UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________ 

FORM 10-Q

 _________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 29, 2020

☐ 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	Minnesota	55435
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (952) 835-1874

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

_________________________________ 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.33 1/3 per share	APOG	NASDAQ Global Select Market

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    o  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     x  Yes    o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	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 October 6, 2020, 26,385,698 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

APOGEE ENTERPRISES, INC. AND SUBSIDIARIES

		Page
PART I	Financial Information
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets	4
	Consolidated Results of Operations	5
	Consolidated Statements of Comprehensive Earnings	6
	Consolidated Statements of Cash Flows	7
	Consolidated Statements of Shareholders' Equity	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II	Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 6.	Exhibits	28
Signatures		29

3

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except stock data)	August 29, 2020		February 29, 2020
Assets
Current assets
Cash and cash equivalents	$	19,001	$	14,952
Receivables, net of allowance for doubtful accounts	165,682		196,806
Inventories	70,191		71,089
Costs and earnings on contracts in excess of billings	30,534		73,582
Other current assets	26,324		25,481
Total current assets	311,732		381,910
Property, plant and equipment, net	314,323		324,386
Operating lease right-of-use assets	53,592		52,892
Goodwill	192,566		185,516
Intangible assets	137,772		140,191
Other non-current assets	44,513		44,096
Total assets	$	1,054,498	$	1,128,991
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	66,172	$	69,056
Accrued payroll and related benefits	35,872		40,119
Billings on contracts in excess of costs and earnings	23,745		32,696
Operating lease liabilities	10,684		11,272
Current portion of debt	152,000		5,400
Other current liabilities	73,313		118,314
Total current liabilities	361,786		276,857
Long-term debt	15,672		212,500
Non-current operating lease liabilities	44,913		43,163
Non-current self-insurance reserves	25,276		22,831
Other non-current liabilities	80,683		56,862
Commitments and contingent liabilities (Note 8)
Shareholders’ equity
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 26,467,450 and 26,443,166 respectively	8,823		8,814
Additional paid-in capital	155,956		154,016
Retained earnings	394,614		388,010
Common stock held in trust	(707)		(685)
Deferred compensation obligations	707		685
Accumulated other comprehensive loss	(33,225)		(34,062)
Total shareholders’ equity	526,168		516,778
Total liabilities and shareholders’ equity	$	1,054,498	$	1,128,991

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED RESULTS OF OPERATIONS

(unaudited)

	Three Months Ended				Six Months Ended
(In thousands, except per share data)	August 29, 2020		August 31, 2019		August 29, 2020		August 31, 2019
Net sales	$	319,483	$	357,058	$	608,578	$	712,424
Cost of sales	243,296		270,851		472,141		545,250
Gross profit	76,187		86,207		136,437		167,174
Selling, general and administrative expenses	52,972		58,631		106,754		116,558
Operating income	23,215		27,576		29,683		50,616
Interest expense, net	1,324		2,566		2,739		5,181
Other income, net	1,260		363		213		368
Earnings before income taxes	23,151		25,373		27,157		45,803
Income tax expense	5,493		6,094		6,623		11,081
Net earnings	$	17,658	$	19,279	$	20,534	$	34,722
Earnings per share - basic	$	0.68	$	0.73	$	0.78	$	1.31
Earnings per share - diluted	$	0.67	$	0.72	$	0.77	$	1.30
Weighted average basic shares outstanding	26,156		26,413		26,162		26,505
Weighted average diluted shares outstanding	26,525		26,736		26,507		26,789

See accompanying notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(unaudited)

	Three Months Ended				Six Months Ended
(In thousands)	August 29, 2020		August 31, 2019		August 29, 2020		August 31, 2019
Net earnings	$	17,658	$	19,279	$	20,534	$	34,722
Other comprehensive earnings (loss):
Unrealized gain on marketable securities, net of $13, $2, $39 and $49 of tax expense, respectively	50		8		147		189
Unrealized gain on derivative instruments, net of $404, $25, $215 and $27 of tax expense, respectively	1,319		84		703		89
Foreign currency translation adjustments	6,139		2,465		(12)		(95)
Other comprehensive earnings	7,508		2,557		838		183
Total comprehensive earnings	$	25,166	$	21,836	$	21,372	$	34,905

See accompanying notes to consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended
(In thousands)	August 29, 2020		August 31, 2019
Operating Activities
Net earnings	$	20,534	$	34,722
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	25,284		22,759
Share-based compensation	3,662		3,200
Deferred income taxes	7,966		9,861
Noncash lease expense	6,032		5,526
Other, net	18		(2,023)
Changes in operating assets and liabilities:
Receivables	31,212		(9,215)
Inventories	846		4,054
Costs and earnings on contracts in excess of billings	43,091		(19,865)
Accounts payable and accrued expenses	(36,922)		(19,044)
Billings on contracts in excess of costs and earnings	(9,105)		(2,001)
Refundable and accrued income taxes	(1,793)		(5,641)
Operating lease liability	(5,857)		(2,812)
Other	362		(1,719)
Net cash provided by operating activities	85,330		17,802
Investing Activities
Capital expenditures	(14,224)		(22,559)
Other	(993)		(451)
Net cash used by investing activities	(15,217)		(23,010)
Financing Activities
Borrowings on line of credit	192,581		184,500
(Repayment) borrowings on debt	(5,400)		150,000
Payments on line of credit	(237,500)		(307,500)
Repurchase and retirement of common stock	(4,731)		(20,010)
Dividends paid	(9,751)		(9,203)
Other	(1,261)		(2,493)
Net cash used by financing activities	(66,062)		(4,706)
Increase (decrease) in cash and cash equivalents	4,051		(9,914)
Effect of exchange rates on cash	(2)		118
Cash, cash equivalents and restricted cash at beginning of year	14,952		29,241
Cash, cash equivalents and restricted cash at end of period	$	19,001	$	19,445
Noncash Activity
Capital expenditures in accounts payable	$	657	$	1,583

See accompanying notes to consolidated financial statements.

7

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)

(In thousands)	Common Shares Outstanding	Common Stock		Additional Paid-In Capital		Retained Earnings		Common Stock Held in Trust		Deferred Compensation Obligation		Accumulated Other Comprehensive (Loss) Income		Total Shareholders' Equity
Balance at February 29, 2020	26,443	$	8,814	$	154,016	$	388,010	$	(685)	$	685	$	(34,062)	$	516,778
Net earnings	—	—		—		2,876		—		—		—		2,876
Unrealized gain on marketable securities, net of $26 tax expense	—	—		—		—		—		—		97		97
Unrealized loss on foreign currency hedge, net of $189 tax benefit	—	—		—		—		—		—		(617)		(617)
Foreign currency translation adjustments	—	—		—		—		—		—		(6,151)		(6,151)
Issuance of stock, net of cancellations	183	62		(39)		—		(11)		11		—		23
Share-based compensation	—	—		1,406		—		—		—		—		1,406
Share repurchases	(231)	(77)		(1,370)		(3,284)		—		—		—		(4,731)
Other share retirements	(26)	(9)		(151)		(505)		—		—		—		(665)
Cash dividends	—	—		—		(4,872)		—		—		—		(4,872)
Balance at May 30, 2020	26,369	$	8,790	$	153,862	$	382,225	$	(696)	$	696	$	(40,733)	$	504,144
Net earnings	—	—		—		17,658		—		—		—		17,658
Unrealized gain on marketable securities, net of $13 tax expense	—	—		—		—		—		—		50		50
Unrealized gain on foreign currency hedge, net of $404 tax expense	—	—		—		—		—		—		1,319		1,319
Foreign currency translation adjustments	—	—		—		—		—		—		6,139		6,139
Issuance of stock, net of cancellations	121	41		(23)		—		(11)		11		—		18
Share-based compensation	—	—		2,256		—		—		—		—		2,256
Other share retirements	(23)	(8)		(139)		(390)		—		—		—		(537)
Cash dividends	—	—		—		(4,879)		—		—		—		(4,879)
Balance at August 29, 2020	26,467	$	8,823	$	155,956	$	394,614	$	(707)	$	707	$	(33,225)	$	526,168

See accompanying notes to consolidated financial statements.

8

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)

(In thousands)	Common Shares Outstanding	Common Stock		Additional Paid-In Capital		Retained Earnings		Common Stock Held in Trust		Deferred Compensation Obligation		Accumulated Other Comprehensive (Loss) Income		Total Shareholders' Equity
Balance at March 2, 2019	27,015	$	9,005	$	151,842	$	367,597	$	(755)	$	755	$	(32,127)	$	496,317
Net earnings	—	—		—		15,443		—		—		—		15,443
Unrealized gain on marketable securities, net of $47 tax expense	—	—		—		—		—		—		181		181
Unrealized gain on foreign currency hedge, net of $2 tax expense	—	—		—		—		—		—		5		5
Foreign currency translation adjustments	—	—		—		—		—		—		(2,560)		(2,560)
Issuance of stock, net of cancellations	79	26		14		—		(12)		12		—		40
Share-based compensation	—	—		1,618		—		—		—		—		1,618
Share repurchases	(532)	(177)		(3,051)		(16,782)		—		—		—		(20,010)
Other share retirements	(32)	(11)		(183)		(1,266)		—		—		—		(1,460)
Cash dividends	—	—		—		(4,598)		—		—		—		(4,598)
Balance at June 1, 2019	26,530	$	8,843	$	150,240	$	360,394	$	(767)	$	767	$	(34,501)	$	484,976
Net earnings	—	—		—		19,279		—		—		—		19,279
Unrealized gain on marketable securities, net of $2 tax expense	—	—		—		—		—		—		8		8
Unrealized gain on foreign currency hedge, net of $25 tax expense	—	—		—		—		—		—		84		84
Foreign currency translation adjustments	—	—		—		—		—		—		2,465		2,465
Issuance of stock, net of cancellations	44	15		27		—		(11)		11		—		42
Share-based compensation	—	—		1,582		—		—		—		—		1,582
Other share retirements	(20)	(7)		(114)		(629)		—		—		—		(750)
Cash dividends	—	—		—		(4,605)		—		—		—		(4,605)
Balance at August 31, 2019	26,554	$	8,851	$	151,735	$	374,439	$	(778)	$	778	$	(31,944)	$	503,081

See accompanying notes to consolidated financial statements.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Summary of Significant Accounting Policies

Basis of presentation

The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended February 29, 2020. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein and are of a normal, recurring nature. The results of operations for the three- and six-month periods ended August 29, 2020 are not necessarily indicative of the results to be expected for the full year.

COVID-19 considerations

The ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our Large-Scale Optical (LSO) segment, many customers reopened and the segment's two manufacturing locations resumed normal operations during the second quarter, after being shutdown for most of the first and second quarters, in response to governmental “stay at home” directives. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which are highly uncertain and cannot be predicted with confidence. However, by the end of the second quarter, we have continued to see signs of improvement, including the reopening of retailers, moderating project delays and fewer workforce absences.

Furthermore, in response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs.

Adoption of new accounting standards

At the beginning of fiscal 2021, we adopted the guidance in ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance provides for a new impairment model on financial instruments which is based on expected credit losses, which was applied following a modified retrospective approach. Additionally, the new guidance makes targeted improvements to the impairment model for certain available-for-sale debt securities, including eliminating the concept of "other than temporary" from that model. The portion of the guidance related to available-for-sale debt securities was adopted following a prospective approach. The adoption of this ASU did not have a significant impact on earnings or financial condition. Refer to additional disclosures in Notes 2 and 4.

Subsequent events

We have evaluated subsequent events for potential recognition and disclosure through the date of this filing. Subsequent to the end of the quarter, in September 2020, we sold our McCook, IL building within our LSO segment for $25.1 million. The carrying value of the building was $4.3 million, and we recognized a gain on this sale of approximately $14.8 million, net of taxes and associated transaction costs. We also entered into a separate lease agreement for this facility, which was determined to be an operating lease, and we will have approximately $8.2 million of additional future lease commitments upon commencement of this lease in September 2020. Additionally, in September 2020, we announced the retirement of our Chief Executive Officer, effective February 27, 2021, the end of our current fiscal year, and entered into a transition agreement with him.

10

2.Revenue, Receivables and Contract Assets and Liabilities

Revenue

The following table disaggregates total revenue by timing of recognition (see Note 12 for disclosure of revenue by segment):

	Three Months Ended				Six Months Ended
(In thousands)	August 29, 2020		August 31, 2019		August 29, 2020		August 31, 2019
Recognized at shipment	$	133,997	$	164,336	$	250,160	$	319,602
Recognized over time	185,486		192,722		358,418		392,822
Total	$	319,483	$	357,058	$	608,578	$	712,424

Receivables

Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released.

(In thousands)	August 29, 2020		February 29, 2020
Trade accounts	$	122,870	$	141,126
Construction contracts	3,611		20,808
Contract retainage	41,168		37,341
Total receivables	167,649		199,275
Less: allowance for credit losses	(1,967)		(2,469)
Net receivables	$	165,682	$	196,806

The following table summarizes the activity in the allowance for credit losses:

(In thousands)	August 29, 2020
Beginning balance	$	2,469
Additions charged to costs and expenses	115
Deductions from allowance, net of recoveries	(541)
Other changes (1)	(76)
Ending balance	$	1,967
(1) Result of foreign currency effects

Contract assets and liabilities

Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.

The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released.

(In thousands)	August 29, 2020		February 29, 2020
Contract assets	$	71,701	$	110,923
Contract liabilities	26,105		35,954

The decrease in contract assets was mainly due to a reduction in costs and earnings in excess of billings, which is driven by the settlement of matters related to a legacy EFCO project, as well as the timing of projects. The change in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.

11

Other contract-related disclosures	Three Months Ended				Six Months Ended
(In thousands)	August 29, 2020		August 31, 2019		August 29, 2020		August 31, 2019
Revenue recognized related to contract liabilities from prior year-end	$	1,184	$	3,361	$	14,195	$	17,455
Revenue recognized related to prior satisfaction of performance obligations	3,652		4,481		6,529		6,430

Some of our contracts have an expected duration of longer than a year, with performance obligations extending over that timeframe. Generally, these contracts are in our businesses with long-term contracts which recognize revenue over time. As of August 29, 2020, the transaction price associated with unsatisfied performance obligations was approximately $958.8 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:

(In thousands)	August 29, 2020
Within one year	$	471,295
Within two years	363,735
Beyond	123,764
Total	$	958,794

3.Supplemental Balance Sheet Information

Inventories

(In thousands)	August 29, 2020		February 29, 2020
Raw materials	$	39,006	$	36,611
Work-in-process	16,804		17,520
Finished goods	14,381		16,958
Total inventories	$	70,191	$	71,089

Other current liabilities

(In thousands)	August 29, 2020		February 29, 2020
Warranties	$	13,648	$	12,822
Accrued project losses	8,684		48,962
Property and other taxes	7,334		5,952
Accrued self-insurance reserves	10,218		8,307
Other	33,429		42,271
Total other current liabilities	$	73,313	$	118,314

Other non-current liabilities

(In thousands)	August 29, 2020		February 29, 2020
Deferred benefit from New Market Tax Credit transactions	$	15,717	$	15,717
Retirement plan obligations	8,245		8,294
Deferred compensation plan	9,564		8,452
Deferred tax liabilities	22,407		7,940
Other	24,750		16,459
Total other non-current liabilities	$	80,683	$	56,862

12

4.Financial Instruments

Marketable securities

Through our wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), we hold the following available-for-sale marketable securities, made up of municipal and corporate bonds: 

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
August 29, 2020	$	12,497	$	462	$	1	$	12,958
February 29, 2020	11,692		275		—		11,967

Prism insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements.

The amortized cost and estimated fair values of these bonds at August 29, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.

(In thousands)	Amortized Cost		Estimated Fair Value
Due within one year	$	1,122	$	1,132
Due after one year through five years	7,221		7,497
Due after five years through 10 years	3,354		3,509
Due beyond 15 years	800		820
Total	$	12,497	$	12,958

Derivative instruments

In August 2019, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility. As of August 29, 2020, the interest rate swap contract had a notional value of $60 million.

We periodically enter into forward purchase foreign currency cash flow hedge contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of August 29, 2020, we held foreign exchange forward contracts with a U.S. dollar notional value of $28.4 million, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro.

These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income.

Fair value measurements

Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.

13

(In thousands)	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Total Fair Value
August 29, 2020
Assets:
Money market funds	$	2,178	$	—	$	2,178
Commercial paper	—		1,000		1,000
Municipal and corporate bonds	—		12,958		12,958
Cash surrender value of life insurance	—		17,125		17,125
Foreign currency forward/option contract	—		920		920
Liabilities:
Deferred compensation