APOGEE ENTERPRISES, INC. - Quarter Report: 2019 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________

FORM 10-Q

_________________________________



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

For the quarterly period ended November 30, 2019



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

For the transition period from to

Commission File Number: 0-6365

_________________________________

APOGEE ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

_________________________________



Minnesota			41-0919654
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

4400 West 78th Street, Suite 520	Minneapolis	Minnesota	55435
(Address of principal executive offices)			(Zip Code)

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

Not Applicable

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

_________________________________

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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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

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



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	☐

Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No

As of January 7, 2020, 26,507,935 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

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APOGEE ENTERPRISES, INC. AND SUBSIDIARIES



		Page
PART I	Financial Information

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets	4

	Consolidated Results of Operations	5

	Consolidated Statements of Comprehensive Earnings	6

	Consolidated Statements of Cash Flows	7

	Consolidated Statements of Shareholders' Equity	8

	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II	Other Information

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 6.	Exhibits	25

Signatures		26

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PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

CONSOLIDATED BALANCE SHEETS

(unaudited)



In thousands, except stock data	November 30, 2019			March 2, 2019
Assets
Current assets
Cash and cash equivalents	$	10,129		$	17,087
Restricted cash	401			12,154
Receivables, net of allowance for doubtful accounts	197,976			192,767
Inventories	75,791			78,344
Costs and earnings on contracts in excess of billings	72,284			55,095
Other current assets	40,335			16,451
Total current assets	396,916			371,898
Property, plant and equipment, net	326,418			315,823
Operating lease right-of-use assets	56,315			—
Goodwill	185,776			185,832
Intangible assets	142,779			148,235
Other non-current assets	41,587			46,380
Total assets	$	1,149,791		$	1,068,168
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	66,557		$	72,219
Accrued payroll and related benefits	33,339			41,119
Billings on contracts in excess of costs and earnings	26,366			21,478
Operating lease liabilities	9,399			—
Current portion of debt	155,400			—
Other current liabilities	108,481			92,696
Total current liabilities	399,542			227,512
Long-term debt	95,856			245,724
Non-current operating lease liabilities	48,509			—
Non-current self-insurance reserves	25,260			21,433
Other non-current liabilities	65,645			77,182
Commitments and contingent liabilities (Note 8)
Shareholders’ equity
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 26,552,935 and 27,015,127 respectively	8,851			9,005
Additional paid-in capital	153,188			151,842
Retained earnings	385,032			367,597
Common stock held in trust	(675		)	(755		)
Deferred compensation obligations	675			755
Accumulated other comprehensive loss	(32,092		)	(32,127		)
Total shareholders’ equity	514,979			496,317
Total liabilities and shareholders’ equity	$	1,149,791		$	1,068,168

See accompanying notes to consolidated financial statements.

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CONSOLIDATED RESULTS OF OPERATIONS

(unaudited)



	Three Months Ended				Nine Months Ended
In thousands, except per share data	November 30, 2019		December 1, 2018		November 30, 2019		December 1, 2018
Net sales	$	337,916	$	357,718	$	1,050,340	$	1,056,382
Cost of sales	263,606		273,628		808,856		807,096
Gross profit	74,310		84,090		241,484		249,286
Selling, general and administrative expenses	52,716		52,682		169,274		167,224
Operating income	21,594		31,408		72,210		82,062
Interest and other expense, net	1,764		2,787		6,577		6,254
Earnings before income taxes	19,830		28,621		65,633		75,808
Income tax expense	4,596		6,730		15,677		18,030
Net earnings	$	15,234	$	21,891	$	49,956	$	57,778
Earnings per share - basic	$	0.58	$	0.79	$	1.89	$	2.06
Earnings per share - diluted	$	0.57	$	0.78	$	1.87	$	2.04
Weighted average basic shares outstanding	26,432		27,836		26,481		28,030
Weighted average diluted shares outstanding	26,750		28,156		26,776		28,304

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(unaudited)



	Three Months Ended						Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			November 30, 2019			December 1, 2018
Net earnings	$	15,234		$	21,891		$	49,956		$	57,778
Other comprehensive (loss) earnings:
Unrealized (loss) gain on marketable securities, net of ($11), ($16), $38 and ($25) of tax (benefit) expense, respectively	(44		)	(58		)	145			(90		)
Unrealized gain (loss) on derivative instruments, net of $119, $10, $146 and ($99) of tax expense (benefit), respectively	387			32			476			(327		)
Foreign currency translation adjustments	(491		)	(3,621		)	(586		)	(7,518		)
Other comprehensive (loss) earnings	(148		)	(3,647		)	35			(7,935		)
Total comprehensive earnings	$	15,086		$	18,244		$	49,991		$	49,843

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	Nine Months Ended
In thousands	November 30, 2019			December 1, 2018
Operating Activities
Net earnings	$	49,956		$	57,778
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	34,681			38,378
Share-based compensation	4,617			4,724
Deferred income taxes	10,088			10,600
Gain on disposal of assets	(623		)	(2,499		)
Proceeds from New Markets Tax Credit transaction, net of deferred costs	—			8,850
Noncash lease expense	1,525			—
Other, net	(2,007		)	(799		)
Changes in operating assets and liabilities:
Receivables	(5,288		)	9,291
Inventories	2,474			4,398
Costs and earnings on contracts in excess of billings	(17,156		)	(54,569		)
Accounts payable and accrued expenses	(22,457		)	(20,072		)
Billings on contracts in excess of costs and earnings	4,901			14,558
Refundable and accrued income taxes	(6,159		)	1,831
Other	(951		)	(1,825		)
Net cash provided by operating activities	53,601			70,644
Investing Activities
Capital expenditures	(41,176		)	(33,867		)
Proceeds from sales of property, plant and equipment	591			12,332
Purchases of marketable securities	(4,201		)	(9,006		)
Sales/maturities of marketable securities	4,867			5,813
Other	(1,523		)	(2,209		)
Net cash used by investing activities	(41,442		)	(26,937		)
Financing Activities
Borrowings on line of credit	108,000			294,500
Proceeds from issuance of term debt	150,000			—
Payments on line of credit	(252,500		)	(278,000		)
Repurchase and retirement of common stock	(20,010		)	(23,313		)
Dividends paid	(13,808		)	(13,180		)
Other	(2,584		)	(1,178		)
Net cash used by financing activities	(30,902		)	(21,171		)
(Decrease) increase in cash and cash equivalents	(18,743		)	22,536
Effect of exchange rates on cash	32			(498		)
Cash, cash equivalents and restricted cash at beginning of year	29,241			19,359
Cash, cash equivalents and restricted cash at end of period	$	10,530		$	41,397
Noncash Activity
Capital expenditures in accounts payable	$	1,205		$	5,771

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)



In thousands	Common Shares Outstanding		Common Stock			Additional Paid-In Capital			Retained Earnings			Common Stock Held in Trust			Deferred Compensation Obligation			Accumulated Other Comprehensive (Loss) Income
Balance at March 2, 2019	27,015		$	9,005		$	151,842		$	367,597		$	(755	)	$	755		$	(32,127	)
Net earnings	—		—			—			15,443			—			—			—
Unrealized gain on marketable securities, net of $47 tax expense	—		—			—			—			—			—			181
Unrealized gain on foreign currency hedge, net of $2 tax expense	—		—			—			—			—			—			5
Foreign currency translation adjustments	—		—			—			—			—			—			(2,560		)
Issuance of stock, net of cancellations	79		26			14			—			(12		)	12			—
Share-based compensation	—		—			1,618			—			—			—			—
Share repurchases	(532	)	(177		)	(3,051		)	(16,782		)	—			—			—
Other share retirements	(32	)	(11		)	(183		)	(1,266		)	—			—			—
Cash dividends	—		—			—			(4,598		)	—			—			—
Balance at June 1, 2019	26,530		$	8,843		$	150,240		$	360,394		$	(767	)	$	767		$	(34,501	)
Net earnings	—		—			—			19,279			—			—			—
Unrealized gain on marketable securities, net of $2 tax expense	—		—			—			—			—			—			8
Unrealized gain on foreign currency hedge, net of $25 tax expense	—		—			—			—			—			—			84
Foreign currency translation adjustments	—		—			—			—			—			—			2,465
Issuance of stock, net of cancellations	44		15			27			—			(11		)	11			—
Share-based compensation	—		—			1,582			—			—			—			—
Other share retirements	(20	)	(7		)	(114		)	(629		)	—			—			—
Cash dividends	—		—			—			(4,605		)	—			—			—
Balance at August 31, 2019	26,554		$	8,851		$	151,735		$	374,439		$	(778	)	$	778		$	(31,944	)
Net earnings	—		—			—			15,234			—			—			—
Unrealized loss on marketable securities, net of $11 tax benefit	—		—			—			—			—			—			(44		)
Unrealized gain on foreign currency hedge, net of $119 tax expense	—		—			—			—			—			—			387
Foreign currency translation adjustments	—		—			—			—			—			—			(491		)
Issuance of stock, net of cancellations	(1	)	1			43			—			103			(103		)	—
Share-based compensation	—		—			1,417			—			—			—			—
Other share retirements	—		(1		)	(7		)	(36		)	—			—			—
Cash dividends	—		—			—			(4,605		)	—			—			—
Balance at November 30, 2019	26,553		$	8,851		$	153,188		$	385,032		$	(675	)	$	675		$	(32,092	)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)



In thousands	Common Shares Outstanding		Common Stock			Additional Paid-In Capital			Retained Earnings			Common Stock Held in Trust			Deferred Compensation Obligation			Accumulated Other Comprehensive (Loss) Income
Balance at March 3, 2018	28,158		$	9,386		$	152,763		$	373,259		$	(922	)	$	922		$	(24,053	)
Cumulative effect adjustment	—		—			—			2,999			—			—			—
Reclassification of tax effects	—		—			—			737			—			—			(737		)
Net earnings	—		—			—			15,373			—			—			—
Unrealized gain on marketable securities, net of $2 tax expense	—		—			—			—			—			—			10
Unrealized loss on foreign currency hedge, net of $92 tax benefit	—		—			—			—			—			—			(304		)
Foreign currency translation adjustments	—		—			—			—			—			—			(517		)
Issuance of stock, net of cancellations	90		30			35			—			91			(91		)	—
Share-based compensation	—		—			1,514			—			—			—			—
Exercise of stock options	19		6			177			—			—			—			—
Other share retirements	(41	)	(13		)	(228		)	(1,440		)	—			—			—
Cash dividends	—		—			—			(4,410		)	—			—			—
Balance at June 2, 2018	28,226		$	9,409		$	154,261		$	386,518		$	(831	)	$	831		$	(25,601	)
Net earnings	—		—			—			20,514			—			—			—
Unrealized loss on marketable securities, net of $11 tax benefit	—		—			—			—			—			—			(42		)
Unrealized loss on foreign currency hedge, net of $17 tax benefit	—		—			—			—			—			—			(55		)
Foreign currency translation adjustments	—		—			—			—			—			—			(3,383		)
Issuance of stock, net of cancellations	35		12			37			—			(11		)	11			—
Share-based compensation	—		—			1,605			—			—			—			—
Other share retirements	(1	)	(1		)	(5		)	—			—			—			—
Cash dividends	—		—			—			(4,413		)	—			—			—
Balance at September 1, 2018	28,260		$	9,420		$	155,898		$	402,619		$	(842	)	$	842		$	(29,081	)
Net earnings	—		—			—			21,891			—			—			—
Unrealized loss on marketable securities, net of $16 tax benefit	—		—			—			—			—			—			(58		)
Unrealized gain on foreign currency hedge, net of $10 tax expense	—		—			—			—			—			—			32
Foreign currency translation adjustments	—		—			—			—			—			—			(3,622		)
Issuance of stock, net of cancellations	—		—			54			—			97			(97		)	—
Share-based compensation	—		—			1,605			—			—			—			—
Share repurchases	(600	)	(200		)	(3,436		)	(19,677		)	—			—			—
Other share retirements	(4	)	(1		)	(26		)	(187		)	—			—			—
Cash dividends	—		—			—			(4,357		)	—			—			—
Balance at December 1, 2018	27,656		$	9,219		$	154,095		$	400,289		$	(745	)	$	745		$	(32,729	)

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	Summary of Significant Accounting Policies

Basis of presentation

The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended March 2, 2019. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. The results of operations for the nine-month period ended November 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Adoption of new accounting standards

At the beginning of fiscal 2020, we adopted the guidance in ASC 842, Leases, following a modified retrospective approach and elected not to restate prior periods. Adoption of the new standard resulted in recording operating lease assets and liabilities of approximately $50 million as of March 3, 2019 and did not materially impact our consolidated net earnings and cash flows. Refer to additional information in Note 7.

Accounting standards not yet adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an approach based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This ASU is effective for our fiscal year 2021. Entities are required to apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We do not expect the adoption of this ASU to have a significant impact on our consolidated financial statements.

Subsequent events

We have evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events that required recognition or disclosure in the consolidated financial statements.


2.	Revenue, Receivables and Contract Assets and Liabilities

Revenue

The following table disaggregates total revenue by timing of recognition (see Note 13 for disclosure of revenue by segment):



	Three Months Ended				Nine Months Ended
In thousands	November 30, 2019		December 1, 2018		November 30, 2019		December 1, 2018
Recognized at shipment	$	153,093	$	158,164	$	472,695	$	481,565
Recognized over time	184,823		199,554		577,645		574,817
Total	$	337,916	$	357,718	$	1,050,340	$	1,056,382

Receivables

Trade and construction accounts receivable consist of amounts billed and due from customers. The amounts due are stated at their estimated net realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. This allowance is based on an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released.



In thousands	November 30, 2019			March 2, 2019
Trade accounts	$	141,448		$	145,693
Construction contracts	23,096			19,050
Contract retainage	35,287			32,396
Total receivables	199,831			197,139
Less: allowance for doubtful accounts	(1,855		)	(4,372		)
Net receivables	$	197,976		$	192,767

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Contract assets and liabilities

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

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



In thousands	November 30, 2019		March 2, 2019
Contract assets	$	107,571	$	87,491
Contract liabilities	28,863		24,083

The increase in contract assets was due to timing of costs incurred in advance of billings, primarily on a legacy EFCO project. The change in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.



Other contract-related disclosures	Three Months Ended				Nine Months Ended
In thousands	November 30, 2019		December 1, 2018		November 30, 2019		December 1, 2018
Revenue recognized related to contract liabilities from prior year-end	$	4,589	$	—	$	22,044	$	10,398
Revenue recognized related to prior satisfaction of performance obligations	1,776		1,470		5,298		3,798

Some of our contracts have an expected duration of longer than a year, with performance obligations extending over that timeframe. Generally these contracts are in our businesses with long-term contracts which recognize revenue over time. As of November 30, 2019, the transaction price associated with unsatisfied performance obligations was approximately $896.7 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:



In thousands	November 30, 2019
Within one year	$	480,803
Within two years	344,827
Beyond	71,044
Total	$	896,674


3.	Supplemental Balance Sheet Information

Inventories



In thousands	November 30, 2019		March 2, 2019
Raw materials	$	39,746	$	43,890
Work-in-process	19,255		15,533
Finished goods	16,790		18,921
Total inventories	$	75,791	$	78,344

Other current assets



In thousands	November 30, 2019		March 2, 2019
Prepaid assets	$	11,662	$	11,682
Insurance receivable	15,000		—
Refundable income taxes	4,278		—
Other	9,395		4,769
Total other current assets	$	40,335	$	16,451

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Other current liabilities



In thousands	November 30, 2019		March 2, 2019
Warranties	$	10,601	$	12,475
Accrued project losses	47,562		37,085
Property and other taxes	7,156		8,026
Accrued self-insurance reserves	9,297		9,537
Other	33,865		25,573
Total other current liabilities	$	108,481	$	92,696

Other non-current liabilities



In thousands	November 30, 2019		March 2, 2019
Deferred benefit from New Market Tax Credit transactions	$	15,717	$	26,458
Retirement plan obligations	7,633		7,633
Deferred compensation plan	11,743		10,408
Other	30,552		32,683
Total other non-current liabilities	$	65,645	$	77,182


4.	Financial Instruments

Marketable securities

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



In thousands	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
November 30, 2019	$	11,750	$	152	$	18	$	11,884
March 2, 2019	12,481		59		108		12,432

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

The amortized cost and estimated fair values of these bonds at November 30, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.



In thousands	Amortized Cost		Estimated Fair Value
Due within one year	$	835	$	837
Due after one year through five years	8,581		8,710
Due after five years through 10 years	2,259		2,262
Due after 10 years through 15 years	—		—
Due beyond 15 years	75		75
Total	$	11,750	$	11,884

Derivative instruments

In August 2019, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility. As of November 30, 2019, the interest rate swap contract had a notional value of $85 million.

We periodically enter into forward purchase foreign currency cash flow hedge contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of November 30, 2019, we held foreign exchange

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forward contracts with a U.S. dollar notional value of $24.7 million, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro.

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

Fair value measurements

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



In thousands	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Total Fair Value
November 30, 2019
Assets:
Money market funds	$	2,680	$	—	$	2,680
Commercial paper	—		500		500
Municipal and corporate bonds	—		12,384		12,384
Liabilities:
Foreign currency forward/option contract	—		69		69
Interest rate swap contract	—		16		16

March 2, 2019
Assets:
Money market funds	$	2,015	$	—	$	2,015
Commercial paper	—		300		300
Municipal and corporate bonds	—		12,432		12,432
Liabilities:
Foreign currency forward/option contract	—		470		470

Money market funds and commercial paper

Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets. These assets are included within cash and cash equivalents on our consolidated balance sheets.

Municipal and corporate bonds

Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified within our consolidated balance sheets as other current or other non-current assets based on maturity date.

Derivative instruments

The interest rate swap is measured at fair value using unobservable market inputs, based off of benchmark interest rates. Forward foreign exchange contracts are measured at fair value using unobservable market inputs, such as quotations on forward foreign exchange points and foreign currency exchange rates. Derivative positions are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are our primary source for forward and spot rate information for both interest and currency rates.

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5.	Goodwill and Other Identifiable Intangible Assets

The carrying amount of goodwill attributable to each reporting segment was:



In thousands	Architectural Framing Systems			Architectural Glass			Architectural Services		Large-Scale Optical		Total
Balance at March 3, 2018	$	143,308		$	25,971		$	1,120	$	10,557	$	180,956
Goodwill adjustments for purchase accounting	6,267			—			—		—		6,267
Foreign currency translation	(1,129		)	(262		)	—		—		(1,391		)
Balance at March 2, 2019	148,446			25,709			1,120		10,557		185,832
Foreign currency translation	47			(103		)	—		—		(56		)
Balance at November 30, 2019	$	148,493		$	25,606		$	1,120	$	10,557	$	185,776

The gross carrying amount of other intangible assets and related accumulated amortization was:



In thousands	Gross Carrying Amount		Accumulated Amortization			Impairment			Foreign Currency Translation			Net
November 30, 2019
Definite-lived intangible assets:
Customer relationships	$	120,238	$	(31,566	)	$	—		$	(20	)	$	88,652
Other intangibles	41,033		(32,274		)	—			(74		)	8,685
Total definite-lived intangible assets	161,271		(63,840		)	—			(94		)	97,337
Indefinite-lived intangible assets:
Trademarks	45,421		—			—			21			45,442
Total intangible assets	$	206,692	$	(63,840	)	$	—		$	(73	)	$	142,779
March 2, 2019
Definite-lived intangible assets:
Customer relationships	$	122,816	$	(26,637	)	$	—		$	(2,578	)	$	93,601
Other intangibles	41,697		(31,634		)	—			(850		)	9,213
Total definite-lived intangible assets	164,513		(58,271		)	—			(3,428		)	102,814
Indefinite-lived intangible assets:
Trademarks	49,078		—			(3,141		)	(516		)	45,421
Total intangible assets	$	213,591	$	(58,271	)	$	(3,141	)	$	(3,944	)	$	148,235

Amortization expense on definite-lived intangible assets was $5.7 million and $10.5 million for the nine-month periods ended November 30, 2019 and December 1, 2018, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At November 30, 2019, the estimated future amortization expense for definite-lived intangible assets was:



In thousands	Remainder of Fiscal 2020		Fiscal 2021		Fiscal 2022		Fiscal 2023		Fiscal 2024
Estimated amortization expense	$	1,982	$	7,921	$	7,915	$	7,750	$	7,563


6.	Debt

As of November 30, 2019, our total debt outstanding was $251.3 million, compared to $245.8 million as of March 2, 2019. 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 with a maturity of June 2020. Outstanding borrowings under the revolving credit facility were $80.5 million, as of November 30, 2019, and $225.0 million, as of March 2, 2019.

Our revolving credit facility and term loan contains two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At November 30, 2019, we were in compliance with both financial covenants. Additionally, at November 30, 2019, we had a total of $24.7 million of ongoing letters of credit related to industrial revenue bonds,

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construction contracts and insurance collateral that expire in fiscal years 2021 to 2032 and reduce borrowing capacity under the revolving credit facility.

At November 30, 2019, debt included $20.4 million of industrial revenue bonds that mature in fiscal years 2021 through 2043 and $0.4 million of long-term debt in Canada. The fair value of the industrial revenue bonds approximated carrying value at November 30, 2019, due to the variable interest rates on these instruments. All debt would be classified as Level 2 within the fair value hierarchy described in Note 4.

We also maintain two Canadian demand credit facilities totaling $12.0 million Canadian dollars. As of November 30, 2019 and March 2, 2019, no borrowings were outstanding under the facilities. Borrowings under these facilities are made available at the sole discretion of the lenders and are payable on demand.

Interest payments were $7.3 million and $7.2 million for the nine months ended November 30, 2019 and December 1, 2018, respectively.

7. Leases

We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases. We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet and such leases are expensed on a straight-line basis over the lease term.

In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and nonlease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions.

The components of lease expense were as follows:



	Three Months Ended		Nine Months Ended
In thousands	November 30, 2019		November 30, 2019
Operating lease cost	$	3,445	$	10,308
Short-term lease cost	427		1,606
Variable lease cost	843		2,223
Total lease cost	$	4,715	$	14,137

Other supplemental information related to leases was as follows:



	Nine Months Ended
In thousands except weighted-average data	November 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	10,335
Lease assets obtained in exchange for new operating lease liabilities	$	15,948
Weighted-average remaining lease term - operating leases	5.9 years
Weighted-average discount rate - operating leases	3.57		%

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Future maturities of lease liabilities are as follows:



In thousands	November 30, 2019
Remainder of Fiscal 2020	$	3,366
Fiscal 2021	12,880
Fiscal 2022	11,256
Fiscal 2023	10,307
Fiscal 2024	8,147
Fiscal 2025	6,290
Thereafter	12,357
Total lease payments	64,603
Less: Amounts representing interest	(6,695		)
Present value of lease liabilities	$	57,908

As of November 30, 2019, we have no additional future operating lease commitments for leases that have not yet commenced.

Aggregate annual future rental commitments under operating leases with noncancellable terms of more than one year at March 2, 2019 were reported under previous lease accounting standards as follows:



In thousands	2020		2021	2022	2023	2024	Thereafter	Total
Total minimum payments	$	14,888	11,787	9,669	8,772	6,735	16,806	$	68,657


8.	Commitments and Contingent Liabilities

Bond commitments

In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At November 30, 2019, $833.9 million of these types of bonds were outstanding, of which $432.6 million is on our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.

Warranty and project-related contingencies

We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on the warranty accrual in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. A warranty rollforward follows:



	Nine Months Ended
In thousands	November 30, 2019			December 1, 2018
Balance at beginning of period	$	16,737		$	22,517
Additional accruals	5,996			3,437
Claims paid	(7,807		)	(8,398		)
Balance at end of period	$	14,926		$	17,556

Additionally, we 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. We manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages. We have recorded an estimated liability related to a legacy EFCO project of $47.6 million and $42.8 million as of November 30, 2019 and March 2, 2019, respectively. This includes approximately $14.7 million recorded in the third quarter for estimated costs associated with project dispute resolution and other additional project costs. In the third quarter, upon confirmation of coverage by an insurer, we also recorded an insurance receivable of $15.0 million, included within other current assets on the consolidated balance sheets and within cost of sales on the consolidated results of operations. We received this payment subsequent to quarter-end.

Letters of credit

At November 30, 2019, we had $24.7 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6.

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Purchase obligations

Purchase obligations for raw material commitments and capital expenditures totaled $146.0 million as of November 30, 2019.

New Markets Tax Credit (NMTC) transactions

We have entered into four separate NMTC programs to support our operational expansion, including two transactions completed in fiscal 2019. Proceeds received from investors on these transactions are included within other current and non-current liabilities on our consolidated balance sheets. The NMTC arrangements are subject to 100 percent tax recapture for a period of seven years from the date of each respective transaction. Therefore, upon the termination of each arrangement, these proceeds will be recognized in earnings in exchange for the transfer of tax credits. The direct and incremental costs incurred in structuring these arrangements have been deferred and are included in other current and non-current assets on our consolidated balance sheets. These costs will be recognized in conjunction with the recognition of the related proceeds on each arrangement. During the construction phase, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash on our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.

The table below provides a summary of our outstanding NMTC transactions (in millions):



Inception date	Termination date	Proceeds received		Deferred costs		Net benefit
November 2013	October 2020	$	10.7	$	3.0	$	7.7
June 2016	May 2023	6.0		0.9		5.1
August 2018	July 2025	6.6		0.9		5.7
September 2018	August 2025	3.2		0.8		2.4
Total		$	26.5	$	5.6	$	20.9

Litigation

On November 5, 2018, a shareholder filed a purported securities class action against the Company and certain named executive officers. On April 26, 2019, the new lead plaintiff filed an amended complaint, alleging that, during the purported class period of May 1, 2017 to April 10, 2019, the Company and the named executive officers made materially false or misleading statements or omissions about the Company's acquisition of EFCO Corporation on June 12, 2017, and about the Company's Architectural Glass business segment, in violation of the federal securities laws. We intend to vigorously defend this matter.

On December 17, 2018, a different shareholder filed a derivative lawsuit, purportedly on behalf of the Company, against certain of our executive officers and directors claiming breaches of fiduciary duty, waste of corporate assets and unjust enrichment. This complaint alleges that the officers and directors allegedly made materially false or misleading statements or omissions about the Company's business, operations and prospects, particularly with respect to our Architectural Glass business segment, during the period between June 28, 2018 and September 17, 2018. This matter has been stayed, pending resolution of a motion to dismiss the foregoing matter. We intend to vigorously defend this matter.

In addition to the foregoing, the Company is 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 is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.


9.	Share-Based Compensation

Total share-based compensation expense included in the results of operations was $4.6 million for the nine-month period ended November 30, 2019 and $4.7 million for the nine-month period ended December 1, 2018.

Stock options and SARs

Stock option and SAR activity for the current nine-month period is summarized as follows:

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Stock options and SARs	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at March 2, 2019	100,341	$	8.34
Awards exercised	—	—
Outstanding and exercisable at November 30, 2019	100,341	8.34		1.8 years	$	3,000,196

No awards were exercised for the nine-months ended November 30, 2019. For the nine-months ended December 1, 2018, cash proceeds from the exercise of stock options were $0.2 million and the aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $0.6 million.

Nonvested shares and share units

Nonvested share activity for the current nine-month period is summarized as follows:



Nonvested shares and units	Number of Shares and Units		Weighted Average Grant Date Fair Value
Nonvested at March 2, 2019	286,613		$	47.00
Granted	125,571		39.53
Vested	(128,333	)	49.00
Canceled	(3,000	)	43.08
Nonvested at November 30, 2019	280,851		42.78

At November 30, 2019, there was $6.9 million of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately 20 months. The total fair value of shares vested during the nine months ended November 30, 2019 was $5.1 million.


10.	Employee Benefit Plans

The Company sponsors two frozen defined-benefit pension plans: an unfunded Officers’ Supplemental Executive Retirement Plan and the Tubelite Inc. Hourly Employees’ Pension Plan. Components of net periodic benefit cost were:



	Three Months Ended						Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			November 30, 2019			December 1, 2018
Interest cost	$	123		$	127		$	369		$	381
Expected return on assets	(46		)	(10		)	(138		)	(30		)
Amortization of unrecognized net loss	55			57			165			171
Net periodic benefit cost	$	132		$	174		$	396		$	522


11.	Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2017, or state and local income tax examinations for years prior to fiscal 2013. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2016, and there is limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.

The total liability for unrecognized tax benefits was approximately $5.2 million at November 30, 2019 and $5.1 million at March 2, 2019. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. The total liability for unrecognized tax benefits is expected to decrease by approximately $0.4 million during the next 12 months due to lapsing of statutes.

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12.	Earnings per Share

The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:



	Three Months Ended		Nine Months Ended
In thousands	November 30, 2019	December 1, 2018	November 30, 2019	December 1, 2018
Basic earnings per share – weighted average common shares outstanding	26,432	27,836	26,481	28,030
Weighted average effect of nonvested share grants and assumed exercise of stock options	318	320	295	274
Diluted earnings per share – weighted average common shares and potential common shares outstanding	26,750	28,156	26,776	28,304
Stock awards excluded from the calculation of earnings per share because the effect was anti-dilutive (award price greater than average market price of the shares)	152	170	152	92


13.	Segment Information

The Company has four reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).

•

The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. The Company has aggregated six operating segments into this reporting segment based on their similar products, customers, distribution methods, production processes and economic characteristics.


•	The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.


•	The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.


•	The LSO segment manufactures value-added glass and acrylic products primarily for framing and display applications.



	Three Months Ended						Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			November 30, 2019			December 1, 2018
Net sales from operations
Architectural Framing Systems	$	165,517		$	181,306		$	533,432		$	550,193
Architectural Glass	89,433			98,524			288,862			263,533
Architectural Services	69,043			72,828			195,787			220,051
Large-Scale Optical	24,405			23,377			66,449			64,522
Intersegment eliminations	(10,482		)	(18,317		)	(34,190		)	(41,917		)
Net sales	$	337,916		$	357,718		$	1,050,340		$	1,056,382
Operating income (loss) from operations
Architectural Framing Systems	$	6,345		$	12,903		$	34,141		$	43,554
Architectural Glass	4,092			5,851			16,951			9,168
Architectural Services	6,533			8,659			15,082			21,435
Large-Scale Optical	6,754			6,628			15,561			15,845
Corporate and other	(2,130		)	(2,633		)	(9,525		)	(7,940		)
Operating income	$	21,594		$	31,408		$	72,210		$	82,062

Due to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported.

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Item 2.	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 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 2, 2019. From time to time, we may also 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 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 2, 2019.

We also wish to caution investors that other factors might in the future prove to be important in affecting the Company’s results of operations. New factors emerge from time to time; it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a world leader in certain technologies involving the design and development of value-added glass and metal products and services for enclosing commercial buildings and framing and displays. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).

The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended March 2, 2019 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.

Highlights of Third Quarter and First Nine Months of Fiscal 2020 Compared to Third Quarter and First Nine Months of Fiscal 2019

Net sales

Consolidated net sales decreased 5.5 percent, or $19.8 million, for the third quarter ended November 30, 2019, and decreased 0.6 percent, or $6.0 million, for the nine-month period, compared to the same periods in the prior year. In the quarter, the decrease in sales was driven by three of our four segments, primarily a result of lower volumes in the Architectural Framing Systems segment, due to customer-driven schedule delays, and in the Architectural Glass segment, resulting from increased foreign competition. The Architectural Services segment also contributed to the decline in sales, as a result of timing of project activity, as expected. For the nine-month period, the decrease in sales was driven by expected project timing-related declines within the Architectural Services segment and by lower volumes as a result of customer-driven schedule delays within the Architectural Framing Systems segment, partially offset by improved volume in the Architectural Glass segment.

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The relationship between various components of operations, as a percentage of net sales, is presented below:



	Three Months Ended				Nine Months Ended
	November 30, 2019		December 1, 2018		November 30, 2019		December 1, 2018
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	78.0		76.5		77.0		76.4
Gross profit	22.0		23.5		23.0		23.6
Selling, general and administrative expenses	15.6		14.7		16.1		15.8
Operating income	6.4		8.8		6.9		7.8
Interest and other expense, net	0.5		0.8		0.6		0.6
Earnings before income taxes	5.9		8.0		6.3		7.2
Income tax expense	1.4		1.9		1.5		1.7
Net earnings	4.5	%	6.1	%	4.8	%	5.5	%
Effective tax rate	23.2	%	23.5	%	23.9	%	23.8	%

Gross profit

Gross profit as a percent of sales was 22.0 percent and 23.0 percent for the three- and nine-month periods ended November 30, 2019, respectively, compared to 23.5 percent and 23.6 percent for the three- and nine-month periods ended December 1, 2018, respectively. The decrease in the current quarter was largely driven by higher manufacturing costs and operational difficulties that we are addressing in some of the businesses in the Architectural Framing Systems segment, as well as reduced operating leverage on lower volumes in the Architectural Services segment. In the nine-month period, gross profit improvements in Architectural Glass were offset by the operational difficulties in the Architectural Framing Systems segment, as well as reduced operating leverage in the Architectural Services segment. Additionally, in the current fiscal year, start-up costs related to the new manufacturing facility for the small projects initiative within the Architectural Glass segment negatively impacted margin by 40 basis points in the quarter and 20 basis points in the year-to-date period.

Selling, general and administrative (SG&A) expenses

SG&A expenses as a percent of sales were 15.6 percent and 16.1 percent for the three- and nine-month periods ended November 30, 2019, respectively, compared to 14.7 percent and 15.8 percent in the prior year three- and nine-month periods, respectively. In both current year periods, SG&A increased as a percent of sales compared to the same period in the prior year, primarily due to costs for outside advisors and legal fees, some of which were offset by net recoveries related to acquired project matters. These matters are included within the Corporate and other category within Note 13, Segment Information.

Income tax expense

The effective tax rate in the third quarter of fiscal 2020 was 23.2 percent, compared to 23.5 percent in the same period last year, and 23.9 percent for the first nine months of fiscal 2020, compared to 23.8 percent in the prior-year period. The small changes in tax rate were driven by the mix of foreign income and the impact of state taxes for both the three- and nine-month periods of the current year, compared to the same periods of the prior year.

Segment Analysis

Architectural Framing Systems



	Three Months Ended								Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			% Change		November 30, 2019			December 1, 2018			% Change
Net sales	$	165,517		$	181,306		(8.7	)%	$	533,432		$	550,193		(3.0	)%
Operating income	6,345			12,903			(50.8	)%	34,141			43,554			(21.6	)%
Operating margin	3.8		%	7.1		%			6.4		%	7.9		%

Architectural Framing Systems net sales declined $15.8 million, or 8.7 percent, and $16.8 million, or 3.0 percent, for the three- and nine-month periods ended November 30, 2019, respectively, compared to the prior-year periods. In both periods, the declines are due to lower volumes as a result of customer-driven schedule delays and operational difficulties.

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Operating margin decreased 330 and 150 basis points for the three- and nine-month periods of the current year, respectively, compared to the same periods in the prior year, reflecting the lower volumes due to customer-driven schedule delays, as well as higher manufacturing costs and operational difficulties in two of the segment's businesses, which have been identified and are being addressed. Last year's third quarter and year-to-date periods also included $0.7 million and $4.7 million, respectively, of expense for the amortization of short-lived acquired intangible assets.

As of November 30, 2019, segment backlog was approximately $375 million, compared to approximately $385 million last quarter.

Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which is expected to be recognized as revenue. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. Backlog should not be used as the sole indicator of future segment revenue because we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are monitored separately and not included in backlog. We use backlog as one of the metrics to evaluate sales trends in our long lead-time segments.

Architectural Glass



	Three Months Ended								Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			% Change		November 30, 2019			December 1, 2018			% Change
Net sales	$	89,433		$	98,524		(9.2	)%	$	288,862		$	263,533		9.6	%
Operating income	4,092			5,851			(30.1	)%	16,951			9,168			84.9	%
Operating margin	4.6		%	5.9		%			5.9		%	3.5		%

Net sales decreased $9.1 million, or 9.2 percent, and increased $25.3 million, or 9.6 percent, for the three- and nine-month periods ended November 30, 2019, respectively, compared to the same periods in the prior year. The decrease in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 is primarily due to lower volumes as a result of increased foreign competition leveraging the strength of the U.S. dollar. For the nine-month period, the increase in sales compared to the same period last year is due to improved volume and mix on strong customer demand in the first half of our current fiscal year.

Operating margin decreased 130 basis points for the three-month period of the current year and increased 240 basis points for the nine-month period of the current year, respectively, compared to the same periods in the prior year. The decrease in the current quarter was due to start-up costs related to the new small projects initiative, as well as decreased volumes, somewhat offset by improved factory productivity. The margin increase in the nine-month of the current year period relates to operating leverage on higher volume and improved price and mix. Start-up costs related to the small projects initiative had a negative impact on margin of approximately 160 basis points and 100 basis points for the three- and nine-month periods of the current year, respectively.

Architectural Services



	Three Months Ended								Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			% Change		November 30, 2019			December 1, 2018			% Change
Net sales	$	69,043		$	72,828		(5.2	)%	$	195,787		$	220,051		(11.0	)%
Operating income	6,533			8,659			(24.6	)%	15,082			21,435			(29.6	)%
Operating margin	9.5		%	11.9		%			7.7		%	9.7		%

As expected, Architectural Services net sales declined $3.8 million, or 5.2 percent, and $24.3 million, or 11.0 percent, for the three- and nine-month periods ended November 30, 2019, over the same periods in the prior year on lower volume due to timing of project activity.

Operating margin decreased 240 and 200 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year, due to reduced leverage on the lower project volume.

As of November 30, 2019, segment backlog was approximately $607 million, compared to approximately $502 million last quarter. Backlog is defined within the Architectural Framing Systems discussion above.

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Large-Scale Optical (LSO)



	Three Months Ended								Nine Months Ended
In thousands	November 30, 2019			December 1, 2018			% Change		November 30, 2019			December 1, 2018			% Change
Net sales	$	24,405		$	23,377		4.4	%	$	66,449		$	64,522		3.0	%
Operating income	6,754			6,628			1.9	%	15,561			15,845			(1.8	)%
Operating margin	27.7		%	28.4		%			23.4		%	24.6		%

LSO net sales increased 4.4 percent and 3.0 percent for the three- and nine-month periods ended November 30, 2019, over the same periods in the prior year due to improved sales mix. Operating margin decreased 70 and 120 basis points for the three- and nine-month periods ended November 30, 2019, compared to the same periods in the prior year, driven by reduced operating leverage.

Liquidity and Capital Resources



Selected cash flow data	Nine Months Ended
In thousands	November 30, 2019			December 1, 2018
Operating Activities
Net cash provided by operating activities	$	53,601		$	70,644
Investing Activities
Capital expenditures	(41,176		)	(33,867		)
Financing Activities
Borrowings on line of credit	108,000			294,500
Proceeds from issuance of term debt	150,000			—
Payments on line of credit	(252,500		)	(278,000		)
Repurchase and retirement of common stock	(20,010		)	(23,313		)
Dividends paid	(13,808		)	(13,180		)

Operating Activities. Cash provided by operating activities was $53.6 million for the first nine months of fiscal 2020, a decrease of $17.0 million compared to the prior-year period, primarily due to reduced net earnings and increased working capital requirements related to a legacy EFCO project, as well as timing of other working capital needs.

Investing Activities. Net cash used in investing activities was $41.4 million for the first nine months of fiscal 2020, primarily due to capital expenditures of $41.2 million, while in the first nine months of the prior year, net cash used by investing activities was $26.9 million, primarily due to capital expenditures of $33.9 million and net purchases of marketable securities of $3.2 million, offset by $12.3 million of proceeds from sales of property, plant and equipment. We estimate fiscal 2020 capital expenditures to be approximately $55 million, as we continue to make investments to drive growth and productivity improvements.

Financing Activities. Net cash used in financing activities was $30.9 million for the first nine months of fiscal 2020, compared to $21.2 million for the prior-year period, primarily due to reduced net borrowings in the current year. At November 30, 2019, we were in compliance with the financial covenants in our credit facility.

We paid dividends totaling $13.8 million ($0.525 per share) in the first nine months of fiscal 2020 compared to $13.2 million ($0.4725 per share) in the comparable prior-year period. In the first nine months of fiscal 2020, we repurchased 531,997 shares under our authorized share repurchase program, all during the first quarter, for a total cost of $20.0 million. In the first nine months of fiscal 2019, we repurchased 600,000 shares under our authorized share repurchase program, for a total cost of $23.3 million, all during the third quarter. We have purchased a total of 5,799,912 shares, at a total cost of $169.3 million, since the fiscal 2004 inception of this program. We currently have remaining authority to repurchase an additional 1,450,088 shares under this program.

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Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of November 30, 2019:



	Payments Due by Fiscal Period
In thousands	Remainder of Fiscal 2020		Fiscal 2021		Fiscal 2022		Fiscal 2023		Fiscal 2024		Thereafter		Total
Debt obligations	$	—	$	155,400	$	82,770	$	1,085	$	—	$	12,000	$	251,255
Operating leases (undiscounted)	3,366		12,880		11,256		10,307		8,147		18,647		64,603
Purchase obligations	59,463		84,960		1,306		127		127		—		145,983
Total cash obligations	$	62,829	$	253,240	$	95,332	$	11,519	$	8,274	$	30,647	$	461,841

We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Purchase obligations in the table above relate to raw material commitments and capital expenditures.

We expect to make contributions of $0.7 million to our defined-benefit pension plans in fiscal 2020, which will equal or exceed our minimum funding requirements.

As of November 30, 2019, we had reserves of $5.2 million and $0.9 million for unrecognized tax benefits and environmental liabilities, respectively. We currently 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 and environmental liabilities will ultimately be settled.

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 November 30, 2019, $833.9 million of these types of bonds were outstanding, of which $432.6 million is on our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.

Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facility, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments for at least the next 12 months.

Outlook

The following statements reflect our expectations for full-year fiscal 2020 results. These statements are forward-looking, and actual results may differ materially.


•	Revenue flat to down 1 percent over fiscal 2019.


•	Earnings per diluted share in the range of $2.15 to 2.30.


•	Capital expenditures of approximately $55 million.

Additionally, we are implementing an integration and cost reduction plan and are identifying procurement cost savings across the Company, which are expected to generate savings largely in fiscal 2021 and beyond.

Related Party Transactions

In the third quarter of fiscal 2020, Sotawall's principal facility, that had been leased from a company owned by an officer of Sotawall, was sold to an unrelated third party. No other significant changes have occurred with respect to related party transactions as set forth in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019.

Critical Accounting Policies

Refer to an update to our critical accounting policies included within Item 1, Notes to the Consolidated Financial Statements (Note 1). No other changes have occurred to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

No material changes have occurred to the disclosures of quantitative and qualitative market risk set forth in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019.


Item 4.	Controls and Procedures

Evaluation of disclosure controls and procedures: As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.


b)	Changes in internal controls: There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended November 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	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 alleges that, during the purported class period of May 1, 2017 to April 10, 2019, the Company and the named executive officers made materially false and/or misleading statements or omissions about the Company's acquisition of EFCO Corporation on June 12, 2017, and about the Company's Architectural Glass business segment in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks an unspecified amount of damages, attorney's fees and costs. We intend to vigorously defend 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 eight of the nine 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, due to the named executive officers and board members allegedly making materially false and/or misleading statements or omissions about the Company's business, operations, and prospects, particularly with respect to our Architectural Glass business segment, during the period between June 28, 2018 and September 17, 2018. 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.

Other Matters


Item 1A.	Risk Factors

There have been no material changes or additions to our risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by the Company of its own stock during the third 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)
September 1, 2019 to September 28, 2019	—	$	—	—	1,450,088
September 29, 2019 to October 26, 2019	1,162	37.65		—	1,450,088
October 27, 2019 to November 30, 2019	—	—		—	1,450,088
Total	1,162	$	37.65	—	1,450,088


(a)	The shares in this column represent the total number of shares that were surrendered to us by plan participants to satisfy stock-for-stock option exercises or withholding tax obligations related to share-based compensation. We did not purchase any shares pursuant to our publicly announced repurchase program during the fiscal quarter.

(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 and January 9, 2018; and by 2,000,000 shares, announced on October 3, 2018. The repurchase program does not have an expiration date.


Item 6.	Exhibits



10.1	Cooperation Agreement, dated November 10, 2019, by and among Apogee Enterprises, Inc. and Engaged Group. Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on November 12, 2019.
10.2	Engaged Capital Waiver, effective October 31, 2019, by and among Apogee Enterprises, Inc. and Engaged Group. Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on October 31, 2019.
10.3	Engaged Capital Waiver, effective October 10, 2019, by and among Apogee Enterprises, Inc. and Engaged Group. Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on October 11, 2019.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2019 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of November 30, 2019 and March 2, 2019, (ii) the Consolidated Results of Operations for the three- and nine-months ended November 30, 2019 and December 1, 2018, (iii) the Consolidated Statements of Comprehensive Earnings for the three- and nine-months ended November 30, 2019 and December 1, 2018, (iv) the Consolidated Statements of Cash Flows for the nine-months ended November 30, 2019 and December 1, 2018, (v) the Consolidated Statements of Shareholders' Equity for the three- and nine-months ended November 30, 2019 and December 1, 2018, and (vi) Notes to Consolidated Financial Statements.
104	Cover Page, formatted as Inline Extensible Business Reporting Language and contained in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	APOGEE ENTERPRISES, INC.

Date: January 9, 2020	By: /s/ Joseph F. Puishys
		Joseph F. Puishys President and Chief Executive Officer (Principal Executive Officer)



Date: January 9, 2020	By: /s/ James S. Porter
		James S. Porter Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)