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 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. Non-GAAP Measures We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors, and include these measures in other communications to investors. For each of these non-GAAP financial measures, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why we believe the non-GAAP measure provides useful information to investors, and any additional material purposes for which our management or Board of Directors uses the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure. Adjusted net earnings and adjusted earnings per diluted share (adjusted diluted EPS) are supplemental non-GAAP financial measures provided by the Company to assess performance on a more comparable basis from period-to-period by excluding amounts that management does not consider part of core operating results. Management uses these non-GAAP 17 Table of Contents measures to evaluate the Company’s historical and prospective financial performance, measure operational profitability on a consistent basis, as a factor in determining executive compensation, and to provide enhanced transparency to the investment community. 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). The three key elements of our enterprise strategy are 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 executing our enterprise strategy and underlying financial targets. 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. Results of Operations The following tables provide various components of operations as year over year U.S. dollar and percentage change, as well as a percentage of net sales. Three Months Ended % of Net Sales (in thousands, except percentages) August 26, 2023 August 27, 2022 $ Change % Change August 26, 2023 August 27, 2022 Net sales $ 353,675 $ 372,109 $ (18,434) (5.0) % 100.0 % 100.0 % Cost of sales 258,304 287,173 (28,869) (10.1) 73.0 77.2 Gross profit 95,371 84,936 10,435 12.3 27.0 22.8 Selling, general and administrative expenses 54,818 52,864 1,954 3.7 15.5 14.2 Operating income 40,553 32,072 8,481 26.4 11.5 8.6 Interest expense, net 2,230 1,698 532 31.3 0.6 0.5 Other (income) expense, net (4,900) 173 (5,073) N/M (1.4) — Earnings before income taxes 43,223 30,201 13,022 43.1 12.2 8.1 Income tax expense (benefit) 9,896 (7,188) 17,084 N/M 2.8 (1.9) Net earnings $ 33,327 $ 37,389 $ (4,062) (10.9) % 9.4 % 10.0 % Effective tax rate 22.9 % (23.8) % 18 Table of Contents Six Months Ended % of Net Sales (in thousands, except percentages) August 26, 2023 August 27, 2022 $ Change % Change August 26, 2023 August 27, 2022 Net sales $ 715,388 $ 728,744 $ (13,356) (1.8) % 100.0 % 100.0 % Cost of sales 527,031 558,191 (31,160) (5.6) 73.7 76.6 Gross profit 188,357 170,553 17,804 10.4 26.3 23.4 Selling, general and administrative expenses 114,037 105,265 8,772 8.3 15.9 14.4 Operating income 74,320 65,288 9,032 13.8 10.4 9.0 Interest expense, net 4,266 2,904 1,362 46.9 0.6 0.4 Other (income) expense, net (4,612) 1,483 (6,095) N/M (0.6) 0.2 Earnings before income taxes 74,666 60,901 13,765 22.6 10.4 8.4 Income tax expense 17,763 781 16,982 2,174.4 2.5 0.1 Net earnings $ 56,903 $ 60,120 $ (3,217) (5.4) % 8.0 % 8.2 % Effective tax rate 23.8 % 1.3 % Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Consolidated net sales decreased 5.0%, or $18.4 million, to $353.7 million, primarily reflecting lower volumes in Architectural Framing Systems and Architectural Services, partially offset by strong growth in the Architectural Glass segment. • Gross profit increased 12.3%, or $10.4 million, and gross margin increased to 27.0% compared to 22.8%. The improvement in gross margin was primarily driven by higher gross margins in both Architectural Glass and Architectural Framing Systems and the increased mix of Architectural Glass in the consolidated results. This was partially offset by lower margins in the Large-Scale Optical segment. • Selling, general and administrative expenses increased $2.0 million to 15.5% of net sales compared to 14.2%. The increase was primarily due to increased compensation-related expenses and higher consulting costs. • Operating income grew 26.4% to $40.6 million, and operating margin increased 290 basis points to 11.5%, primarily driven by improved operating margin in Architectural Glass as well as the Architectural Glass segment comprising a higher mix of the consolidated results. • Interest expense, net was $2.2 million compared to $1.7 million, reflecting a higher average interest rate, partially offset by a lower average debt level. • Other (income) expense, net included a $4.7 million pre-tax gain related to finalization of a New Markets Tax Credit transaction realized during the second quarter of fiscal 2024. • Income tax expense was $9.9 million, compared to a tax benefit of $7.2 million. The prior year period included a $13.7 million tax deduction for a worthless stock loss and related discrete tax benefits. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Consolidated net sales decreased 1.8%, or $13.4 million to $715.4 million, primarily reflecting lower volumes in Architectural Framing Systems and Architectural Services, partially offset by improved pricing, mix and volumes in the Architectural Glass segment. • Gross profit increased 10.4%, or $17.8 million, to 26.3% of net sales compared to 23.4%. The gross margin improvement was driven primarily by higher margins in the Architectural Glass segment and the increased mix of that segment in consolidated results. This was partially offset by lower margins in the Architectural Services and Large Scale Optical segments. • Selling, general and administrative expenses increased $8.8 million to 15.9% of net sales compared to 14.4%. The increase in expenses was primarily due to increased compensation-related expenses, commissions and higher consulting costs. 19 Table of Contents • Operating income grew 13.8% to $74.3 million, and operating margin increased 140 basis points to 10.4%, primarily driven by improved operating margin in Architectural Glass as well as the Architectural Glass segment comprising a higher mix of the consolidated results. • Interest expense, net was $4.3 million compared to $2.9 million, reflecting a higher average interest rate, partially offset by a lower average debt level. • Other (income) expense, net included a $4.7 million pre-tax gain related to finalization of a New Markets Tax Credit transaction realized during the second quarter of fiscal 2024. • Income tax expense was $17.8 million, compared to tax expense of $0.8 million. The prior year period included a $13.7 million tax deduction for a worthless stock loss and related discrete tax benefits. Segment Analysis The following table presents net sales, operating income (loss) and operating margin by segment and consolidated total. Three Months Ended Six Months Ended (In thousands, except percentages) August 26, 2023 August 27, 2022 % Change August 26, 2023 August 27, 2022 % Change Segment net sales Architectural Framing Systems $ 158,801 $ 172,867 (8.1) % $ 322,963 $ 336,159 (3.9) % Architectural Glass 94,096 77,352 21.6 191,298 153,617 24.5 Architectural Services 88,064 106,732 (17.5) 177,482 210,120 (15.5) Large-Scale Optical 23,645 25,166 (6.0) 46,101 50,328 (8.4) Intersegment eliminations (10,931) (10,008) 9.2 (22,456) (21,480) 4.5 Net sales $ 353,675 $ 372,109 (5.0) % $ 715,388 $ 728,744 (1.8) % Segment operating income (loss) Architectural Framing Systems $ 21,060 $ 20,512 2.7 % $ 41,005 $ 44,177 (7.2) % Architectural Glass 17,434 6,457 170.0 33,955 11,626 192.1 Architectural Services 3,519 5,490 (35.9) 2,923 8,417 (65.3) Large-Scale Optical 4,663 5,991 (22.2) 10,188 12,489 (18.4) Corporate and other* (6,123) (6,378) (4.0) (13,751) (11,421) 20.4 Operating income $ 40,553 $ 32,072 26.4 % $ 74,320 $ 65,288 13.8 % Segment operating margin Architectural Framing Systems 13.3 % 11.9 % 12.7 % 13.1 % Architectural Glass 18.5 8.3 17.7 7.6 Architectural Services 4.0 5.1 1.6 4.0 Large-Scale Optical 19.7 23.8 22.1 24.8 Corporate and other N/M N/M N/M N/M Operating income 8.6 % 10.4 % 9.0 % N/M Indicates calculation not meaningful. Architectural Framing Systems Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Net sales decreased $14.1 million, or 8.1%, primarily reflecting lower volume, partially offset by a more favorable sales mix. • Operating income increased to $21.1 million, or 13.3% of net sales, compared to $20.5 million, or 11.9% of net sales. The operating margin improvement was primarily driven by improved sales mix and cost efficiencies, partially offset by the impact of lower volume. 20 Table of Contents Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Net sales decreased $13.2 million, or 3.9%, primarily reflecting lower volume, partially offset by more favorable sales mix and improved pricing. • Operating income decreased to $41.0 million, or 12.7% of net sales, compared to $44.2 million, or 13.1% of net sales. The operating margin decline was primarily driven by the impact of lower volume, as well as the unfavorable comparative impact of timing of inventory flows and aluminum prices in the prior year period. These items were partially offset by improved sales mix, favorable pricing and cost efficiencies. Architectural Glass Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Net sales increased $16.7 million, or 21.6%, primarily driven by improved pricing and mix, reflecting the strategic shift to emphasize premium, high performance products, as well as higher volume. • Operating income increased to $17.4 million, or 18.5% of net sales, compared to $6.5 million, or 8.3% of net sales. The operating margin improvement was primarily driven by the impact of improved pricing and mix, as well as higher volume, partially offset by cost inflation. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Net sales increased $37.7 million, or 24.5%, driven by improved pricing, a more favorable sales mix, and higher volume, reflecting the segment's strategic shift to emphasize premium, high-performance products. • Operating income increased to $34.0 million, or 17.7% of net sales, compared to $11.6 million, or 7.6% of net sales. The operating margin improvement was primarily driven by the improved pricing and mix and the impact of higher volume, partially offset by cost inflation. Architectural Services Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Net sales decreased $18.7 million, or 17.5%, primarily reflecting lower project volume due to a higher mix of projects in earlier stages of completion. • Operating income was $3.5 million, or 4.0% of net sales, compared to $5.5 million, or 5.1% of net sales. The decline in operating margin was primarily driven by the impact of lower project volume. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Net sales decreased $32.6 million, or 15.5%, primarily reflecting lower project volume due to a higher mix of projects in earlier stages of completion. • Operating income was $2.9 million, or 1.6% of net sales, compared to $8.4 million, or 4.0% of net sales. The decline in operating margin was primarily due to the impact of lower project volume. Large-Scale Optical (LSO) Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • LSO net sales decreased $1.5 million, or 6.0%, primarily reflecting lower volume driven by customer inventory destocking, partially offset by a more favorable mix. • Operating income was $4.7 million, or 19.7% of net sales, compared to $6.0 million, or 23.8% of net sales. The decline in operating margin was primarily driven by the impact of lower volume, partially offset by improved price and mix. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • LSO net sales decreased $4.2 million, or 8.4%, primarily reflecting lower volume due to customer inventory destocking, partially offset by a more favorable mix. • Operating income was $10.2 million, or 22.1% of net sales, compared to $12.5 million, or 24.8% of net sales. The decline in operating margin was primarily driven by the impact of lower volume, partially offset by improved price and mix. 21 Table of Contents Corporate and other Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Our corporate and other expense was $6.1 million, compared to $6.4 million. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Our corporate and other expense increased to $13.8 million, compared to $11.4 million, primarily due to an increase in compensation expense and higher consulting costs. Backlog 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 also have visibility into future business commitments beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog. Architectural Framing Systems As of August 26, 2023, segment backlog was approximately $197 million, compared to approximately $221 million at the end of the prior quarter, and to approximately $286 million at the end of the second quarter of fiscal 2023. The reduction in backlog was primarily driven by a decline in our longer-cycle business, reflecting delays in award activity, and a continued strategic shift toward projects that allow for more attractive margins. Architectural Services As of August 26, 2023, segment backlog was approximately $674 million, compared to approximately $709 million at the end of the prior quarter, and to approximately $785 million at the end of the second quarter of fiscal 2023. The decline was primarily driven by delays in award activity. Net earnings, diluted EPS, adjusted net earnings (non-GAAP), and adjusted diluted EPS (non-GAAP) In order to provide a better understanding of the impact of certain items on our net earnings and diluted EPS, the tables that follow report the comparative impact of certain items on net earnings and diluted EPS for the periods presented below. Adjusted net earnings and adjusted diluted EPS are considered non-GAAP financial measures as contemplated by SEC Regulation G, Rule 100. For additional information regarding management’s decision to present this non-GAAP financial information, see the introduction to this Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Three Months Ended Six Months Ended (In thousands) August 26, 2023 August 27, 2022 % change August 26, 2023 August 27, 2022 % change Net earnings $ 33,327 $ 37,389 (10.9) % $ 56,903 $ 60,120 (5.4) % NMTC settlement gain (1) (4,687) — (4,687) — Worthless stock deduction and related discrete tax benefits (2) — (13,702) — (13,702) Income tax impact on above adjustments 1,148 — 1,148 — Adjusted net earnings $ 29,788 $ 23,687 25.8 % $ 53,364 $ 46,418 15.0 % Three Months Ended Six Months Ended August 26, 2023 August 27, 2022 % change August 26, 2023 August 27, 2022 % change Diluted EPS $ 1.52 $ 1.68 (9.5) % $ 2.57 $ 2.66 (3.4) % NMTC settlement gain (1) (0.21) (0.21) — Worthless stock deduction and related discrete tax benefits (2) — (0.62) — (0.61) Income tax impact on above adjustments 0.05 — 0.05 — Adjusted diluted EPS $ 1.36 $ 1.06 28.3 % $ 2.41 $ 2.06 17.0 % Weighted average diluted shares outstanding 21,962 22,245 22,105 22,563 (1) Realization of a New Market Tax Credit (NMTC) benefit during the second quarter of fiscal 2024, which was recorded in other (income) expense, net. (2) Worthless stock deduction and related discrete income tax benefits from the impairment of the Sotawall business in fiscal 2023, which were recorded in income tax expense (benefit). 22 Table of Contents Comparison of Second Quarter Fiscal 2024 to Second Quarter Fiscal 2023 • Net earnings were $33.3 million, compared to $37.4 million. Diluted EPS was $1.52, compared to $1.68. • Adjusted net earnings increased 25.8% to $29.8 million, compared to $23.7 million. Adjusted diluted EPS increased 28.3% to $1.36, compared to $1.06. Comparison of First Six Months of Fiscal 2024 to First Six Months of Fiscal 2023 • Net earnings were $56.9 million, compared to $60.1 million. Diluted EPS was $2.57, compared to $2.66. • Adjusted net earnings increased 15.0% to $53.4 million, compared to $46.4 million. Adjusted diluted EPS increased 17.0% to $2.41, compared to $2.06. Liquidity and Capital Resources We rely on cash provided by operations for our 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 $62.6 million for the first six months of fiscal 2024, compared to $2.6 million of net cash used by operating activities in the prior year period, primarily reflecting improved working capital in the current year period. Investing Activities. Net cash used by investing activities was $15.1 million for the first six months of fiscal 2024, compared to $4.7 million in the prior year, driven primarily by higher capital expenditures to fund strategic initiatives. Financing Activities. Net cash used by financing activities was $50.1 million for the first six months of fiscal 2024, compared to net cash provided by financing activities of $0.5 million in the prior year period. The increase in cash used for financing activities was primarily driven by higher net debt payments in the current year period. We paid dividends totaling $10.5 million ($0.48 per share) in the first six months of fiscal 2024, compared to $9.6 million ($0.44 per share) in the comparable prior year period. During the first six months of fiscal 2024, we repurchased 279,916 shares under our authorized share repurchase program, for a total cost of $11.8 million. In the first six 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 11,276,517 shares, at a total cost of $393.5 million. As of August 26, 2023, we had remaining authority to repurchase an additional 973,483 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. As of the end of the second quarter of fiscal 2024, we had a committed revolving credit facility in the U.S. 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 August 26, 2023, we had outstanding borrowings under our committed, revolving credit facility of $130.0 million, and $3.7 million outstanding under the Canadian committed, revolving credit facilities. 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 facilities contain 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. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 26, 2023, we were in compliance with both financial covenants (which are identical in both of our revolving credit facilities). The U.S. credit facility also contains an acquisition holiday. 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 23 Table of Contents 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. Borrowings under the credit facilities 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 U.S. 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 August 26, 2023, we had a total of $15.2 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 U.S. revolving credit facility. As of August 26, 2023, the amount available for revolving borrowings under the Wells Fargo credit facility was $239.8 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 $48.1 million at August 26, 2023, with $6.6 million payable during the remainder of fiscal 2024. As of August 26, 2023, we had $30.4 million of open purchase obligations, of which payments totaling $20.7 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 August 26, 2023, we had reserves of $5.3 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 26, 2023, $1.3 billion of these types of bonds were outstanding, of which $452.4 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. 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. 24 Table of Contents