APOGEE ENTERPRISES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements This Quarterly Report on Form 10-Q, including the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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,” "will," "continue" 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. From time to time, we may also 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 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 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. Information about factors that could materially affect our results can be found in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended February 27, 2021 and in subsequent filings with the U.S. Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. We also wish 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. We undertake 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 the design and development of value-added glass and metal products and services for enclosing commercial buildings and framing and displays. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO). The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended February 27, 2021 and the consolidated financial statements, including the notes to consolidated financial statements, included therein. Highlights of Second Quarter of Fiscal 2022 Compared to Second Quarter of Fiscal 2021 Net sales Consolidated net sales increased 2.0 percent, or $6.3 million, and increased 7.1 percent, or $43.2 million, for the three- and six-month periods ended August 28, 2021, compared to the same periods in the prior year, primarily driven by volume growth in the Architectural Services and LSO segments. LSO was closed for most of the first and second quarters of fiscal 2021, due to COVID-19. 21 Table of Contents The relationship between various components of operations, as a percentage of net sales, is presented below: Three Months Ended Six Months Ended August 28, 2021 August 29, 2020 August 28, 2021 August 29, 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 85.3 76.2 82.2 77.6 Gross margin 14.7 23.8 17.8 22.4 Selling, general and administrative expenses 15.7 16.6 15.8 17.5 Operating (loss) income (0.9) 7.3 2.0 4.9 Interest expense, net 0.3 0.4 0.4 0.5 Other income (expense), net — 0.4 — — (Loss) earnings before income taxes (1.2) 7.2 1.6 4.5 Income tax (benefit) expense (0.6) 1.7 0.3 1.1 Net (loss) earnings (0.6) % 5.5 % 1.3 % 3.4 % Effective tax rate 47.6 % 23.7 % 16.8 % 24.4 % Gross profit Gross profit as a percent of sales (gross margin) was 14.7 percent and 17.8 percent for the three- and six-month periods ended August 28, 2021, compared to 23.8 percent and 22.4 percent for the three- and six-month periods ended August 29, 2020. Gross margin decreased in the current year three- and six-month periods compared to the prior year, primarily due to $18.5 million of restructuring charges included in cost of goods sold incurred during the second quarter of fiscal 2022, as well as inflationary pressure on raw materials and freight within the Architectural Glass and Architectural Framing Systems segments. These costs were partially offset by positive impacts from continued recovery of the LSO segment (which closed for most of the first and second quarters last year, based on COVID-related government directives). Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales were 15.7 percent and 15.8 percent for the three- and six-month periods ended August 28, 2021, compared to 16.6 percent and 17.5 percent for the prior year three- and six-month periods. SG&A decreased as a percent of sales compared to the same period in the prior year primarily due to ongoing controlling of spending across all segments of the business, partially offset by higher Corporate and other costs related to investments in transformation initiatives and increased health care costs. In addition, we recognized a benefit of $1.8 million and $4.5 million during the three- and six-month periods ended August 28, 2021, respectively, compared to $1.3 million in the prior year three- and six-month periods, from a Canadian wage subsidy program offered to support Canadian businesses due to the ongoing impacts of the COVID-19 pandemic. Income tax expense The effective income tax rate in the second quarter of fiscal 2022 was a benefit of 47.6 percent, compared to expense of 23.7 percent in the same period last year. During the second quarter, the tax rate was favorably impacted by the release of a $1.2 million valuation allowance on certain state net operating losses, which is the result of tax planning identified due to the realignment and simplification of our business structure. The effective tax rate was 16.8 percent for the first six months of fiscal 2022, compared to 24.4 percent in the prior year period, with the rate decrease also primarily related to the release of the valuation allowance, as well as lower year-to-date net income. Segment Analysis Architectural Framing Systems Three Months Ended Six Months Ended (In thousands) August 28, 2021 August 29, 2020 % Change August 28, 2021 August 29, 2020 % Change Net sales $ 149,972 $ 152,927 (1.9) % $ 301,812 $ 303,091 (0.4) % Operating income 8,278 11,697 (29.2) % 16,338 18,993 (14.0) % Operating margin 5.5 % 7.6 % 5.4 % 6.3 % Architectural Framing Systems net sales decreased $3.0 million, or 1.9 percent, and decreased $1.3 million, or 0.4 percent for the three- and six-month periods ended August 28, 2021, compared to the prior-year periods, primarily reflecting lower volume, partially offset by improved pricing. 22 Table of Contents Operating margin decreased 210 basis points and 90 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year, reflecting increased costs for materials and freight, the impact of lower volume, as well as $2.0 million of restructuring costs incurred during the current year second quarter, partially offset by improved pricing and benefits from restructuring actions implemented in fiscal 2021. As previously announced, this segment incurred restructuring-related termination costs in the quarter related to realignment of the segment to increase focus on target markets, better serve customers, improve operational execution, and reduce overall costs. In addition, this segment benefited from a Canadian wage subsidy of $1.8 million and $4.5 million during the three- and six-month periods ended August 28, 2021, respectively, compared to $1.3 million in the prior-year three- and six-month periods, as a result of a program to support Canadian businesses due to the ongoing impacts of the COVID-19 pandemic. As of August 28, 2021, segment backlog was approximately $406 million, compared to approximately $423 million at the end of the prior quarter, and $404 million at the end of the second quarter of the prior year. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog. Architectural Glass Three Months Ended Six Months Ended (In thousands) August 28, 2021 August 29, 2020 % Change August 28, 2021 August 29, 2020 % Change Net sales $ 79,373 $ 86,584 (8.3) % $ 162,404 $ 163,495 (0.7) % Operating (loss) income (16,995) 4,976 N/M (14,867) 4,482 N/M Operating margin (21.4) % 5.7 % (9.2) % 2.7 % Net sales decreased $7.2 million, or 8.3 percent, and $1.1 million, or 0.7 percent, for the three- and six-month periods ended August 28, 2021, compared to the same period in the prior year, primarily reflecting lower volume. In the current quarter, the segment had operating loss of $17.0 million and negative operating margin of 21.4 percent, compared to operating income of $5.0 million and operating margin of 5.7 percent in the same period of the prior year. These results were primarily driven by $17.4 million of restructuring costs incurred during the current year second quarter, as well as increased costs for materials and freight, and the impact of lower volume and price, partially offset by an improved sales mix and increased factory productivity. As previously announced, this segment incurred restructuring charges related to the closure of two operating facilities and the associated employee termination costs in the quarter. This restructuring will enable the segment to emphasize more premium, high-performance products in its business. For the six months ended August 28, 2021, the segment had an operating loss of $14.9 million and negative operating margin of 9.2 percent, compared to operating income of $4.5 million and operating margin of 2.7 percent in the prior year, primarily due to the restructuring costs incurred during the second quarter of the current year. Architectural Services Three Months Ended Six Months Ended (In thousands) August 28, 2021 August 29, 2020 % Change August 28, 2021 August 29, 2020 % Change Net sales $ 83,031 $ 73,670 12.7 % $ 158,686 $ 137,221 15.6 % Operating income 7,242 6,569 10.2 % 11,779 11,912 (1.1) % Operating margin 8.7 % 8.9 % 7.4 % 8.7 % Architectural Services net sales increased $9.4 million, or 12.7 percent, and $21.5 million, or 15.6 percent, for the three- and six-month periods ended August 28, 2021, compared to the same periods in the prior year, driven by increased volume from executing projects in backlog. Operating margin decreased 20 basis points and 130 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year, primarily reflecting a less favorable project mix. Additionally, the six-month period was negatively impacted by isolated performance challenges on certain projects experienced during the first quarter of fiscal 2022. 23 Table of Contents As of August 28, 2021, segment backlog was approximately $572 million, compared to approximately $559 million as of the end of the prior quarter, and $665 million at the end of the second quarter of the prior year. Backlog is described within the Architectural Framing Systems discussion above. Large-Scale Optical (LSO) Three Months Ended Six Months Ended (In thousands) August 28, 2021 August 29, 2020 % Change August 28, 2021 August 29, 2020 % Change Net sales $ 23,543 $ 16,860 39.6 % $ 47,772 $ 23,171 106.2 % Operating income (loss) 5,483 2,149 155.1 % 11,330 (984) N/M Operating margin 23.3 % 12.7 % 23.7 % (4.2) % LSO net sales increased $6.7 million or 39.6 percent, and $24.6 million or 106.2 percent for the three- and six-month periods ended August 28, 2021, compared to the same periods in the prior year, reflecting favorable mix and increased volume, as demand recovered from the impact of COVID in the prior year. In fiscal 2021, the segment's customers and manufacturing operations were closed for a large part of the first and second quarters to comply with COVID-related government directives. In the current quarter, the segment had operating income of $5.5 million and operating margin of 23.3 percent, compared to operating income of $2.1 million and operating margin of 12.7 percent in the same period of the prior year, primarily driven by the improved sales mix and increased volume. For the six months ended August 28, 2021, the segment had operating income of $11.3 million and operating margin of 23.7 percent, compared to operating loss of $1.0 million and negative operating margin of 4.2 percent, reflecting the improved mix and volume noted above. Liquidity and Capital Resources Selected cash flow data Six Months Ended (In thousands) August 28, 2021 August 29, 2020 Operating Activities Net cash provided by operating activities $ 54,907 $ 85,330 Investing Activities Capital expenditures (10,121) (14,224) Financing Activities Borrowings on line of credit — 192,581 Payments on line of credit — (237,500) Repurchase and retirement of common stock (22,419) (4,731) Dividends paid (10,060) (9,751) Operating Activities. Net cash provided by operating activities was $54.9 million for the first six months of fiscal 2022, a decrease of $30.4 million compared to the prior-year period, reflecting a decline in net earnings of $11.8 million in the current-year period compared to the prior-year period, as well as, the impact of temporary actions related to COVID in the prior-year period. Investing Activities. Net cash used by investing activities was $8.8 million for the first six months of fiscal 2022, driven primarily by capital expenditures of $10.1 million. In the first six months of the prior year, net cash used by investing activities was $15.2 million, driven by capital expenditures of $14.2 million. Capital expenditures in the current year declined $4.1 million from the prior year due to slower spending within the Architectural Glass segment. Financing Activities. Net cash used by financing activities was $32.2 million for the first six months of fiscal 2022, compared to $66.1 million in the prior-year period, reflecting net debt repayments of $45 million in the prior year. Additionally, in the first six months of the current year, we made share repurchases totaling $22.4 million, compared to $4.7 million in the prior year six-month period. At August 28, 2021, we were in compliance with the financial covenants under our revolving credit facility and term loan. We paid dividends totaling $10.1 million ($0.4000 per share) in the first six months of fiscal 2022, compared to $9.8 million ($0.3750 per share) in the comparable prior-year period. During the first six months of fiscal 2022, we repurchased 589,533 shares under our authorized share repurchase program, for a total cost of $22.0 million. In the first six months of fiscal 2021, we repurchased 231,492 shares under the share repurchase program, for a total cost of $4.7 million. Since the inception of the share repurchase program in 2004, we have purchased a total of 7,722,149 shares, at a total cost of $229.3 million. We currently have 24 Table of Contents remaining authority to repurchase an additional 527,851 shares under this program. We will continue to evaluate making future share repurchases, considering our cash flow, debt levels and market conditions, in the context of all our capital allocation options, with the goal of maximizing long-term value for our shareholders. Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of August 28, 2021: Payments Due by Fiscal Period (In thousands) Remainder of Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Fiscal 2026 Thereafter Total Debt obligations $ — $ 1,000 $ — $ 150,000 $ — $ 12,000 $ 163,000 Operating leases (undiscounted) 6,956 12,843 10,871 9,597 7,726 12,923 60,916 Purchase obligations 116,487 81,122 2,815 1,433 1,433 487 203,777 Total cash obligations $ 123,443 $ 94,965 $ 13,686 $ 161,030 $ 9,159 $ 25,410 $ 427,693 We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Purchase obligations in the table above relate to raw material commitments and capital expenditures. We expect to make contributions of $0.7 million to our defined-benefit pension plans in fiscal 2022, which will equal or exceed our minimum funding requirements. As of August 28, 2021, we had reserves of $3.8 million for unrecognized tax benefits. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits will ultimately be settled. We are required, in the ordinary course of business, to provide surety or performance bonds that commit payments to our customers for any non-performance. At August 28, 2021, $1.2 billion of these types of bonds were outstanding, of which $490.1 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses. During calendar 2020, we took advantage of the option to defer remittance of the employer portion of Social Security tax as provided in the CARES Act. This deferral allowed us to retain cash during calendar year 2020 that would have otherwise been remitted to the federal government. At the end of fiscal 2021, we had deferred tax payments of $13.6 million, which are included within accrued payroll and other benefits and other non-current liabilities on our consolidated balance sheets. The deferred tax payments will be repaid in two equal portions in calendar years 2021 and 2022. Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facility, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments for at least the next 12 months. While we believe we have adequate sources of liquidity to continue to fund our business for at least the next 12 months, the extent to which the ongoing COVID-19 pandemic may impact our results of operations or liquidity is uncertain. The extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors including, but not limited to, the emergence of new variants of the coronavirus, such as the Delta variant, and the effectiveness of ongoing public health initiatives, which have been buoyed by vaccine production and distribution. Off-balance sheet arrangements. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Outlook The company previously provided guidance of full-year GAAP earnings in the range of $2.20 to $2.40 per diluted share. The company is now providing guidance of full-year adjusted earnings in the range of $2.20 to $2.40 per diluted share, which excludes the impact of restructuring costs. This guidance includes $7 to $10 million of expected pre-tax costs related to investments in transformation initiatives. We expect a tax rate of approximately 24.5 percent in the second half of fiscal 2022, and full-year capital expenditures of approximately $35 million. Related Party Transactions No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021. 25 Table of Contents Critical Accounting Policies There have been no material changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021.