Apogee(US:APOG)2022-04-21 16:00markdown PART I [Business](index=4&type=section&id=Item%201.%20Business) Apogee Enterprises, Inc. provides architectural products and services across four segments, launching a new enterprise strategy in FY22 with financial targets for FY25, operating within the cyclical commercial construction market FY 2022 Net Sales by Segment | Segment | Percentage of Net Sales | | :--- | :--- | | Architectural Framing Systems | ~45% | | Architectural Glass | ~20% | | Architectural Services | ~27% | | Large-Scale Optical Technologies (LSO) | ~8% | - The company established a new three-pronged enterprise strategy: 1) Become the **economic leader** in target markets, 2) Actively manage the portfolio for **higher margins and returns**, and 3) Strengthen core capabilities by shifting from a decentralized to a **center-led model**[12](index=12&type=chunk) - Apogee has set consolidated financial targets to be achieved by the end of fiscal year 2025: **Return on Invested Capital (ROIC) > 12%**, **operating margin > 10%**, and **revenue growth > 1.2 times** the non-residential construction market[14](index=14&type=chunk) Segment Backlog at Fiscal Year-End 2022 | Segment | FY 2022 Backlog | FY 2021 Backlog | Change | | :--- | :--- | :--- | :--- | | Architectural Framing Systems | $428.7 million | $411.3 million | Increase | | Architectural Services | $517.7 million | $570.9 million | Decrease | - As of February 26, 2022, the company had approximately **5,500 employees**, a **decrease from 6,100 employees** at the end of the prior fiscal year. Approximately **420** of these employees were represented by U.S. labor unions[38](index=38&type=chunk) [Risk Factors](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from pandemic impacts, cyclical commercial construction, strategic execution, operational challenges like inflation and supply chain disruptions, and financial exposures including asset impairment - The COVID-19 pandemic has caused project delays, labor shortages, and supply chain disruptions, and while direct impacts moderated by the end of fiscal 2022, the ongoing pandemic continues to pose a risk to future revenue and operations[47](index=47&type=chunk)[48](index=48&type=chunk) - The company's architectural segments are highly dependent on the cyclical North American commercial construction industry, which is influenced by macroeconomic factors like credit availability, employment levels, and interest rates[49](index=49&type=chunk) - Execution of the new enterprise strategy carries risks, including the potential inability to differentiate products cost-effectively, accurately predict customer needs, or achieve desired efficiencies from a new centralized operating model[54](index=54&type=chunk) - Rising inflation on costs for freight, aluminum, glass, and other materials has impacted and could continue to impact profitability. The ability to mitigate these costs through price increases may lag, negatively affecting margins[58](index=58&type=chunk) - The company recorded a $49.5 million intangible impairment expense in Q4 FY2022 related to the integration of the Sotawall business. Further impairment of goodwill or other assets could occur if revenue or profitability fall below forecasted levels[77](index=77&type=chunk)[78](index=78&type=chunk) [Unresolved Staff Comments](index=14&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments - None[79](index=79&type=chunk) [Properties](index=14&type=section&id=Item%202.%20Properties) The company owns and leases various manufacturing, warehouse, and administrative facilities across the United States, Canada, and Brazil to support its four operating segments - The company operates a mix of owned and leased properties. Key owned manufacturing facilities are located in **Wausau, WI**; **Monett, MO**; **Owatonna, MN**; and **Faribault, MN**. Leased facilities are located in various cities including **Dallas, TX** and **Toronto, ON, Canada**[79](index=79&type=chunk) [Legal Proceedings](index=14&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine legal proceedings related to construction, product liability, and employment, with management not expecting a material adverse financial impact - The company is routinely involved in disputes and claims related to construction projects, product liability (including claims related to a former commercial sealant product), and employment matters[80](index=80&type=chunk) - Management believes that **no current legal proceedings will result in losses that would have a material adverse effect** on the company's results of operations, cash flows, or financial condition[80](index=80&type=chunk) [Mine Safety Disclosures](index=14&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[81](index=81&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=16&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Apogee's common stock trades on NASDAQ, consistently paying increasing quarterly dividends and repurchasing **1.54 million shares** in Q4 FY2022 under its ongoing program Annual Cash Dividends Per Share | Fiscal Year | Total Dividend per Share | | :--- | :--- | | 2022 | $0.8200 | | 2021 | $0.7625 | | 2020 | $0.7125 | - In Q4 FY2022, the company repurchased a total of **1.54 million shares**. Of these, **1.54 million** were part of the publicly announced repurchase program. As of the end of the quarter, **1.82 million shares** remained authorized for repurchase under the program[87](index=87&type=chunk)[88](index=88&type=chunk) - Over the last five fiscal years, a $100 investment in Apogee stock would have grown to **$86.10**, **underperforming** both the S&P Small Cap 600 Growth Index (**$162.88**) and the Russell 2000 Index (**$155.92**)[91](index=91&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2022, Apogee's net sales grew **7% to $1.3 billion**, but GAAP operating income and EPS declined due to impairments and restructuring, while adjusted EPS increased **3% to $2.48**, with **$100.5 million** cash from operations and **$100.0 million** in share repurchases Fiscal 2022 Summary of Results (GAAP) | Metric | Fiscal 2022 | Fiscal 2021 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $1.3 billion | $1.2 billion | +7% | | Operating Income | $22.0 million | $25.5 million | -14% | | Diluted EPS | $0.14 | $0.59 | -76% | Reconciliation of GAAP to Adjusted (Non-GAAP) Results | Metric | Fiscal 2022 | Fiscal 2021 | % Change | | :--- | :--- | :--- | :--- | | Adjusted Operating Income | $82.6 million | $87.1 million | -5% | | Adjusted Diluted EPS | $2.48 | $2.40 | +3% | - Gross margin decreased by **150 basis points** to **20.9%** in FY2022, driven by **$28.2 million** in restructuring costs and inflationary pressures, partially offset by a **$19.5 million** gain on the sale of a manufacturing facility[108](index=108&type=chunk) - Cash from operating activities decreased to **$100.5 million** in FY2022 from **$141.9 million** in FY2021, primarily due to lower net earnings and reduced working capital benefits compared to the prior year[122](index=122&type=chunk) - The company repurchased **2.29 million shares** for **$100.0 million** in fiscal 2022 and paid **$20.3 million** in dividends[124](index=124&type=chunk) - For fiscal year 2023, the company provides initial guidance for adjusted earnings in the range of **$2.90 to $3.30** per diluted share and expects revenue growth[133](index=133&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=26&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks from interest rate fluctuations, foreign currency exposure in Canada and Brazil, and significant volatility in raw material prices, particularly aluminum, managed through hedging and cost pass-through - A hypothetical **200 basis point** increase or decrease in interest rates over 12 months would impact net earnings by approximately **$0.8 million**[159](index=159&type=chunk) - The company has operations in Canada and Brazil, exposing it to foreign currency exchange rate risk against the U.S. dollar. This risk is partially mitigated as revenues and costs are generally denominated in local currencies[161](index=161&type=chunk) - The company faces significant market risk from volatile commodity prices, especially aluminum. It manages this exposure through fixed/floating rate swaps and forward purchase agreements, and by attempting to pass on cost changes to customers[162](index=162&type=chunk)[163](index=163&type=chunk) [Financial Statements and Supplementary Data](index=28&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents management's report on internal controls, independent auditor's reports, and consolidated financial statements for FY2020-FY2022, detailing financial position, operations, cash flows, and equity with comprehensive accounting notes - Management assessed the company's internal control over financial reporting as of February 26, 2022, and concluded that it was **effective**[167](index=167&type=chunk) - The independent registered public accounting firm, Deloitte & Touche LLP, issued **unqualified opinions** on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting[171](index=171&type=chunk)[172](index=172&type=chunk)[182](index=182&type=chunk) Key Consolidated Balance Sheet Items (in thousands) | Account | Feb 26, 2022 | Feb 27, 2021 | | :--- | :--- | :--- | | Total Assets | $887,863 | $1,015,099 | | Total Liabilities | $501,664 | $522,354 | | Total Shareholders' Equity | $386,199 | $492,745 | Key Consolidated Results of Operations (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $1,313,977 | $1,230,774 | $1,387,439 | | Operating Income | $22,045 | $25,527 | $87,848 | | Net Earnings | $3,486 | $15,436 | $61,914 | [Notes to Consolidated Financial Statements](index=38&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes detail accounting policies, including revenue recognition, goodwill impairment, debt, leases, and employee benefits, highlighting FY2022 restructuring costs and a **$49.5 million** intangible asset impairment related to Sotawall integration - In FY2022, approximately **38%** of total revenue was recognized over time for long-term, fixed-price contracts using a cost-to-cost input method, which requires significant judgment in estimating total costs[223](index=223&type=chunk)[224](index=224&type=chunk) - In Q4 FY2022, the company recorded a total impairment expense of **$49.5 million** on intangible assets within the Architectural Framing Systems segment, comprising a **$12.7 million** impairment of the Sotawall trade name and a **$36.7 million** impairment of finite-lived intangibles, due to the planned integration of the Sotawall business into the Architectural Services segment[266](index=266&type=chunk)[267](index=267&type=chunk) - As of February 26, 2022, the company had a **$150 million** term loan and a **$235 million** revolving credit facility, with no borrowings outstanding on the revolver. Total debt was **$163.0 million**[270](index=270&type=chunk)[273](index=273&type=chunk) - Restructuring actions in FY2022 resulted in pre-tax costs of **$30.5 million**, primarily related to the closure of two Architectural Glass facilities. This was partially offset by a **$19.5 million** gain on the sale of one of the facilities[338](index=338&type=chunk)[339](index=339&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=64&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There were no changes in or disagreements with accountants on accounting and financial disclosure - None[343](index=343&type=chunk) [Controls and Procedures](index=64&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were **effective** at fiscal year-end, with no material changes to internal control over financial reporting in the most recent fiscal quarter - Based on an evaluation as of the fiscal year-end, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[343](index=343&type=chunk) - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[345](index=345&type=chunk) PART III [Directors, Executive Officers, Code of Ethics and Corporate Governance](index=65&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20Code%20of%20Ethics%20and%20Corporate%20Governance) Information on directors, executive officers, corporate governance, and the Code of Business Ethics and Conduct is incorporated by reference from the company's 2022 Proxy Statement - The company has adopted a Code of Business Ethics and Conduct applicable to all employees and directors, which is available on its website[346](index=346&type=chunk) - Most information required by this item is incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Shareholders to be filed within 120 days of the fiscal year-end[347](index=347&type=chunk) [Executive and Director Compensation](index=65&type=section&id=Item%2011.%20Executive%20and%20Director%20Compensation) Executive and director compensation details are incorporated by reference from the company's 2022 Proxy Statement - Details regarding executive and director compensation are incorporated by reference from the 2022 Proxy Statement[348](index=348&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=65&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership and equity compensation plan information is incorporated by reference from the company's 2022 Proxy Statement - Details regarding security ownership and equity compensation plans are incorporated by reference from the 2022 Proxy Statement[348](index=348&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=65&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 Proxy Statement - Details regarding certain relationships, related transactions, and director independence are incorporated by reference from the 2022 Proxy Statement[348](index=348&type=chunk) [Principal Accountant Fees and Services](index=66&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Details regarding fees paid to the principal accountant, Deloitte & Touche LLP, are incorporated by reference from the company's 2022 Proxy Statement - Information about fees billed by the principal accountant, Deloitte & Touche LLP, will be presented in the 2022 Proxy Statement and is incorporated herein by reference[350](index=350&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=66&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists documents filed as part of the Form 10-K, including consolidated financial statements in Item 8, confirms omission of inapplicable schedules, and provides a detailed list of exhibits - The consolidated financial statements are located in Item 8 of the report[351](index=351&type=chunk) - All financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes[351](index=351&type=chunk) - A detailed list of exhibits, including management contracts, compensatory plans, and other material agreements, is provided, with many incorporated by reference from previous filings[352](index=352&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) [Form 10-K Summary](index=68&type=section&id=Item%2016.%20Form%2010-K%20Summary) No summary is provided under this item - None[356](index=356&type=chunk)