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For the quarterly period ended December 2, 2017

For the transition period from             to             

Commission File Number: 0-6365

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(Exact name of registrant as specified in its charter)

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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)

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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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

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

As of January 10, 2018, 28,417,366 shares of the registrant's common stock, par value $0.33 1/3 per share, were outstanding.

APOGEE ENTERPRISES, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

CONSOLIDATED RESULTS OF OPERATIONS

(unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 4, 2017 . 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 December 2, 2017 are not necessarily indicative of the results to be expected for the full year.

Subsequent events

In connection with preparing the unaudited consolidated financial statements for the nine months ended December 2, 2017 , we evaluated subsequent events for potential recognition and disclosure through the date of this filing. On December 20, 2017, the Tax Cuts and Jobs Act (the "2017 Act") was signed into law. We are in the process of preparing and analyzing information to determine the impact of the 2017 Act on our accounting for income taxes, including the remeasurement of our deferred tax assets and liabilities. The consolidated financial statements presented herein do not reflect any impact that may result from completing the accounting for the income tax effects of the 2017 Act.

Subsequent to the end of the quarter, in late December 2017 and early January 2018, we purchased 246,299 shares of stock under our authorized share repurchase program, at a total cost of $11.1 million .

On January 5, 2018, we announced a restructuring plan that involves the closure of our St. George, UT architectural glass manufacturing facility in March 2018, enabled by our investments in productivity and increased capabilities, which have led to an increase in capacity. This and other restructuring activities are expected to have an approximately $4.5 million pre-tax impact in our fiscal fourth quarter.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Under the new standard, an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017, our fiscal 2019. We have undertaken a comprehensive assessment process at each of our businesses and have concluded on the application of the new guidance at nearly all of our businesses. We are in the process of quantifying the impact that this standard will have on our financial statements upon adoption. At this time:

In February 2016, the FASB issued ASU 2016-02,  Leases , which provides for comprehensive changes to lease accounting. The new standard requires that a lessee recognize a lease obligation liability and a right to use asset for virtually all leases of property, plant and equipment, subsequently amortized over the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, our fiscal year 2020, with a modified retrospective transition. The adoption of this standard will result in reflecting assets and liabilities for the value of our leased property and equipment on our consolidated balance sheet, but we do not currently expect this guidance to have a significant impact on our consolidated results of operations.

In August 2016, the FASB issued ASU 2016-15,  Statement of Cash Flows , and in November 2016, it issued 2016-18,  Restricted Cash . Both standards provide guidance for presentation of certain topics within the statement of cash flows, including presenting

restricted cash within cash and cash equivalents, and are intended to improve consistency in presentation. The new classification guidance is effective for fiscal years beginning after December 15, 2017, our fiscal year 2019, and is to be applied retrospectively for comparability across all periods. We do not expect this guidance to have a significant impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04,  Simplifying the Test for Goodwill Impairment , which simplifies the accounting for goodwill impairment by requiring impairment charges to be based on the first step in the current two-step impairment test process. The new guidance eliminates the current requirement to calculate a goodwill impairment charge using step 2. The standard is applicable to impairment tests performed in periods beginning after December 15, 2019, our fiscal 2021, with early adoption permitted. We are currently evaluating early adoption of this guidance for our future annual goodwill impairment review process.

Total share-based compensation expense included in the results of operations was $4.6 million for the nine -month period ended December 2, 2017 and $4.4 million for the nine -month period ended November 26, 2016 .

Stock Options and SARs

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

Cash proceeds from the exercise of stock options were $0.8 million and $1.3 million for the nine months ended December 2, 2017 and November 26, 2016 , respectively. 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 $4.8 million during the nine months ended December 2, 2017 and $4.5 million during the prior-year period.

Nonvested Shares and Share Units

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

At December 2, 2017 , there was $8.5 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 21 months. The total fair value of shares vested during the nine months ended December 2, 2017 was $7.0 million .

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

There were no anti-dilutive stock options excluded from the calculation of earnings per share for any of the periods presented, as the average market price exceeded the exercise price of options outstanding.

Marketable securities are classified as available for sale:

We have a wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), which holds municipal bonds. 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, which are generally high-quality municipal bonds, for the purpose of providing collateral for Prism's obligations under the reinsurance agreements.

The amortized cost and estimated fair values of municipal bonds at December 2, 2017 , 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.

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.

Cash equivalents

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.

Short- and long-term securities

Municipal bonds were measured at fair value based on market prices from recent trades of similar securities and are classified as short-term or long-term based on maturity date.

EFCO

In line with our strategic objectives, on June 12, 2017, we acquired 100 percent of the stock of EFCO Corporation, a privately held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for $192 million in cash. The acquisition was funded through our committed revolving credit facility, with $7.5 million of the purchase price payable in equal installments over the next three years. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition. Those results include $135.3 million of sales and $6.1 million of operating income since the date of acquisition.

The assets and liabilities of EFCO were recorded in our consolidated balance sheet as of the acquisition date, at their respective fair values. Fair value is estimated based on one or a combination of income, cost and/or market approaches, as determined based on the nature of the asset or liability, and the level of inputs available. With respect to assets and liabilities, the determination of fair value requires management to make subjective judgments as to projections of future operating performance, the appropriate discount rate to apply, long-term growth rates, etc. (i.e. - unobservable inputs classified as Level 3 inputs under the fair value hierarchy described in Note 7), which affect the amounts recorded in the purchase price allocation. The excess of the consideration transferred over the fair value of the identifiable assets, net of liabilities, is recorded as goodwill, which is indicative of the expected continued growth and development of EFCO. The purchase price allocation is based on these estimated fair values of assets acquired and liabilities assumed, as follows:

Other intangible assets reflect the following:

These fair values are based on preliminary estimates and are subject to change based on finalization of net working capital items included in the purchase price allocation.

Sotawall

On December 14, 2016, we acquired substantially all the assets of Sotawall, Inc., now operating under the name Sotawall Limited ("Sotawall"). Sotawall specializes in the design, engineering, fabrication, assembly and installation of unitized curtainwall systems for industrial, commercial and institutional buildings, primarily serving the Canadian and northeastern U.S. geographic regions. Sotawall's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition. Purchase accounting related to the acquisition of Sotawall was finalized during the the first quarter of fiscal 2018.

The following table sets forth certain unaudited pro forma consolidated data for the combined company for the third quarters and first nine-month periods of fiscal 2018 and 2017, as if the EFCO and Sotawall acquisitions were consummated pursuant to each of their respective same terms at the beginning of the fiscal year preceding their respective acquisition dates.

We have provided this unaudited pro forma information for comparative purposes only. This information does not necessarily reflect what the combined results of operations actually would have been had the acquisitions occurred at the beginning of fiscal year 2017. The information does not reflect the effect of any synergies or integration costs that will result from the acquisitions.

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

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

Amortization expense on definite-lived intangible assets was $12.8 million and $1.2 million for the nine -month periods ended December 2, 2017 and November 26, 2016 , respectively. The amortization expense associated with debt issue costs is included in interest expense while the remainder is in selling, general and administrative expenses in the consolidated results of operations. At December 2, 2017 , the estimated future amortization expense for definite-lived intangible assets was:

We maintain a committed revolving credit facility with maximum borrowings of up to $335.0 million , maturing in November 2021 . Outstanding borrowings under our committed revolving credit facility were $209.0 million , as of December 2, 2017 , and $45.0 million , as of March 4, 2017 . Under this facility, we are subject to 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 December 2, 2017 , we were in compliance with both financial covenants. Additionally, at December 2, 2017 , we had a total of $26.3 million of ongoing letters of credit related to industrial revenue bonds and construction contracts that expire in fiscal 2018 and reduce availability of funds under our committed credit facility.

At December 2, 2017 , our debt also 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 December 2, 2017 , 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 7.

We also maintain two Canadian revolving demand credit facilities totaling $ 12.0 million Canadian dollars. As of December 2, 2017 , $1.5 million was outstanding under these facilities, and no borrowings were outstanding as of March 4, 2017 . Borrowings under these facilities are made available at the sole discretion of the lenders and are payable on demand. The Company classifies any outstanding balances under this demand facility as long-term debt, as outstanding amounts can be refinanced through our committed revolving credit facility.

Interest payments were $3.6 million and $0.5 million for the nine months ended December 2, 2017 and November 26, 2016 , respectively.

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:

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 2015, or U.S. state and local income tax examinations for years prior to fiscal 2011. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2014, and there is very 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 at December 2, 2017 and March 4, 2017 was approximately $5.4 million and $4.5 million , respectively. 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 $0.3 million during the next 12 months due to lapsing of statutes.

13.    Other Non-Current Liabilities

14. Commitments and Contingent Liabilities

Operating lease commitments. As of December 2, 2017 , the Company was obligated under non-cancelable operating leases for buildings and equipment. Certain leases provide for increased rental payments based upon increases in real estate taxes or operating costs. Future minimum rental payments under non-cancelable operating leases are:

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 December 2, 2017 , $86.4 million of our backlog was bonded by performance bonds with a face value of $310.0 million . Performance bonds do not have stated expiration dates, as we are generally released from the bonds upon completion of the contract. We have never been required to make any payments related to these performance bonds with respect to any of our current portfolio of businesses.

Warranties. 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:

Letters of credit. At December 2, 2017 , we had ongoing letters of credit related to construction contracts and certain industrial revenue bonds. The total value of letters of credit under which we were obligated as of December 2, 2017 was approximately $26.3 million , all of which have been issued under our committed revolving credit facility. Availability under this credit facility is reduced by borrowings under the facility and also by letters of credit issued under the facility.

Purchase obligations. Purchase obligations for raw material commitments and capital expenditures totaled $120.9 million as of December 2, 2017 .

Litigation. We are a party to various legal proceedings incidental to our normal operating activities. In particular, like others in the construction supply and services industry, our businesses are routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. We are also subject to litigation arising out of general liability, employment practices, workers' compensation and automobile claims. Although it is very difficult to accurately predict 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 our results of operations, cash flows or financial condition.

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