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2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
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5: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
11: R1 Cover Page HTML 73K
12: R2 Consolidated Balance Sheets (Unaudited) HTML 130K
13: R3 Consolidated Results of Operations (Unaudited) HTML 90K
14: R4 Consolidated Statements of Comprehensive Earnings HTML 57K
(Unaudited)
15: R5 Consolidated Statements of Cash Flows (Unaudited) HTML 122K
16: R6 Consolidated Statement of Shareholders Equity HTML 117K
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18: R8 Income Taxes (Textual) HTML 24K
19: R9 Summary of Significant Accounting Policies HTML 24K
20: R10 Revenue, Receivables and Contract Assets and HTML 73K
Liabilities
21: R11 Supplemental Balance Sheet Information HTML 48K
22: R12 Financial Instruments HTML 74K
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28: R18 Earnings per Share HTML 34K
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Liabilities Revenue (Details)
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Liabilities Accounts Receivable (Details)
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Liabilities Allowance for Credit Losses (Details)
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Liabilities Contract Assets & Liabilities
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Liabilities (Details 4)
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Liabilities (Details 5)
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(Exact name of registrant as specified in its charter)
_________________________________
iMinnesota
i41-0919654
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i4400 West 78th Street, Suite 520
iMinneapolis
iMinnesota
i55435
(Address
of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (i952) i835-1874
Not Applicable
(Former name, former address
and former fiscal year, if changed since last report)
_________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
stock, par value $0.33 1/3 per share
iAPOG
iThe Nasdaq Stock Market LLC
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xiYeso No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xiYeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐ Yes x No
The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended February 26, 2022. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein and are of a normal, recurring nature. The
results of operations for the three- and six-month periods ended August 27, 2022 are not necessarily indicative of the results to be expected for the full year.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The comparative fiscal 2022 segment results for the Architectural Framing Systems and Architectural Services segments have been recast to reflect the move of the Sotawall business into the Architectural Services segment from the Architectural Framing Systems segment, effective at the start of the first quarter of fiscal 2023.
2.iRevenue,
Receivables and Contract Assets and Liabilities
Revenue
i
The following table disaggregates total revenue by timing of recognition (see Note 12 for disclosure of revenue by segment):
Receivables
reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released to us from the customer.
Contract
assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.
The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer
until the project reaches a level of completion where amounts are released to us from the customer.
The
changes in contract assets and contract liabilities were mainly due to timing of project activity within our businesses that operate under long-term contracts.
Revenue recognized related to contract liabilities from prior year-end
$
i4,978
$
i2,479
$
i33,157
$
i16,579
Revenue
recognized related to prior satisfaction of performance obligations
i4,770
i5,354
i4,946
i7,518
Some
of our contracts have an expected duration of longer than a year, with performance obligations extending over that time frame. Generally, these contracts are found in our businesses that typically operate with long-term contracts, which recognize revenue over time. The transaction prices associated with unsatisfied performance obligations at August 27, 2022 are iexpected
to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
Deferred benefit from New Markets Tax Credit transactions
$
i9,250
$
i9,165
Retirement
plan obligations
i6,857
i7,041
Deferred
compensation plan
i7,290
i9,483
Deferred
tax liabilities
i7,611
i2,296
Other
i19,346
i16,598
Total
other non-current liabilities
$
i50,354
$
i44,583
/
4.iFinancial
Instruments
Marketable securities
Through our wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), wie hold the following available-for-sale marketable securities, made up of municipal and corporate bonds:
Prism
insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements.
i
The amortized cost and estimated fair values of these bonds at August 27, 2022, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.
(In thousands)
Amortized Cost
Estimated Fair Value
Due within one year
$
i1,430
$
i1,419
Due
after one year through five years
i9,578
i9,069
Due
after five years through 10 years
i336
i294
Total
$
i11,344
$
i10,782
/
Derivative
instruments
We use interest rate swaps, foreign exchange forward contracts, commodity swaps and forward purchase contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments we use, how such instruments are accounted for, and how such instruments impact our financial position and performance.
In fiscal 2020, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility and term loan. As of August
27, 2022, the interest rate swap contract had a notional value of $i30.0 million.
We periodically enter into forward purchase contracts and/or fixed/floating swaps to manage the risk associated with fluctuations in aluminum prices and fluctuations in foreign exchange rates (primarily related to the Canadian dollar). These contracts
generally have an original maturity date of less than one year. As of August 27, 2022, we held foreign exchange forward contracts and aluminum fixed/floating swaps with U.S. dollar notional values of $i3.2 million and $i12.2
million, respectively.
These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income.
Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.
Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets. These assets are included within cash and cash equivalents on our consolidated balance sheets.
Municipal and corporate bonds
Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified within our consolidated balance sheets as other current or other non-current assets based on maturity date.
Cash surrender value of life insurance and deferred compensation
Contracts
insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. Changes in cash surrender value are recorded in other expense. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Derivative instruments
The interest rate swap is measured at fair value using other observable market inputs, based off of benchmark interest rates. Forward foreign exchange and fixed/floating aluminum contracts
are measured at fair value using other observable market inputs, such as quotations on forward foreign exchange points, foreign currency exchange rates, and forward purchase aluminum prices. Derivative positions are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are our primary source for forward and spot rate information for both interest and currency rates and aluminum prices.
Nonrecurring fair value measurements
We measure certain financial instruments at fair value on a nonrecurring basis including goodwill, intangible assets, property and equipment and right-of-use lease assets. These assets were initially measured and recognized at amounts equal to the fair
value determined as of the date of acquisition or purchase subject to changes in value only for foreign currency translation. Periodically, these assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these assets were to become impaired, we would recognize an impairment expense equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted cash flow models that contain certain Level 3 inputs requiring significant management judgment, including projections of economic conditions, customer demand and changes in competition, revenue growth rates, gross profit margins, operating margins, capital expenditures,
working capital requirements, terminal growth rates and discount rates. Fair value measurements of the reporting units associated with our goodwill balances and our indefinite-lived intangible assets are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing if a quantitative analysis is performed.
5.iGoodwill
and Other Intangible Assets
Goodwill
Goodwill represents the excess of the cost over the value of net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually as of the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects which resulted in the combination of the Sotawall and Harmon reporting units into a single reporting unit. We evaluated goodwill on
a qualitative basis prior to and subsequent to this change for these reporting units and concluded that no adjustment to the carrying value of goodwill was necessary. Concurrent with the move of Sotawall from the Architectural Framing Systems segment to the Architectural Services segment effective at the start of our first quarter of fiscal 2023, goodwill was reallocated to the affected reporting units within each segment, using a relative fair value approach as outlined in ASC 350, Intangibles - Goodwill and Other. In addition, for all reporting units, no qualitative indicators of impairment were identified during the first quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.
The following table presents the carrying amount of goodwill attributable to each reporting segment including the amount
of goodwill that was reallocated from the Architectural Framing Systems segment to the Architectural Services segment using the relative fair value approach during the first quarter of fiscal 2023:
(1)
Represents the reallocation of goodwill as a result of transitioning Sotawall from the Architectural Framing Systems segment to the Architectural Services segment as of the start of the first quarter of fiscal 2023.
/
Other intangible assets
Indefinite-lived intangible assets
We have intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. We test indefinite-lived intangible assets for impairment annually at the same measurement date as goodwill, the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that it is more likely than
not that the asset is impaired. Based on the impairment analysis performed in the fourth quarter of fiscal 2022, the fair value of each of our trade names and trademarks exceeded the carrying amount. However, due to triggering events identified in the fourth quarter of fiscal 2022, resulting from the finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the carrying value of the Sotawall trade name exceeded fair value by $i12.7 million.
We determined that Sotawall had an immaterial fair value, resulting in the trade name being fully impaired as of fiscal 2022 year-end. We recognized this amount as impairment expense in the fourth quarter ended February 26, 2022.
Finite-lived intangible assets
Long-lived assets or asset groups, including intangible assets subject to amortization and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be
recoverable.
We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows to determine the fair value of long-lived assets. Due to triggering events identified during the fourth quarter of fiscal 2022, as a result of finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the finite-lived intangible assets of Sotawall were impaired as of February 26, 2022. As such, we recognized a long-lived asset impairment charge of $i36.7 million
in finite-lived intangible assets in the fourth quarter of fiscal year 2022, within the Architectural Framing Systems segment.
i
The gross carrying amount of other intangible assets and related accumulated amortization was:
Amortization
expense on definite-lived intangible assets was $i2.1 million and $i3.9 million for the six-month periods ended August
27, 2022 and August 28, 2021, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. iAt August 27, 2022, the estimated future amortization expense for definite-lived intangible assets was:
(In
thousands)
Remainder of 2023
2024
2025
2026
2027
Estimated amortization expense
$
i2,258
$
i4,362
$
i4,332
$
i4,315
$
i4,313
6.iDebt
During
the second quarter ended August 27, 2022, we amended and extended our committed revolving credit facility to include maximum borrowings of up to $i385 million with a maturity of August 2027. As part of the amendment, we repaid the $ii150/
million term loan with borrowings under the revolving credit facility. As of August 27, 2022, outstanding borrowings under our revolving credit facility were $i235.0 million, while there were ino
outstanding borrowings under the revolving credit facility as of February 26, 2022.
Our revolving credit facility contains two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of EBITDA-to-interest expense. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 27, 2022, we were in compliance with both financial covenants. Additionally, at August 27, 2022, we had a total of $i12.3
million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2023 to 2032 and reduce borrowing capacity under the revolving credit facility.
At August 27, 2022, debt included $i12.0 million of industrial revenue bonds that mature in fiscal years 2036 through 2043. In March 2022, a $i1.0
million industrial revenue bond matured and was repaid. The fair value of all industrial revenue bonds approximated carrying value at August 27, 2022, due to the variable interest rates on these instruments. Our credit facility, term loan and industrial revenue bonds would be classified as Level 2 within the fair value hierarchy described in Note 4.
We also maintain two Canadian committed, revolving credit facilities totaling $i25.0
million (USD). At August 27, 2022, outstanding borrowings under our Canadian committed, revolving credit facilities were $i3.8 million, while there were ino outstanding borrowings under the Canadian
facilities as of February 26, 2022.
Interest payments were $i2.8 million and $i1.9 million for
the six months ended August 27, 2022 and August 28, 2021, respectively.
i
7. Leases
We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases.
We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet; such leases are expensed on a straight-line basis over the lease term.
In determining
lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and non lease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions.
In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required
to provide surety or performance bonds that commit payments to our customers for any non-performance. At August 27, 2022, $i1.1 billion of these types of bonds were outstanding, of which $i361.1
million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.
Warranty and project-related contingencies
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on these accruals in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume.
Additionally,
we are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses. We manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages.
Letters of credit
At August 27, 2022, we had $i12.3
million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. We also have a $3.4 million letter of credit which has been issued outside our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants.
Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $i225.2 million as of August
27, 2022.
New Markets Tax Credit (NMTC) transactions
We have three outstanding NMTC arrangements which help to support operational expansion. Proceeds received from investors on these transactions are included within other current and other non-current liabilities in our consolidated balance sheets. The NMTC arrangements are subject to 100 percent tax credit recapture for a period of seven years from the date of each respective transaction. Upon the termination of each arrangement, these proceeds will be recognized in earnings in exchange for the transfer of tax credits. The direct and incremental costs incurred in structuring these arrangements have been deferred and are included in other non-current assets in our consolidated balance sheets. These costs will be recognized in conjunction with the recognition of the related proceeds on
each arrangement. During the construction phase or for working capital purposes for each project, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash in our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.
During the first quarter of fiscal 2023, one NMTC transaction was terminated, and a new NMTC transaction was established as a replacement. As a result of these transactions, $19.5 million in previous proceeds received were repaid and $19.5 million was contributed back to the Company as part of the newly established
NMTC transaction. This NMTC transaction will be held for the remainder of the original seven-year term.
The table below provides a summary of our outstanding NMTC transactions (in millions):
Inception
date
Termination date
Deferred Benefit
Deferred costs
Net benefit
June 2016
June 2023
$
i6.0
$
i1.2
$
i4.8
September
2018
September 2025
i3.2
i1.0
i2.2
May
2022
August 2025
i6.1
i1.6
i4.5
Total
$
i15.3
$
i3.8
$
i11.5
Litigation
The
Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. We have in the past and are currently subject to product liability and warranty claims, including certain legal claims related to a commercial sealant product formerly incorporated into our products. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate
that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.
9.iShare-Based Compensation
Total
share-based compensation expense included in the results of operations was $i3.4 million for the six-month period ended August 27, 2022 and $i3.3
million for the six-month period ended August 28, 2021.
Stock options and SARs
i
Stock option and SAR activity for the current six-month period is summarized as follows:
Stock
Options and SARs
Number of Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life
Aggregate Intrinsic Value
Outstanding at beginning of year
i370,800
$
i23.04
Awards
exercised
(i145,060)
i23.04
Awards
canceled/expired
(i67,740)
i23.04
Outstanding
at end of period
i158,000
$
i23.04
i0.9
years
$
i2,000,280
Vested or expected to vest at end of period
i158,000
$
i23.04
i0.9
years
$
i2,000,280
/
For
the six-months ended August 27, 2022, there were ino cash proceeds from the exercise of stock options as all stock options were exercised on a stock for stock basis. The aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $i2.7
million. For the six-months ended August 28, 2021, cash proceeds from the exercise of stock options was $i4.1 million and the aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $i2.3
million.
Executive Compensation Program In fiscal 2022, the Compensation Committee of the Board of Directors implemented an executive compensation program for certain key employees. In the each of the first quarters of fiscal 2023 and fiscal 2022, we issued performance shares in the form of nonvested share unit awards, which give the recipient the right to receive shares earned at the end of the respective performance periods. The number of share units issued at grant is equal to the target number of performance shares and allows for the right to receive a variable number of shares dependent on achieving a defined performance goal of return on invested capital and being employed at the end of the performance period.
(1)
Includes a total of 50,825 nonvested share units granted and outstanding at target level for the fiscal 2022-2024 performance period.
(2) Includes a total of 38,564 nonvested share units granted and outstanding at target level for the fiscal 2023-2025 performance period.
(3) Includes a total of 9,690 nonvested share units cancelled for the fiscal 2022-2024 and fiscal 2023-2025 performance periods.
(4) Includes a total of 45,207 and 34,492 nonvested share units granted and outstanding at target level for the 2022-2024 and 2023-2025 performance periods, respectively.
At August 27, 2022, there was $i12.8
million of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately i27 months. The total fair value of shares vested during the six months ended August 27, 2022 was $i3.8
million.
10.iIncome Taxes
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The
Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2019, or state and local income tax examinations for years prior to fiscal 2013. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2018, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.
In the second quarter of fiscal 2023, the Company claimed certain tax deductions, including a worthless stock loss deduction, related to its investment in Sotawall Limited, a Canadian subsidiary. These deductions generated a net tax benefit
of $i13.7 million.
The total liability for unrecognized tax benefits was $i5.3
million at August 27, 2022, compared to $i3.3 million at February 26, 2022. The increase was primarily related to the tax deductions claimed during the second quarter of fiscal 2023 associated with the Company's investment in Sotawall Limited, a Canadian subsidiary. Penalties and interest related to unrecognized tax benefits are recorded
in income tax expense.
11.iEarnings per Share
i
The
following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:
Basic earnings per share – weighted average common shares outstanding
i21,860
i25,140
i22,129
i25,271
Weighted
average effect of nonvested share grants and assumed exercise of stock options
i385
i—
i434
i366
Diluted
earnings per share – weighted average common shares and potential common shares outstanding
i22,245
i25,140
i22,563
i25,637
Stock
awards excluded from the calculation of earnings per share because the effect was anti-dilutive (award price greater than average market price of the shares)
•The Architectural Framing Systems segment
designs, engineers, fabricates and finishes aluminum window, curtainwall, storefront and entrance systems for the exterior of buildings.
•The Architectural Services segment integrates technical services, project management, and field installation services to design, engineer, fabricate, and install building glass and curtainwall systems.
•The Architectural Glass segment coats and fabricates, high-performance glass used in custom window and wall systems on commercial buildings.
•The Large-Scale Optical (LSO) segment manufactures high-performance glass and acrylic products for custom framing, museum, and technical glass markets.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The fiscal 2022 segment results were recast for comparability.
Due
to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported.
13. Restructuring
i
On August 11, 2021, we announced plans to realign
and simplify our business structure. During the first quarter of fiscal 2023, we completed the execution of these plans with the sale of the remaining manufacturing assets at our Architectural Glass location, in Dallas, Texas, for $i4.1 million. The remaining assets had a carrying value of $i3.4 million,
and we recognized a gain on the sale of approximately $i0.6 million, net of associated transaction costs, which is included as a reduction of cost of sales within our consolidated statements of operations.
i
The
following table summarizes our restructuring related accrual balances included within accrued payroll and related costs and other current liabilities in the consolidated balance sheets. All balances are expected to be paid within the current fiscal year.
iWe have evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events that required recognition or disclosure in the consolidated financial statements.
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 26, 2022 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).
During
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. This will be supported by a robust talent management program and a commitment to strong governance to ensure compliance and drive sustainable performance.
At
the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The comparative fiscal 2022 segment results for the Architectural Framing Systems and Architectural Services segments have been recast to reflect the move of the Sotawall business into the Architectural Services segment from the Architectural Framing Systems segment, effective at the start of the first quarter of fiscal 2023.
The following selected financial data should be read in conjunction
with the Company’s Form 10-K for the year ended February 26, 2022 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of Second Quarter of Fiscal 2023 Compared to Second Quarter of Fiscal 2022
Net sales
Consolidated net sales increased 14.2 percent, or $46.3 million, and 11.8 percent, or $76.9 million, for the three- and six-month periods ended August 27, 2022, compared to the same periods in the
prior year, primarily driven by flow-through from pricing actions taken to offset inflation within the Architectural Framing Systems segment and volume growth within the Architectural Services segment.
The relationship between various components of operations, as a percentage of net sales, is presented below:
Gross profit as a percent of sales (gross margin) was 22.8 percent and 23.4 percent for the three- and six-month periods ended August 27, 2022, compared to 14.7 percent and 17.8 percent for the three- and six-month periods ended August
28, 2021. Both period increases in gross margin were driven by inflation-related pricing actions in the Architectural Framing Systems segment and benefits from restructuring actions completed in the second quarter of the prior year in the Architectural Glass and Architectural Framing Systems segments. The prior-year periods included $18.5 million of restructuring charges which were incurred in the second quarter and were recorded in costs of sales.
Selling, general and administrative (SG&A) expenses
SG&A expenses as a percent of sales were 14.2 percent and 14.4 percent for the three- and six-month periods ended August 27, 2022, compared to 15.7 percent and 15.8 percent for the prior year three- and six-month periods. SG&A decreased as a percent of sales compared to the same
period in the prior year primarily due to the benefits realized from previously completed restructuring actions.
Income tax expense
The effective income tax rate in the second quarter of fiscal 2023 was a benefit of 23.8 percent, compared to expense of 47.6 percent in the same period last year, and 1.3 percent for the first six months of fiscal 2023, compared to 16.8 percent in the prior year. In the second quarter of fiscal 2023, the Company claimed certain tax deductions, including a worthless stock loss deduction, related to its investment in Sotawall Limited, a Canadian subsidiary. These deductions generated a net tax benefit of $13.7 million.
Architectural
Framing Systems net sales increased $35.9 million, or 26.2 percent, and $62.4 million, or 22.8 percent, for the three- and six-month periods ended August 27, 2022, compared to the prior year periods, primarily driven by inflation-related pricing actions and a more favorable sales mix.
Operating margin increased 580 basis points and 700 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year, reflecting improved pricing and mix, and the benefits from restructuring actions completed in the prior year, which further strengthened our competitive position and offset the impact of cost inflation. The second quarter of the prior fiscal year included $2.0 million of restructuring costs, which reduced operating margin by 150 and 80 basis points for the three- and six-month periods
of the prior fiscal year.
As of August 27, 2022, segment backlog was approximately $286 million, compared to approximately $310 million at the end of the prior quarter of the current fiscal year. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times
that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog.
Architectural Services net sales increased $10.4 million, or 10.8 percent, and $23.0 million, or 12.3 percent for the three- and six-month periods ended August 27, 2022, compared to the same periods in the prior year, driven
by increased volume from executing projects in backlog.
Operating margin decreased 230 basis points and 210 basis points in the three- and six-month periods of the current year, compared to the same periods in the prior year, primarily reflecting increased costs for investments to support future growth and impact of performance write-downs on a discrete number of projects, partially offset by higher volume.
As of August 27, 2022, segment backlog was approximately $785 million, compared to approximately $681 million at the end of the prior quarter of the current fiscal year, driven by significant new project wins in the transportation and healthcare markets. Segment backlog at the end of the second quarter of fiscal 2022 was approximately $716 million. Backlog, a
non-GAAP financial measure, is described within the Architectural Framing Systems discussion above.
Net sales decreased $2.0 million, or 2.5 percent, and $8.8 million, or 5.4 percent for the three- and six-month periods ended August 27, 2022, compared to the same periods
in the prior year, primarily reflecting lower volume, partially offset by improved pricing.
In the current quarter, the segment had operating income of $6.5 million and operating margin of 8.3 percent, compared to operating loss of $17.0 million and negative operating margin of 21.4 percent in the same period of the prior year. The prior year second quarter included $17.4 million of restructuring costs, while the current year second quarter reflects improved pricing, productivity gains, and the positive impacts of restructuring actions completed during the prior year, all of which offset the impact of inflation. For the six months ended August 27, 2022, the segment had operating income of $11.6 million and operating margin of 7.6 percent, compared to operating loss of $14.9 million and negative operating margin of 9.2 percent in
the same period of the prior year, primarily related to the restructuring costs incurred during the second quarter of prior fiscal year, as well as productivity gains and improved pricing during the current year period.
LSO net sales increased $1.6 million, or 6.9 percent, and $2.6 million, or 5.4 percent, for the three- and six-month periods ended August 27, 2022, compared to the same periods
in the prior year, primarily driven by higher volume.
Operating margin increased 50 basis points and 110 basis points in the three- and six-month periods of the current year, compared to the same periods in the prior year, primarily reflecting higher volume and improved pricing, partially offset by cost inflation.
Proceeds from sales of property, plant and equipment
4,122
1,292
Financing
Activities
Borrowings on line of credit
409,880
—
Repayment on debt
(151,000)
(2,000)
Payments on line of credit
(171,000)
—
Repurchase
and retirement of common stock
(74,312)
(22,419)
Dividends paid
(9,602)
(10,060)
Operating Activities. Net cash used by operating activities was $2.6 million for the first six months of fiscal 2023, compared to $54.9 million of net cash provided by operating activities in the prior year period, reflecting increased working capital related to revenue growth and inflation.
Investing
Activities. Net cash used by investing activities was $4.7 million for the first six months of fiscal 2023, driven primarily by capital expenditures of $9.3 million, partially offset by proceeds received from sales of property, plant and equipment of $4.1 million. In the first six months of the prior year, net cash used by investing activities was $8.8 million, primarily driven by capital expenditures of $10.1 million.
Financing Activities. Net cash provided by financing activities was $0.5 million for the first six months of fiscal 2023, compared to net cash used by financing activities of $32.2 million in the prior year period. The current year period was primarily driven by net debt borrowings of $87.9 million, partially offset by share repurchases totaling $74.3 million, compared to $22.4 million in the prior
year period.
We paid dividends totaling $9.6 million ($0.4400 per share) in the first six months of fiscal 2023, compared to $10.1 million ($0.4000 per share) in the comparable prior year period. During the first six months of fiscal 2023, we repurchased 1,571,139 shares under our authorized share repurchase program, for a total cost of $74.3 million. In the first six months of fiscal 2022, we repurchased 589,533 shares under the share repurchase program, for a total cost of $22.0 million. Since the inception of the share repurchase program in 2004, we have purchased a total of 10,996,601 shares, at a total cost of $381.6 million. As of August 27, 2022, we had remaining authority to repurchase an additional 1,253,399 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.
Additional Liquidity Considerations. We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, and other working capital needs.
During the second quarter ended August 27, 2022, we amended and extended our committed revolving credit
facility to include maximum borrowings of up to $385 million with a maturity of August 2027. As part of the amendment, we repaid the $150 million term loan with borrowings under the revolving credit facility. As of August 27, 2022, outstanding borrowings under our revolving credit facility were $235.0 million, while there were no outstanding borrowings under the revolving credit facility as of February 26, 2022. 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 financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of EBITDA-to-interest
expense. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 27, 2022, we were in compliance with both financial covenants.
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 $49.3 million at August 27, 2022, with $6.7 million payable during the remainder of fiscal 2023.
As of August 27, 2022, we had $225.2 million of open purchase obligations, of which payments totaling $117.8 million are expected to become due within the
remainder of fiscal 2023. 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 2023, which will equal or exceed our minimum funding requirements.
As of August 27, 2022, 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 27, 2022, $1.1 billion of these types of bonds were outstanding, of which $361.1 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.
During calendar year 2020, we took advantage of the option to defer remittance of the employer portion of Social Security tax as provided in the Coronavirus Aid, Relief, and Economic Security Act. This deferral allowed us to retain cash during calendar year 2020 that would have otherwise been remitted to the federal government. We paid our first installment of these deferred social security taxes, totaling approximately $6.8 million, in the fourth quarter of fiscal 2022,
and expect to pay our second installment of approximately $6.8 million in the fourth quarter of fiscal 2023.
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 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 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 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
Based on our second-quarter results and increasing confidence in our outlook, we have raised our guidance for full-year adjusted earnings to a range of $3.75 to $4.05 per diluted* share, up from the previously announced range of $3.50 to $3.90. We expect full year revenue growth of 8 to 10 percent, primarily driven by growth in our Architectural Framing Systems segment. The company continues to expect full-year capital expenditures of approximately $40 million.
*
A reconciliation of non-GAAP guidance on adjusted earnings per diluted share (“Adjusted EPS”) to GAAP guidance is not available on a forward-looking basis without unreasonable effort due to the uncertainty of the magnitude and timing of future adjustments. These adjustments may include the impact of such items as impairment charges, restructuring costs, acquired
project-related charges, and gains or losses from significant asset sales. Accordingly, the company is unable to provide a reconciliation of Adjusted EPS to the most directly comparable GAAP financial measure
or address the probable significance of the unavailable information, which could be material to the company's future financial results computed in accordance with GAAP.
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 26, 2022.
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 26, 2022, except as noted below.
Impairment of goodwill, indefinite-lived intangible assets and long-lived assets
Goodwill
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects which resulted in the combination of the Sotawall and Harmon reporting units into a single reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change for these reporting units and concluded that no adjustment to the carrying value of goodwill was necessary. Concurrent with the move of Sotawall from
the Architectural Framing Systems segment to the Architectural Services segment effective at the start of our first quarter of fiscal 2023, goodwill was reallocated to the affected reporting units within each segment, using a relative fair value approach as outlined in ASC 350, Intangibles - Goodwill and Other. In addition, for all reporting units, no qualitative indicators of impairment were identified during the first quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
a)Evaluation of disclosure controls and procedures: As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the
Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure.
b)Changes
in internal controls: There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended August 27, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal
Proceedings
The Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. We have in the past and are currently subject to product liability and warranty claims, including certain legal claims related to a commercial sealant product formerly incorporated into our products. The Company is also subject to litigation arising out of areas such as employment practices, workers
compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.
There have been no material changes or additions
to our risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by the Company of its own stock during the second quarter of fiscal 2023:
Period
Total Number
of Shares Purchased (a)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (b)
(a)The
shares in this column represent the total number of shares that were surrendered to us by plan participants to satisfy withholding tax obligations related to share-based compensation. We did not purchase any shares pursuant to our publicly announce repurchase program during the fiscal quarter.
The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended August 27, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of August 27, 2022 and February 26, 2022, (ii) the Consolidated Results of Operations for the three- and six-months ended August 27, 2022 and August 28, 2021, (iii) the Consolidated Statements of Comprehensive Earnings for the three-
and six-months ended August 27, 2022 and August 28, 2021, (iv) the Consolidated Statements of Cash Flows for the six-months ended August 27, 2022 and August 28, 2021, (v) the Consolidated Statements of Shareholders' Equity for the three- and six-months ended August 27, 2022 and August 28, 2021, and (vi) Notes to Consolidated Financial Statements.
104#
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.