10-K 1 apog-20183310k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________ 
FORM 10-K
 _________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 3, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 0-6365
_________________________________ 
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Minnesota
 
41-0919654
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4400 West 78th Street – Suite 520,
Minneapolis, MN
 
55435
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (952) 835-1874

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.33 1/3 Par Value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨  Yes    x  No
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.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     x  Yes    ¨  No



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 
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).  ¨  Yes    x  No
As of September 2, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $1,242,000,000 (based on the closing price of $43.37 per share as reported on the NASDAQ Stock Market LLC as of that date).
As of April 26, 2018, 28,159,542 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III hereof is incorporated by reference to the Proxy Statement for the registrant's 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
 



APOGEE ENTERPRISES, INC.
Annual Report on Form 10-K
For the fiscal year ended March 3, 2018

TABLE OF CONTENTS
 
 
  
Page
 
 
 
 
 
 
 
 
 
 
 


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PART I
ITEM 1. BUSINESS

The Company
Apogee Enterprises, Inc. (Apogee, the Company or we) was incorporated under the laws of the State of Minnesota in 1949. We are a world leader in the design and development of value-added glass and metal products and services for enclosing commercial buildings and framing and displays.

Our Company has four reporting segments, with three of the segments serving the commercial construction market:
The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized window, curtainwall, storefront and entrance systems comprising the outside skin of buildings. For fiscal 2018, this segment accounted for approximately 51 percent of our net sales.
The Architectural Glass segment fabricates coated, high-performance glass used globally in customized window and wall systems. For fiscal 2018, this segment accounted for approximately 26 percent of our net sales.
The Architectural Services segment provides building glass and curtainwall installation services. For fiscal 2018, this segment accounted for approximately 16 percent of our net sales.
The Large-Scale Optical Technologies (LSO) segment manufactures value-added coated glass and acrylic products for framing and display applications. For fiscal 2018, this segment accounted for approximately 7 percent of our net sales.

On June 12, 2017, we acquired the stock of EFCO Corporation (EFCO), a privately-held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for $192 million in cash, funded through our committed revolving credit facility, with $7.5 million of that amount payable in annual installments beginning in June 2018. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

On December 14, 2016, we acquired substantially all the assets of Sotawall, Inc. (operating under the name Sotawall Limited or “Sotawall”), a privately-held Canadian designer and fabricator of high-performance, unitized curtainwall systems for commercial construction projects, for approximately $138 million. Sotawall's results of operations have been included in the consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

Strategy
Our strategies are to diversify revenue streams and structure the business to provide more stable revenue growth and profit generation over an economic cycle. Strategies are focused on diversification of end sectors served through growth from new geographies, new products and new markets, while improving margins through productivity and project selection initiatives.

In an effort to reduce our exposure to the cyclical nature of the large-building segment of the commercial construction industry, we have expanded our focus to include mid-sized projects in the Architectural Glass segment and grown our geographic footprint through organic growth and acquisitions in the Architectural Framing Systems segment. We have also increased our focus on retrofit and renovation of windows and curtainwall as we have seen increased interest from the non-residential and high-end multi-family residential building sectors in upgrading building façades and improving energy efficiency.

In the Architectural Services segment, our emphasis is on improving margins through focused project selection, while continuing to deliver long-term organic growth through geographic expansion in line with our available project management capacity.

Within the LSO segment, our strategy is to grow in newer display markets that desire the value-added properties our glass and acrylic products provide, while continuing to convert the domestic and international custom picture framing and fine art markets from clear uncoated glass and acrylic products to value-added products that protect art from UV damage and minimize reflection.

Across all our segments, we also regularly evaluate business development opportunities in adjacent sectors that will complement our existing portfolio. These business development strategies can be executed organically, through acquisition or with strategic alliances.

Finally, we are constantly working to improve the efficiency and productivity of our operations by implementing lean manufacturing disciplines and automation.





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Products and Services
Architectural Framing Systems, Architectural Glass and Architectural Services segments
These three segments participate in various phases of the value chain to design, engineer, fabricate and install customized glass and aluminum window, curtainwall, storefront and entrance systems comprising the outside skin of buildings in the commercial, institutional and high-end multi-family residential construction sectors.

Within our Architectural Framing Systems segment, we design and fabricate window, curtainwall, storefront and entrance systems using our customized aluminum and glass, or glass supplied by others. We also provide finishing services for metal components used in windows and curtainwall, as well as plastic components for other products.

In our Architectural Glass segment, we apply ultra-thin, high-performance coatings to uncoated glass to create a variety of aesthetic characteristics, unique designs and energy efficiency, including varying levels of solar energy management to enhance energy-efficiency. We also laminate layers of glass and vinyl to protect against hurricanes and other severe impacts, and temper, or heat strengthen, glass to provide additional strength. Our high-performance glass is made-to-order and is typically fabricated into insulating and/or laminated glass units for installation into window, curtainwall, storefront or entrance systems.

By integrating technical capabilities, project management skills and field installation services, our Architectural Services segment provides design, engineering, fabrication and installation services for the outside skin of buildings. Our ability to efficiently design high-quality window and curtainwall systems and effectively manage the installation of building façades assists our customers in meeting the schedule and cost requirements of their jobs.

Our product and service offerings allow architects to create distinctive looks for commercial building such as office towers, hotels, education and athletic facilities and dormitories, health care facilities, government buildings, retail centers and multi-family residential buildings, while meeting functional requirements such as energy efficiency, hurricane, blast and other impact resistance and/or sound control.

LSO segment
The LSO segment provides coated glass and acrylic primarily for use in wall decor and display applications. Products vary based on size and coatings applied to provide conservation-grade UV protection, anti-reflective and anti-static properties and/or security features.

Product Demand and Distribution Channels
Architectural Framing Systems, Architectural Glass and Architectural Services segments
Demand for the products and services offered by our Architectural segments is affected by changes in the North American commercial construction industries, as well as by changes in general economic conditions. Additionally, the Architectural Glass segment has an operation in Brazil and is, therefore, also impacted by Brazil's commercial construction industry and general economic conditions.

We look at several external indicators to analyze potential demand for our products and services, such as U.S. and Canadian job growth, office space vacancy rates, credit and interest rates available for commercial construction projects, architectural billing statistics and material costs. We also rely on internal indicators to analyze demand, including our sales pipeline, made up of contracts in review, projects awarded or committed, and bidding activity. Our sales pipeline, together with ongoing feedback, analysis and data from our customers, architects and building owners, provide visibility into near- and medium-term future demand. Additionally, we evaluate data on U.S. and Canadian non-residential construction market activity, industry analysis and longer-term trends provided by external data sources.

Our architectural products and services are used in subsets of the construction industry differentiated by building type, level of customization required, customers, geographic location and project size.

Building type - The construction industry is typically segmented into residential construction and non-residential construction, which includes commercial, industrial and institutional construction. Our products and services are primarily used in commercial buildings (office towers, hotels and retail centers) and institutional buildings (education facilities and dormitories, health care facilities and government buildings), as well as in high-end multi-family residential buildings (a subset of residential construction).

Level of customization - The large majority of our projects involve a high degree of customization, as the product or service is based on customer-specified requirements for aesthetics, performance and size, and is designed to satisfy local building codes.

Customers and distribution channels - Our customers are mainly glazing subcontractors and general contractors, with project design being influenced by architects and building owners. Our high-performance architectural glass is primarily sold using a

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direct sales force and independent sales representatives. Installation services are sold by a direct sales force in certain metropolitan areas in the U.S. We also have the ability to provide remote installation project management throughout the U.S. We sell our custom and standard windows, curtainwall, storefront and entrance systems using a combination of direct sales forces, independent sales representatives and distributors.

Geographic location - We primarily supply architectural glass products to customers in North America, with some international sales of our high-performance architectural glass. We estimate the U.S. demand for architectural glass fabrication in non-residential buildings is in excess of $1.5 billion annually. Our aluminum framing systems, including windows, curtainwall, storefront and entrances, are marketed primarily in the U.S. and Canada, and we estimate demand to be in excess of $3 billion annually. In installation services, we are one of only a few architectural glass installation companies in the U.S. to have a national presence, and we estimate the U.S. demand for installation services on commercial projects to be in the range of $10 to $20 billion.

Project size - Our Architectural Glass segment primarily serves mid-size to monumental high-profile projects. Architectural Framing Systems primarily targets small and mid-size projects, and Architectural Services primarily serves mid-size projects.

LSO segment
In our LSO segment, we have a leading brand of value-added coated glass and acrylic used in the custom picture framing market. Under the Tru Vue brand, products are sold primarily in North America through national and regional retail chains using a direct sales force, as well as through local picture framing shops using an independent distribution network. We also supply our glass and acrylic products to museums, shops and galleries worldwide through independent distributors. We have also begun to supply to other display markets, such as digital signage, and to other wall decor sectors.

Competitive Conditions
Architectural Framing Systems, Architectural Glass and Architectural Services segments
The North American commercial construction market is highly fragmented. Competitive factors include price, product quality, product attributes and performance, reliable service, on-time delivery, lead-time, warranty and the ability to provide project management, technical engineering and design services. To protect and enhance our competitive position, we maintain strong relationships with architects, who influence the selection of products and services on a project, and with general contractors, who initiate projects and develop specifications.

The competition in the commercial window and storefront manufacturing industry is highly fragmented, and our Architectural Framing Systems segment competes against several national, regional and local aluminum window and storefront manufacturers, as well as regional paint and anodizing finishing companies. Our businesses compete by providing high-quality products, faster than average lead times, and on-time delivery.

In our Architectural Glass segment, we experience competition from regional glass fabricators who can provide certain products with attributes similar to our products. Within the market sector for large, complex projects, we encounter competition from international companies, which have benefited from the relative strength of the U.S. dollar and lower fabrication costs in recent years. We maintain our competitive pricing position against these international competitors by providing high-quality products, short lead times, and responsive customer service.

Our Architectural Services segment competes against national, regional and local glass installation companies.

LSO segment
Product attributes, price, quality, marketing and service are the primary competitive factors in the LSO segment. Our competitive strengths include our excellent relationships with customers, innovative marketing programs and the performance of our value-added products. We compete with certain European valued-added glass and acrylic products for picture framing and display.

Warranties
We offer product and service warranties that we believe are competitive for the markets in which our products and services are sold. The nature and extent of these warranties depend upon the product or service, the market and, in some cases, the customer being served. Our standard warranties are generally from two to 10 years for our architectural glass, curtainwall and window system products, while we generally offer warranties of two years or less on our other products and services.

Sources and Availability of Raw Materials
Raw materials used within the Architectural Glass segment include flat glass, vinyl, silicone sealants and lumber. Materials used in the Architectural Framing Systems segment include aluminum billet and extrusions, fabricated glass, plastic extrusions, hardware, paint and chemicals. Within the Architectural Services segment, materials used include fabricated glass, aluminum

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extrusions and fabricated metal panels. The LSO segment mainly uses glass and acrylic. A majority of our raw materials are readily available from a variety of domestic and international sources.

Trademarks and Patents
We have several trademarks and trade names that we believe have significant value in the marketing of our products, including APOGEE®. Trademark registrations in the U.S. are generally for a term of 10 years, renewable every 10 years as long as the trademark is used in the regular course of trade.
Within the Architectural Framing Systems segment, LINETEC®, WAUSAU WINDOW AND WALL SYSTEMS®, TUBELITE®, ADVANTAGE BY WAUSAU®, 300ES®, FINISHER OF CHOICE®, THERML=BLOCK®, MAXBLOCK®, DFG®, ECOLUMINUM®, ALUMINATE®, GET THE POINT!®, FORCEFRONT®, SOTAWALL®, HYBRID-WALL®, EFCO®, TERRASTILE®, THERMASTILE®, TRIPLE SET®, ULTRADIZE®, ULTRAFLUR®, ULTRALINE®, ULTRAPON® and XTHERM® are registered trademarks. CUSTOM WINDOW™, INVENT™, INVENT.PLUS™, INVENT RETRO™, INVISION™, CLEARSTORY™, EPIC™, HERITAGE™, VISULINE™, SEAL™, SUPERWALL™, CROSSTRAK™, HP-Wall™, VersaTherm™, E-Strut™, E-Shade™, E-Lite™, Series 960 Wall™, Durastile™ and X Force™ are unregistered trademarks. ALUMICOR™, BUILDING EXCELLENCE™, TerraPorte 7600 Out-Swing accessABLE™ and Integra 6000™ are unregistered trademarks in Canada.
Within the Architectural Glass segment, VIRACON®, DIGITALDISTINCTIONS®, ROOMSIDE®, EXTREMEDGE®, BUILDING DESIGN®, GLASS IS EVERYTHING®, CLEARPOINT®, CYBERSHIELD® and STORMGUARD® are registered trademarks. VIRASPAN™ is an unregistered trademark. In addition, GLASSEC®, INSULATTO® and BLINDATTO® are registered trademarks in Brazil. GLASSECVIRACON™ is an unregistered trademark in Brazil.
Within the Architectural Services segment, HARMON®, H DESIGN®, HARMON GLASS®, HI-7000®, BUILDING TRUST IN EVERYTHING WE DO ® and INNOVATIVE FAÇADE SOLUTIONS® are registered trademarks. UCW-8000™, HI-8500™, HI-9000™, SMU-6000™ and HPW-250™ are unregistered trademarks.
Within the LSO segment, TRU VUE®, CONSERVATION CLEAR®, CONSERVATION MASTERPIECE ACRYLIC®, CONSERVATION REFLECTION CONTROL®, ULTRAVUE®, MUSEUM GLASS®, OPTIUM®, PREMIUM CLEAN®, REFLECTION CONTROL®, AR REFLECTION-FREE®, TRU VUE AR®, OPTIUM ACRYLIC®, OPTIUM MUSEUM ACRYLIC®, CONSERVATION MASTERPIECE®, STATICSHIELD®, TRULIFE® and VISTA AR® are registered trademarks. TRULIFE INFINITY FRAME™, THE DIFFERENCE IS CLEAR™ and TRU FRAMEABLE MOMENTS™ are unregistered trademarks.
We have several patents pertaining to our glass coating methods and products, for hybrid window wall/curtainwall systems and methods of installation and for our UV coating and etch processes for anti-reflective glass for the picture framing industry and fine art market. Despite being a point of differentiation from our competitors, no single patent is considered to be material.

Seasonality
We do not experience a significant seasonal effect in our Architectural segments. However, the construction industry is highly cyclical in nature and can be influenced differently by the effects of local economies. Within the LSO segment, North American picture framing glass and acrylic sales tend to increase in the September-to-December timeframe, but the timing of customer promotional activities may offset some of this seasonal impact.

Working Capital Requirements
Trade and contract-related receivables and other contract assets are the largest components of our working capital. Inventory requirements, mainly related to raw materials, are most significant in our Architectural Framing and Architectural Glass segments.

Backlog
Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which is expected to be recognized as revenue primarily in the near-term. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. Backlog should not be used as the sole indicator of our future revenue because 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 monitored separately and not included in backlog.

Architectural Framing Systems segment backlog grew to
$378.4 million at year-end, net of intersegment eliminations, compared to $245.4 million at the end of the prior year, due primarily to the acquisition of EFCO, which contributed approximately $130 million to backlog, as well as recent increased order activity, particularly of longer lead-time contracts. Approximately 80 percent

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of the backlog in this segment is expected to be fulfilled in fiscal 2019, with the remainder expected to be filled in fiscal 2020 and beyond.

Architectural Glass segment backlog as of year-end was $36.7 million, compared to $66.4 million in the prior year, net of intersegment eliminations. This segment has strategically shortened lead-times, with capability and productivity improvements, in order to serve mid-size projects where there is a higher level of book-and-bill activity within quarters. The backlog is all expected to be fulfilled in fiscal 2019.

Backlog in the Architectural Services segment as of year-end was $426.3 million, compared to $255.1 million in the prior year, due to timing of firm orders and signed contracts. Approximately 65 percent of the backlog in this segment is expected to be filled during fiscal 2019, with the remainder expected to be filled in fiscal 2020 and beyond.

Backlog is not a significant metric for the LSO segment, as orders are typically booked and billed within a short time frame.

Research and Development
The amount spent on research and development activities was $14.0 million, $8.6 million and $8.0 million in fiscal 2018, 2017 and 2016, respectively. Of these amounts, $1.5 million, $2.2 million and $2.4 million, respectively, were focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and are included in cost of sales in the accompanying consolidated financial statements.

Environment
We use hazardous materials in our manufacturing operations, and have air and water emissions that require controls. As a result, we are subject to stringent federal, state and local regulations governing the storage and use of these materials and disposal of wastes. We contract with outside vendors to collect and dispose of waste at our production facilities in compliance with applicable environmental laws. In addition, we have procedures in place that we believe enable us to properly manage the regulated materials used in and wastes created by our manufacturing processes. We believe we are currently in material compliance with such laws and regulations. While we will continue to incur environmental compliance costs for our ongoing manufacturing operations, we do not expect these to be material to our consolidated financial statements. We have one manufacturing facility where we are working to remediate historical environmental impacts. The remediation activities are being conducted without significant disruption to our operations.

Employees
The Company employed 6,700 and 5,511 persons on March 3, 2018 and March 4, 2017, respectively. At March 3, 2018, 629 of these employees were represented by U.S. labor unions.

International Sales
Information regarding export and international sales is included in Item 8, Financial Statements and Supplementary Data, within Note 16 of our Consolidated Financial Statements.

Available Information
The Company maintains a website at www.apog.com. Through a link to a third-party content provider, this corporate website provides free access to the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after electronic filing such material with, or furnishing it to, the Securities and Exchange Commission. Also available on our website are various corporate governance documents, including our Code of Business Ethics and Conduct, Corporate Governance Guidelines, and charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors.













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EXECUTIVE OFFICERS OF THE REGISTRANT
Name
 
Age
 
Positions with Apogee Enterprises and Employment History
Joseph F. Puishys
 
59
 
Chief Executive Officer and President of the Company since 2011. President of Honeywell's Environmental and Combustion Controls division from 2008 through 2011, President of Honeywell's Building Solutions from 2005 through 2008, and President of Honeywell Building Solutions, America from 2004 to 2005.
James S. Porter
 
57
 
Chief Financial Officer since 2005 and Executive Vice President since 2015. Vice President of Strategy and Planning from 2002 through 2005. Various management positions within the Company since 1997.
Patricia A. Beithon
 
64
 
General Counsel and Secretary since 1999.
Gary R. Johnson
 
56
 
Vice President, Treasurer since 2001. Various management positions within the Company since 1995.
John A. Klein
 
61
 
President of EFCO Corporation, a subsidiary of the Company, since February 2018. Senior Vice President, Operations and Supply Chain Management of the Company from 2012 through January 2018. Director of Operations at Cooper Industries' Power Systems Division from 2008 through 2012, and Vice President of Operations at Rexnord Industries' Bearing Division from 2005 through 2007.

Executive officers are elected annually by the Board of Directors to serve for a one-year period. There are no family relationships between any of the executive officers or directors of the Company.

ITEM 1A. RISK FACTORS

Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other filings with the Securities and Exchange Commission, could have a material adverse impact on our business, financial condition or results of operations.

General global economic and business conditions
Our Architectural Framing Systems, Architectural Glass and Architectural Services segments are dependent on global economic conditions and the cyclical nature of the North American commercial construction industry. The commercial construction industry is impacted by global macroeconomic trends that, in turn, affect, among other things, availability of credit, employment levels, consumer confidence, interest rates and commodity prices. To the extent changes in these factors negatively impact the overall commercial construction industry, our revenue and profits could be significantly reduced.

Our Architectural Glass segment's operation located in Brazil is subject to the economic, political and tax conditions prevalent in the country. We cannot predict how changing economic conditions in Brazil will impact our financial results; however, our Brazilian operation makes up less than five percent of our net sales annually.

Our LSO segment depends on the strength of the retail custom picture framing industry. This industry is highly dependent on consumer confidence and the conditions of the U.S. economy. A decline in consumer confidence, whether as a result of an economic slowdown, uncertainty regarding the future or other factors, could result in a decrease in net sales and operating income of this segment.

Foreign currency exchange impacts
Our subsidiaries in Canada and Brazil report their results of operations and financial position in their relevant functional currencies (local country currency), which are then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements. As the relationship between these currencies and the U.S. dollar changes, there could be a negative impact on our reported results and financial position.

In addition, when the U.S. dollar strengthens against foreign currencies, imports of products into the U.S. produced by international competitors become more price competitive and exports of our U.S.-fabricated products become less price competitive. If we are not able to counteract these types of price pressures through superior quality and service, our net sales and operating income could be negatively impacted.

New competitors or specific actions of our existing competitors
All of our operating segments operate in competitive industries where the actions of our existing competitors or new competitors could result in a loss of customers or share of customers' demand. Changes in our competitors' products, prices or services could negatively impact our share of demand, net sales or margins.


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Our Architectural Framing Systems and Architectural Glass segments have seen an increase in imports of competitive products into the U.S. from international suppliers due to the relative strength of the U.S. dollar. If imports of competitive products were to occur at increased levels for extended periods of time, our net sales and margins could be negatively impacted.

Our LSO segment competes with several international specialty glass manufacturers. If these competitors are able to successfully increase their product attributes and production capacity and/or increase their sales and marketing focus to the U.S. custom picture framing market, this segment's net sales and margins could be negatively impacted.

Acquisitions and related integration activities
We have completed and may complete additional acquisitions in the future to accelerate the execution of our growth strategies, including new geographies, adjacent market sectors and new product introductions. While we have a disciplined approach to assessing potential acquisition targets, conducting due diligence activities, negotiating appropriate acquisition terms and integration activities, there are risks inherent in completing acquisitions, including:
diversion of management’s attention from existing business activities;
difficulties or delays in integrating and assimilating information and financial systems, operations and products of an acquired business or other business venture or in realizing projected efficiencies, growth prospects, cost savings and synergies;
potential loss of key employees, customers and suppliers of the acquired businesses or adverse effects on relationships with existing customers and suppliers;
adverse impact on overall profitability if the acquired business does not achieve the return on investment projected at the time of acquisition; and
inaccurate assessment of additional post-acquisition capital investments, undisclosed, contingent or other liabilities, problems executing backlog of material supply or installation projects, unanticipated costs and an inability to recover or manage such liabilities and costs.
If one or more of these risks arises in a material manner, our operating results could be negatively impacted.
Goodwill and indefinite-lived intangible asset impairment
Our total assets include a significant amount of goodwill and indefinite-lived intangible assets as a result of our recent acquisitions. We test goodwill and indefinite-lived intangibles for impairment annually, or more frequently if events or changes in circumstances indicate the potential for impairment. If future operating performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or more of our acquired businesses were to decline, we could incur a non-cash impairment charge that would negatively impact our net earnings.

Effective utilization and management of our manufacturing capacity
Near-term performance depends, to a significant degree, on our ability to provide sufficient available capacity and appropriately utilize existing production capacity. The failure to successfully maintain existing capacity, successfully implement planned capacity expansions, and make investments in additional physical capacity could adversely affect our operating results.

Loss of key personnel and inability to source sufficient labor
Our success depends on the skills of the Company's leadership, construction project managers and other key technical personnel, and our ability to secure sufficient manufacturing labor.  Increased activity in residential and commercial construction has caused increased competition for experienced construction project managers.  Additionally, some of our manufacturing facilities are located in regions that at times have experienced low levels of unemployment.  If we are unable to retain existing employees and/or recruit and train additional employees with the requisite skills and experience, our operating results could be adversely impacted.

Commodity price fluctuations, trade policy impacts and supply availability
Our Architectural Framing Systems and Architectural Services segments use aluminum as a significant input to their products. While we structure many of our supply agreements in a way to moderate the effects of fluctuations in the market for raw aluminum and we endeavor to adjust market pricing to offset potential impacts, operating results could be negatively impacted by price movements in the market for raw aluminum.

As a result of recently announced increased tariffs on aluminum and sanctions against certain producers, we have seen increased volatility regarding the cost of aluminum that we purchase from both domestic and international sources.  Also, recently announced steel tariffs have the potential to impact our customers as steel is a significant input the construction of commercial buildings.  Lastly, due to our Architectural Framing Systems segment presence in Canada, we have significant cross-border activity as our Canadian businesses purchase inputs from U.S.-based suppliers and sell to U.S.-based customers.  A significant change in the terms of the North American Free Trade Agreement could have an adverse impact on our net sales and operating results.


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Our Architectural Glass and LSO segments use raw glass as a significant input to their products. The supply of raw glass has become tighter due to several years of growth in automotive manufacturing and residential and non-residential construction. Although we have secured supply commitments from multiple suppliers that allow us to reach our near-term growth targets, a significant unplanned downtime or shift in strategy at one or more of our key suppliers could negatively impact our operating results.

Product quality issues
We manufacture and/or install a significant portion of our products based on the specific requirements of each customer. We believe that future orders of our products or services will depend on our ability to maintain the performance, reliability and quality standards required by our customers. If our products have performance, reliability or quality problems, or products are installed using incompatible glazing materials or installed improperly (by us or a customer), we may experience: additional warranty expense; reduced or canceled orders; higher manufacturing or installation costs; or delays in the collection of accounts receivable. Additionally, performance, reliability or quality claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages that could negatively impact our financial results.

Project management and installation issues
The Architectural Services segment and, occasionally, the Architectural Framing Systems segment are awarded fixed-price contracts that include material supply and installation services. Often, bids are required before all aspects of a construction project are known. An underestimate in the amount of labor required and/or cost of materials for a project; a change in the timing of the delivery of product; system design errors, difficulties or errors in execution; or significant project delays, caused by us or other trades, could result in failure to achieve the expected results. Any one or more of such issues could result in losses on individual contracts that could negatively impact our operating results.

Changes in architectural trends, building codes or consumer preferences
Any change in commercial construction customer preference, architectural trends or building codes that reduce window-to-wall ratios could negatively impact net sales and operating income in our architectural-related segments. The LSO segment depends on U.S. consumers framing art and other decorative items. Any shift in customer preference away from framed art to other forms of wall decor could negatively impact future net sales and operating income in the LSO segment.

Customer dependence in the LSO segment
The LSO segment continues to be highly dependent on a relatively small number of customers for its sales, while working to grow in new markets and with additional customers. Accordingly, loss of a significant customer, a significant reduction in pricing, or a shift to a less favorable mix of value-added picture framing glass or acrylic products for one or more of those customers could materially reduce LSO net sales and operating results.

Results can differ significantly from our expectations and the expectations of analysts
Our sales and earnings guidance and resulting external analyst estimates are largely based on our view of our business and the broader commercial construction market. Even though we have market intelligence through our contact with real estate developers, building owners and architects, and continually monitor micro- and macro-economic indicators of future performance of the commercial construction market, we are unable to precisely predict events that can significantly change market cycles. Failure to meet our guidance or analyst expectations for net sales and earnings would likely have an adverse impact on the market price of our common stock.

Significant risk retention through self-insurance programs
We obtain third-party insurance for potential losses from general liability, employment practices, workers' compensation and automobile liability risk, as well as medical insurance. However, a high amount of risk is retained on a self-insured basis, partially through our wholly-owned insurance subsidiary. Therefore, a material architectural product liability event could have a material adverse effect on our operating results.

Dependence on information technology systems and potential security threats
Our operations are dependent upon various information technology systems that are used to process, transmit and store electronic information, and to manage or support our manufacturing operations and a variety of other business processes and activities. We could encounter difficulties in maintaining our existing systems, and developing and implementing new systems. Such difficulties could lead to disruption in business operations and/or significant additional expenses that could adversely affect our results.

Additionally, information technology security threats are increasing in frequency and sophistication. These threats pose a risk to the security of our systems and networks, and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromise of confidential information, manipulation and destruction of data and product

11


specifications, production downtimes, disruption in the availability of financial data, or misrepresentation of information via digital media. The occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, project delay claims, and increased costs and operational consequences of implementing further data protection systems.

Use of hazardous chemicals and environmental compliance
We use hazardous chemicals in the production process of some of our products. As a result, we are subject to a variety of local, state and federal governmental regulations relating to storage, discharge, handling, emission, generation and disposal of toxic or other hazardous substances used to manufacture our products, compliance with which is expensive. Our failure to comply with current or future environmental regulations could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing processes or increased costs.

Changes in tax rates or the adoption of new tax legislation
We are subject to taxes in the U.S., Canada and Brazil. Our effective tax rate could be affected by changes in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws or their implementation. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the U.S. While the Act will reduce our U.S. effective tax rate, the overall impact is uncertain due to the complexity of certain provisions of the Act and ambiguities in the interpretation and application of those provisions. Therefore, any material change in the interpretation or application of the provisions of the Act could have a significant impact on our net earnings.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The following table lists, by segment, the Company's major properties as of March 3, 2018.
Property Location
 
Owned/ Leased
 
Function
Architectural Framing Systems segment
 
 
 
 
Wausau, WI
 
Owned
 
Manufacturing/Administrative

Stratford, WI
 
Owned
 
Manufacturing
Reed City, MI
 
Owned
 
Manufacturing
Walker, MI
 
Leased
 
Manufacturing/Administrative

Dallas, TX
 
Leased
 
Manufacturing
Toronto, ON Canada
 
Leased
 
Manufacturing/Warehouse/Administrative
Toronto, ON Canada
 
Owned
 
Manufacturing
Brampton, ON Canada
 
Leased
 
Manufacturing/Warehouse/Administrative
Verona, VA
 
Leased
 
Manufacturing/Warehouse/Administrative
Springfield, MO
 
Leased
 
Manufacturing/Warehouse/Administrative
Monett, MO
 
Owned
 
Manufacturing/Warehouse/Administrative
Architectural Glass segment
 
 
 
 
Owatonna, MN
 
Owned
 
Manufacturing/Administrative
Owatonna, MN
 
Leased
 
Warehouse
Statesboro, GA
 
Owned
 
Manufacturing/Warehouse
St. George, UT
 
Owned(1)
 
Manufacturing/Warehouse
Nazaré Paulista, Brazil
 
Owned(2)
 
Manufacturing/Administrative
Architectural Services segment
 
 
 
 
Minneapolis, MN
 
Leased
 
Administrative
West Chester, OH
 
Leased
 
Manufacturing
Mesquite, TX
 
Leased
 
Manufacturing
Glen Burnie, MD
 
Leased
 
Manufacturing
Orlando, FL
 
Leased
 
Manufacturing
LSO segment
 
 
 
 
McCook, IL
 
Owned
 
Manufacturing/Warehouse/Administrative

Faribault, MN
 
Owned
 
Manufacturing/Administrative

Other
 
 
 
 
Minneapolis, MN
 
Leased
 
Administrative
(1) 
Facility was closed in March 2018 and is classified as held-for-sale as of March 3, 2018.
(2) 
This is an owned facility; however, the land is leased from the city.

12



ITEM 3. LEGAL PROCEEDINGS

The Company has been 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's construction supply and services businesses are routinely involved in various disputes and claims arising out of construction projects, sometimes involving demands for significant monetary damages or product replacement. The Company has also been subject to litigation arising out of general liability, employment practices, workers' compensation and automobile claims. Although it is very difficult to accurately predict the outcome of such proceedings, facts currently available indicate that no such claims will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
Apogee common stock is traded on the NASDAQ Stock Market LLC (Nasdaq) under the ticker symbol APOG.

As of April 12, 2018, there were 1,142 shareholders of record and 14,476 shareholders for whom securities firms acted as nominees.

The following chart shows the quarterly range and year-end closing price for one share of the Company's common stock over the past three fiscal years.
 
 
First
 
Second
 
Third
 
Fourth
 
Year-end
 
 
Low
High
 
Low
High
 
Low
High
 
Low
High
 
Close
2018
 
$
50.72

$
59.61

 
$
41.01

$
58.13

 
$
43.35

$
50.12

 
$
42.01

$
50.88

 
$
43.97

2017
 
39.93

45.94

 
41.50

48.88

 
39.96

49.17

 
47.64

59.38

 
58.19

2016
 
42.35

56.27

 
49.60

60.16

 
43.90

57.86

 
34.52

50.53

 
39.41


Dividends
Quarterly, the Board of Directors evaluates declaring dividends based on operating results, available funds and the Company's financial condition. Cash dividends have been paid each quarter since 1974. The chart below shows quarterly and annual cumulative cash dividends per share for the past three fiscal years.
 
 
First
 
Second
 
Third
 
Fourth
 
Total
2018
 
$
0.1400

 
$
0.1400

 
$
0.1400

 
$
0.1575

 
$
0.5775

2017
 
0.1250

 
0.1250

 
0.1250

 
0.1400

 
0.5150

2016
 
0.1100

 
0.1100

 
0.1100

 
0.1250

 
0.4550


Purchases of Equity Securities by the Company
The following table provides information with respect to purchases made by the Company of its own stock during the fourth quarter of fiscal 2018:
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)
December 3, 2017 through December 30, 2017
75,080

 
$
45.89

 
74,900

 
667,467

December 31, 2017 through January 27, 2018
226,251

 
45.13

 
225,998

 
1,441,469

January 28, 2018 through March 3, 2018
205,678

 
45.59

 
201,401

 
1,240,068

   Total
507,009

 
$
45.43

 
502,299

 
1,240,068


13


(a) The shares in this column include 180, 253 and 4,277 shares, respectively, that were surrendered to us by plan participants during each of the monthly periods referred to above, in order to satisfy stock-for-stock option exercises or withholding tax obligations related to stock-based compensation.
(b) In fiscal 2004, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock, which was announced on April 10, 2003. Subsequently, the Board of Directors increased the authorization by 750,000 shares, announced on January 24, 2008; by 1,000,000 shares, announced on October 8, 2008; by 1,000,000 shares, announced on January 13, 2016; and by 1,000,000 shares, announced on January 9, 2018. The Company's repurchase program does not have an expiration date.

Comparative Stock Performance
The graph below compares the cumulative total shareholder return on a $100 investment in our common stock for the last five fiscal years with the cumulative total return on a $100 investment in the Standard & Poor's Small Cap 600 Growth Index and the Russell 2000 Index. The graph assumes an investment at the close of trading on March 2, 2013, and also assumes the reinvestment of all dividends.
apog-201510ka03.jpg
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Apogee
$
100.00

 
$
132.26

 
$
179.16

 
$
155.49

 
$
232.16

 
$
177.46

S&P Small Cap 600 Growth Index
100.00

 
131.21

 
140.75

 
129.15

 
169.38

 
190.32

Russell 2000 Index
100.00

 
131.04

 
138.42

 
118.06

 
161.16

 
179.39


We are not aware of any competitors, public or private, that are similar to us in size and scope of business activities. Most of our direct competitors are either privately owned or divisions of larger, publicly owned companies.

ITEM 6. SELECTED FINANCIAL DATA

The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and related notes, included in Item 8 of this Report.

14


 
Fiscal Year
(In thousands, except per share data and percentages)
2018(1)
 
2017(2)(3)
 
2016
 
2015
 
2014(4)
Results of Operations Data
 
 
 
 
 
 
 
 
 
Net sales
$
1,326,173

 
$
1,114,533

 
$
981,189

 
$
933,936

 
$
771,445

Gross profit
333,518

 
292,023

 
243,570

 
208,544

 
165,252

Operating income
114,284

 
122,225

 
97,393

 
63,585

 
40,285

Net earnings
79,488

 
85,790

 
65,342

 
50,516

 
27,986

Earnings per share - basic
2.79

 
2.98

 
2.25

 
1.76

 
0.98

Earnings per share - diluted
2.76

 
2.97

 
2.22

 
1.72

 
0.95

Cash dividends per share
0.5775

 
0.5150

 
0.4550

 
0.4100

 
0.3700

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
1,022,320

 
784,658

 
657,440

 
612,057

 
569,995

Long-term debt
215,860

 
65,400

 
20,400

 
20,587

 
20,659

Shareholders' equity
511,355

 
470,577

 
406,195

 
382,476

 
356,104

Other Data
 
 
 
 
 
 
 
 
 
Gross profit as a percentage of sales
25.1
%
 
26.2
%
 
24.8
%
 
22.3
%
 
21.4
%
Operating income as a percentage of sales
8.6
%
 
11.0
%
 
9.9
%
 
6.8
%
 
5.2
%
Return on average invested capital(5)
9.3
%
 
14.3
%
 
12.7
%
 
8.8
%
 
6.0
%
(1) 
Includes the acquisition of EFCO in June 2017.
(2) 
Fiscal 2017 contained 53 weeks. Each of the other periods presented contained 52 weeks.
(3) 
Includes the acquisition of Sotawall in December 2016.
(4) 
Includes the acquisition of Alumicor in November 2013.
(5) 
Return on average invested capital is a non-GAAP measure that we define as [operating income x .65]/average invested capital. We believe this measure is useful in understanding operational performance over time. This non-GAAP measure should be viewed in addition to, and not as an alternative to, the reported financial results of the company prepared in accordance with GAAP. Other companies may calculate this measure differently from us, limiting the usefulness of the measure for comparison with others.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
This discussion 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” 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 of the Company's near-term results, based on current information available pertaining to the Company, including the risk factors noted under Item 1A in this Form 10-K. From time to time, we also may 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 Item 1A in this Form 10-K.

We 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 world 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 Technologies (LSO).


15


During fiscal 2018, we advanced strategies to diversify and strengthen our revenue streams in order to improve the stability of our business throughout an economic cycle, by focusing on diversifying geographies, markets and project sizes served. We also focused on generating cash flow and expanding backlog, as we continue to execute on our strategies and grow our business in fiscal 2019 and beyond.

Fiscal 2018 summary of results:
Consolidated net sales increased to $1.3 billion, or 19 percent over fiscal 2017.
Operating income was $114.3 million, a decline of 6.5 percent from $122.2 million in the prior year.
Diluted EPS was $2.76, compared to $2.97 in the prior year, a decline of 7 percent.
Adjusted operating income was $132.9 million, an increase of 6.8 percent compared to the prior year, and adjusted diluted EPS was $3.23, an increase of 6.6 percent compared to the prior year. Refer to the tables that follow for details of these adjusted amounts.
In June 2017, we acquired the assets of EFCO Corporation, a privately-held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for $192 million in cash. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

Adjusted operating income, adjusted operating margin and adjusted earnings per diluted share (“adjusted diluted EPS”) are supplemental non-GAAP measures provided 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 to evaluate the company’s historical and prospective financial performance, measure operational profitability on a consistent basis, and provide enhanced transparency to the investment community. 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 GAAP. Other companies may calculate these measures differently, limiting the usefulness of the measure for comparison with other companies. Income tax impact on the adjustments is calculated based on the Company's effective tax rate for each period presented.
Reconciliation of Non-GAAP Financial Information
Adjusted Operating Income and Adjusted Net Earnings Per Diluted Common Share
 
 
 
 
 
 
 
Diluted per share amounts
In thousands, except per share data
Year-ended March 3, 2018
(52 weeks)
 
Year-ended March 4, 2017
(53 weeks)
 
% change
 
Year-ended March 3, 2018
(52 weeks)
 
Year-ended March 4, 2017
(53 weeks)
 
% change
Operating income
$
114,284

 
$
122,225

 
(6.5
)%
 
$
2.76

 
$
2.97

 
(7.1
)%
Amortization of short-lived acquired intangibles
10,521

 
1,722

 
N/M

 
0.37

 
0.06

 
N/M

Acquisition-related costs
5,098

 
531

 
N/M

 
0.18

 
0.02

 
N/M

Restructuring-related costs
3,026

 

 
N/M

 
0.11

 

 
N/M

Income tax impact on above adjustments
N/A

 
N/A

 
N/M

 
(0.18
)
 
(0.02
)
 
N/M

Adjusted operating income
$
132,929

 
$
124,478

 
6.8
 %
 
$
3.23

 
$
3.03

 
6.6
 %

Results of Operations
Net Sales
(Dollars in thousands)
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
Net sales
$
1,326,173

 
$
1,114,533

 
$
981,189

 
19.0
%
 
13.6
%

Fiscal 2018 Compared to Fiscal 2017
Net sales in fiscal 2018 increased by 19.0 percent compared to fiscal 2017 due to the acquisition of EFCO in the second quarter of 2018. This acquisition, as well as a full year of results from Sotawall (acquired in the fourth quarter of fiscal 2017) and pricing and volume gains from our existing segment businesses, resulted in overall growth in our Architectural Framing Systems segment, which was partially offset by volume declines in our Architectural Services and Architectural Glass segments.
    
Fiscal 2017 Compared to Fiscal 2016
Net sales in fiscal 2017 increased by 13.6 percent compared to fiscal 2016, due to gains in volume across all three architectural segments, as well as the inclusion of Sotawall, acquired in the fourth quarter of fiscal 2017. Volume growth was driven by continued strength in non-residential construction end-markets and success in our strategies to expand geographically and introduce new products. The Architectural Framing Systems segment drove nearly 60 percent of our growth, with the acquisition of Sotawall in

16


the fourth quarter contributing 13 percent of our overall growth. The Architectural Glass segment drove approximately 22 percent of our growth and the Architectural Services segment contributed nearly all of the remainder.

Performance
The relationship between various components of operations, as a percentage of net sales, is provided below.
(Percentage of net sales)
2018
 
2017
 
2016
Net sales
100.0
 %
 
100.0
%
 
100.0
%
Cost of sales
74.9

 
73.8

 
75.2

Gross profit
25.1

 
26.2

 
24.8

Selling, general and administrative expenses
16.5

 
15.2

 
14.9

Operating income
8.6

 
11.0

 
9.9

Interest (expense) income and other, net
(0.3
)
 

 

Earnings before income taxes
8.3

 
11.0

 
9.9

Income tax expense
2.3

 
3.3

 
3.3

Net earnings
6.0
 %
 
7.7
%
 
6.7
%
Effective income tax rate
27.7
 %
 
30.1
%
 
32.9
%

Fiscal 2018 Compared to Fiscal 2017
Gross profit was 25.1 percent in fiscal 2018, a decline of 110 basis points from fiscal 2017, driven by reduced operating leverage on volume within the Architectural Services and Architectural Glass segments and the inclusion of EFCO at lower margins, somewhat offset by improved productivity across all our segments.

Selling, general and administrative (SG&A) expense for fiscal 2018 was 16.5 percent, an increase of 130 basis points, or $49.4 million, from fiscal 2017, mainly as a result of the inclusion of EFCO, as well as a full year of amortization expense on intangible assets acquired in the Sotawall transaction.

The effective tax rate for fiscal 2018 was 27.7 percent, compared to 30.1 percent in fiscal 2017. The decline of 240 basis points was a result of benefits from the U.S. Tax Cuts and Jobs Act ("the Act"), enacted in December 2017.

Fiscal 2017 Compared to Fiscal 2016
Gross profit was 26.2 percent in fiscal 2017, an improvement of 140 basis points from fiscal 2016, driven by operating leverage on increased volume and improved productivity in our three architectural segments.

Selling, general and administrative expense for fiscal 2017 was 15.2 percent, an increase of 30 basis points, or $23.6 million, from fiscal 2016, mainly as a result of increased incentive-related compensation and intangible asset amortization expenses.

The effective tax rate for fiscal 2017 was 30.1 percent, compared to 32.9 percent in fiscal 2016. The decline of 280 basis points was a result of benefits from various tax planning strategies, including recognition of a foreign tax credit contributing 160 basis points, and increased income in foreign jurisdictions with lower tax rates.

Segment Analysis
Architectural Framing Systems
(In thousands)
2018
 
2017
 
2016
Net sales
$
677,198

 
$
385,978

 
$
308,593

Operating income
59,031

 
44,768

 
31,911

Operating margin
8.7
%
 
11.6
%
 
10.3
%

Fiscal 2018 Compared to Fiscal 2017. Net sales improved 75.4 percent, or $291.2 million, over fiscal 2017. EFCO, acquired in the second quarter of fiscal 2018, contributed net sales of $203.7 million in fiscal 2018, or approximately 70 percent of the total segment growth, and Sotawall contributed 19 percent of the growth in fiscal 2018. Net sales increased 8.7 percent over the prior year within our existing businesses, due to increased pricing in order to offset material inflation, volume growth due to gains in share of demand and geographic growth in North America.

Operating margin declined 290 basis points over fiscal 2017, with improved margins in legacy businesses offset by the inclusion of EFCO at lower operating margins.

17



Fiscal 2017 Compared to Fiscal 2016. Net sales improved 25.1 percent, or $77.4 million, over fiscal 2016, due to volume growth across our businesses. Our volume growth resulted from strong U.S. construction market conditions, increased penetration into certain geographies and new product introductions. In addition, Sotawall, acquired in the fourth quarter of fiscal 2017, contributed net sales of $17.8 million in fiscal 2017, or approximately six percentage points of growth. Operating margin improved 130 basis points over fiscal 2016, driven by leverage on volume growth and productivity.

Architectural Glass
(In thousands)
2018
 
2017
 
2016
Net sales
$
384,137

 
$
411,881

 
$
377,713

Operating income
32,764

 
44,656

 
35,504

Operating margin
8.5
%
 
10.8
%
 
9.4
%

Fiscal 2018 Compared to Fiscal 2017. Fiscal 2018 net sales decreased 6.7 percent, or $27.7 million, over the prior year. The decrease was primarily due to volume declines on larger projects in our U.S.-based business, as a result of international competition as well as lower pricing on a higher mix of less complex glass products for mid-size projects. Operating margin declined 230 basis points, driven by reduced operating leverage on lower volume, lower pricing due to project mix and restructuring-related charges associated with the closure of our Utah facility, somewhat offset by improved productivity.

Fiscal 2017 Compared to Fiscal 2016. Fiscal 2017 net sales increased 9.0 percent, or $34.2 million, over the prior year. This was primarily due to volume growth and improved pricing and mix in our U.S.-based business, as a result of our focus on growth in the mid-size building sector, as well as the effects of a positive U.S. construction market. Operating margin improved 140 basis points, driven by leverage on volume growth, pricing, mix and productivity.

Architectural Services
(In thousands)
2018
 
2017
 
2016
Net sales
$
213,757

 
$
270,937

 
$
245,935

Operating income
10,420

 
18,494

 
11,687

Operating margin
4.9
%
 
6.8
%
 
4.8
%

Fiscal 2018 Compared to Fiscal 2017. Net sales decreased 21.1 percent, or $57.2 million, over the prior year, due to year-on-year timing of project activity. Operating margin declined 190 basis points over the prior year, as a result of lower volume leverage on fixed project management, engineering and manufacturing costs, partially offset by favorable project performance.

Fiscal 2017 Compared to Fiscal 2016. Net sales improved 10.2 percent, or $25.0 million, over fiscal 2016, driven by volume growth. This growth was due to year-on-year timing of project activity, as we continued to experience strong commercial construction activity in the U.S. Operating margin improved 200 basis points over the same period, as a result of leveraging volume growth and continued good execution on projects with better margins.

Large-Scale Optical Technologies (LSO)
(In thousands)
2018
 
2017
 
2016
Net sales
$
88,303

 
$
89,710

 
$
88,541

Operating income
22,000

 
22,467

 
22,963

Operating margin
24.9
%
 
25.0
%
 
25.9
%

Fiscal 2018 Compared to Fiscal 2017. Net sales decreased 1.6 percent over the prior year and operating margin declined 10 basis points over the prior year, as productivity gains were offset by unfavorable pricing, mix and volume.

Fiscal 2017 Compared to Fiscal 2016. Net sales increased 1.3 percent over the prior year due to volume growth. Operating margin declined 90 basis points over the prior year, as a result of increased investments in new market opportunities.






18


Liquidity and Capital Resources
(In thousands)
2018
 
2017
 
2016
Operating Activities
 
 
 
 
 
Net cash provided by operating activities
$
127,463

 
$
124,001

 
$
128,943

Investing Activities
 
 
 
 
 
Capital expenditures
(53,196
)
 
(68,061
)
 
(42,037
)
Acquisition of business and intangibles
(182,849
)
 
(137,932
)
 

Financing Activities
 
 
 
 
 
Borrowings on line of credit, net
149,960

 
44,988

 

Repurchase and retirement of common stock
(33,676
)
 
(10,817
)
 
(24,911
)
Dividends paid
(16,393
)
 
(14,667
)
 
(13,184
)

Operating Activities. Cash provided by operating activities was $127.5 million in fiscal 2018, an increase of $3.5 million from fiscal 2017. In both fiscal 2018 and fiscal 2017 we maintained effective working capital management.

Investing Activities. Net cash used in investing activities was $225.7 million in fiscal 2018, largely due to the acquisition of EFCO and capital expenditures focused primarily on increasing our product capabilities and manufacturing productivity. In fiscal 2017, cash of $183.8 million was used to acquire Sotawall and to make capital expenditures focused on increasing our product capabilities, in particular related to our oversized glass fabrication project, and manufacturing productivity. In fiscal 2016, capital investments were primarily focused on increasing manufacturing productivity and capacity.

We estimate fiscal 2019 capital expenditures to be $60 to $65 million, as we continue to invest in productivity and capacity to capture new geographic and market segments.

We continue to review our portfolio of businesses and their assets in comparison to our internal strategic and performance objectives. As part of this review, we may continue to acquire other businesses, pursue geographic expansion, take actions to manage capacity and further invest in, fully divest and/or sell parts of our current businesses.

Financing Activities. We paid dividends totaling $16.4 million in fiscal 2018. Additionally, we repurchased 702,299 shares under our authorized share repurchase program during fiscal 2018, for a total cost of $33.7 million. We repurchased 250,001 shares under the program in fiscal 2017 and 575,000 shares under the program in fiscal 2016. We have repurchased a total of 4,009,932 shares, at a total cost of $106.0 million, since the 2004 inception of this program. We have remaining authority to repurchase 1,240,068 shares under this program, which has no expiration date.

We maintain a $335.0 million committed revolving credit facility that expires in November 2021, as further described in Note 8 of the Notes to Consolidated Financial Statements. $195.0 million was outstanding under this credit facility as of March 3, 2018, as we used this facility to finance the EFCO acquisition. As defined within the credit facility, we have two financial covenants which require us to stay below a maximum leverage ratio and to maintain a minimum interest expense-to-EBITDA ratio. At March 3, 2018, we were in compliance with both financial covenants.

Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of March 3, 2018:
 
Payments Due by Fiscal Period
(In thousands)
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Debt obligations
$
121

 
$
121

 
$
5,520

 
$
197,120

 
$
1,098

 
$
12,000

 
$
215,980

Operating leases (undiscounted)
14,385

 
12,440

 
9,095

 
7,090

 
6,199

 
14,110

 
63,319

Purchase obligations
149,056

 
31,167

 
2,459

 
1,230

 

 

 
183,912

Total cash obligations
$
163,562

 
$
43,728

 
$
17,074

 
$
205,440

 
$
7,297

 
$
26,110

 
$
463,211


In addition to the committed revolving credit facility discussed above, we also have industrial revenue bond obligations of $20.4 million that mature in fiscal years 2021 through 2043 and $0.5 million of other debt that matures in August 2022.


19


We acquire the use of certain assets through operating leases, such as warehouses, vehicles, forklifts, office equipment, hardware, software and some manufacturing equipment. While many of these operating leases have termination penalties, we consider the risk related to termination penalties to be minimal.

Purchase obligations in the table above relate to raw material commitments and capital expenditures.

We expect to make contributions of approximately $1.0 million to our defined-benefit pension plans in fiscal 2019, which will equal or exceed our minimum funding requirements.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
As of March 3, 2018, we had reserves of $4.6 million and $1.3 million for long-term unrecognized tax benefits and environmental liabilities, respectively. We expect approximately $0.5 million of the unrecognized tax benefits to lapse during the next 12 months. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits and environmental liabilities will ultimately be settled.

At March 3, 2018, we had ongoing letters of credit of $23.5 million related to industrial revenue bonds and construction contracts that expire in fiscal 2019 and that reduce availability of funds under our committed credit facility.

In addition to the above standby letters of credit, 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 by us. At March 3, 2018, $238.6 million of our backlog was bonded by performance bonds with a face value of $519.3 million. Performance bonds do not have stated expiration dates, as we are released from the bonds upon completion of the contracts and any related warranty periods. We have never been required to make any payments related to these performance bonds with respect to any of our current portfolio of businesses.

We had total cash and short-term marketable securities of $19.8 million, and $116.5 million available under our committed revolving credit facility, at March 3, 2018. Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facility, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments for at least the next 12 months.

Off-balance Sheet Arrangements. With the exception of operating leases, we had no off-balance sheet arrangements at March 3, 2018 or March 4, 2017.

Outlook
The following statements are based on our current expectations for fiscal 2019 results. These statements are forward-looking, and actual results may differ materially.
Revenue growth of approximately 10 percent over fiscal 2018.
Operating margin of 8.8 to 9.3 percent.
Earnings per diluted share of $3.30 to $3.50.
Adjusted operating margin of 9.1 to 9.6 percent and adjusted earnings per diluted share of $3.43 to $3.63. These are non-GAAP measures that reflect the after-tax impact of amortization of short-lived acquired intangible assets from the Sotawall and EFCO acquisitions of $3.8 million ($0.13 per diluted share).
Capital expenditures of approximately $60 to $65 million.
Effective annual tax rate of approximately 24 percent.

Recently Issued Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements within Item 8 of this Form 10-K for information pertaining to recently issued accounting pronouncements, incorporated herein by reference.

Critical Accounting Policies
Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. In developing these estimates and assumptions, a collaborative effort is undertaken involving management across the organization, including finance, sales, project management, quality, risk, legal and tax, as well as outside advisors, such as consultants, engineers, lawyers and actuaries. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other assumptions or circumstances.

20



We consider the following items in our consolidated financial statements to require significant estimation or judgment.

Revenue recognition
We recognize revenue when title has transferred, except within our Architectural Services segment and for one business within our Architectural Framing Systems segment, which enter into fixed-price contracts for projects typically performed over a 12- to 24-month timeframe. The contracts clearly specify the enforceable rights of the parties, the consideration and the terms of settlement, and both parties are expected to satisfy all obligations under the contract. We record revenue for these contracts on a percentage-of-completion basis as we are able to reasonably estimate total contract revenue and total contract costs. We compare the total costs incurred to date to the total estimated costs for the contract, and record that proportion of the total contract revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe utilizing the cost-to-cost method for revenue recognition provides the greatest degree of accuracy in measuring revenue throughout the contract period. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in contract revenue only upon customer approval. Recognizing revenue under the percentage-of-completion method of accounting requires significant estimates, including total costs and the percentage complete on the contract, as well as any potential losses or contract overruns. During fiscal 2018, approximately 22 percent of our consolidated sales were recorded on a percentage-of-completion basis.

Goodwill and indefinite-lived intangible asset impairment
Goodwill
We evaluate goodwill for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. This year we elected to bypass the qualitative assessment process and to proceed directly to comparing the fair value of each of our reporting units to carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill impairment is not indicated. Each of our nine businesses (or business units) represents a reporting unit for the goodwill impairment analysis. For our goodwill impairment testing beginning in fiscal 2018, we have elected to early adopt Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment. As a result of this election, if the carrying amount of a reporting unit would be determined to be higher than its estimated fair value, an impairment loss is recognized for the excess.

We base our determination of fair value on a discounted cash flow methodology that involves significant judgment and projections of future performance. Assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on the annual operating plan and long-term business plan for each business unit. These plans take into consideration numerous factors, including historical experience, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. Growth rates for revenues and operating profits vary for each reporting unit. The discount rate assumption is consistent across business units and takes into consideration an estimated weighted-average cost of capital.

Based on our analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated. However, for one of our businesses within our Architectural Framing Systems segment with goodwill of approximately $21.8 million, fair value did not exceed carrying value by a significant margin. We utilized a discount rate of 10.8 percent in determining the discounted cash flows in our fair value analysis and a perpetual growth rate of 3 percent. If our discount rate were to increase by 100 basis points, the fair value of this reporting units could fall below carrying value, which would indicate impairment of the goodwill on this business.

Indefinite-lived intangible assets
We hold intangible assets for certain acquired tradenames and trademarks which are determined to have indefinite useful lives. We evaluate the reasonableness of the useful life and test indefinite-lived intangible assets for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. We bypassed a qualitative assessment and performed a quantitative impairment test to compare the fair value of each indefinite-lived intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount becomes the asset's new accounting basis.

Fair value is measured using the relief-from-royalty method. This method assumes the trade name or mark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. Based on our analysis, the fair value of each indefinite-lived asset exceeded the carrying amount, and we determined indefinite-lived useful lives continue to be reasonable. However, for one of our tradenames, with a carrying value of $32.4 million, the fair value of the tradename did not exceed carrying value by a significant margin. In determining the discounted future revenue in our fair value analysis, we assumed a discount rate

21


of 10.8 percent, a royalty rate of 1 percent, and a perpetual growth rate of 3 percent. If our discount rate were to increase by 10 basis points, the fair value of this tradename could fall below carrying value, which would indicate impairment.

Reserves for disputes and claims regarding product liability and warranties
We are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our architectural products and services. The time period from when a claim is asserted to when it is resolved, either by dismissal, negotiation, settlement or litigation, can be several years. While we maintain product liability insurance, the insurance policies include significant self-retention of risk in the form of policy deductibles. In addition, certain claims could be determined to be uninsured. We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs, based on historical product liability claims, as a ratio of sales. Factors that could have an impact on the warranty reserve in any given period include: changes in manufacturing quality, shifts in product mix and any significant changes in sales volume.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
We are exposed to ongoing market risk related to changes in interest rates and foreign currency exchange rates.

A rise in interest rates could negatively affect the fair value of our fixed income holdings, while serving to provide greater return on our equity investments. To manage our direct risk from changes in market interest rates, we actively monitor the interest-sensitive components of our balance sheet, primarily available-for-sale securities, fixed income securities and debt obligations, and maintain a diversified portfolio in order to minimize the impact of changes in interest rates on net earnings and cash flow. We do not enter into any financial instruments for trading purposes, and we currently do not use derivative financial instruments to manage interest rate risk. We also diversify and manage our investment portfolio in order to limit the impact of potential credit risk.

The primary measure of interest rate risk is the simulation of net income under different interest rate environments. If interest rates were to increase or decrease over the next 12 months by 200 basis points, net earnings would be impacted by approximately $1.3 million. Our debt exceeded investments at March 3, 2018, so as interest rates increase, net earnings decrease; as interest rates decrease, net earnings increase.

In addition to the market risk related to interest rate changes on our financial instruments, the commercial construction markets in which our businesses operate are highly affected by changes in interest rates. Increases in interest rates could adversely impact activity in the commercial construction industry and our operating results.

We are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar.
We have operations in Canada and Brazil, which primarily transact business in local currencies. We manage these operating activities locally. Revenues, costs, assets and liabilities of these operations are generally denominated in local currencies, thereby mitigating some of the risk associated with changes in foreign exchange rates. However, our consolidated financial results are reported in U.S. dollars. Thus, changes in exchange rates between the Canadian dollar and Brazilian real, on the one hand, and the U.S. dollar, on the other, will impact our results. From time to time, we enter into forward purchase foreign currency contracts, generally with an original maturity date of less than one year, to hedge foreign currency risk (refer to additional discussion within Note 11 of the Notes to Consolidated Financial Statements). Sales from our domestic operations are generally denominated in U.S. dollars.



22


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Annual Report on Internal Control over Financial Reporting
Management of Apogee Enterprises, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of March 3, 2018, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). The Company's management believes that, as of March 3, 2018, the Company's internal control over financial reporting was effective based on those criteria.

In accordance with application guidance of the Securities and Exchange Commission, management has excluded from its assessment the internal control over financial reporting at EFCO. EFCO was acquired on June 12, 2017, and its results constitute 26 percent of total consolidated assets, 15 percent of total consolidated revenues and less than one percent of total consolidated operating income, as of and for the year ended March 3, 2018.

Following this report are reports from the Company's independent registered public accounting firm, Deloitte & Touche LLP, on the Company's consolidated financial statements and on the effectiveness of the Company's internal control over financial reporting as of March 3, 2018.

23


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Apogee Enterprises, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apogee Enterprises, Inc. and subsidiaries (the "Company") as of March 3, 2018 and March 4, 2017, and the related consolidated results of operations, statements of comprehensive earnings, statements of cash flows, and statements of shareholders' equity, for each of the three years in the period ended March 3, 2018, and the related notes and the financial statement schedule listed in the Table of Contents at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 3, 2018 and March 4, 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 3, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 27, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Minneapolis, MN  
April 30, 2018

We have served as the Company's auditor since 2003.


24


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Apogee Enterprises, Inc.

Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Apogee Enterprises, Inc. and subsidiaries (the “Company”) as of March 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended March 3, 2018, of the Company and our report dated April 27, 2018, expressed an unqualified opinion on those financial statements.
As described in Management's Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at EFCO Corporation (EFCO), which was acquired on June 12, 2017 and whose financial statements constitute 26 percent of total assets, 15 percent of revenues, and less than one percent of operating income of the consolidated financial statement amounts as of and for the year ended March 3, 2018. Accordingly, our audit did not include the internal control over financial reporting at EFCO.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Minneapolis, MN
April 30, 2018

25



CONSOLIDATED BALANCE SHEETS
 
(In thousands, except per share data)
 
March 3, 2018
 
March 4, 2017
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
19,359

 
$
19,463

Short-term available for sale securities
 
423

 
548

Restricted cash
 

 
7,834

Receivables, net of allowance for doubtful accounts
 
211,852

 
185,740

Inventories
 
85,028

 
73,409

Refundable income taxes
 
2,040

 
1,743

Other current assets
 
17,576

 
8,724

Total current assets
 
336,278

 
297,461

Property, plant and equipment, net
 
304,063

 
246,748

Available for sale securities
 
8,630

 
9,041

Deferred tax assets
 
1,354

 
4,025

Goodwill
 
180,956

 
101,334

Intangible assets
 
167,349

 
106,686

Other non-current assets
 
23,690

 
19,363

Total assets
 
$
1,022,320

 
$
784,658

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
68,416

 
$
63,182

Accrued payroll and related benefits
 
36,646

 
51,244

Accrued self-insurance reserves
 
10,933

 
8,575

Other current liabilities
 
79,696

 
34,200

Billings in excess of costs and earnings on uncompleted contracts
 
12,461

 
28,857

Total current liabilities
 
208,152

 
186,058

Long-term debt
 
215,860

 
65,400

Unrecognized tax benefits
 
4,568

 
3,980

Long-term self-insurance reserves
 
16,307

 
8,831

Deferred tax liabilities
 
4,657

 
4,025

Other non-current liabilities
 
61,421

 
45,787

Commitments and contingent liabilities (Note 11)
 

 

Shareholders’ equity
 
 
 
 
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 28,158,042 and 28,680,841 shares, respectively
 
9,386

 
9,560

Additional paid-in capital
 
152,763

 
150,111

Retained earnings
 
373,259

 
341,996

Common stock held in trust
 
(922
)
 
(875
)
Deferred compensation obligations
 
922

 
875

Accumulated other comprehensive loss
 
(24,053
)
 
(31,090
)
Total shareholders’ equity
 
511,355

 
470,577

Total liabilities and shareholders’ equity
 
$
1,022,320

 
$
784,658


See accompanying notes to consolidated financial statements.

26


CONSOLIDATED RESULTS OF OPERATIONS
 
 
 
Year-Ended
 
 
March 3, 2018
 
March 4, 2017
 
February 27, 2016
(In thousands, except per share data)
 
(52 weeks)
 
(53 weeks)
 
(52 weeks)
Net sales
 
$
1,326,173

 
$
1,114,533

 
$
981,189

Cost of sales
 
992,655

 
822,510

 
737,619

Gross profit
 
333,518

 
292,023

 
243,570

Selling, general and administrative expenses
 
219,234

 
169,798

 
146,177

Operating income
 
114,284

 
122,225

 
97,393

Interest income
 
538

 
1,008

 
981

Interest expense
 
5,508

 
971

 
593

Other income (expense), net
 
566

 
543

 
(457
)
Earnings before income taxes
 
109,880

 
122,805

 
97,324

Income tax expense
 
30,392

 
37,015

 
31,982

Net earnings
 
$
79,488

 
$
85,790

 
$
65,342

Earnings per share - basic
 
$
2.79

 
$
2.98

 
$
2.25

Earnings per share - diluted
 
$
2.76

 
$
2.97

 
$
2.22

Weighted average basic shares outstanding
 
28,534

 
28,781

 
29,058

Weighted average diluted shares outstanding
 
28,804

 
28,893

 
29,375


See accompanying notes to consolidated financial statements.

27


CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
 
 
 
Year-Ended
 
 
March 3,
2018
 
March 4,
2017
 
February 27,
2016
(In thousands)
 
(52 weeks)
 
(53 weeks)
 
(52 weeks)
Net earnings
 
$
79,488

 
$
85,790

 
$
65,342

Other comprehensive earnings (loss):
 
 
 
 
 
 
Unrealized (loss) gain on marketable securities, net of $(29), $(45) and $38 of tax (benefit) expense, respectively
 
(95
)
 
(83
)
 
73

Unrealized gain on foreign currency hedge, net of $47, $- and $- of tax expense, respectively
 
156

 

 

Unrealized gain on pension obligation, net of $87, $74 and $347 of tax expense, respectively
 
284

 
130

 
610

Foreign currency translation adjustments
 
6,692

 
234

 
(9,734
)
Other comprehensive earnings (loss)
 
7,037

 
281

 
(9,051
)
Total comprehensive earnings
 
$
86,525

 
$
86,071

 
$
56,291



See accompanying notes to consolidated financial statements.

28


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Year-Ended
 
 
March 3,
2018
 
March 4,
2017
 
February 27,
2016
(In thousands)
 
(52 weeks)
 
(53 weeks)
 
(52 weeks)
Operating Activities
 
 
 
 
 
 
Net earnings
 
$
79,488

 
$
85,790

 
$
65,342

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
54,843

 
35,607

 
31,248

Share-based compensation
 
6,205

 
5,986

 
4,923

Deferred income taxes
 
3,195

 
(1,065
)
 
(6,139
)
Gain (loss) on disposal of assets
 
1,037

 
(371
)
 
(198
)
Proceeds from new markets tax credit transaction, net of deferred costs
 

 
5,109

 

Other, net
 
(1,431
)
 
(2,331
)
 
1,017

Changes in operating assets and liabilities:
 
 
 
 
 
 
Receivables
 
18,172

 
3,460

 
(2,918
)
Inventories
 
11,521

 
(6,387
)
 
(2,798
)
Accounts payable and accrued expenses
 
(25,627
)
 
17,449

 
17,265

Billings in excess of costs and earnings on uncompleted contracts
 
(16,541
)
 
(9,991
)
 
9,657

Refundable and accrued income taxes
 
315

 
(9,647
)
 
12,589

Other, net
 
(3,714
)
 
392

 
(1,045
)
Net cash provided by operating activities
 
127,463

 
124,001

 
128,943

Investing Activities
 
 
 
 
 
 
Capital expenditures
 
(53,196
)
 
(68,061
)
 
(42,037
)
Purchases of marketable securities
 
(10,244
)
 
(3,705
)
 
(35,814
)
Sales/maturities of marketable securities
 
10,476

 
36,433

 
4,047

Acquisition of business and intangibles
 
(182,849
)
 
(137,932
)
 

Change in restricted cash
 
7,834

 
(7,834
)
 

Other, net
 
2,245

 
(2,659
)
 
(4,052
)
Net cash used in investing activities
 
(225,734
)
 
(183,758
)
 
(77,856
)
Financing Activities
 
 
 
 
 
 
Borrowings on line of credit
 
385,700

 
121,000

 

Payments on line of credit
 
(235,740
)
 
(76,012
)
 

Borrowings (payments) on debt, net
 
155

 
(396
)
 
(56
)
Shares withheld for taxes, net of stock issued to employees
 
(1,712
)
 
(446
)
 
(3,254
)
Repurchase and retirement of common stock
 
(33,676
)
 
(10,817
)
 
(24,911
)
Dividends paid
 
(16,393
)
 
(14,667
)
 
(13,184
)
Net cash provided by (used in) financing activities
 
98,334

 
18,662

 
(41,405
)
Increase (decrease) in cash and cash equivalents
 
63

 
(41,095
)
 
9,682

Effect of exchange rates on cash
 
(167
)
 
88

 
(1,397
)
Cash and cash equivalents at beginning of year
 
19,463

 
60,470

 
52,185

Cash and cash equivalents at end of period
 
$
19,359

 
$
19,463

 
$
60,470

Noncash Activity
 
 
 
 
 
 
Capital expenditures in accounts payable
 
$
1,784

 
$
3,254

 
$
(2,737
)
Deferred payments on acquisition of business
 
7,500

 

 


See accompanying notes to consolidated financial statements.

29


Consolidated Statements of Shareholders' Equity
(In thousands, except per share data)
 
Common Shares Outstanding
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Common Stock Held in Trust
 
Deferred Compensation Obligation
 
Accumulated Other Comprehensive (Loss) Income
Balance at February 28, 2015
 
29,050

 
$
9,683

 
$
138,575

 
$
256,538

 
$
(801
)
 
$
801

 
$
(22,320
)
Net earnings
 

 

 

 
65,342

 

 

 

Unrealized gain on marketable securities, net of $38 tax expense
 

 

 

 

 

 

 
73

Unrealized gain on pension obligation, net of $347 tax expense
 

 

 

 

 

 

 
610

Foreign currency translation adjustments
 

 

 

 

 

 

 
(9,734
)
Issuance of stock, net of cancellations
 
102

 
34

 
114

 

 
(36
)
 
36

 

Share-based compensation
 

 

 
4,923

 

 

 

 

Tax benefit associated with stock plans
 

 

 
3,856

 

 

 

 

Exercise of stock options
 
200

 
67

 
1,539

 

 

 

 

Share repurchases
 
(575
)
 
(192
)
 
(2,996
)
 
(21,723
)
 

 

 

Other share retirements
 
(93
)
 
(31
)
 
(483
)
 
(4,496
)
 

 

 

Cash dividends ($0.455 per share)
 

 

 

 
(13,184
)
 

 

 

Balance at February 27, 2016
 
28,684

 
$
9,561

 
$
145,528

 
$
282,477

 
$
(837
)
 
$
837

 
$
(31,371
)
Net earnings
 

 

 

 
85,790

 

 

 

Unrealized loss on marketable securities, net of $45 tax benefit
 

 

 

 

 

 

 
(83
)
Unrealized gain on pension obligation, net of $74 tax expense
 

 

 

 

 

 

 
130

Foreign currency translation adjustments
 

 

 

 

 

 

 
234

Issuance of stock, net of cancellations
 
140

 
47

 
105

 
36

 
(38
)
 
38

 

Share-based compensation
 

 

 
5,986

 

 

 

 

Tax deficit associated with stock plans
 

 

 
(1,745
)
 

 

 

 

Exercise of stock options
 
163

 
54

 
1,893

 

 

 

 

Share repurchases
 
(250
)
 
(83
)
 
(1,357
)
 
(9,377
)
 

 

 

Other share retirements
 
(57
)
 
(19
)
 
(299
)
 
(2,263
)
 

 

 

Cash dividends ($0.515 per share)
 

 

 

 
(14,667
)
 

 

 

Balance at March 4, 2017
 
28,680

 
$
9,560

 
$
150,111

 
$
341,996

 
$
(875
)
 
$
875

 
$
(31,090
)
Net earnings
 

 

 

 
79,488

 

 

 

Unrealized loss on marketable securities, net of $29 tax benefit
 

 

 

 

 

 

 
(95
)
Unrealized gain on foreign currency hedge, net of $47 tax expense
 

 

 

 

 

 

 
156

Unrealized gain on pension obligation, net of $87 tax expense
 

 

 

 

 

 

 
284

Foreign currency translation adjustments
 

 

 

 

 

 

 
6,692

Issuance of stock, net of cancellations
 
128

 
43

 
(186
)
 
208

 
(47
)
 
47

 

Share-based compensation
 

 

 
6,205

 

 

 

 

Exercise of stock options
 
102

 
34

 
800

 

 

 

 

Share repurchases
 
(702
)
 
(234
)
 
(3,886
)
 
(29,556
)
 

 

 

Other share retirements
 
(50
)
 
(17
)
 
(281
)
 
(2,484
)
 

 

 

Cash dividends ($0.5775 per share)
 

 

 

 
(16,393
)
 

 

 

Balance at March 3, 2018
 
28,158

 
$
9,386

 
$
152,763

 
$
373,259

 
$
(922
)
 
$
922

 
$
(24,053
)
See accompanying notes to consolidated financial statements.

30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Summary of Significant Accounting Policies and Related Data

Basis of Consolidation. The consolidated financial statements include the balances of Apogee Enterprises, Inc. and its subsidiaries (Apogee, the Company or we) after elimination of intercompany balances and transactions. We consolidate variable interest entities where it has been determined that the Company is the primary beneficiary of those entities' operations.

Fiscal Year. Our fiscal year ends on the Saturday closest to the last day of February, or as determined by the Board of Directors. Fiscal 2018 and 2016 each consisted of 52 weeks, while fiscal 2017 consisted of 53 weeks. Our Brazilian subsidiary follows a calendar year-end and is consolidated on a two-month lag. 

Accounting Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Cash Equivalents. Highly liquid investments with an original maturity of three months or less are included in cash equivalents and are stated at cost, which approximates fair value.

Marketable securities. Our marketable securities are classified as available for sale, and we test for other-than-temporary losses on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of a security may not be recoverable. We consider all unrealized losses to be temporary in nature. We intend to hold our securities until the full principal amount can be recovered, and we have the ability to do so based on other sources of liquidity. Gross realized gains and losses are included in other income (expense) in our consolidated results of operations.

Inventories. Inventories, which consist primarily of purchased glass and aluminum, are valued at lower of cost or market using the first-in, first-out (FIFO) method.

Property, Plant and Equipment. Property, plant and equipment (PP&E) is recorded at cost. Significant improvements and renewals that extend the useful life of the asset are capitalized. Repairs and maintenance are charged to expense as incurred. When an asset is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in selling, general and administrative expenses. Long-lived assets to be held and used, such as PP&E, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Depreciation is computed on a straight-line basis, based on the following estimated useful lives:
 
Years
Buildings and improvements
10 to 25
Machinery and equipment
3 to 15
Office equipment and furniture
3 to 7

Goodwill and Intangible Assets. Goodwill represents the excess of the cost over the net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually at our year-end, or more frequently if impairment indicators exist. This year we elected to bypass the qualitative assessment process and to proceed directly to comparing the fair value of each of our reporting units to carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill impairment is not indicated. Each of our nine business units represents a reporting unit for the goodwill impairment analysis. Based on our analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated. We have followed a consistent discounted cash flow methodology to evaluate goodwill in all periods presented.
 
We base our determination of fair value on a discounted cash flow methodology that involves significant judgment and projections of future performance. Assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on the annual operating plan and long-term business plan for each business unit. These plans take into consideration numerous factors, including historical experience, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. Growth rates for revenues and operating profits vary for each reporting unit. The discount rate assumption for each reporting unit takes into consideration our assessment of risks inherent in the future cash flows of our business and an estimated weighted-average cost of capital.


31


Intangible assets with indefinite useful lives are tested for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value is measured using the relief-from-royalty method. This method assumes the trade name or mark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. Based on our analysis, the fair value of each indefinite-lived asset exceeded the carrying amount.

Intangible assets with defined useful lives are amortized based on estimated useful lives ranging from 18 months to 20 years and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The estimated useful lives of all intangible assets are reviewed annually, and we have determined that the remaining lives were appropriate.

Self-Insurance. We obtain commercial insurance for potential losses for general liability, employment practices, workers' compensation, automobile liability, architect's and engineer's errors and omissions risk, product rework and other miscellaneous coverages. A substantial portion of this risk is retained on a self-insured basis through our wholly-owned insurance subsidiary. We establish a reserve for estimated ultimate losses on reported claims and those incurred but not yet reported utilizing actuarial projections. Reserves are classified within accrued or long-term self-insurance reserves based on expectations of when the estimated loss will be paid.

Additionally, we maintain a self-insurance reserve for health insurance programs offered to eligible employees, included within accrued self-insurance reserves. The reserve includes an estimate for losses on reported claims as well as for amounts incurred but not yet reported, based on historical trends.

Warranty. We are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our architectural products and services. We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs, based on historical product liability claims as a ratio of sales. Our warranty reserves are included in other current and non-current liabilities based on the estimated timing of dispute resolution.

Environmental Liability. We recognize environmental clean-up liabilities on an undiscounted basis when loss is probable and can be reasonably estimated based on estimates by specialists and applicable law. Such estimates are based primarily on the estimated cost of investigation and remediation required, and the likelihood that, where applicable, other potentially responsible parties will not be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. The reserve for environmental liabilities is included in other current and non-current liabilities in the consolidated balance sheets.

Foreign Currency. Local currencies are considered the functional currencies for our subsidiaries outside of the United States. Assets and liabilities of these subsidiaries are translated at the exchange rates at the balance sheet date. Income and expense items are translated using average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive loss in the consolidated balance sheets.

Derivatives and Hedging Activities. We periodically enter into forward purchase foreign currency contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. All derivative instruments within the scope of ASC 815, Derivatives and Hedging, are recorded on the consolidated balance sheet at fair value. All hedging instruments that qualify for hedge accounting are designated and effective as hedges. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships.We do not hold or issue derivative financial instruments for trading purposes and are not a party to leveraged derivatives.

Revenue Recognition. We recognize revenue when title has transferred, except within our Architectural Services segment and for one business within our Architectural Framing Systems segment, which enter into fixed-price contracts for projects typically performed over a 12- to 24-month timeframe. We record revenue for these contracts on a percentage-of-completion basis as we are able to reasonably estimate total contract revenue and total contract costs. We compare the total costs incurred to date to the total estimated costs for the contract, and record that proportion of the total contract revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe utilizing the cost-to-cost method for revenue recognition provides the greatest degree of accuracy in measuring revenue throughout the contract period. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing

32


contract change orders, claims or other items are included in contract revenue only upon customer approval. Approximately 22 percent, 26 percent and 25 percent of our consolidated net sales in fiscal 2018, 2017 and 2016, respectively, were recorded on a percentage-of-completion basis.

Revenue excludes sales taxes as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.

Pricing and Sales Incentives. The Company records estimated reductions to revenue for customer programs and incentive offerings, including pricing arrangements, promotions and other volume-based incentives, at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to customers are recorded as a reduction to net sales unless (1) the Company receives an identifiable benefit for goods or services in exchange for the consideration, and (2) the Company can reasonably estimate the fair value of the benefit received.

Shipping and Handling. All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and are reported as revenue. Costs incurred by the Company for shipping and handling are reported as cost of sales.

Research and Development. Research and development costs are expensed as incurred within selling, general and administrative expenses, and were $14.0 million, $8.6 million and $8.0 million for fiscal 2018, 2017 and 2016, respectively. Of these amounts, $1.5 million, $2.2 million and $2.4 million, respectively, were focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and are included in cost of sales.

Advertising. Advertising costs are expensed as incurred within selling, general and administrative expenses, and were $1.4 million in fiscal 2018, $1.1 million in fiscal 2017 and $1.2 million in fiscal 2016.

Income Taxes. The Company recognizes deferred tax assets and liabilities based upon the future tax consequences of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. See Note 14 for additional information regarding income taxes.

Subsequent Events. We 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.

New Accounting Standards. In February 2018, the Financial Accounting Standards Board (FASB), issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits a company to reclassify the disproportionate income tax effects of the 2017 Act on items within AOCI to retained earnings. The FASB refers to these amounts as “stranded tax effects.” The ASU also requires certain new disclosures, applicable for all companies. The guidance is effective for fiscal years beginning after December 15, 2018, and may be early adopted. We are evaluating the timing of adopting this standard, but do not expect it to have a significant impact on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (our fiscal 2020), with early adoption permitted. We have elected to early adopt ASU 2017-12, and the standard has been applied to derivative contracts entered into in fiscal 2018.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by requiring impairment charges to be based on the first step in the current two-step impairment test process. The new guidance eliminates the current requirement to calculate a goodwill impairment charge using step 2. The standard is applicable to impairment tests performed in periods beginning after December 15, 2019 (our fiscal 2020), with early adoption permitted. We elected to early adopt this standard for our fiscal 2018 goodwill impairment assessment process.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, and in November 2016, it issued 2016-18, Restricted Cash. Both standards provide guidance for presentation of certain topics within the statement of cash flows, including presenting restricted cash within cash and cash equivalents, and are intended to improve consistency in presentation. The new classification guidance is effective for fiscal years beginning after December 15, 2017 (our fiscal 2019), and is to be applied retrospectively for comparability across all periods. These standards may be adopted early, and we are considering the timing of adoption but we do not expect this guidance to have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which provides for a comprehensive change to lease accounting. The new standard requires that a lessee recognize a lease obligation liability and a right to use asset for virtually all leases of property, plant and equipment, subsequently amortized over the lease term. The new standard is effective for fiscal years beginning after

33


December 15, 2018 (our fiscal 2020), with a modified retrospective transition. The adoption of this standard will result in reflecting assets and liabilities for the value of our leased property and equipment on our consolidated balance sheet, but it is not expected to have a significant impact on our consolidated results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Under the new standard, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017, our fiscal 2019 and we adopted the standard beginning in our fiscal year 2019.
We adopted the guidance following a modified retrospective transition method, with a cumulative effect adjustment to opening retained earnings in fiscal 2019. We estimate this retained earnings adjustment to be approximately $3 to $5 million.
Some of our business units will continue to recognize revenue at the point in time when goods are shipped, as that represents when control is transferred to the customer. We also have business units that will continue to recognize revenue over time, following a cost-to-cost percentage of completion method for revenue recognition.
Two of our business units, representing approximately 38 percent of our total net sales, will change from recognizing revenue at a point in time to recognizing revenue over time, to better reflect transfer of control to the customer in line with the new guidance. We have determined measures of progress toward completion for each business, based on the contract terms and the facts and circumstances associated with the performance obligations of each business.

2.    Acquisitions

EFCO
On June 12, 2017, we acquired 100 percent of the stock of EFCO Corporation, a privately-held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for approximately $192 million in cash. The acquisition was funded through our committed revolving credit facility, with $7.5 million of that amount payable in three annual installments beginning in June 2018. Subsequent to the acquistion, we received approximately $2 million through a working capital settlement. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition, including $203.7 million of sales and $0.8 million of operating income. As of March 3, 2018, we had incurred approximately $5.1 million of acquisition-related costs associated with this transaction.
The assets and liabilities of EFCO were recorded in our consolidated balance sheet as of the acquisition date, at their respective fair values. Fair value is estimated based on one or a combination of income, cost and/or market approaches, as determined based on the nature of the asset or liability, and the level of inputs available. With respect to assets and liabilities, the determination of fair value requires management to make subjective judgments, including projections of future operating performance, the appropriate discount rate to apply and long-term growth rates (unobservable inputs classified as Level 3 inputs under the fair value hierarchy described in Note 5), which affect the amounts recorded in the purchase price allocation. The excess of the consideration transferred over the fair value of the identifiable assets, net of liabilities, is recorded as goodwill, which is indicative of the expected continued growth and development of EFCO. The purchase price allocation is based on the estimated fair values of assets acquired and liabilities assumed, including estimated acquired contract liabilities, as follows:
(In thousands)
 
 
Net working capital
 
$
7,689

Property, plant and equipment
 
44,641

Goodwill
 
84,162

Other intangible assets
 
71,500

Less: Long-term liabilities acquired, net
 
17,643