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 19 Table of Contents 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 25, 2023 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. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO). In fiscal 2022, we conducted a strategic review of our business and the markets we serve in order to establish a new enterprise strategy with three key elements, as discussed below: 1. Become the economic leader in our target markets. We will achieve this by developing a deep understanding of our target markets and aligning our businesses with clear go-to-market strategies to drive value for our customers through differentiated product and service offerings. We will also build a relentless focus on operational execution, driving productivity improvements, and maintaining a competitive cost structure, so that we may bring more value to our customers and improve our own profitability. 2. Actively manage our portfolio to drive higher margins and returns. We intend to shift our business mix toward higher operating margin offerings and improve our return on invested capital performance. We will accomplish this by allocating resources to grow our top performing businesses, actively addressing underperforming businesses, and investing to add new differentiated product and service offerings to accelerate our growth. 3. Strengthen our core capabilities. We are shifting from our historical, decentralized operating model, to one with center-led functional expertise that enables us to leverage the scale of the enterprise to better support the needs of the business. We are establishing a Company-wide operating system with common tools and processes that are based on the foundation of Lean and Continuous Improvement, which we are calling "Apogee Management System or AMS". This will be supported by a robust talent management program and a commitment to strong governance to ensure compliance and drive sustainable performance. We have made significant progress toward these financial targets through the execution of our strategy. We advanced our AMS initiatives, which have resulted in meaningful productivity improvements, particularly in Architectural Glass. We increased our focus on differentiated products and services, and effectively managed pricing to share in the value we delivered for our customers. We have focused on sustainable cost improvements and improvements to quality, service and delivery, while shifting mix toward more differentiated offerings. We integrated the Sotawall business into the Architectural Services segment, in order to create a single, unified offering for larger custom curtainwall projects. We advanced several initiatives to strengthen our core capabilities, driving the standardization of key business processes and systems. We also relaunched our talent development and leadership training programs and added key talent across the organization. The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended February 25, 2023 and the consolidated financial statements, including the notes to consolidated financial statements, included therein. 20 Table of Contents Highlights of First Quarter of Fiscal 2024 Compared to First Quarter of Fiscal 2023 Net sales Consolidated net sales increased 1.4%, or $5.1 million, for the three-month period ended May 27, 2023, compared to the same period in the prior year, primarily driven by strong growth in the Architectural Glass segment, partially offset by a decline in the Architectural Services segment. The relationship between various components of operations, as a percentage of net sales, is presented below: Three Months Ended May 27, 2023 May 28, 2022 Net sales 100.0 % 100.0 % Cost of sales 74.3 76.0 Gross profit 25.7 24.0 Selling, general and administrative expenses 16.4 14.7 Operating income 9.3 9.3 Interest expense, net 0.6 0.3 Other expense, net 0.1 0.4 Earnings before income taxes 8.7 8.6 Income tax expense 2.2 2.2 Net earnings 6.5 % 6.4 % Effective tax rate 25.0 % 26.0 % Gross profit Gross profit as a percent of sales (gross margin) was 25.7% for the three-month period ended May 27, 2023, compared to 24.0% for the three-month period ended May 28, 2022. The improvement was driven primarily by strong performance in the Architectural Glass segment, partially offset primarily by lower margins in the Architectural Services and Architectural Framing segment. Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales was 16.4% for the three-month period ended May 27, 2023, compared to 14.7% for the prior year three-month period. SG&A increased as a percent of sales compared to the three-month period in the prior year primarily due to an increase in compensation related expenses, higher consulting costs, and higher allowance for credit losses. Interest expense Interest expense as a percent of sales was 0.6% for the three-month period ended May 27, 2023, compared to 0.3% for the prior year three-month period, primarily due to an increase in interest rates for the current year period. Income tax expense The effective income tax rate in the first quarter of fiscal 2024 was 25.0%, compared to 26.0% in the same period last year, primarily due to an increase to the valuation allowance related to foreign net operating loss carryforwards in the prior year. 21 Table of Contents Segment Analysis The following table summarizes net sales, operating income (loss) and operating margin by segment and consolidated total. Three Months Ended (In thousands, except percentages) May 27, 2023 May 28, 2022 Segment net sales Architectural Framing Systems $ 164,162 $ 163,292 Architectural Glass 97,202 76,265 Architectural Services 89,418 103,388 Large-Scale Optical 22,456 25,162 Intersegment eliminations (11,525) (11,472) Net sales $ 361,713 $ 356,635 Segment operating income (loss) Architectural Framing Systems $ 19,945 $ 23,665 Architectural Glass 16,521 5,169 Architectural Services (596) 2,927 Large-Scale Optical 5,525 6,498 Corporate and other (7,628) (5,043) Operating income $ 33,767 $ 33,216 Segment operating margin Architectural Framing Systems 12.1 % 14.5 % Architectural Glass 17.0 6.8 Architectural Services (0.7) 2.8 Large-Scale Optical 24.6 25.8 Corporate and other N/M N/M Operating income 9.3 % 9.3 % N/M Indicates calculation not meaningful. Architectural Framing Systems Three Months Ended (In thousands) May 27, 2023 May 28, 2022 % Change Net sales $ 164,162 $ 163,292 0.5 % Operating income 19,945 23,665 (15.7) % Operating margin 12.1 % 14.5 % Architectural Framing Systems net sales increased $0.9 million, or 0.5%, for the three-month period ended May 27, 2023, compared to the prior year period, driven by improved pricing and mix, which offset lower volume, as the segment continues to increase focus on target markets where it can provide differentiated offerings. Operating margin decreased 240 basis points for the three-month period of the current year, compared to the same period in the prior year, primarily reflecting favorable timing of inventory flows and aluminum prices in the prior year, which did not repeat in this year's first quarter. As of May 27, 2023, segment backlog was approximately $221 million, compared to approximately $243 million at the end of the prior quarter, and to approximately $310 million at the end of the first quarter of fiscal 2023. 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 visibility into future business commitments beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog. 22 Table of Contents Architectural Glass Three Months Ended (In thousands) May 27, 2023 May 28, 2022 % Change Net sales $ 97,202 $ 76,265 27.5 % Operating income 16,521 5,169 219.6 % Operating margin 17.0 % 6.8 % Net sales increased $20.9 million, or 27.5%, for the three-month period ended May 27, 2023, compared to the same period in the prior year, driven by improved pricing, higher volume, and a more favorable sales mix, reflecting the segment's strategic shift to emphasize premium, high-performance products. Operating margin increased by 10.2 percentage points primarily driven by improved pricing, favorable mix, and increased volume, partially offset by cost inflation. Architectural Services Three Months Ended (In thousands) May 27, 2023 May 28, 2022 % Change Net sales $ 89,418 $ 103,388 (13.5) % Operating (loss) income (596) 2,927 N/M Operating margin (0.7) % 2.8 % N/M Indicates calculation not meaningful. Architectural Services net sales decreased $14.0 million, or 13.5% for the three-month period ended May 27, 2023, compared to the same period in the prior year, primarily reflecting lower volume. In the current quarter, the segment had negative operating margin of 0.7%, compared to operating margin of 2.8% in the same period of the prior year, primarily due to the impact of lower estimated profitability levels on certain projects, the unfavorable leverage impact of lower net sales, and severance costs related to a facility closure. As of May 27, 2023, segment backlog was approximately $709 million, compared to approximately $727 million at the end of the prior quarter, and to approximately $681 million at the end of the first quarter of fiscal 2023. Backlog, a non-GAAP financial measure, and the implications thereof, are described within the Architectural Framing Systems discussion above. Large-Scale Optical (LSO) Three Months Ended (In thousands) May 27, 2023 May 28, 2022 % Change Net sales $ 22,456 $ 25,162 (10.8) % Operating income 5,525 6,498 (15.0) % Operating margin 24.6 % 25.8 % LSO net sales decreased $2.7 million, or 10.8%, for the three-month period ended May 27, 2023 compared to the same period in the prior year, primarily reflecting lower volume due to timing of customer orders and customer inventory destocking. Operating margin decreased 120 basis points in the three-month period of the current year, compared to the same period in the prior year, primarily reflecting the unfavorable leverage impact of lower net sales. Corporate and other Our corporate and other expenses increased $2.6 million for the three-month period ended May 27, 2023 compared to the same period in the prior year, primarily due to an increase in compensation expense and higher consulting costs. 23 Table of Contents Liquidity and Capital Resources Selected cash flow data Three Months Ended (In thousands) May 27, 2023 May 28, 2022 Operating Activities Net cash provided (used) by operating activities $ 21,287 $ (30,462) Investing Activities Capital expenditures (7,398) (5,125) Proceeds from sales of property, plant and equipment 66 4,087 Net cash used by investing activities (6,932) (938) Financing Activities Borrowings on line of credit 105,852 161,000 Payments on line of credit (105,000) (62,000) Repurchase and retirement of common stock (5,193) (74,312) Dividends paid (5,245) (4,793) Net cash (used) provided by financing activities (11,263) 17,624 We rely on cash provided by operations for the Company’s material cash requirements, including working capital needs, capital expenditures, satisfaction of contractual commitments (including principal and interest payments on our outstanding indebtedness) and shareholder return through dividend payments and share repurchases. Operating Activities. Net cash provided by operating activities was $21.3 million for the first three months of fiscal 2024, compared to $30.5 million of net cash used by operating activities in the prior year period, primarily reflecting lower working capital requirements for the current year period. Investing Activities. Net cash used by investing activities was $6.9 million for the first three months of fiscal 2024, driven primarily by capital expenditures of $7.4 million. In the first three months of the prior year, net cash used by investing activities was $0.9 million, primarily driven by capital expenditures of $5.1 million, partially offset by proceeds from sales of property, plant and equipment of $4.1 million. The majority of our capital expenditures in the current year and prior year periods are to support future growth and cost reduction initiatives. Financing Activities. Net cash used by financing activities was $11.3 million for the first three months of fiscal 2024, compared to net cash provided by financing activities of $17.6 million in the prior year period. The usage in the current year period was primarily driven by share repurchases and dividend payments totaling $10.4 million, while the prior year period included $99.0 million of net debt borrowings, partially offset by $79.1 million of share repurchases and dividend payments. We paid dividends totaling $5.2 million ($0.24 per share) in the first three months of fiscal 2024, compared to $4.8 million ($0.22 per share) in the comparable prior year period. During the first three months of fiscal 2024, we repurchased 119,916 shares under our authorized share repurchase program, for a total cost of $5.2 million. In the first three months of fiscal 2023, we repurchased 1,571,139 shares under the share repurchase program, for a total cost of $74.3 million. In fiscal 2004, announced on April 10, 2003, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock. The Board increased the authorization by 750,000 shares, announced on January 24, 2008; by 1,000,000 shares on each of the announcement dates of October 8, 2008, January 13, 2016, January 9, 2018, January 14, 2020, October 7, 2021, and June 22, 2022; and by 2,000,000 shares, on each of the announcement dates of October 3, 2018 and January 14, 2022. The repurchase program does not have an expiration date. Since the inception of the share repurchase program in 2004, we have purchased a total of 11,116,517 shares, at a total cost of $386.8 million. As of May 27, 2023, we had remaining authority to repurchase an additional 1,133,483 shares under this program. We may also elect to repurchase additional shares of common stock under our authorization, subject to limitations contained in our debt agreements and based upon our assessment of a number of factors, including share price, trading volume and general market conditions, working capital requirements, general business conditions, financial conditions, any applicable contractual limitations, and other factors, including alternative investment opportunities. We may finance share repurchases with available cash, additional debt or other sources of financing. Additional Liquidity Considerations. We periodically evaluate our liquidity requirements, cash needs and availability of debt resources relative to acquisition plans, significant capital plans, and other working capital needs. 24 Table of Contents As of the end of the first quarter of fiscal 2024, we had a committed revolving credit facility with maximum borrowings of up to $385 million, with a maturity date of August 5, 2027, and two Canadian committed, revolving credit facilities totaling $25 million (USD). At May 27, 2023, we had outstanding borrowings under our committed, revolving credit facility of $155.0 million, and $3.7 million outstanding under the Canadian committed, revolving credit facility. We are required to make periodic interest payments on our outstanding indebtedness, and future interest payments will be determined based on the amount of outstanding borrowings and prevailing interest rates during that time. Our revolving credit facility contains two maintenance financial covenants that require us to stay below a maximum debt-to-EBITDA ratio of 3.25 and maintain a minimum ratio of EBITDA-to-interest expense of 3.00. In the event we make an acquisition for which the purchase price is greater than $75 million, we can elect to increase the maximum debt-to-EBITDA ratio to 3.75 for a period of four consecutive fiscal quarters, commencing with the fiscal quarter in which a qualifying acquisition occurs. No more than two acquisition "holidays" can occur during the term of the facility, and at least two fiscal quarters must separate qualifying acquisitions. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At May 27, 2023, we were in compliance with both financial covenants (which are identical in both of our revolving credit facilities). Borrowings under the credit facility bear floating interest at either the Base Rate or Term SOFR, plus a margin based on the Leverage Ratio (as defined in the Credit Agreement). For Base Rate borrowings the margin ranges from 0.125% to 0.75%. For Term SOFR borrowings the margin ranges from 1.135% to 1.85%. The facility also contains an "accordion" provision. Under this provision, we can request that the facility be increased by as much $200.0 million. Any Lender may elect or decline to participate in the requested increase at the Lender’s sole discretion. Additionally, at May 27, 2023, we had a total of $12.3 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2024 to 2032 and reduce borrowing capacity under the revolving credit facility. As of May 27, 2023, the amount available for revolving borrowings under the Wells Fargo credit facility was $217.7 million. We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Future payments for such leases, excluding leases with initial terms of one year or less, were $46.7 million at May 27, 2023, with $9.5 million payable during the remainder of fiscal 2024. As of May 27, 2023, we had $31.6 million of open purchase obligations, of which payments totaling $22.4 million are expected to become due during the remainder of fiscal 2024. These purchase obligations primarily relate to raw material commitments and capital expenditures and are not expected to impact future liquidity, as amounts should be recovered through customer billings. We expect to make contributions of $0.7 million to our defined-benefit pension plans in fiscal 2024, which will equal or exceed our minimum funding requirements. As of May 27, 2023, we had reserves of $5.2 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 May 27, 2023, $1.3 billion of these types of bonds were outstanding, of which $503.4 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. We continue to evaluate acquisition opportunities on a regular basis. We may finance acquisition activity with available cash, the issuance of shares of common stock, additional debt, or other sources of financing, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition. Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facilities, we believe that our sources of liquidity will be adequate to meet our short-term and long-term liquidity and capital expenditure needs. In addition, we believe that we have the ability currently to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. We also believe that we will be able to operate our business so as to continue to be in compliance with our existing debt covenants over the next fiscal year. 25 Table of Contents 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 25, 2023. 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 25, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2023 for a discussion of the Company’s market risk. There have been no material changes in market risk since February 25, 2023.