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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________ 
FORM 10-K
 _________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 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: (952835-1874

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, $0.33 1/3 Par Value
 
APOG
 
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      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      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.      Yes      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).       Yes      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
 
  
Accelerated Filer
 
 
 
 
 
 
 
 
Non-accelerated Filer
 
 
  
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      No
As of August 31, 2019, 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 $981,000,000 (based on the closing price of $36.93 per share as reported on the NASDAQ Stock Market LLC as of that date).
As of April 22, 2020, 26,149,688 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

 



APOGEE ENTERPRISES, INC.
Annual Report on Form 10-K
For the fiscal year ended February 29, 2020

TABLE OF CONTENTS
 
 
  
Page
 
 
 
 
 
 
 
 
 
 


3


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 leader in the design and development of architectural products and services, providing architectural glass, aluminum framing systems and installation services for buildings, as well as value-added glazing products for custom picture framing.

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 aluminum window, curtainwall, storefront and entrance systems comprising the exterior of buildings. For fiscal 2020, this segment accounted for approximately 49 percent of our net sales.
The Architectural Glass segment fabricates coated, high-performance glass used in custom window and wall systems. For fiscal 2020, this segment accounted for approximately 25 percent of our net sales.
The Architectural Services segment integrates technical services, project management, and field installation services to design, engineer, fabricate, and install building glass and curtainwall systems. For fiscal 2020, this segment accounted for approximately 20 percent of our net sales.
The Large-Scale Optical Technologies (LSO) segment manufactures value-added coated glass and acrylic products for custom framing, museum, and technical glass markets. For fiscal 2020, this segment accounted for approximately 6 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 approximately $190 million. Results of operations for this business have been included in the consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.

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

In an effort to reduce our exposure to the cyclical nature of the large-building segment of the commercial construction industry and to drive growth, we have expanded our capabilities to be able to serve small- and mid-sized projects in the Architectural Glass segment, have grown our North American geographic reach in the Architectural Framing Systems segment, and increased our focus on retrofit and renovation of windows and curtainwall within our Architectural Framing and Architectural Glass segments.

Specifically over the past fiscal year, in the Architectural Framing Systems segment, our focus was to drive margin improvement through increased productivity, cost management and integration/synergy activities, supply chain optimization, and new product development. In the Architectural Glass segment, we completed construction and began operation of our new fabrication facility designed to serve small-sized and quick-turn projects. In the Architectural Services segment, our emphasis is on maintaining consistent margins through focused project selection and execution, 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 continue 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, and to grow in newer display markets that desire value-added properties that our glass and acrylics products provide.

Across all our segments, we also regularly evaluate business development opportunities in adjacent sectors that will complement our existing portfolio. Finally, we are constantly working to improve the efficiency and productivity of our operations by implementing continuous improvement, lean manufacturing disciplines and automation.

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


4


Within our Architectural Framing Systems segment, we design, engineer and fabricate aluminum window, curtainwall, storefront and entrance systems. We also extrude aluminum and provide finishing services for metal components used in a variety of building materials applications, as well as for plastic components for other products.

In our Architectural Glass segment, we fabricate coated glass and apply high-performance coatings to uncoated glass to create a variety of aesthetic characteristics, unique designs and energy-efficiency. We also laminate layers of glass and vinyl for protection against hazards such as severe weather and blasts, and we temper, or heat strengthen, glass to provide additional strength. Much of our high-performance glass is made-to-order and is typically fabricated into insulating and/or laminated glass units for 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 exterior of commercial buildings. Our ability to efficiently design high-quality window and curtainwall systems and effectively manage the installation of building façades enables our customers to meet 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, 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 custom picture framing, museum framing, wall decor and technical glass for other display applications. Products vary based on size and coatings 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 industry, as well as by changes in general economic conditions. Additionally, the Architectural Glass segment has operations in Brazil and is 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 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, which is 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 the following types of factors:

Building type - Our products and services are primarily used in commercial buildings (office buildings, hotels and retail centers) and institutional buildings (education facilities, health care facilities and government buildings), as well as in high-end multi-family residential buildings (a subset of residential construction).

Level of customization - Many of our projects involve a high degree of customization, as the product or service is designed to meet customer-specified requirements for aesthetics, performance and size, and 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 both a direct sales force and independent sales representatives. Our installation services are sold by a direct sales force in certain metropolitan areas in the U.S. Our window, curtainwall, storefront and entrance systems are sold using a combination of direct sales forces, independent sales representatives and distributors.

Geographic location - We primarily supply architectural glass products and aluminum framing systems, including window, curtainwall, storefront and entrance systems, to customers in North America. We are one of only a few architectural glass installation service companies in the U.S. to have a national presence and we have the ability to provide remote installation

5


project management throughout the U.S. Our Architectural Glass segment also supplies architectural glass products to customers in Brazil and certain other international locations.

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 and museum 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 retailers using an independent distribution network. We also supply our glass, acrylic and other products to museums, galleries and other organizations in Europe and other international locations through independent distributors.

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 building owners, architects, who influence the selection of products and services on a project, and with general contractors, who initiate projects and develop specifications.

There is a great deal of competition in the North America commercial window and storefront manufacturing industry, 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, innovation, reliable on-time delivery and short lead times.

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 and large regional fabricators, some of which have benefited from the relative strength of the U.S. dollar and lower fabrication costs in recent years. We differentiate ourselves by providing high-quality, innovative and customizable products, short lead times, and strong customer service.

Our Architectural Services segment competes against national and regional glass installation companies. We distinguish ourselves from these competitors through our strong project management and our track record of regularly meeting each project's unique execution requirements.

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 and U.S. valued-added glass and acrylic companies.

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
Materials used in the Architectural Framing Systems segment include aluminum billet and extrusions, fabricated glass, plastic extrusions, hardware, paint and chemicals. Raw materials used within the Architectural Glass segment include flat glass, vinyl, silicone sealants and lumber. Within the Architectural Services segment, materials used include fabricated glass, finished aluminum extrusions, fabricated metal panels and hardware. Materials used in the LSO segment are primarily glass and acrylic. Most 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®, SOTA®, HYBRID-WALL®,

6


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™, ThermaSlide™ 7000, Integra 6000™ and ThermaSlide™ are unregistered trademarks in Canada.
Within the Architectural Glass segment, VIRACON®, DIGITALDISTINCTIONS®, ROOMSIDE®, EXTREMEDGE®, BUILDING DESIGN®, GLASS IS EVERYTHING®, CLEARPOINT®, CYBERSHIELD®, STORMGUARD®, ACCELERATING YOUR ARCHITECTURAL GLASS®, VELOCITY, AN APOGEE COMPANY® and VTS® are registered trademarks. VIRASPAN™ is an unregistered trademark. In addition, GLASSECVIRACON®, GLASSEC®, INSULATTO® and BLINDATTO® are registered trademarks 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 REFLECTION CONTROL®, ULTRAVUE®, MUSEUM GLASS®, OPTIUM®, PREMIUM CLEAN®, REFLECTION CONTROL®, AR REFLECTION-FREE®, OPTIUM ACRYLIC®, OPTIUM MUSEUM ACRYLIC®, CONSERVATION MASTERPIECE®, CONSERVATION MASTERPIECE ACRYLIC®, TRU VUE AR®, STATICSHIELD®, TRULIFE®, and VISTA AR® are registered trademarks. TRULIFE INFINITY FRAME™, PREMIUM CLEAR, 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
Activity in the construction industry is impacted by the seasonal impact of weather and weather events in our operating locations, with activity in some markets reduced in winter due to inclement weather.

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 Systems 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 may be expected to be recognized as revenue in the future. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog.

Architectural Framing Systems segment backlog, net of intersegment eliminations, grew to
$429.6 million at year-end, compared to $399.5 million at the end of the prior year, due primarily to strong order activity, particularly of longer lead-time contracts. We expect approximately 60 percent of the backlog in this segment to be fulfilled in fiscal 2021, with the remainder expected to be filled in fiscal 2022 and beyond; however, the timing of backlog may be impacted by project delays resulting from the COVID-19 pandemic.

Architectural Glass segment backlog as of year-end was $31.0 million, net of intersegment eliminations, compared to $71.3 million at the end of the prior year, due to reduced lead times, fulfillment of orders at year-end and lower order activity. We expect all of the backlog to be fulfilled in fiscal 2021.

Backlog in the Architectural Services segment as of year-end was $659.7 million, compared to $444.0 million at the end of the prior year, due to strong contract activity during fiscal 2020. We expect approximately 40 percent of the backlog in this segment to be filled during fiscal 2021, with the remainder expected to be filled in fiscal 2022 and beyond; however, the timing of backlog may be impacted by project delays resulting from the COVID-19 pandemic.


7


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

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 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. At one manufacturing facility in our Architectural Framing Systems segment, we are continuing to work to remediate historical environmental impacts. These remediation activities are being conducted without significant disruption to our operations.

Employees
The Company had approximately 7,200 and 7,000 employees on February 29, 2020 and March 2, 2019, respectively. At February 29, 2020, 669 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, our 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 (SEC). These reports are also available on the SEC's website at www.sec.gov. 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.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Name
 
Age
 
Positions with Apogee Enterprises and Past Experience
Joseph F. Puishys
 
61
 
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.
James S. Porter
 
59
 
Chief Financial Officer since 2005 and Executive Vice President since 2015. Vice President of Strategy and Planning from 2002 through 2005.
Curtis Dobler
 
55
 
Executive Vice President and Chief Human Resources Officer since April 2019. Executive Vice President and Chief Human Resources Officer at Associated Materials, Inc. from 2015 through 2019.
Patricia A. Beithon
 
66
 
General Counsel and Corporate Secretary since 1999.
Brent C. Jewell
 
45
 
President of Architectural Framing Systems Segment since August 2019. Senior Vice President, Business Development and Strategy from May 2018 to August 2019. Senior leadership positions at Valspar's General Industrial Americas and North America Wood Coatings divisions from 2010 to 2017.

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.

The novel coronavirus (COVID-19) pandemic, efforts to mitigate the pandemic, and the related weakening economic conditions, have impacted our business and could have a significant negative impact on our operations, liquidity, financial condition and financial results
In the last quarter of our fiscal 2020, a novel strain of coronavirus, COVID-19, started to impact the global economic environment causing extreme volatility and uncertainty in global markets. In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and we started to see certain impacts to our business. This contagious disease outbreak, which has continued to spread, and the related adverse public health developments, and government orders to "stay in place" have adversely affected

8


work forces, economies and financial markets globally. Quarantines and "stay in place" orders, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to our supply chain or our customers, will adversely impact our sales and operating results and has resulted in some project delays. In addition, the pandemic has resulted in an economic downturn that could affect the ability of our customers to obtain financing for projects and therefore impact demand for our products and services. Order lead times could be extended or delayed and our pricing or pricing of suppliers for needed materials could increase. Some critical materials, products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, we are considering alternative product sourcing in the event that material supply becomes problematic.

To date, we have experienced some delays in commercial construction projects due to COVID-19. While the construction and construction-related industries are considered an "essential service" in most jurisdictions in which we operate, site closures or project delays have occurred and increased social distancing and health-related precautions are required on many work sites, which may cause additional project delays and additional costs to be incurred. Within the LSO segment, we also experienced the temporary closure of many of our customer's retail locations and we temporarily shut down our factories in this segment to comply with government "stay in place" orders. We expect this global pandemic to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 will impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate severity and spread of the disease, the duration of the outbreak, travel restrictions and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

Given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers are adversely impacted by the coronavirus outbreak, this could reduce the availability, or result in delays, of materials or supplies, or delays in customer payments, which in turn could materially interrupt our business operations and/or impact our liquidity.

Global instability and uncertainty arising from events outside of our control, such as significant natural disasters, political crises, public health crises and pandemics, and/or other catastrophic events
Natural disasters, political crises, public health crises, such as the current COVID-19 pandemic, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend, have broader adverse impacts on the commercial construction market, consumer confidence and spending, and/or impact the well-being of our employees and ability to operate our facilities. These types of disruptions or other events outside of our control could affect our business negatively, cause delays or cancellation of commercial construction projects or cause us to temporarily close our facilities, harming our operating results. In addition, if any of our facilities, including our manufacturing, finishing or distribution facilities, or the facilities of our suppliers, third-party service providers, or customers, is affected by natural disasters, political crises, public health crises, and other catastrophic events or events outside of our control, our business and operating results could suffer.

North American and global economic and industry-related business conditions
Our Architectural Framing Systems, Architectural Glass and Architectural Services segments are dependent on North American economic conditions and the somewhat cyclical nature of the North American commercial construction industry. The commercial construction industry is impacted by macroeconomic trends such as 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 LSO segment primarily 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 (due to COVID-19 concerns discussed above or otherwise), uncertainty regarding the future or other factors, could result in a decrease in net sales and operating income of this segment.

Foreign currency impacts
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. Additionally, our international subsidiaries report their results of operations and financial position in their relevant functional currencies (local country currency), which are then translated into U.S. dollars. 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.


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

Our Architectural Framing Systems and Architectural Glass segments have seen an increase in imports of products into the U.S. from international suppliers due to the relative strength of the U.S. dollar. If foreign imports 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 and international and domestic acrylic suppliers. If these competitors are able to successfully increase their product attributes, service capabilities and production capacity and/or increase their sales and marketing focus in 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. 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
with respect to the acquired assets and liabilities, 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 were to arise in a material manner, our operating results could be negatively impacted.
Goodwill and indefinite-lived intangible asset impairment
Our assets include a significant amount of goodwill and indefinite-lived intangible assets. We evaluate goodwill and indefinite-lived intangibles for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. The assessment of impairment requires determination of estimated fair value, generally using a discounted cash flow analysis, which involves significant judgment and projections about future performance.

Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. 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 and indefinite-lived intangible asset exceeded its carrying value and, therefore, impairment was not indicated. However, the estimated fair value did not exceed carrying value by a significant margin for two of our reporting units within the Architectural Framing Systems segment, Sotawall and Alumicor, which had goodwill balances of $21.0 million and $14.1 million, respectively, at February 29, 2020. We utilized a discount rate of 9.4 percent in determining the discounted cash flows in our fair value analysis and a long-term growth rate of 3.0 percent. If our discount rate were to increase by 20 basis points, the fair value of these reporting units would fall below carrying value, which would indicate impairment of the goodwill. Additionally, this discounted cash flow analysis is dependent upon achieving forecasted levels of revenue and profitability. If revenue or profitability were to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment would be indicated at these reporting units, and potentially at our other reporting units. Subsequent to year-end, we have begun to see impacts from COVID-19 that will likely have a negative impact on our forecasted revenue and profitability and this, along with the decline in our stock price and other market conditions, could result in an indication of impairment of goodwill in our first quarter of 2021.

Fair value of our indefinite-lived intangible assets is measured using the relief-from-royalty method. This method assumes the trade name or trademark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. This method requires estimation of the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. Based on our analysis, the estimated fair value of each indefinite-lived intangible asset exceeded its carrying value and, therefore, impairment was not indicated. In determining the discounted future revenue in our fair value

10


analysis, we assumed a discount rate of 9.4 percent, a royalty rate of 1.0 percent, and a long-term growth rate of 3.0 percent. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, we could incur a non-cash impairment charge that would negatively impact our net earnings for the fiscal period in which the charge was recorded.

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, or manage unanticipated interruptions in production, successfully implement planned capacity expansions, and/or make timely investments in additional physical capacity and supporting technology systems 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 and installation labor. In recent years, strong residential and commercial construction and low U.S. unemployment has caused increased competition for experienced construction project managers and other labor. If we are unable to retain existing employees, provide a safe and healthy working environment, and/or recruit and train additional employees with the requisite skills and experience, our operating results could be adversely impacted.

Supply chain management, including availability and price of materials used in our products
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 our pricing to offset potential impacts, operating results could be negatively impacted by price movements in the market for raw aluminum. In recent years, we have seen increased volatility in the price of aluminum that we purchase from both domestic and international sources. 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 U.S. trade policy with Canada could therefore have an adverse impact on our net sales and operating results.

Our Architectural Glass and LSO segments use raw glass as a significant input to their products. We periodically experience a tighter supply of raw glass when there is 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.

Our suppliers are subject to the fluctuations in general economic cycles, and global economic conditions may impact their ability to operate their businesses, including recent impacts from the evolving COVID-19 pandemic. They may also be impacted by the increasing costs or availability of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our business and financial condition. Further, the potential impact of COVID-19 could adversely impact our suppliers and result in our inability to purchase needed materials in a timely manner or to achieve our targeted procurement cost reductions.

If we encounter problems with distribution, our ability to deliver our products to market could be adversely affected. Our operations are vulnerable to interruptions in the event of work stoppages, whether due to health concerns such as COVID-19 or otherwise, labor disputes or shortages and natural disasters that may affect our distribution and transportation to job sites. Moreover, our distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to data and system security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. If we encounter problems with our distribution system, our ability to meet customer and consumer expectations, manage inventory, manage transportation-related costs, complete sales and achieve operating efficiencies could be adversely affected.

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 could result in costly and time-consuming litigation

11


that could require significant time and attention of management and involve significant monetary damages that could negatively impact our operating results.

Project management and installation issues
Some of our segments 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.

Specifically, we have a large construction project that is nearing completion but continues to experience certain project delays that have resulted in significant additional costs and ongoing negotiations with our customer. These and any further delays or project difficulties could have additional negative impact on our operating results.

Customer dependence in the LSO segment
The LSO segment is highly dependent on a relatively small number of customers for its sales, while working to grow in new markets and with new 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. Recently, many customers in this segment temporarily closed retail outlets as a result of "stay in place" orders within the United States, resulting in reduced demand for our product. In response to this changing retail environment, the LSO segment has temporarily reduced production and labor, and furloughed employees. We expect this situation to result in a significant reduction in sales in our first quarter of fiscal 2021, however, we are unable to estimate the severity or longer-term impact resulting from this COVID-19 pandemic on our business in this segment. If demand continues to remain depressed, it could have a material adverse effect on the operating results of this segment.

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. Further, there is additional risk in our ability to accurately forecast and provide guidance in the current environment, given the rapidly evolving conditions as a result of the COVID-19 pandemic. Failure to meet our guidance or analyst expectations for net sales and earnings would have an adverse impact on the market price of our common stock.

Significant risk retention through self-insurance programs
We obtain third-party insurance to provide coverage for potential risk in areas such as employment practices, workers' compensation, directors and officers, automobile, architect's and engineer's errors and omissions, product rework and general liability, as well as medical insurance and various other coverages. 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 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.





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ITEM 2. PROPERTIES

The following table lists, by segment, the Company's major properties as of February 29, 2020.
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
Brampton, ON Canada
 
Leased
 
Manufacturing/Warehouse/Administrative
Springfield, MO
 
Leased
 
Manufacturing/Warehouse/Administrative
Monett, MO
 
Owned
 
Manufacturing/Warehouse/Administrative
Architectural Glass segment
 
 
 
 
Owatonna, MN
 
Owned
 
Manufacturing/Administrative
Statesboro, GA
 
Owned
 
Manufacturing/Warehouse
Dallas, TX
 
Leased
 
Manufacturing/Warehouse
Nazaré Paulista, Brazil
 
Owned(1)
 
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) 
This is an owned facility; however, the land is leased from the city.

ITEM 3. LEGAL PROCEEDINGS

Murray Mayer v. Apogee Enterprises, Inc., et al

On November 5, 2018, Murray Mayer, individually and on behalf of all others similarly situated, filed a purported securities class action lawsuit against the Company and our Chief Executive Officer and our Chief Financial Officer in the United States District Court for the District of Minnesota. On February 26, 2019, the Court appointed as lead plaintiffs the City of Cape Coral Municipal Firefighters’ Retirement Plan and the City of Cape Coral Municipal Police Officers’ Retirement Plan. On April 26, 2019, the lead plaintiffs filed an amended complaint. The amended complaint seeks an unspecified amount of damages, attorney's fees and costs. On March 25, 2020, the District Court granted the Company's motion to dismiss without prejudice this matter.

Justin Buley v. Apogee Enterprises, Inc. et al

On December 17, 2018, Justin Buley filed a derivative lawsuit, purportedly on behalf of the Company, against our Chief Executive Officer, our Chief Financial Officer and certain of our non-executive members of our Board of Directors, in the Fourth Judicial District of the State of Minnesota. The complaint alleges claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks an unspecified amount of damages and equitable relief, including requiring the Company to offer our shareholders the opportunity to vote for certain amendments to our Bylaws or Articles of Incorporation purporting to improve identified corporate governance practices. This matter has been stayed pending resolution of a motion to dismiss in the Mayer action described above. We intend to vigorously defend this matter.

In addition to the foregoing, 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

13


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 under the ticker symbol "APOG". As of April 7, 2020, there were 1,126 shareholders of record and 9,877 shareholders for whom securities firms acted as nominees.

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.
Fiscal Year
 
First
 
Second
 
Third
 
Fourth
 
Total
2020
 
$
0.1750

 
$
0.1750

 
$
0.1750

 
$
0.1875

 
$
0.7125

2019
 
0.1575

 
0.1575

 
0.1575

 
0.1750

 
0.6475

2018
 
0.1400

 
0.1400

 
0.1400

 
0.1575

 
0.5775


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 2020:
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 1, 2019 through December 28, 2019
 
15,000

 
$
31.77

 
15,000

 
1,435,088

December 29, 2019 through January 25, 2020
 
90,000

 
33.13

 
90,000

 
2,345,088

January 26, 2020 through February 29, 2020
 
57,177

 
32.82

 
50,000

 
2,295,088

   Total
 
162,177

 
$
32.95

 
155,000

 
2,295,088

(a) The shares in this column represent the total number of shares that were repurchased by us pursuant to our publicly announced repurchase program, plus the shares surrendered to us by plan participants to satisfy withholding tax obligations related to share-based compensation.

(b) In fiscal 2004, announced on April 10, 2003, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock. The Board increased the authorization by 750,000 shares, announced on January 24, 2008; by 1,000,000 shares on each of the announcement dates of October 8, 2008, January 13, 2016, January 9, 2018, and January 14, 2020; and by 2,000,000 shares, announced on October 3, 2018. The repurchase program does not have an expiration date.



14


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 February 27, 2015, and also assumes the reinvestment of all dividends.
https://cdn.kscope.io/14fe4713a33caffe258b683bbfd14ef5-chart-4b9be71e82a959ff894.jpg
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020
Apogee
 
$
100.00

 
$
86.79

 
$
129.59

 
$
99.06

 
$
82.45

 
$
70.43

S&P Small Cap 600 Growth Index
 
100.00

 
91.76

 
120.34

 
135.21

 
145.19

 
135.65

Russell 2000 Index
 
100.00

 
85.29

 
116.43

 
129.60

 
136.18

 
128.31


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.





















15


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.
 
 
Fiscal Year
(In thousands, except per share data and percentages)
 
2020
 
2019
 
2018(1)
 
2017(2)(3)
 
2016
Results of Operations Data
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,387,439

 
$
1,402,637

 
$
1,326,173

 
$
1,114,533

 
$
981,189

Gross profit
 
318,959

 
293,565

 
333,518

 
292,023

 
243,570

Operating income
 
87,848

 
67,284

 
114,284

 
122,225

 
97,393

Net earnings
 
61,914

 
45,694

 
79,488

 
85,790

 
65,342

Earnings per share - basic
 
2.34

 
1.64

 
2.79

 
2.98

 
2.25

Earnings per share - diluted
 
2.32

 
1.63

 
2.76

 
2.97

 
2.22

Cash dividends per share
 
0.7125

 
0.6475

 
0.5775

 
0.5150

 
0.4550

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets
 
1,128,991

 
1,068,168

 
1,022,320

 
784,658

 
657,440

Long-term debt
 
217,900

 
245,724

 
215,860

 
65,400

 
20,400

Shareholders' equity
 
516,778

 
496,317

 
511,355

 
470,577

 
406,195

Other Data
 
 
 
 
 
 
 
 
 
 
Gross profit as a percentage of sales
 
23.0
%
 
20.9
%
 
25.1
%
 
26.2
%
 
24.8
%
Operating income as a percentage of sales
 
6.3
%
 
4.8
%
 
8.6
%
 
11.0
%
 
9.9
%
Return on average invested capital(4)
 
8.4
%
 
5.6
%
 
9.3
%
 
14.3
%
 
12.7
%
(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) 
Return on average invested capital is a non-GAAP measure that we define as [operating income x 0.75]/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, thereby 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.



16


Overview
We are a leader in the design and development of value-added glass and metal products and services. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical Technologies (LSO).

During fiscal 2020, we continued to focus on strategies to diversify and strengthen our revenue streams, through geographies, markets and project sizes served, in addition to focusing on good project selection, in order to improve the stability of our business throughout an economic cycle. We also focused on driving productivity, good cost management and integration/synergy activities, throughout our operations. We continue to execute a balanced capital allocation approach to invest in the business for growth and margin expansion while also returning capital to shareholders.

Fiscal 2020 summary of results:
Consolidated net sales were $1.4 billion, a decrease of 1 percent over fiscal 2019.
Operating income was $87.8 million, an increase of 31 percent from $67.3 million in the prior year.
Diluted EPS was $2.32, compared to $1.63 in the prior year, an increase of 42 percent.
Adjusted operating income was $90.0 million, a decrease of 22.6 percent compared to the prior year, and adjusted diluted EPS was $2.38 in fiscal 2020, a decrease of 22.3 percent compared to the prior year. Refer to the table below for details of these adjusted amounts.

Adjusted operating income and adjusted earnings per diluted share (adjusted diluted EPS) are supplemental non-GAAP measures provided by the Company 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, thereby limiting the usefulness of the measures for comparison with other companies.
Reconciliation of Non-GAAP Financial Information
Adjusted Operating Income and Adjusted Net Earnings per Diluted Common Share
(Unaudited)
 
 
 
 
 
 
Diluted per share amounts
 
 
Year-ended
 
Year-ended
(In thousands)
 
February 29, 2020
 
March 2, 2019
 
February 29, 2020
 
March 2, 2019
Operating income
 
$
87,848

 
$
67,284

 
$
2.32

 
$
1.63

Cooperation agreement advisory costs
 
2,776

 

 
0.10

 

Acquired EFCO project matters
 
(635
)
 
40,948

 
(0.02
)
 
1.46

Amortization of short-lived acquired intangibles
 

 
4,894

 

 
0.17

Impairment charge
 

 
3,141

 

 
0.11

Income tax impact on above adjustments
 
N/A

 
N/A

 
(0.02
)
 
(0.41
)
Adjusted operating income
 
$
89,989

 
$
116,267

 
$
2.38

 
$
2.96


Results of Operations
Net Sales
(Dollars in thousands)
 
2020
 
2019
 
2018
 
2020 vs. 2019
 
2019 vs. 2018
Net sales
 
$
1,387,439

 
$
1,402,637

 
$
1,326,173

 
(1.1
)%
 
5.8
%

Fiscal 2020 Compared to Fiscal 2019
Net sales in fiscal 2020 decreased by 1.1 percent compared to fiscal 2019, driven by expected project timing-related decreases within the Architectural Services segment and by lower volumes at certain businesses within the Architectural Framing Systems segment, partially offset by improved volume in the Architectural Glass segment.
    
Fiscal 2019 Compared to Fiscal 2018
Net sales in fiscal 2019 increased by 5.8 percent compared to fiscal 2018, driven by strong project execution in the Architectural Services segment, as well as growth from our Architectural Framing segment, primarily due to the addition of EFCO (acquired in June 2017) for the full period, partially offset by a sales decline in the Architectural Glass segment.

17


Performance
The relationship between various components of operations, as a percentage of net sales, is provided below.
(Percentage of net sales)
 
2020
 
2019
 
2018
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
77.0

 
79.1

 
74.9

Gross profit
 
23.0

 
20.9

 
25.1

Selling, general and administrative expenses
 
16.7

 
16.1

 
16.5

Operating income
 
6.3

 
4.8

 
8.6

Interest and other expense, net
 
0.6

 
0.6

 
0.3

Earnings before income taxes
 
5.7

 
4.2

 
8.3

Income tax expense
 
1.3

 
0.9

 
2.3

Net earnings
 
4.5
%
 
3.3
%
 
6.0
%
Effective income tax rate
 
22.4
%
 
22.1
%
 
27.7
%

Fiscal 2020 Compared to Fiscal 2019
Gross profit was 23.0 percent in fiscal 2020, an increase of 210 basis points from fiscal 2019. This increase was driven by project-related charges of $40.9 million incurred in fiscal 2019 on certain contracts acquired with the purchase of EFCO. The increase was also driven by operating improvements in the Architectural Glass segment, partially offset by manufacturing difficulties in certain of the businesses in the Architectural Framing Systems segment and reduced operating leverage in the Architectural Services segment, based on timing of project activity.

Selling, general and administrative (SG&A) expense for fiscal 2020 was 16.7 percent, an increase of 60 basis points from fiscal 2019. This was primarily driven by costs for outside advisors and legal fees, including cooperation agreement advisory costs, in addition to higher compensation and related costs compared to the prior year.

The effective tax rate for fiscal 2020 was 22.4 percent, compared to 22.1 percent in fiscal 2019, due to the impact of state taxes.

Fiscal 2019 Compared to Fiscal 2018
Gross profit was 20.9 percent in fiscal 2019, a decline of 420 basis points from fiscal 2018, driven by $40.9 million of project-related charges on certain contracts acquired with the purchase of EFCO, higher operating costs in the Architectural Glass segment and negative leverage on reduced volumes and mix in the Architectural Framing segment, partially offset by volume leverage and good project performance in the Architectural Services segment.

SG&A expense for fiscal 2019 was 16.1 percent, a decrease of 40 basis points but an increase of $7.0 million from fiscal 2018. This was due to the inclusion of a full year of expense for EFCO (acquired in the second quarter of fiscal 2018), partially offset by lower amortization on acquired intangible assets.

Interest and other expenses increased by 30 basis points over the prior year, due to an increase in the average variable interest rate on our debt and a higher average outstanding debt balance throughout fiscal 2019, compared to fiscal 2018.

The effective tax rate for fiscal 2019 was 22.1 percent, a decline of 560 basis points compared to a rate of 27.7 percent in fiscal 2018, driven by a full year of benefits from the U.S. Tax Cuts and Jobs Act (the Act), enacted in December 2017, as well as increased research and development tax credits in fiscal 2019.

Segment Analysis
Architectural Framing Systems
(In thousands)
 
2020
 
2019
 
2018
 
2020 vs. 2019
 
2019 vs. 2018
Net sales
 
$
686,596

 
$
720,829

 
$
677,198

 
(4.7
)%
 
6.4
 %
Operating income
 
36,110

 
49,660

 
59,031

 
(27.3
)%
 
(15.9
)%
Operating margin
 
5.3
%
 
6.9
%
 
8.7
%
 
 
 
 

Fiscal 2020 Compared to Fiscal 2019. Net sales decreased 4.7 percent, or $34.2 million, from fiscal 2019, primarily due to lower volumes as a result of certain customer-driven schedule delays. Operating margin declined 160 basis points from fiscal 2019, reflecting the impact of lower volumes and certain operational difficulties negatively impacting customer deliveries in two of the segment's businesses, which have been addressed.

18



Fiscal 2019 Compared to Fiscal 2018. Net sales improved 6.4 percent, or $43.6 million, over fiscal 2018. The inclusion of EFCO for the full fiscal year contributed approximately 60 percent of the growth. Remaining growth was driven by increased order activity in our other businesses within this segment. Operating margin declined 180 basis points over fiscal 2018, driven by the inclusion of a full year of EFCO at lower operating margins. In addition, we recorded a $3.1 million impairment charge on an indefinite-lived intangible asset at EFCO during fiscal 2019.

Architectural Glass
(In thousands)
 
2020
 
2019
 
2018
 
2020 vs. 2019
 
2019 vs. 2018
Net sales
 
$
387,191

 
$
367,203

 
$
384,137

 
5.4
%
 
(4.4
)%
Operating income
 
20,760

 
16,503

 
32,764

 
25.8
%
 
(49.6
)%
Operating margin
 
5.4
%
 
4.5
%
 
8.5
%
 
 
 
 

Fiscal 2020 Compared to Fiscal 2019. Fiscal 2020 net sales increased 5.4 percent, or $20.0 million, over the prior year, due to improved volume and mix, with lower large project revenue due to increased foreign competition, offset by growth in mid-size projects. Operating margin increased 90 basis points for the fiscal year ended 2020 compared to the prior year period, as a result of improved factory productivity and volume leverage and cost control. This improvement was partially offset by 160 basis points of start-up costs related to our new manufacturing facility for the segment's small projects growth initiative. This facility is now fully operational.

Fiscal 2019 Compared to Fiscal 2018. Fiscal 2019 net sales decreased 4.4 percent, or $16.9 million, over fiscal 2018 due to changes in timing of customer orders, as well as volume declines stemming from operational challenges in the second and third fiscal quarters. Operating margin declined 400 basis points, largely due to increased labor costs, lower productivity and higher cost of quality due to challenges in ramping-up production in a tight labor market to meet higher than expected order intake and customer demand. In the second half of fiscal 2019, we made progress on improving productivity and controlling costs.

Architectural Services
(In thousands)
 
2020
 
2019
 
2018
 
2020 vs. 2019
 
2019 vs. 2018
Net sales
 
$
269,140

 
$
286,314

 
$
213,757

 
(6.0
)%
 
33.9
%
Operating income
 
23,582

 
30,509

 
10,420

 
(22.7
)%
 
192.8
%
Operating margin
 
8.8
%
 
10.7
%
 
4.9
%
 
 
 
 

Fiscal 2020 Compared to Fiscal 2019. Net sales decreased 6.0 percent, or $17.2 million, compared to the prior year, as a result of lower volumes due to timing of project activity. Operating margin decreased 190 basis points over the prior year, due primarily to reduced leverage on the lower project volume and project mix.

Fiscal 2019 Compared to Fiscal 2018. Net sales increased 33.9 percent, or $72.6 million, over fiscal 2018, due to strong project execution on maturing projects. Operating margin improved 580 basis points over the prior year, due to volume leverage and strong project performance.

Large-Scale Optical Technologies (LSO)
(In thousands)
 
2020
 
2019
 
2018
 
2020 vs. 2019
 
2019 vs. 2018
Net sales
 
$
87,911

 
$
88,493

 
$
88,303

 
(0.7
)%
 
0.2
%
Operating income
 
22,642

 
23,003

 
22,000

 
(1.6
)%
 
4.6
%
Operating margin
 
25.8
%
 
26.0
%
 
24.9
%
 
 
 
 

Fiscal 2020 Compared to Fiscal 2019. Net sales and operating margin were largely consistent with the prior year, with good cost control and operational performance.

Fiscal 2019 Compared to Fiscal 2018. Net sales were consistent with the prior year and operating margin improved 110 basis points over the prior year, driven by a $1.0 million gain from an insurance recovery and good operational performance.





19


Liquidity and Capital Resources
(In thousands)
 
2020
 
2019
 
2018
Operating Activities
 
 
 
 
 
 
Net cash provided by operating activities
 
$
107,262

 
$
96,423

 
$
127,463

Investing Activities
 
 
 
 
 
 
Capital expenditures
 
(51,428
)
 
(60,717
)
 
(53,196
)
Proceeds on sale of property
 
5,307

 
12,333

 
1,394

Acquisition of business and intangibles
 

 

 
(182,849
)
Financing Activities
 
 
 
 
 
 
(Payments) borrowings on line of credit, net
 
(177,500
)
 
30,000

 
149,960

Proceeds from issuance of term debt
 
150,000

 

 

Repurchase and retirement of common stock
 
(25,140
)
 
(43,326
)
 
(33,676
)
Dividends paid
 
(18,714
)
 
(17,864
)
 
(16,393
)

Operating Activities. Cash provided by operating activities was $107.3 million in fiscal 2020, an increase of $10.8 million from fiscal 2019 due to improved earnings, offset by working capital timing.

Investing Activities. Net cash used in investing activities was $47.0 million in fiscal 2020, compared to $53.7 million in fiscal 2019, with the year-over-year decline largely due to lower capital expenditures during fiscal 2020. In fiscal 2020, we benefited from the sale of an Architectural Framing manufacturing facility in Toronto, and in fiscal 2019, we benefited from the sale of an Architectural Glass manufacturing facility in Utah.

We continually review our portfolio of businesses and their assets and how they support our business strategy and performance objectives. As part of this review, we may acquire other businesses, pursue geographic expansion, take actions to manage capacity and further invest in, divest and/or sell parts of our current businesses.

Financing Activities. Cash used in financing activities was $74.5 million in fiscal 2020, compared to $32.3 million in fiscal 2019. We paid dividends totaling $18.7 million in fiscal 2020 and repurchased 686,997 shares under our authorized share repurchase program, at a total cost of $25.1 million. We repurchased 1,257,983 shares under the program in fiscal 2019 and 702,299 shares under the program in fiscal 2018. We have repurchased a total of 5,954,912 shares, at a total cost of $174.4 million, since the 2004 inception of this program. We have remaining authority to repurchase 2,295,088 shares under this program, which has no expiration date, and we will continue to evaluate making future share repurchases, depending on our cash flow and debt levels, market conditions, including the continuing effects of the COVID-19 pandemic, and other potential uses of cash.

During the second quarter of fiscal 2020, we amended the borrowing capacity of our prior credit facility to $235 million with a maturity of June 2024, and we established a $150 million term loan, maturing in June 2020, as further described in Note 8 of the Notes to Consolidated Financial Statements. Subsequent to the end of the year, the Company extended its $150 million term loan maturity to April 2021. As of February 29, 2020, $47.5 million was outstanding under the revolving credit facility. 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 February 29, 2020, we were in compliance with both financial covenants.

Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of February 29, 2020:
 
 
Payments Due by Fiscal Period
(In thousands)
 
2021
 
2022
 
2023
 
2024
 
2025
 
Thereafter
 
Total
Debt obligations
 
$
5,400

 
$
152,000

 
$
1,000

 
$

 
$
47,500

 
$
12,000

 
$
217,900

Operating leases (undiscounted)
 
12,742

 
11,037

 
10,147

 
8,151

 
6,319

 
12,364

 
60,760

Purchase obligations
 
163,791

 
1,718

 
1,709

 
897

 
770

 
1,540

 
170,425

Total cash obligations
 
$
181,933

 
$
164,755

 
$
12,856

 
$
9,048

 
$
54,589

 
$
25,904

 
$
449,085


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.


20


We acquire the use of certain assets through operating leases, such as warehouses, manufacturing equipment, office equipment, hardware, software and vehicles. 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 $0.7 million to our defined-benefit pension plans in fiscal 2021, which will equal or exceed our minimum funding requirements.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
As of February 29, 2020, we had reserves of $3.8 million and $0.7 million for long-term unrecognized tax benefits and environmental liabilities, respectively. We expect approximately $0.4 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 will ultimately be settled.

At February 29, 2020, we had ongoing letters of credit of $24.7 million related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2021 to 2032 and that reduce borrowing capacity under the revolving 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. At February 29, 2020, $487.5 million of our backlog was bonded by performance bonds with a face value of $913.9 million. These bonds do not have stated expiration dates, as we are released from the bonds upon completion of the contract. We have not been required to make any payments under these bonds with respect to our existing businesses.

We had total cash and short-term marketable securities of $15.0 million, and $162.8 million available under our committed revolving credit facility, at February 29, 2020. Due to our ability to generate cash from operations and our available sources of borrowing capacity, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements and necessary capital expenditures for at least the next 12 months. We also believe we will continue to be in compliance with debt covenants over the next fiscal year.

COVID-19 Consideration. While we believe we have adequate sources of liquidity to continue to fund our business for at least the next 12 months, the extent to which the evolving COVID-19 situation may impact our results of operations or liquidity is uncertain. To date, we have experienced some delays in commercial construction projects due to COVID-19. While the construction and construction-related industries are considered an "essential service" in most jurisdictions in which we operate, site closures or project delays have occurred and increased social distancing and health-related precautions are required on many work sites, which may cause additional project delays and additional costs to be incurred. Within the LSO segment, we also experienced the temporary closure of many of our customer's retail locations and we temporarily shut down our factories in this segment to comply with government "stay in place" orders. We expect this global pandemic to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. At this time, we do not expect that the impact from the coronavirus outbreak will have a significant effect on our liquidity. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures. Given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers are adversely impacted by the coronavirus outbreak, this could reduce the availability, or result in delays, of materials or supplies, or delays in customer payments, which in turn could materially interrupt our business operations and/or impact our liquidity.

Off-balance Sheet Arrangements. We have no off-balance sheet arrangements at February 29, 2020 or March 2, 2019.

Outlook
We are not providing annual guidance for fiscal 2021 at this time, given the rapidly evolving COVID-19 pandemic and the uncertain potential impact on our business.

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.





21


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.

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

Revenue recognition
We generate revenue from the design, engineering and fabrication of architectural glass, curtainwall, window, storefront and entrance systems, and from installing those products on commercial buildings. We also manufacture value-added glass and acrylic products. Due to the diverse nature of our operations and various types of contracts with customers, we have businesses that recognize revenue over time and businesses that recognize revenue at a point in time. We believe the most significant areas of estimation and judgment relate to over-time revenue recognition on longer-term contracts.

We have three businesses which operate under long-term, fixed-price contracts, representing approximately 31 percent of our total revenue in fiscal 2020. The contracts for these businesses have a single, bundled performance obligation, as these businesses generally provide interrelated products and services and integrate these products and services into a combined output specified by the customer. The customer obtains control of this combined output, generally integrated window systems or installed window and curtainwall systems, over time. We measure progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract, and record that proportion of the total contract price as revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe this method of recognizing revenue is consistent with our progress in satisfying our contract obligations.

Due to the nature of the work required under these long-term contracts, the estimation of costs incurred and remaining to complete on a project is subject to many variables and requires significant judgment. It is common for these contracts to contain potential bonuses or penalties which are generally awarded or charged upon certain project milestones or cost or timing targets, and can be based on customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on our assessments of anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Long-term contracts are often modified to account for changes in contract specifications and requirements of work to be performed. We consider contract modifications to exist when the modification, generally through a change order, either creates new or changes existing enforceable rights and obligations, and we evaluate these types of modifications to determine whether they may be considered distinct performance obligations. In many cases, these contract modifications are for goods or services that are not distinct from the existing contract, due to the significant integration service provided in the context of the contract. Therefore, these modifications are generally accounted for as part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress is recognized as an adjustment to revenue, generally on a cumulative catch-up 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 carrying value of a reporting unit may not be recoverable. Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. We identified that each of our business units represents a reporting unit for the goodwill impairment analysis. 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. For our goodwill impairment testing beginning in fiscal 2018, we elected to 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.


22


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 reporting unit. These plans take into consideration numerous factors, including historical experience, current and future operational plans, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. These plans also take into consideration our assessment of risks inherent in our projections of future cash flows. The discount rate and long-term growth rate assumptions are consistent across reporting units.

Based on our analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated at the end of fiscal 2020. However, the estimated fair value did not exceed carrying value by a significant margin for two reporting units within the Architectural Framing Systems segment, Sotawall and Alumicor, which had goodwill balances of $21.0 million and $14.1 million, respectively, at February 29, 2020. We utilized a discount rate of 9.4 percent in determining the discounted cash flows in our fair value analysis and a long-term growth rate of 3.0 percent. If our discount rate were to increase by 20 basis points, the fair value of these reporting units would fall below carrying value, which would indicate impairment of the goodwill. Additionally, this discounted cash flow analysis is dependent upon achieving forecasted levels of revenue and profitability. If revenue or profitability were to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment would be indicated at these reporting units, and potentially at our other reporting units. Subsequent to year-end, we have begun to see impacts from COVID-19 that will likely have a negative impact on our forecasted revenue and profitability and this, along with the decline in our stock price and other market conditions, could result in an indication of impairment of goodwill in our first quarter of 2021.
 
Indefinite-lived intangible assets
We hold intangible assets for certain acquired trade names 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. If 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 trademark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. 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. In determining the discounted future revenue in our fair value analysis, we assumed a discount rate of 9.4 percent, a royalty rate of 1.0 percent, and a long-term growth rate of 3.0 percent. Based on our analysis, the fair value of each of our trade names and trademarks exceeded its carrying amount and impairment was not indicated. We continue to conclude that the useful life of our indefinite-lived intangible assets is appropriate. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, impairment could be indicated on one our more of our indefinite-lived intangible assets.

Reserves for disputes and claims regarding product liability, warranties and other project-related contingencies
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 products, some of which may be covered under our warranty policies. We also are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses, including those taken on with our acquisition of EFCO. The time period from when a claim is asserted to when it is resolved, either by negotiation, settlement or litigation, can be several years. While we maintain various types of 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 also actively manage the risk of these exposures through contract negotiations and proactive project management.

We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs, based on similar historical product liability claims, as a ratio of sales. We also reserve for estimated exposures on other claims as they are known and reasonably estimable.






23


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 investments, while serving to provide greater long-term return potential on these 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 hold any financial instruments for trading purposes. We also hedge a portion of the floating interest rate on our long-term line of credit through a floating-to-fixed interest rate swap.

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 $1.4 million. Our debt exceeded investments at February 29, 2020, 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, versus the U.S. dollar, will impact our reported financial 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 5 of the Notes to Consolidated Financial Statements). Sales from our domestic operations are generally denominated in U.S. dollars.



24


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 February 29, 2020, 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 February 29, 2020, the Company's internal control over financial reporting was effective based on those criteria.

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 February 29, 2020.

25


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 February 29, 2020 and March 2, 2019, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended February 29, 2020, and the related notes and the schedules listed in the Index 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 February 29, 2020 and March 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2020, 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 February 29, 2020, 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 24, 2020, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Net Sales - Revenue Recognition for Long-Term Contracts in the Architectural Services Segment - Refer to Notes 1, 3, and 16 to the consolidated financial statements
Critical Audit Matter Description
The Architectural Services segment, which provides building glass and curtainwall installation services and operates under long-term, fixed-price contracts, accounted for approximately $269 million, or 19 percent of total net sales for the year ended February 29, 2020. The contracts for this business typically have a single, bundled performance obligation, as the business generally provides interrelated services and integrates these services into a combined output specified by the customer. The customer obtains control of this combined output, generally installed window and curtainwall systems, over time. The Company measures progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract and recording that proportion of the total contract price as revenue.
Given the judgments necessary to estimate total costs and profit for the contract performance obligations used to recognize revenue for long-term, fixed-price contracts in the Architectural Services segment, auditing such estimates required extensive audit effort

26


due to the complexity of long-term contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of total costs and profit for the contract performance obligations used to recognize revenue for certain long-term contracts in the Architectural Services segment included, but were not limited to the following:
We tested the effectiveness of controls over long-term contract revenue in the Architectural Services segment, including those over the estimates of total costs and profit for performance obligations.
We developed an expectation of the amount of total long-term contract revenue in the Architectural Services segment based on prior year margins applied to cost of sales in the current year and compared our expectation to the amount of long-term contract revenue ultimately recorded by management.
We evaluated management’s ability to estimate total costs and profit by comparing actual costs and profit to management’s historical estimates for performance obligations that have been fulfilled.
We tested the mathematical accuracy of management’s calculation of long-term contract revenue for the performance obligation.
We selected a sample of long-term contracts from the Architectural Services segment contract portfolio and performed the following procedures:
Evaluated whether the long-term contracts were properly included in management’s calculation of long-term contract revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfillment of the performance obligations.
Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the long-term contracts and any modifications that were agreed upon with the customers.
Tested management’s identification of distinct performance obligations by evaluating whether the underlying services are highly interdependent and interrelated.
Tested the accuracy and completeness of the costs incurred to date for the performance obligations.
Evaluated the estimates of total cost and profit for the performance obligations by:
Observing the work sites and inspecting the progress to completion.
Comparing costs incurred to date to the costs management estimated to be incurred to date.
Evaluating management’s ability to achieve the estimates of total cost and profit by performing corroborating inquiries with the Company’s project managers and engineers, and comparing the estimates to management’s work plans, engineering specifications, and supplier contracts.
Comparing management’s estimates for the selected contracts to costs and profit of similar performance obligations, when applicable.
Goodwill - Sotawall and Alumicor Reporting Units - Refer to Notes 1 and 7 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company bases its determination of fair value of each reporting unit on a discounted cash flow methodology that involves significant judgment and projections about future performance. The determination of the fair value using the discounted cash flow methodology requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, operating profit, capital expenditures and discount rates. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. Based on the Company’s analysis, the estimated fair value of each reporting unit exceeded its carrying value. However, the estimated fair value did not exceed carrying value by a significant margin for two of the Company’s reporting units within the Architectural Framing Systems segment, Sotawall and Alumicor, which had goodwill balances of $21.0 million and $14.1 million, respectively, at February 29, 2020.
Given the significant estimates and assumptions management makes to estimate the fair value of Sotawall and Alumicor, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of revenues, expenses and operating profit, and the selection of the discount rates for these reporting units, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of revenues, expenses, operating profit, and the selection of discount rates for the Sotawall and Alumicor reporting units included the following, among others:
We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the

27


determination of the estimated fair value of Sotawall and Alumicor, such as controls related to management’s forecasts and selection of the discount rate.
We evaluated management’s ability to accurately forecast revenue, expenses and operating profit by comparing actual results to management’s historical forecasts.
We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, (3) industry information, and (4) forecasted information included in Company press releases as well as in analyst and industry reports of the Company.
With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management.
We evaluated the allocation of the Company’s estimated fair value to its reporting units and the comparison of the Company’s estimated fair value to its market capitalization.


/s/ Deloitte & Touche LLP

Minneapolis, MN  
April 24, 2020

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


28


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 February 29, 2020, 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 February 29, 2020, 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 February 29, 2020, of the Company and our report dated April 24, 2020, expressed an unqualified opinion on those financial statements.
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 Annual 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 24, 2020

29



CONSOLIDATED BALANCE SHEETS
 
(In thousands, except per share data)
 
February 29, 2020
 
March 2, 2019
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
14,952

 
$
17,087

Restricted cash
 

 
12,154

Receivables, net of allowance for doubtful accounts
 
196,806

 
192,767

Inventories
 
71,089

 
78,344

Costs and earnings on contracts in excess of billings
 
73,582

 
55,095

Other current assets
 
25,481

 
16,451

Total current assets
 
381,910

 
371,898

Property, plant and equipment, net
 
324,386

 
315,823

Operating lease right-of-use assets
 
52,892

 

Goodwill
 
185,516

 
185,832

Intangible assets
 
140,191

 
148,235

Other non-current assets
 
44,096

 
46,380

Total assets
 
$
1,128,991

 
$
1,068,168

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
69,056

 
$
72,219

Accrued payroll and related benefits
 
40,119

 
41,119

Billings in excess of costs and earnings on uncompleted contracts
 
32,696

 
21,478

Operating lease liabilities
 
11,272

 

Current portion long-term debt
 
5,400

 

Other current liabilities
 
118,314

 
92,696

Total current liabilities
 
276,857

 
227,512

Long-term debt
 
212,500

 
245,724

Non-current operating lease liabilities
 
43,163

 

Non-current self-insurance reserves
 
22,831

 
21,433

Other non-current liabilities
 
56,862

 
77,182

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 26,443,166 and 27,015,127 shares, respectively
 
8,814

 
9,005

Additional paid-in capital
 
154,016

 
151,842

Retained earnings
 
388,010

 
367,597

Common stock held in trust
 
(685
)
 
(755
)
Deferred compensation obligations
 
685

 
755

Accumulated other comprehensive loss
 
(34,062
)
 
(32,127
)
Total shareholders’ equity
 
516,778

 
496,317

Total liabilities and shareholders’ equity
 
$
1,128,991

 
$
1,068,168


See accompanying notes to consolidated financial statements.

30


CONSOLIDATED RESULTS OF OPERATIONS
 
 
 
Year-Ended
(In thousands, except per share data)
 
February 29, 2020
 
March 2, 2019
 
March 3, 2018
Net sales
 
$
1,387,439

 
$
1,402,637

 
$
1,326,173

Cost of sales
 
1,068,480

 
1,109,072

 
992,655

Gross profit
 
318,959

 
293,565

 
333,518

Selling, general and administrative expenses
 
231,111

 
226,281

 
219,234

Operating income
 
87,848

 
67,284

 
114,284

Interest and other expense, net
 
8,098

 
8,622

 
4,404

Earnings before income taxes
 
79,750

 
58,662

 
109,880

Income tax expense
 
17,836

 
12,968

 
30,392

Net earnings
 
$
61,914

 
$
45,694

 
$
79,488

Earnings per share - basic
 
$
2.34

 
$
1.64

 
$
2.79

Earnings per share - diluted
 
$
2.32

 
$
1.63

 
$
2.76

Weighted average basic shares outstanding
 
26,474

 
27,802

 
28,534

Weighted average diluted shares outstanding
 
26,729

 
28,082

 
28,804


See accompanying notes to consolidated financial statements.

31


CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
 
 
 
Year-Ended
(In thousands)
 
February 29,
2020
 
March 2,
2019
 
March 3,
2018
Net earnings
 
$
61,914

 
$
45,694

 
$
79,488

Other comprehensive (loss) earnings:
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net of $67, $17 and $(29) of tax expense (benefit), respectively
 
257

 
64

 
(95
)
Unrealized (loss) gain on foreign currency hedge, net of $(129), $(172) and $47 of tax (benefit) expense, respectively
 
(423
)
 
(565
)
 
156

Unrealized (loss) gain on pension obligation, net of $(124), $72 and $87 of tax (benefit) expense, respectively
 
(405
)
 
229

 
284

Foreign currency translation adjustments
 
(1,364
)
 
(7,065
)
 
6,692

Other comprehensive (loss) earnings
 
(1,935
)
 
(7,337
)
 
7,037

Total comprehensive earnings
 
$
59,979

 
$
38,357

 
$
86,525



See accompanying notes to consolidated financial statements.

32


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Year-Ended
(In thousands)
 
February 29,
2020
 
March 2,
2019
 
March 3,
2018
Operating Activities
 
 
 
 
 
 
Net earnings
 
$
61,914

 
$
45,694

 
$
79,488

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
46,795

 
49,798

 
54,843

Share-based compensation
 
6,607

 
6,286

 
6,205

Deferred income taxes
 
10,463

 
(5,506
)
 
3,195

(Gain) loss on disposal of assets
 
(2,197
)
 
(2,475
)
 
1,037

Impairment on intangible assets
 

 
3,141

 

Proceeds from new markets tax credit transaction, net of deferred costs
 

 
8,850

 

Noncash lease expense
 
12,420

 

 

Other, net
 
(1,516
)
 
(2,179
)
 
(1,431
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
Receivables
 
(4,217
)
 
18,164

 
18,172

Inventories
 
7,142

 
5,114

 
10,387

Costs and earnings on contracts in excess of billings
 
(18,468
)
 
(48,712
)
 
1,134

Accounts payable and accrued expenses
 
(375
)
 
7,600

 
(25,627
)
Billings in excess of costs and earnings on uncompleted contracts
 
11,314

 
9,026

 
(16,541
)
Refundable and accrued income taxes
 
(8,726
)
 
3,680

 
315

Operating lease liability
 
(10,829
)
 

 

Other, net
 
(3,065
)
 
(2,058
)
 
(3,714
)
Net cash provided by operating activities
 
107,262

 
96,423

 
127,463

Investing Activities
 
 
 
 
 
 
Capital expenditures
 
(51,428
)