Apogee(APOG) - 2021 Q1 - Quarterly Report

Part I: Financial Information Financial Statements (Unaudited) The company reported net sales of $289.1 million and net earnings of $2.9 million for Q1 FY2021, with total assets at $1.07 billion and positive operating cash flow of $24.0 million Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Items | May 30, 2020 | February 29, 2020 | | :--- | :--- | :--- | | Total Assets | $1,071,624 | $1,128,991 | | Total current assets | $330,693 | $381,910 | | Goodwill | $190,544 | $185,516 | | Total Liabilities | $567,480 | $612,213 | | Total current liabilities | $379,530 | $276,857 | | Long-term debt | $55,500 | $212,500 | | Total Shareholders' Equity | $504,144 | $516,778 | Consolidated Results of Operations Quarterly Results of Operations (in thousands, except per share data) | Metric | Three Months Ended May 30, 2020 | Three Months Ended June 1, 2019 | | :--- | :--- | :--- | | Net sales | $289,095 | $355,365 | | Gross profit | $60,251 | $80,967 | | Operating income | $6,469 | $23,041 | | Net earnings | $2,876 | $15,443 | | Diluted EPS | $0.11 | $0.58 | Consolidated Statements of Cash Flows Quarterly Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended May 30, 2020 | Three Months Ended June 1, 2019 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $23,976 | $(9,742) | | Net cash used by investing activities | $(9,688) | $(12,022) | | Net cash (used) provided by financing activities | $(17,334) | $21,622 | | Decrease in cash and cash equivalents | $(3,046) | $(142) | Notes to Consolidated Financial Statements Notes detail COVID-19 impacts, $995.9 million in unsatisfied performance obligations, no goodwill impairment, $210.9 million total debt, and significant segment revenue declines - The COVID-19 pandemic caused project delays, slowed orders in Architectural Glass and Framing, and led to temporary factory shutdowns in the LSO segment due to retail closures[18] - As of May 30, 2020, the company had approximately $995.9 million in unsatisfied performance obligations (backlog), with $434.1 million expected to be recognized as revenue within one year[29][30] - Due to a significant decline in stock price and COVID-19 concerns, an interim quantitative goodwill impairment test was performed on four reporting units, with no impairment recorded as fair value exceeded carrying value[49][52] Segment Net Sales and Operating Income (in thousands) | Segment | Net Sales (Q1 FY21) | Net Sales (Q1 FY20) | Operating Income (Loss) (Q1 FY21) | Operating Income (Loss) (Q1 FY20) | | :--- | :--- | :--- | :--- | :--- | | Architectural Framing Systems | $150,164 | $180,522 | $7,296 | $12,273 | | Architectural Glass | $76,911 | $100,291 | $(494) | $6,399 | | Architectural Services | $63,551 | $65,147 | $5,343 | $4,573 | | Large-Scale Optical | $6,312 | $21,259 | $(3,132) | $4,177 | Management's Discussion and Analysis (MD&A) Consolidated net sales decreased 18.6% to $289.1 million due to COVID-19, with gross margin at 20.8%, while operating cash flow significantly improved to $24.0 million - Consolidated net sales decreased by 18.6% to $289.1 million in Q1 FY2021 compared to the prior year, primarily due to COVID-19 related volume declines in all segments[94] - Gross margin decreased to 20.8% from 22.8% year-over-year, largely due to lower volumes from COVID-19 related project delays[96] - Operating cash flow was a source of $24.0 million, a $33.7 million improvement from the prior-year period, mainly due to strong working capital management[105] - The company temporarily suspended its share repurchase program in response to the economic uncertainty caused by the pandemic[108] Segment Analysis All segments experienced sales declines due to COVID-19, with Architectural Framing Systems down 16.8%, Architectural Glass down 23.3%, Architectural Services down 2.4%, and LSO plummeting 70.3% - Architectural Framing Systems: Net sales declined 16.8% due to COVID-19 project delays, with segment backlog approximately $421 million[99] - Architectural Glass: Net sales decreased 23.3% due to project timing, delays, and significant production disruptions, leading to an operating loss of $0.5 million[100] - Architectural Services: Net sales declined 2.4%, but operating margin improved to 8.4% from 7.0% due to strong project execution, with segment backlog increasing to approximately $685 million[101][103] - Large-Scale Optical (LSO): Net sales fell 70.3% as retail customers closed, resulting in an operating loss of $3.1 million due to factory shutdowns[104] Liquidity and Capital Resources The company maintained strong liquidity with $24.0 million cash from operations, $210.9 million total debt, extended a $150 million term loan, and believes liquidity is sufficient for the next 12 months - The company extended the maturity of its $150 million term loan to April 2021 and was in compliance with all financial covenants as of May 30, 2020[107] - Dividends paid totaled $4.9 million, while $4.7 million was spent on share repurchases before the program was temporarily suspended[108] - Total contractual cash obligations for the remainder of fiscal 2021 amount to $161.5 million, primarily for purchase obligations[110] - Despite the pandemic's impact, management believes existing liquidity sources are adequate to fund operations, capital expenditures, and dividends for at least the next 12 months[114][115] Critical Accounting Policies An interim goodwill impairment test was performed with no impairment recorded, but EFCO and Sotawall units face future impairment risk if performance deteriorates or discount rates increase by 100 basis points - An interim goodwill impairment analysis was performed due to qualitative indicators like a declining stock price and COVID-19 concerns, with no impairment recognized[118] - The fair value of two reporting units, EFCO ($90.4 million goodwill) and Sotawall ($26.7 million goodwill), did not significantly exceed their carrying values, posing a risk of future impairment[119] - A 100 basis point increase in the discount rates for EFCO (11.0%) and Sotawall (10.4%) would cause their fair values to fall below carrying values, indicating goodwill impairment[119] Quantitative and Qualitative Disclosures About Market Risk No material changes were reported regarding the company's quantitative and qualitative market risk disclosures from the prior fiscal year's Annual Report - There were no material changes to the company's market risk disclosures during the quarter[122] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the evaluation date, the company's disclosure controls and procedures were effective[123] - No changes occurred during the fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[124] Part II: Other Information Legal Proceedings Two significant legal matters, the Murray Mayer securities class action and Justin Buley shareholder derivative lawsuits, were dismissed and are now considered closed - The securities class action lawsuit filed by Murray Mayer was dismissed by the District Court on March 25, 2020, and the company now considers the matter closed[125] - The shareholder derivative lawsuit filed by Justin Buley was dismissed by joint stipulation on May 29, 2020, and is also considered closed[126] Risk Factors Key risks include the uncertain impact of the COVID-19 pandemic on operations and demand, and the potential for future goodwill and intangible asset impairment, particularly for EFCO and Sotawall units - The COVID-19 pandemic poses a significant risk, with potential impacts including continued project delays, supply chain disruptions, reduced demand due to economic downturn, and increased costs, with the full extent unpredictable[129][132] - A significant risk of goodwill impairment exists for the EFCO and Sotawall reporting units, as their fair values did not substantially exceed carrying values in the recent test, and future declines could trigger impairment[135] - Indefinite-lived intangible assets also face impairment risk if future revenue falls below forecasts or market conditions decline, potentially exacerbated by the COVID-19 pandemic[136][138] Share Repurchases and Use of Proceeds In Q1 FY2021, the company repurchased 256,995 shares at an average of $20.86 per share, with 2,063,596 shares remaining authorized for repurchase under the temporarily suspended program Share Repurchases in Q1 Fiscal 2021 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | Mar 1 - Mar 28, 2020 | 234,272 | $21.72 | 231,492 | | Mar 29 - Apr 25, 2020 | 2,590 | $18.83 | — | | Apr 26 - May 30, 2020 | 20,133 | $20.48 | — | | Total | 256,995 | $20.86 | 231,492 | - As of the end of the quarter, 2,063,596 shares remained authorized for repurchase under the company's program[139]