Any provision of this Agreement may be amended, modified,
supplemented or waived, but only by a written amendment or supplement,
or written waiver, signed by the Borrower and either the Required
Lenders (and, if the rights or duties of the Administrative Agent are
affected thereby, by the Administrative Agent), or the Administrative
Agent with the consent of the Required Lenders; provided, however, that
no such amendment, modification, or waiver shall, unless signed by all
the Lenders, or by the Administrative Agent with the consent of all the
Lenders, (i) increase or decrease (other than a pro rata decrease) the
Commitment of any Lender or subject any Lender to any additional
obligation, (ii) reduce the principal of or rate of interest on any
Loan or any fees hereunder, (iii) postpone any scheduled payment of
principal of or interest on any Loan or any fees hereunder, (iv)
postpone any reduction or termination of any Commitment or any
mandatory prepayment related thereto, (v) release the Subsidiary
Guaranties, (vi) change the definition of "Required Lenders" or (vii)
amend, modify, supplement or waive the provisions of this Section
11.05."
Section 2. Amendment to Security Agreement.
-------------------------------
Pursuant to Sections 14(a) and 14(b) of the Security
Agreement, Section 3(f) of the Security Agreement shall be amended to read in
its entirety as follows:
"(f) Subject to Sections 4(b), 5(a), 6(b), 6(c), 7, and 9(c)
hereof, and except for the transfer of assets as expressly and
specifically permitted under the terms of the Credit Agreement and this
Agreement, each Debtor agrees it will not, without the Agent's prior
written consent, sell, assign, mortgage, lease or otherwise dispose of
the Collateral or any interest therein. For transfers of assets
specifically permitted by this Section 3(f), upon reasonable request by
the Borrower, the Agent will have the authority to execute and deliver
any certificates, amendments to financing statements or other similar
documents or instruments necessary or required to release the security
interest of the Agent and the Secured Creditors in the assets to be
transferred, provided that the Borrower has delivered to the Agent a
written communication acceptable to the Agent certifying compliance of
such transfer with this Section and the conditions on such transfer
imposed by this Agreement or the Credit Agreement."
Section 3. Sale of Assets Release.
----------------------
The parties understand that the Borrower and/or certain of its
Subsidiaries may be in the process of selling certain real property currently
owned by them: (1) excess land owned by Tru Vue, Inc., (2) 23 Harmon Glass
Company retail shops (the "Retail Shops") and (3) 5 Harmon Autoglass
Distribution Depots (the "Distribution Depots"). For the avoidance of doubt, the
Secured Creditors under the Security Agreement release any security interest in
any equipment or inventory located at, or to be sold with, the Retail Shops or
Distribution Depots, provided that such sale is conducted in compliance with
Section 3(f) of the Security Agreement and Section 7.02(a) of the Credit
Agreement.
Section 4. Conditional Waiver on Mortgage Transactions.
-------------------------------------------
(a) Understandings. The parties understand the following:
(1) The Borrower and certain of its Subsidiaries desire
to enter into certain mortgage transactions on real
property owned by the Borrower and/or these
Subsidiaries and grant mortgage liens in addition to
any liens already in existence;
(2) Such proposed transactions may take the form of
traditional mortgage liens, sale-leaseback
transactions, or sale-leaseback transactions through
a special purpose entity (the "Mortgage
Transactions"); and
(3) This Waiver and Amendment is being executed and
delivered prior to the Mortgage Transactions being
negotiated or resulting in definitive documentation.
(b) Waivers. Pursuant to Section 11.05 of the Credit
Agreement, the Lenders hereby waive (insofar as necessary to permit the Borrower
and its Subsidiaries to negotiate, draft and execute and perform under documents
related to, and structure and participate in transactions
contemplated by the documents related to, any Mortgage Transaction) the
restrictions contained in
(1) Section 7.02(a) of the Credit Agreement on sales,
transfers and leases of property;
(2) Section 7.02(b) of the Credit Agreement on liens;
(3) Section 7.02(c) of the Credit Agreement on additional
indebtedness; and
(4) Section 7.02(d) of the Credit Agreement on investments and
Section 7.02(g) of the Credit Agreement on stock issuances
of Subsidiaries, but only insofar as to permit the
Borrower or any one of its Subsidiaries to create a
special purpose vehicle deemed necessary or advisable by
the Borrower to execute a Mortgage Transaction;
in each case subject to the conditions described in Section 4(c) of this Waiver
and Amendment. Anything herein or elsewhere to the contrary notwithstanding,
such waivers are granted only insofar as necessary to permit the Mortgage
Transactions.
(c) Conditions. The waivers in Section 4(b) above will not be
effective, and shall become immediately null, void and unenforceable in their
entirety, if any of the following conditions are not satisfied:
(1) in the aggregate, the Mortgage Transactions may not relate
to real property having a Fair Market Value (as certified
under the Credit Agreement) of greater than $60 million
and any New Indebtedness from the Mortgage Transactions
may not be in an amount greater than $50 million;
(2) notwithstanding Section 7.02(a) of the Credit Agreement
and, in particular, its conditions for sale-leaseback
transactions, all of the net proceeds (100%) of any
Mortgage Transaction shall be deemed to be proceeds of New
Indebtedness, not proceeds of a sale, transfer or lease,
and must be used by the Borrower and its Subsidiaries to
(i) reduce the Total Commitment by an amount equal to such
net proceeds in accordance with Section 2.03(c) of the
Credit Agreement, and (ii) prepay Loans in an amount equal
to such net proceeds in accordance with Section 2.05(b) of
the Credit Agreement not later than the close of business
on the third Business Day after the receipt of such
proceeds;
(3) transfers and leases of real property will be permitted
between the Borrower or any of its Subsidiaries and an
Affiliate, but only insofar as to permit the execution of
a Mortgage Transaction involving a special purpose entity
that is an Affiliate or as otherwise permitted under the
Credit Agreement;
(4) prior to execution of any documents related to a Mortgage
Transaction, the Borrower shall provide a copy of all
draft documents (including any
and all schedules or exhibits thereto) to the
Administrative Agent and the Agent, in its sole
discretion, shall have determined (as Administrative
promptly as practicable after receipt of such documents)
that (i) the documents and provisions contained therein
are consistent with the requirements of the Credit
Agreement as modified or waived by this Waiver and
Amendment; and (ii) the Mortgage Transaction described by
such documents satisfies all of the conditions set forth
in this Section 4(c); and
(5) the Borrower or the appropriate Subsidiary executes a
Mortgage Transaction that satisfies all of the conditions
set forth in this Section 4(c).
Section 5. Miscellaneous.
-------------
(a) All capitalized terms not otherwise defined in this Waiver
and Amendment shall have the meanings ascribed to them in the Credit Agreement
or the Security Agreement.
(b) All provisions in Article XI of the Credit Agreement and
Section 14 of the Security Agreement shall apply to this Waiver and Amendment
with equal force and effect as if restated completely herein.
(c) Except as set forth in this Waiver and Amendment, the
Credit Agreement and the Security Agreement shall remain in full force and
effect without amendment, modification or waiver. Execution and delivery hereof
by a Lender or the Agent shall not preclude the exercise by such Lender or the
Agent of any rights under the Credit Agreement or the Security Agreement (each
as amended by this Waiver and Amendment).
(d) This Waiver and Amendment shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state.
(e) This Waiver and Amendment shall be effective on the first
date as of which a counterpart hereof has been executed and delivered to the
Administrative Agent by the Borrower and all of the Lenders under the Credit
Agreement.
[THE NEXT PAGE IS A SIGNATURE PAGE.]
[CREDIT AGREEMENT SIGNATURE PAGES]
IN WITNESS WHEREOF, the parties to the Credit Agreement have
caused this Waiver and Amendment to be duly executed as of the date first above
written.
APOGEE ENTERPRISES, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
THE BANK OF NEW YORK, as
Administrative Agent, L/C Issuer and Swing Line
Lender in the Credit Agreement
By: /s/ John-Paul Marotta
--------------------------------------
Name: John-Paul Marotta
Title: Vice President
LENDERS (and other Agents)
--------------------------
THE BANK OF NEW YORK, as a Lender in
the Credit Agreement
By: /s/ John-Paul Marotta
--------------------------------------
Name: John-Paul Marotta
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION, as|
Syndication Agent and a Lender in the Credit
Agreement
By: /s/ Matthew A. Ross
--------------------------------------
Name: Matthew A. Ross
Title: Sr. Vice President
HARRIS TRUST AND SAVINGS BANK, as
Documentation Agent and a Lender in the Credit
Agreement
By: /s/ Andrew T. Claar
--------------------------------------
Name: Andrew T. Claar
Title: Vice President
THE BANK OF NOVA SCOTIA, as Co-Agent
and a Lender in the Credit Agreement
By: /s/ M.A. Thomas
--------------------------------------
Name: M.A. Thomas
Title: Senior Manager
COMERICA BANK, as Co-Agent and a Lender
in the Credit Agreement
By: /s/ Timothy O'Rourke
--------------------------------------
Name: Timothy O'Rourke
Title: Vice President
SUMITOMO MITSUI BANKING CORPORATION,
as a Lender in the Credit Agreement
By: /s/ John H. Kemper
--------------------------------------
Name: John H. Kemper
Title: Senior Vice President
WELLS FARGO BANK, N.A., as a Lender in
the Credit Agreement
By: /s/ Molly S. Van Metre
--------------------------------------
Name: Molly S. Van Metre
Title: Vice President and Senior Banker
WELLS FARGO BANK, N.A., as a Lender in
the Credit Agreement
By: /s/ Chad M. Kortgard
--------------------------------------
Name: Chad M. Kortgard
Title: Assistant Vice President
REGIONS BANK, as a Lender in the Credit
Agreement
By: /s/ Tammy M. Foschee
--------------------------------------
Name: Tammy M. Foschee
Title: Assistant Vice President
[SECURITY AGREEMENT SIGNATURE PAGES]
IN WITNESS WHEREOF, the parties to the Security Agreement have
caused this Waiver and Amendment to be duly executed as of the date first above
written.
DEBTORS:
-------
APOGEE ENTERPRISES, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
HARMON, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
VIRACON/CURVLITE, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
APOGEE WAUSAU GROUP, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
VIRACON, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
VIRATEC THIN FILMS, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
TRU VUE, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
HARMON GLASS COMPANY
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
VIRACON GEORGIA, INC.
By: /s/ Gary R. Johnson
--------------------------------------
Name: Gary R. Johnson
Title: V.P. - Treasurer
Accepted and Agreed to in New York,
New York as of the date first above written
THE BANK OF NEW YORK,
as Agent for the Secured Creditors
By: /s/ Paul Marotta
--------------------------------------
Name: John-Paul Marotta
Title: Vice President
