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. 21 Table of Contents 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 Third Quarter of Fiscal 2022 Compared to Third Quarter of Fiscal 2021 Net sales Consolidated net sales increased 6.6 percent, or $20.6 million, and increased 6.9 percent, or $63.9 million, for the three- and nine-month periods ended November 27, 2021, compared to the same periods in the prior year, primarily driven by volume growth in the Architectural Services and LSO segments, as well as, flow-through from pricing actions taken to offset inflation within the Architectural Framing segment. LSO was closed for most of the first and second quarters of fiscal 2021, due to COVID-19. The relationship between various components of operations, as a percentage of net sales, is presented below: Three Months Ended Nine Months Ended November 27, 2021 November 28, 2020 November 27, 2021 November 28, 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 80.6 77.8 81.7 77.7 Gross margin 19.4 22.2 18.3 22.3 Selling, general and administrative expenses 14.1 6.3 15.2 13.7 Operating income 5.3 15.9 3.1 8.6 Interest expense, net 0.2 0.5 0.3 0.5 Other (expense) income, net (0.9) 0.2 (0.3) 0.1 Earnings before income taxes 4.2 15.5 2.5 8.2 Income tax expense 0.9 3.7 0.5 2.0 Net earnings 3.3 % 11.9 % 2.0 % 6.2 % Effective tax rate 21.7 % 23.5 % 19.6 % 23.8 % Gross profit Gross profit as a percent of sales (gross margin) was 19.4 percent and 18.3 percent for the three- and nine-month periods ended November 27, 2021, compared to 22.2 percent and 22.3 percent for the three- and nine-month periods ended November 28, 2020. Gross margin decreased in the current year three- and nine-month periods compared to the prior year, primarily due to $3.6 million and $22.1 million of restructuring charges included in cost of goods sold incurred during the three- and nine-month periods of the current fiscal year, 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). 22 Table of Contents Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales were 14.1 percent and 15.2 percent for the three- and nine-month periods ended November 27, 2021, compared to 6.3 percent and 13.7 percent for the prior year three- and nine-month periods. SG&A expenses in the three- and nine-month periods ended November 27, 2021, included increased Corporate and other costs, primarily related to investments in transformation initiatives in the current year periods and higher health care costs in the current year compared to the prior-year periods. Additionally, SG&A expenses in the prior year third quarter were reduced by a $19.3 million gain on the sale-leaseback of a building and $7.4 million of income related to a New Markets Tax Credit transaction, driving lower SG&A expenses as a percent of sales in the prior year three- and nine-month periods. In addition, we recognized a benefit of $1.0 million and $5.5 million during the three- and nine-month periods ended November 27, 2021, respectively, compared to $4.2 million and $5.5 million in the prior year three- and nine-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 third quarter of fiscal 2022 was 21.7 percent, compared to 23.5 percent in the same period last year, and 19.6 percent for the first nine months of fiscal 2022, compared to 23.8 percent in the prior year period. The rate decrease was primarily related to lower year-to-date net income, as well as, the release of a $1.2 million valuation allowance on certain state net operating losses, which is the result of a realignment and simplification of our business and legal-entity structure during the second quarter of fiscal 2022. Segment Analysis Architectural Framing Systems Three Months Ended Nine Months Ended (In thousands) November 27, 2021 November 28, 2020 % Change November 27, 2021 November 28, 2020 % Change Net sales $ 151,665 $ 136,688 11.0 % $ 453,476 $ 439,779 3.1 % Operating income 10,689 7,218 48.1 % 27,027 26,211 3.1 % Operating margin 7.0 % 5.3 % 6.0 % 6.0 % Architectural Framing Systems net sales increased $15.0 million, or 11.0 percent, and increased $13.7 million, or 3.1 percent for the three- and nine-month periods ended November 27, 2021, compared to the prior-year periods, primarily driven by flow-through from pricing actions taken to offset inflation. Operating margin increased 170 basis points for the three-month period of the current year, compared to the same period in the prior year, primarily driven by improved pricing and the benefits from restructuring actions, which offset increased costs for materials, freight and labor. As previously announced, the segment incurred restructuring-related termination costs in the second and third quarters of the current fiscal year related to realignment of the segment to increase focus on target markets, better serve customers, improve operational execution, and reduce overall costs. Operating margin was 6.0 percent for the nine-month periods in the current and prior fiscal years. In addition, this segment benefited from a Canadian wage subsidy of $1.0 million and $5.5 million during the three- and nine-month periods ended November 27, 2021, respectively, compared to $4.2 million and $5.5 million in the prior-year three- and nine-month periods, respectively, as a result of a program to support Canadian businesses due to the ongoing impacts of the COVID-19 pandemic. As of November 27, 2021, segment backlog was approximately $419 million, compared to approximately $406 million at the end of the prior quarter. 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 Nine Months Ended (In thousands) November 27, 2021 November 28, 2020 % Change November 27, 2021 November 28, 2020 % Change Net sales $ 74,289 $ 84,779 (12.4) % $ 236,693 $ 248,274 (4.7) % Operating (loss) income (1,277) 10,825 N/M (16,143) 15,306 N/M Operating margin (1.7) % 12.8 % (6.8) % 6.2 % 23 Table of Contents Net sales decreased $10.5 million, or 12.4 percent, and $11.6 million, or 4.7 percent, for the three- and nine-month periods ended November 27, 2021, compared to the same periods in the prior year, primarily reflecting lower volume due to weaker order backlog from fiscal year 2021, partially offset by an improved sales mix. In the current quarter, the segment had operating loss of $1.3 million and negative operating margin of 1.7 percent, compared to operating income of $10.8 million and operating margin of 12.8 percent in the same period of the prior year. For the nine-months ended November 27, 2021, the segment had an operating loss of $16.1 million and negative operating margin of 6.8 percent, compared to operating income of $15.3 million and operating margin of 6.2 percent in the prior year period. The results for the current year periods were primarily driven by $3.5 million and $20.9 million of restructuring costs for the three- and nine-month periods ended November 27, 2021, respectively. As previously announced, this segment incurred restructuring charges related to the closure of two operating facilities and the associated employee termination costs in the second and third quarters of the current fiscal year. This restructuring is intended to enable the segment to emphasize more premium, high-performance products in its business. The three- and nine-month periods of the prior fiscal year also included $7.4 million of operating income related to the settlement of a New Markets Tax Credit transaction during the third quarter of fiscal 2021. Architectural Services Three Months Ended Nine Months Ended (In thousands) November 27, 2021 November 28, 2020 % Change November 27, 2021 November 28, 2020 % Change Net sales $ 91,971 $ 76,690 19.9 % $ 250,657 $ 213,911 17.2 % Operating income 9,203 8,558 7.5 % 20,982 20,470 2.5 % Operating margin 10.0 % 11.2 % 8.4 % 9.6 % Architectural Services net sales increased $15.3 million, or 19.9 percent, and $36.7 million, or 17.2 percent, for the three- and nine-month periods ended November 27, 2021, compared to the same periods in the prior year, driven by increased volume from executing projects in backlog. Operating margin decreased 120 basis points in each of the three- and nine-month periods of the current year, compared to the same periods in the prior year, primarily reflecting a less favorable project mix. Additionally, the nine-month period was negatively impacted by isolated performance challenges on certain projects experienced during the first quarter of fiscal 2022. As of November 27, 2021, segment backlog of $572 million was unchanged from the end of the prior quarter. Segment backlog at the end of the third quarter of fiscal 2021 was approximately $597 million. Backlog is described within the Architectural Framing Systems discussion above. Large-Scale Optical (LSO) Three Months Ended Nine Months Ended (In thousands) November 27, 2021 November 28, 2020 % Change November 27, 2021 November 28, 2020 % Change Net sales $ 27,351 $ 25,267 8.2 % $ 75,122 $ 48,438 55.1 % Operating income (loss) 5,996 26,114 (77.0) % 17,326 25,131 (31.1) % Operating margin 21.9 % 103.4 % 23.1 % 51.9 % LSO net sales increased $2.1 million or 8.2 percent, and $26.7 million or 55.1 percent for the three- and nine-month periods ended November 27, 2021, compared to the same periods in the prior year, reflecting a more favorable sales mix, as demand recovered from the impact of COVID in the prior year nine-month period. In fiscal 2021, most of the segment's customers and the segment's manufacturing operations were closed for a large part of the first and second quarters to comply with COVID-related government directives. The segment had operating income of $6.0 million and $17.3 million and operating margin of 21.9 percent and 23.1 percent, for the three- and nine-month periods ended November 27, 2021, respectively, compared to operating income of $26.1 million and $25.1 million, and operating margin of 103.4 percent and 51.9 percent, in the same periods of the prior year. The decreases for the fiscal 2022 periods are primarily the result of a $19.3 million gain on the sale-leaseback of a segment manufacturing facility recorded during the prior year third quarter. 24 Table of Contents Liquidity and Capital Resources Selected cash flow data Nine Months Ended (In thousands) November 27, 2021 November 28, 2020 Operating Activities Net cash provided by operating activities $ 86,291 $ 120,512 Investing Activities Capital expenditures (13,070) (17,116) Proceeds from sale of property, plant and equipment 1,347 23,724 Financing Activities Borrowings on line of credit — 193,332 Payments on line of credit — (237,500) Repurchase and retirement of common stock (29,164) (20,731) Dividends paid (15,050) (14,546) Operating Activities. Net cash provided by operating activities was $86.3 million for the first nine months of fiscal 2022, a decrease of $34.2 million compared to the prior-year period, reflecting a decline in net earnings of $38.0 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 $11.6 million for the first nine months of fiscal 2022, driven primarily by capital expenditures of $13.1 million. In the first nine months of the prior year, net cash provided by investing activities was $5.5 million, driven by proceeds of $23.7 million on the sale-leaseback of a building, offset by capital expenditures of $17.1 million. Capital expenditures in the first nine months of the current year declined $4.0 million from the prior year due to slower investments while we conducted our strategic review. Financing Activities. Net cash used by financing activities was $44.0 million for the first nine months of fiscal 2022, compared to $85.7 million in the prior-year period, primarily driven by net debt repayments of $47.5 million in the prior year. Additionally, in the first nine months of the current year, we made share repurchases totaling $29.2 million, compared to $20.7 million in the prior year nine-month period. At November 27, 2021, we were in compliance with the financial covenants under our revolving credit facility and term loan. We paid dividends totaling $15.1 million ($0.6000 per share) in the first nine months of fiscal 2022, compared to $14.5 million ($0.5625 per share) in the comparable prior-year period. During the first nine months of fiscal 2022, we repurchased 755,384 shares under our authorized share repurchase program, for a total cost of $28.8 million. In the first nine months of fiscal 2021, we repurchased 852,029 shares under the share repurchase program, for a total cost of $20.7 million. Since the inception of the share repurchase program in 2004, we have purchased a total of 7,888,000 shares, at a total cost of $236.1 million. We currently have remaining authority to repurchase an additional 1,362,000 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 November 27, 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) 3,501 13,563 11,261 9,915 7,903 13,116 59,259 Purchase obligations 61,169 166,446 8,530 1,433 1,433 487 239,498 Total cash obligations $ 64,670 $ 181,009 $ 19,791 $ 161,348 $ 9,336 $ 25,603 $ 461,757 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. 25 Table of Contents 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 November 27, 2021, we had reserves of $4.0 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 November 27, 2021, $1.2 billion of these types of bonds were outstanding, of which $448.0 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 and Omicron variants, and the effectiveness of ongoing public health initiatives, which have been boosted 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 has narrowed its guidance for full-year adjusted earnings to a range of $2.25 to $2.40 per diluted share, from the previous range of $2.20 to $2.40. This guidance excludes the impact of restructuring and impairment costs. The company expects to record a pre-tax gain of approximately $19.0 million in the fourth quarter, related to the previously announced sale of its Architectural Glass facility in Statesboro, Georgia. The company intends to exclude this gain from its adjusted earnings results. The company continues to expect a long-term average tax rate of approximately 24.5 percent and continues to expect full-year capital expenditures of approximately $25 million, down from the previous estimate of approximately $35 million, as the company has slowed some investments while it conducted its strategic review. 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. 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, except as noted below. Goodwill and indefinite-lived intangible asset impairment Goodwill During the third quarter of fiscal 2022, we combined certain reporting units to form two reporting units, following certain structural and leadership changes at the Company, specifically within the Architectural Framing Systems segment. Within this segment, as a result of integration efforts that are ongoing, leadership over our Wausau, EFCO and Sotawall reporting units have been combined to form the Window and Wall Systems reporting unit, and our Linetec and Tubelite reporting units have been combined to form the Storefront and Finishing Solutions reporting unit. With these organizational changes, Architectural Framing Systems segment management regularly reviews and evaluates the results of the Window and Wall Systems and Storefront and Finishing Solutions reporting units. Additionally, functional leaders in areas such as operations, sales, marketing and general and administrative areas are responsible for allocating resources and reviewing results of the Window and Wall Systems and Storefront and Finishing Solutions reporting units. The goodwill of the five individual pre-integration reporting units was aggregated to the respective combined reporting units. We evaluated goodwill on a qualitative basis prior to and subsequent to this change and concluded no adjustment to the carrying value of goodwill was necessary as a result of this 26 Table of Contents change. In addition, for all reporting units, no qualitative indicators of impairment were identified during the third quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.