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 certain statements that are considered “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. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" or similar words or expressions. All forecasts and projections in this document are “forward-looking statements,” and are based on management’s current expectations or beliefs of the Company's near-term results, based on current information available pertaining to the Company. 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. These uncertainties and other risk factors include, but are not limited to, the risks and uncertainties set forth under “Risk Factors” section of our Annual Report on Form 10-K for the year ended March 2, 2024 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 U.S. GAAP. We believe that these measures provide useful information and include these measures in other communications to investors. For each of these non-GAAP financial measures, we provide a reconciliation of the differences between the non-GAAP measure and the most directly comparable U.S. GAAP measure (see "Reconciliation of Non-GAAP Financial Measures" in this Item 2 below), and an explanation of why we believe the non-GAAP measure provides useful information to management and investors. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable U.S. GAAP measure. Overview We are a leading provider of architectural products and services for enclosing buildings, and high-performance glass and acrylic products used in applications for preservation, protection and enhanced viewing. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO). Our enterprise strategy is based on the following three key elements: 1. Become the economic leader in our target markets. We are 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 are focused 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 are shifting our business mix toward higher operating margin offerings in order to improve our return on invested capital performance. We expect to 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 and increase margins. 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. In fiscal 2022, we established a Company-wide operating system with common tools and processes based on the foundation of Lean and Continuous Improvement, which we call the "Apogee Management System". Our strategy is supported by a robust talent management program and a commitment to strong governance to ensure compliance and drive sustainable performance. We set this strategy by developing a deep knowledge of the markets we serve and by gaining extensive input from customers and industry influencers, along with detailed competitive benchmarking. We continually analyze our portfolio of products, 18 Table of Contents services, and capabilities to identify the best areas for future profitable growth. We also evaluate our operating model to ensure we have the organizational structure and capabilities needed to deliver consistent profitable growth. Through this work, we validate strengths that we can leverage and identify opportunities to improve our performance. In fiscal 2024, we drove further progress toward our strategic goals and financial targets. We continued the deployment of the Apogee Management System across our business, supporting sustainable cost and productivity improvements. We invested in organic growth initiatives, including capacity expansion in the Large-Scale Optical Segment and geographic growth in the Architectural Services Segment. We increased our focus on differentiated products and services, and continued to diversify the mix of architectural projects that we serve while leaning more heavily into higher, value-added products. We also advanced several initiatives to strengthen our core capabilities, driving the standardization of key business processes and systems, and strengthening talent management and leadership development programs. The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended March 2, 2024 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) June 1, 2024 May 27, 2023 % Change June 1, 2024 May 27, 2023 Net sales $ 331,516 $ 361,713 (8.3) % 100.0 % 100.0 % Cost of sales 232,661 268,727 (13.4) 70.2 74.3 Gross profit 98,855 92,986 6.3 29.8 25.7 Selling, general and administrative expenses 57,474 59,219 (2.9) 17.3 16.4 Operating income 41,381 33,767 22.5 12.5 9.3 Interest expense, net 450 2,036 (77.9) 0.1 0.6 Other expense, net (143) 288 N/M — 0.1 Earnings before income taxes 41,074 31,443 30.6 12.4 8.7 Income tax expense 10,063 7,867 27.9 3.0 2.2 Net earnings $ 31,011 $ 23,576 31.5 % 9.4 % 6.5 % Effective tax rate 24.5 % 25.0 % N/M Indicates calculation not meaningful. Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • Consolidated net sales decreased 8.3%, to $331.5 million, primarily driven by lower volume. • Gross margin increased to 29.8%, compared to 25.7%, primarily driven by a more favorable mix of projects in Architectural Services, favorable material costs, lower insurance-related costs, and productivity gains, partially offset by the impact of lower volume and $0.6 million of restructuring costs associated with Project Fortify. • Selling, general and administrative (SG&A) expenses decreased $1.7 million to 17.3% of net sales, compared to 16.4% of net sales. The increase in SG&A as a percentage of sales was primarily due to unfavorable sales leverage, partially offset by lower bad debt expense. • Operating income grew to $41.4 million from $33.8 million, and operating margin increased 320 basis points to 12.5%. The improvement in operating margin was primarily driven by a more favorable mix of projects in Architectural Services, favorable material costs, lower insurance-related costs, productivity gains, and lower bad debt expense, which more than offset the impact of lower volume, $1.1 million of restructuring costs related to Project Fortify, and unfavorable segment mix. Adjusted operating income grew 25.9% to $42.5 million, and adjusted operating margin improved to 12.8%. • Interest expense, net was $0.5 million, compared to $2.0 million, primarily driven by lower average debt levels. 19 Table of Contents • Income tax expense as a percentage of earnings before income tax was 24.5%, compared to 25.0% for the same period last year. The decrease in the effective tax rate was primarily due to a decrease in tax expense for discrete items, partially offset by an increase in non-deductible executive compensation expense. Segment Analysis The following table presents net sales, operating income (loss) and operating margin by segment and consolidated total. Three Months Ended (In thousands, except percentages) June 1, 2024 May 27, 2023 % Change Segment net sales Architectural Framing Systems $ 133,172 $ 164,162 (18.9) % Architectural Glass 86,703 97,202 (10.8) Architectural Services 99,027 89,418 10.7 Large-Scale Optical 21,204 22,456 (5.6) Intersegment eliminations (8,590) (11,525) (25.5) Net sales $ 331,516 $ 361,713 (8.3) % Segment operating income (loss) Architectural Framing Systems $ 18,336 $ 19,945 (8.1) % Architectural Glass 17,091 16,521 3.5 Architectural Services 5,623 (596) N/M Large-Scale Optical 4,846 5,525 (12.3) Corporate and Other (4,515) (7,628) (40.8) Operating income $ 41,381 $ 33,767 22.5 % Segment operating margin Architectural Framing Systems 13.8 % 12.1 % Architectural Glass 19.7 17.0 Architectural Services 5.7 (0.7) Large-Scale Optical 22.9 24.6 Corporate and Other N/M N/M Operating income 12.5 % 9.3 % N/M Indicates calculation not meaningful. Segment net sales is defined as net sales for a certain segment and includes revenue related to intersegment transactions. We report net sales intersegment eliminations separately to exclude these sales from our consolidated total. Segment operating income is equal to net sales, less cost of goods sold, SG&A, and any asset impairment charges associated with the segment. Segment operating income includes operating income related to intersegment sales transactions and excludes certain corporate costs that are not allocated at a segment level. We report these unallocated corporate costs in Corporate and Other. Operating income does not include other income or expense, interest expense or a provision for income taxes. Architectural Framing Systems Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • Net sales were $133.2 million, compared to $164.2 million, primarily reflecting reduced volume due to lower end market demand and the exit of certain lower-margin product lines as part of Project Fortify. • Operating income was $18.3 million, or 13.8% of net sales, compared to $19.9 million, or 12.1% of net sales. The 170 basis point improvement in operating margin was primarily driven by favorable material costs, favorable mix, productivity gains, and lower bad debt expense, partially offset by the impact of lower volume and $1.0 million of restructuring charges as part of Project Fortify. Adjusted operating income was $19.3 million, or 14.5% of net sales, compared to $19.9 million, or 12.1% of net sales. 20 Table of Contents Architectural Glass Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • Net sales were $86.7 million, compared to $97.2 million, reflecting lower volume due to lower end-market demand, partially offset by improved pricing. • Operating income increased to $17.1 million, or 19.7% of net sales, compared to $16.5 million, or 17.0% of net sales. The 270 basis point improvement in operating margin was primarily driven by productivity gains and improved pricing, partially offset by the impact of lower volume. Architectural Services Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • Net sales were $99.0 million, compared to $89.4 million, primarily due to a more favorable mix of projects and increased volume. • Operating income increased to $5.6 million, or 5.7% of net sales, compared to an operating loss of $0.6 million, or (0.7)% of net sales, primarily driven by a more favorable mix of projects. Large-Scale Optical (LSO) Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • LSO net sales were $21.2 million, compared to $22.5 million, primarily reflecting lower volume in the retail channel, partially offset by a more favorable mix. • Operating income was $4.8 million, or 22.9% of net sales, compared to $5.5 million, or 24.6% of net sales. The 170 basis point decline in operating margin primarily reflects the impact of lower volume, partially offset by cost savings and improved mix. Corporate and Other Comparison of First Quarter Fiscal 2025 to First Quarter Fiscal 2024 • Corporate and Other expense was $4.5 million, compared to $7.6 million, primarily due to lower insurance-related 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 most meaningful for Architectural Services due to the longer-term nature of their projects. 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. Architectural Services As of June 1, 2024, segment backlog was approximately $866.9 million, compared to approximately $807.8 million at the end of the prior quarter. The increase in backlog compared to the prior quarter was primarily driven by several large project awards in the current quarter. Reconciliation of Non-GAAP Financial Measures Adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share (adjusted diluted EPS), adjusted net earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), and adjusted EBITDA margin 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 measures as noted below: • We use adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted diluted EPS to provide meaningful supplemental information about our operating performance by excluding amounts that are not considered part of core operating results to enhance comparability of results from period to period. • We believe adjusted EBITDA and adjusted EBITDA margin metrics provide useful information to investors and analysts about our core operating performance. 21 Table of Contents These non-GAAP measures should be viewed in addition to, and not as an alternative to, the reported financial results of the Company prepared in accordance with U.S. GAAP. Other companies may calculate these measures differently, thereby limiting the usefulness of the measures for comparison with other companies. Reconciliation of Non-GAAP Financial Measures Adjusted Operating Income and Adjusted Operating Margin (Unaudited) Three Months Ended June 1, 2024 (In thousands, except percentages) Architectural Framing Systems Architectural Glass Architectural Services LSO Corporate and Other Consolidated Operating income $ 18,336 $ 17,091 $ 5,623 $ 4,846 $ (4,515) $ 41,381 Restructuring costs (1) 998 — — — 124 1,122 Adjusted operating income $ 19,334 $ 17,091 $ 5,623 $ 4,846 $ (4,391) $ 42,503 Operating margin 13.8 % 19.7 % 5.7 % 22.9 % N/M 12.5 % Restructuring costs (1) 0.7 % — % — % — % N/M 0.3 % Adjusted operating margin 14.5 % 19.7 % 5.7 % 22.9 % N/M 12.8 % Three Months Ended May 27, 2023 Architectural Framing Systems Architectural Glass Architectural Services LSO Corporate and Other Consolidated Operating income (2) $ 19,945 $ 16,521 $ (596) $ 5,525 $ (7,628) $ 33,767 Operating margin (2) 12.1 % 17.0 % (0.7) % 24.6 % N/M 9.3 % (1) Restructuring charges related to Project Fortify, including $0.4 million of employee termination costs and $0.7 million of other costs. (2) For the first quarter of fiscal 2024, we did not make any adjustments to operating income or operating margin as calculated in accordance with U.S. GAAP. Reconciliation of Non-GAAP Financial Measures Adjusted Net Earnings and Adjusted Diluted Earnings Per Share (Unaudited) Diluted per share amounts Three Months Ended Three Months Ended (In thousands, except per share amounts) June 1, 2024 May 27, 2023 June 1, 2024 May 27, 2023 Net earnings $ 31,011 $ 23,576 $ 1.41 $ 1.05 Restructuring costs (1) 1,122 — 0.05 — Income tax impact on above adjustments (2) (275) — (0.01) — Adjusted net earnings $ 31,858 $ 23,576 $ 1.44 $ 1.05 Shares outstanding for EPS 22,061 22,386 (1) Restructuring charges related to Project Fortify, including $0.4 million of employee termination costs and $0.7 million of other costs. (2) Income tax impact calculated using an estimated statutory tax rate of 24.5%, which reflects the estimated blended statutory tax rate for the jurisdictions in which the charge or income occurred. 22 Table of Contents Reconciliation of Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA Margin (Earnings before interest, taxes, depreciation and amortization) (Unaudited) Three Months Ended (In thousands) June 1, 2024 May 27, 2023 Net earnings $ 31,011 $ 23,576 Income tax expense 10,063 7,867 Interest expense, net 450 2,036 Depreciation and amortization 9,976 10,282 EBITDA $ 51,500 $ 43,761 Restructuring costs (1) 1,122 — Adjusted EBITDA $ 52,622 $ 43,761 EBITDA Margin 15.5 % 12.1 % Adjusted EBITDA Margin 15.9 % 12.1 % (1) Restructuring charges related to Project Fortify, including $0.4 million of employee termination costs and $0.7 million of other costs. 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 $5.5 million for the first three months of fiscal 2025, compared to $21.3 million in the prior year period. The decrease was primarily driven by increased cash used for working capital requirements and increased cash paid for incentive compensation payments, partially offset by higher earnings. Investing Activities. Net cash used by investing activities was $7.3 million for the first three months of fiscal 2025, compared to $6.9 million in the prior year. Financing Activities. Net cash used by financing activities was $4.9 million for the first three months of fiscal 2025, compared to $11.3 million in the prior year period. The decrease in cash used for financing activities was primarily driven by higher net debt borrowings in the current year period, partially offset by increased share repurchases. 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 first quarter of fiscal 2025, we had a committed revolving U.S. credit facility with maximum borrowings of up to $385 million, with a maturity date of August 5, 2027, and two Canadian credit facilities totaling $25 million (USD). At June 1, 2024, we had outstanding borrowings under our U.S. credit facility of $65.0 million, and no outstanding borrowings under the Canadian 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 June 1, 2024, we were in compliance with both financial covenants (which are identical in all three of our revolving credit facilities). Our revolving credit facilities also contain 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 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. 23 Table of Contents Borrowings under the credit facilities bear floating interest at either the Base Rate or Term Secured Overnight Financing Rate (SOFR), or, in the case of the Canadian credit facilities, Canadian Overnight Repo Rate Average (CORRA) plus, in each a margin based on the Leverage Ratio (as defined in the Credit Agreements). For Base Rate borrowings, the margin ranges from 0.125% to 0.75%. For Term SOFR and CORRA borrowings, the margin ranges from 1.125% to 1.75%, with an incremental Term SOFR and CORRA adjustment of 0.10% and 0.29547%, respectively. The U.S. credit facility also contains an "accordion" provision. Under this provision, we can request that the facility be increased by as much as $200.0 million. Any lender may elect or decline to participate in the requested increase at their sole discretion. Additionally, at June 1, 2024, we had a total of $15.0 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2026 through 2032 and reduce borrowing capacity under the U.S. credit facility. As of June 1, 2024, the amount available for revolving borrowings was $305.0 million and $25.0 million under the U.S. credit facility and Canadian credit facilities, respectively. 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 $43.0 million at June 1, 2024, with $9.5 million payable during the remainder of fiscal 2025. As of June 1, 2024, we had $17.9 million of open purchase obligations, of which payments totaling $13.4 million are expected to become due during the remainder of fiscal 2025. 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 $0.4 million to our defined-benefit pension plans in fiscal 2025, which will equal or exceed our minimum funding requirements. As of June 1, 2024, we had reserves of $5.6 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 June 1, 2024, $1.3 billion of these types of bonds were outstanding, of which $434.7 million is in our backlog. These bonds have expiration dates that align with completion of the purchase order or contract. We have not been required to make any payments under these bonds with respect to our existing businesses. 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 we have the ability to obtain both short-term and long-term debt to meet our financing needs, including additional sources of debt to finance potential acquisitions, for the foreseeable future. We also believe 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. We continually review our portfolio of businesses and their assets and how they support our business strategy and performance objectives. As part of this review, we may acquire other businesses, pursue geographic expansion, take actions to manage capacity and further invest in, divest and/or sell parts of our current businesses. 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 March 2, 2024. 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 March 2, 2024. 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 March 2, 2024 for a discussion of the Company’s market risk. There have been no material changes in market risk since March 2, 2024. 24 Table of Contents