Apogee Enterprises, Inc 10-Q for FY2021 Q3
Apogee Enterprises, Inc. (APOG)
10-Q
2021-01-07
For: 2020-11-28
View Original
Added on
April 04, 2026
About this 10-Q
Apogee Enterprises, Inc filed this 10-Q on January 7, 2021, covering the quarter ended November 28, 2020 (FY2021 Q3).
Headline figures
Quarter ended November 28, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $313.58M
- down 7.2% from $337.92M a year earlier
- Net income
- $37.27M
- up 144.7% from net income of $15.23M a year earlier
- Diluted EPS
- $1.42
- up 149.1% from $0.57 a year earlier
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 28, 2020
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 0-6365
_________________________________
(Exact name of registrant as specified in its charter)
_________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (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 | ||||||||||||
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.
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 5, 2021, 26,007,703 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
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| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
3
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
| (In thousands, except stock data) | November 28, 2020 | February 29, 2020 | ||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Receivables, net | ||||||||||||||
| Inventories | ||||||||||||||
| Costs and earnings on contracts in excess of billings | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued payroll and related benefits | ||||||||||||||
| Billings on contracts in excess of costs and earnings | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Current portion of debt | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Non-current operating lease liabilities | ||||||||||||||
| Non-current self-insurance reserves | ||||||||||||||
| Other non-current liabilities | ||||||||||||||
| Commitments and contingent liabilities (Note 8) | ||||||||||||||
| Shareholders’ equity | ||||||||||||||
Common stock of $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Common stock held in trust | ( | ( | ||||||||||||
| Deferred compensation obligations | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED RESULTS OF OPERATIONS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands, except per share data) | November 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||
| Other income, net | ||||||||||||||||||||||||||
| Earnings before income taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share - basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share - diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive earnings (loss): | ||||||||||||||||||||||||||
Unrealized (loss) gain on marketable securities, net of $ | ( | ( | ||||||||||||||||||||||||
Unrealized gain on derivative instruments, net of $ | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||||||||
| Other comprehensive earnings (loss) | ( | |||||||||||||||||||||||||
| Total comprehensive earnings | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended | ||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | ||||||||||||
| Operating Activities | ||||||||||||||
| Net earnings | $ | $ | ||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Share-based compensation | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Gain on disposal of assets | ( | ( | ||||||||||||
| Noncash lease expense | ||||||||||||||
| Other, net | ( | ( | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Receivables | ( | |||||||||||||
| Inventories | ( | |||||||||||||
| Costs and earnings on contracts in excess of billings | ( | |||||||||||||
| Accounts payable and accrued expenses | ( | ( | ||||||||||||
| Billings on contracts in excess of costs and earnings | ( | |||||||||||||
| Refundable and accrued income taxes | ( | |||||||||||||
| Operating lease liability | ( | ( | ||||||||||||
| Other | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Investing Activities | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Proceeds from sales of property, plant and equipment | ||||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash provided (used) by investing activities | ( | |||||||||||||
| Financing Activities | ||||||||||||||
| Borrowings on line of credit | ||||||||||||||
| (Repayment) borrowings on debt | ( | |||||||||||||
| Payments on line of credit | ( | ( | ||||||||||||
| Repurchase and retirement of common stock | ( | ( | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash used by financing activities | ( | ( | ||||||||||||
| Increase (decrease) in cash and cash equivalents | ( | |||||||||||||
| Effect of exchange rates on cash | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||||||||
| Noncash Activity | ||||||||||||||
| Capital expenditures in accounts payable | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
7
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 | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at February 29, 2020 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on foreign currency hedge, net of $ | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at May 30, 2020 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at August 29, 2020 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities, net of $ | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at November 28, 2020 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
8
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 | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 2, 2019 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 1, 2019 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2019 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities, net of $ | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on foreign currency hedge, net of $ | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock, net of cancellations | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other share retirements | ( | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at November 30, 2019 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
9
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 February 29, 2020. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein and are of a normal, recurring nature. The results of operations for the three- and nine-month periods ended November 28, 2020 are not necessarily indicative of the results to be expected for the full year.
COVID-19 considerations
The ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our Large-Scale Optical (LSO) segment, most customers reopened and the segment's two manufacturing locations resumed normal operations during the latter part of the second quarter, after being shutdown for most of the first and second quarters due to governmental orders. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which have been buoyed recently by the commencement of vaccine production and distribution.
In response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs.
Subsequent events
We have evaluated subsequent events for potential recognition and disclosure through the date of this filing. Subsequent to the end of the quarter, we announced the election of our new Chief Executive Officer, Ty R. Silberhorn, and entered into an employment agreement with him, effective January 4, 2021. Mr. Silberhorn replaces, Joseph F. Puishys, who announced his retirement, as an employee of the Company, in September 2020, effective January 4, 2021.
2.Revenue, Receivables and Contract Assets and Liabilities
Revenue
The following table disaggregates total revenue by timing of recognition (see Note 12 for disclosure of revenue by segment):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Recognized at shipment | $ | $ | $ | $ | ||||||||||||||||||||||
| Recognized over time | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
10
Receivables
Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. 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 28, 2020 | February 29, 2020 | ||||||||||||
| Trade accounts | $ | $ | ||||||||||||
| Construction contracts | ||||||||||||||
| Contract retainage | ||||||||||||||
| Total receivables | ||||||||||||||
| Less: allowance for credit losses | ( | ( | ||||||||||||
| Net receivables | $ | $ | ||||||||||||
The following table summarizes the activity in the allowance for credit losses:
| (In thousands) | November 28, 2020 | |||||||
| Beginning balance | $ | |||||||
| Additions charged to costs and expenses | ||||||||
| Deductions from allowance, net of recoveries | ( | |||||||
Other changes (1) | ( | |||||||
| Ending balance | $ | |||||||
(1) Result of foreign currency effects | ||||||||
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 28, 2020 | February 29, 2020 | ||||||||||||
| Contract assets | $ | $ | ||||||||||||
| Contract liabilities | ||||||||||||||
The decrease in contract assets was mainly due to a reduction in costs and earnings in excess of billings, which is driven by the settlement of matters related to a legacy EFCO project, as well as the timing of projects. 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 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Revenue recognized related to contract liabilities from prior year-end | $ | $ | $ | $ | ||||||||||||||||||||||
| Revenue recognized related to prior satisfaction of performance obligations | ||||||||||||||||||||||||||
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 28, 2020, the transaction price associated with unsatisfied performance obligations was approximately $901.6
11
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 28, 2020 | |||||||
| Within one year | $ | |||||||
| Within two years | ||||||||
| Beyond | ||||||||
| Total | $ | |||||||
3.Supplemental Balance Sheet Information
Inventories
| (In thousands) | November 28, 2020 | February 29, 2020 | ||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories | $ | $ | ||||||||||||
Other current liabilities
| (In thousands) | November 28, 2020 | February 29, 2020 | ||||||||||||
| Warranties | $ | $ | ||||||||||||
| Accrued project losses | ||||||||||||||
| Property and other taxes | ||||||||||||||
| Accrued self-insurance reserves | ||||||||||||||
| Other | ||||||||||||||
| Total other current liabilities | $ | $ | ||||||||||||
Other non-current liabilities
| (In thousands) | November 28, 2020 | February 29, 2020 | ||||||||||||
| Deferred benefit from New Market Tax Credit transactions | $ | $ | ||||||||||||
| Retirement plan obligations | ||||||||||||||
| Deferred compensation plan | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Other | ||||||||||||||
| Total other non-current liabilities | $ | $ | ||||||||||||
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 28, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||
| February 29, 2020 | ||||||||||||||||||||||||||
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.
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The amortized cost and estimated fair values of these bonds at November 28, 2020, 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 | $ | $ | ||||||||||||
| Due after one year through five years | ||||||||||||||
| Due after five years through 10 years | ||||||||||||||
| Due beyond 15 years | ||||||||||||||
| Total | $ | $ | ||||||||||||
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 28, 2020, the interest rate swap contract had a notional value of $55 million.
We periodically enter into forward purchase foreign currency cash flow hedge contracts and forward purchase aluminum hedge contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk and future purchases of aluminum in certain of our architectural businesses. As of November 28, 2020, we held foreign exchange forward contracts and aluminum forward contracts with U.S. dollar notional values of $18.7 million and $1.9 million, respectively, with the objective of reducing the exposure to fluctuations in the Canadian dollar, the Euro and the price of aluminum.
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 28, 2020 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Money market funds | $ | $ | $ | |||||||||||||||||
| Commercial paper | — | |||||||||||||||||||
| Municipal and corporate bonds | — | |||||||||||||||||||
| Cash surrender value of life insurance | — | |||||||||||||||||||
| Foreign currency and aluminum forward/option contracts | — | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deferred compensation | — | |||||||||||||||||||
| Interest rate swap contract | — | |||||||||||||||||||
| February 29, 2020 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Money market funds | $ | $ | $ | |||||||||||||||||
| Commercial paper | ||||||||||||||||||||
| Municipal and corporate bonds | ||||||||||||||||||||
| Cash surrender value of life insurance | — | |||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deferred compensation | — | |||||||||||||||||||
| Foreign currency forward/option contract | — | |||||||||||||||||||
| Interest rate swap contract | — | |||||||||||||||||||
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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.
Cash surrender value of life insurance and deferred compensation
Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. Changes in cash surrender value are recorded in other expense. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Derivative instruments
5.Goodwill and Other Identifiable Intangible Assets
Goodwill
Goodwill represents the excess of the cost over the net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis.
In the third quarter of fiscal 2021, we changed the date of our annual goodwill impairment testing from our year-end to the first day in our fiscal fourth quarter. This change results in better alignment of the annual impairment testing with our strategic and annual planning processes. This change was determined to not be material and had no impact on our current or historical consolidated financial statements.
During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including a significant decline in our stock price and market capitalization, along with concerns resulting from the COVID-19 pandemic at four of our nine identified reporting units. Therefore, we performed an interim goodwill impairment evaluation as of May 30, 2020. Based on the results of the interim quantitative goodwill impairment analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated as of May 30, 2020. However, the estimated fair value did not exceed carrying value by a significant margin at two reporting units within the Architectural Framing Systems segment, EFCO and Sotawall, which had goodwill balances of $90.4 million and $26.7 million, respectively, at May 30, 2020. We utilized a discount rate of 11.0 percent in determining the discounted cash flows for EFCO and a discount rate of 10.4 percent in determining the discounted cash flows for Sotawall. We utilized a long-term growth rate of 3.0 percent in our fair value analysis for all reporting units. If our discount rates were to increase by 100 basis points at Sotawall and EFCO, the fair value of these reporting units would fall below carrying value, which would indicate impairment of the goodwill. Additionally, this discounted cash flow analysis is dependent upon achieving forecasted levels of revenue and profitability. If revenue or profitability were to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment could be indicated at these reporting units, and potentially at other reporting units.
During the third quarter, we combined two reporting units into one reporting unit, following certain structural and leadership changes at the Company, specifically within the Architectural Framing Systems segment. Within this segment, as a result of integration efforts that are ongoing, leadership over our Tubelite and Alumicor reporting units have been combined and functional leaders in areas such as operations, sales, marketing and general and administrative areas are responsible for allocating resources and reviewing results of the combined business. The goodwill of these individual reporting units was aggregated to the combined reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change
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and have concluded no adjustment to the carrying value of goodwill was necessary as a result of this change. In addition, for all reporting units, no qualitative indicators of impairment were identified during the third quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.
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 2, 2019 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Foreign currency translation | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at February 29, 2020 | ||||||||||||||||||||||||||||||||
Adjustment (1) | ||||||||||||||||||||||||||||||||
| Foreign currency translation | ( | |||||||||||||||||||||||||||||||
| Balance at November 28, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(1) During the quarter ended May 30, 2020, we recorded a $6.3 million increase to goodwill and corresponding increase to deferred tax liabilities to correct an immaterial error related to prior periods. The error was not material to any previously reported annual or interim consolidated financial statements. | ||||||||||||||||||||||||||||||||
Indefinite-lived intangible assets
We hold intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. Similar to the change in goodwill measurement date discussed above, we historically evaluated the reasonableness of the useful life and tested indefinite-lived intangible assets for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. In the third quarter of fiscal 2021, we changed the date of our annual impairment testing from our year-end to the first day in our fiscal fourth quarter.
During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including deteriorating macroeconomic conditions resulting from the COVID-19 pandemic. Therefore, the Company performed a quantitative indefinite-lived intangible asset impairment evaluation as of May 30, 2020. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If an impairment loss is recognized, the adjusted carrying amount becomes the asset's new accounting basis.
Fair value is measured using the relief-from-royalty method. This method assumes the trade name or trademark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. This method requires us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. In determining the discounted future revenue in our fair value analysis, we used discount rates that are appropriate with the risks and uncertainties inherent in the respective businesses in the range of 10.9 percent to 11.5 percent, royalty rates of 1.5 to 2.0 percent, and a long-term growth rate of 3.0 percent. Based on our analysis, the fair value of each of our trade names exceeded its carrying amount and impairment was not indicated as of May 30, 2020. During the third quarter of fiscal 2021, no additional qualitative indicators of impairment were identified and therefore, no interim quantitative indefinite-lived intangible asset impairment evaluation was completed. We continue to conclude that the useful life of our indefinite-lived intangible assets is appropriate. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, impairment could be indicated on one or more of our indefinite-lived intangible assets.
15
The gross carrying amount of other intangible assets and related accumulated amortization was:
| (In thousands) | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net | ||||||||||||||||||||||||||||
| November 28, 2020 | ||||||||||||||||||||||||||||||||
| Definite-lived intangible assets: | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
| Other intangibles | ( | |||||||||||||||||||||||||||||||
| Total definite-lived intangible assets | ( | |||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||
| Trademarks | — | |||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
| February 29, 2020 | ||||||||||||||||||||||||||||||||
| Definite-lived intangible assets: | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||
| Other intangibles | ( | ( | ||||||||||||||||||||||||||||||
| Total definite-lived intangible assets | ( | ( | ||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||
| Trademarks | — | ( | ||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||
Amortization expense on definite-lived intangible assets was $5.6 million and $5.7 million for the nine-month periods ended November 28, 2020 and November 30, 2019, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At November 28, 2020, the estimated future amortization expense for definite-lived intangible assets was:
| (In thousands) | Remainder of Fiscal 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 | Fiscal 2025 | |||||||||||||||||||||||||||
| Estimated amortization expense | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
6.Debt
As of November 28, 2020, we had a committed revolving credit facility with maximum borrowings of up to $235 million with a maturity of June 2024 and a $150 million term loan. The term loan was amended during the third quarter of fiscal 2021 to extend the maturity date to June 2024. Total debt outstanding was $168.5 million, compared to $217.9 million as of February 29, 2020. There were no outstanding borrowings under the revolving credit facility as of November 28, 2020, while there were $47.5 million in outstanding borrowings under the revolving credit facility as of February 29, 2020.
Our revolving credit facility and term loan contain 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 28, 2020, we were in compliance with both financial covenants. Additionally, at November 28, 2020, we had a total of $18.7 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal year 2022 and reduce borrowing capacity under the revolving credit facility.
At November 28, 2020, debt included $15.0 million of industrial revenue bonds that mature in fiscal years 2022 through 2043. In June 2020, a $5.4 million industrial revenue bond matured and was repaid. The fair value of the industrial revenue bonds approximated carrying value at November 28, 2020, 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 committed, revolving credit facilities totaling $25.0 million (USD). As of November 28, 2020, $3.5 million was outstanding under the facilities, while at February 29, 2020, there were no borrowings under the facilities.
Interest payments were $3.7 million and $7.3 million for the nine months ended November 28, 2020 and November 30, 2019, respectively.
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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 non lease 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 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Short-term lease cost | ||||||||||||||||||||||||||
| Variable lease cost | ||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
Other supplemental information related to leases was as follows:
| Nine Months Ended | ||||||||||||||
| (In thousands except weighted-average data) | November 28, 2020 | November 30, 2019 | ||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||||||||
| Lease assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||||||||
| Weighted-average remaining lease term - operating leases | ||||||||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||||||||
Future maturities of lease liabilities are as follows:
| (In thousands) | November 28, 2020 | |||||||
| Remainder of Fiscal 2021 | $ | |||||||
| Fiscal 2022 | ||||||||
| Fiscal 2023 | ||||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Fiscal 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Amounts representing interest | ( | |||||||
| Present value of lease liabilities | $ | |||||||
In September 2020, we sold a building in McCook, IL used within our LSO segment for $25.1 million. The carrying value of the building was $4.3 million, and we recognized a gain on this sale of approximately $19.3 million, net of associated transaction costs, which is included as a reduction of selling, general and administrative expenses within our consolidated
17
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 28, 2020, $1.1 billion of these types of bonds were outstanding, of which $527.8 million is in 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 28, 2020 | November 30, 2019 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Additional accruals | ||||||||||||||
| Claims paid | ( | ( | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
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. The liability for these types of project-related contingencies was $3.3 million and $49.0 million as of November 28, 2020 and February 29, 2020, respectively. In June 2020, we settled contract claims related to a majority of these project-related contingencies on a legacy EFCO project for an amount equal to the recorded contingency at May 30, 2020.
Letters of credit
At November 28, 2020, we had $18.7 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. In connection with the settlement of contract claims related to a legacy EFCO project referenced above, the original project performance and payment bond related to the project was replaced, which required a $25.0 million letter of credit. The letter of credit for the replacement bond was issued outside of our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants.
Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $207.5 million as of November 28, 2020.
New Markets Tax Credit (NMTC) transactions
We have four separate NMTC transactions to support our operational expansion. Proceeds received from investors on these transactions are included within other 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 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 then 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. During the third quarter ended November 28, 2020, an NMTC transaction was settled as expected and as a result, $7.4 million of operating income was recognized as a reduction to selling, general and administrative expenses within the Architectural Glass segment.
18
The table below provides a summary of our remaining outstanding NMTC transactions (in millions):
| Inception date | Termination date | Proceeds received | Deferred costs | Net benefit | ||||||||||||||||||||||
| June 2016 | June 2023 | $ | $ | $ | ||||||||||||||||||||||
| August 2018 | August 2025 | |||||||||||||||||||||||||
| September 2018 | September 2025 | |||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
Litigation
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 $6.2 million for the nine-month period ended November 28, 2020 and $4.6 million for the nine-month period ended November 30, 2019.
Stock options and SARs
Stock option and SAR activity for the current nine-month period is summarized as follows:
| Stock options and SARs | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Outstanding at February 29, 2020 | $ | |||||||||||||||||||||||||
| Awards granted | ||||||||||||||||||||||||||
| Awards exercised | ( | |||||||||||||||||||||||||
| Outstanding at November 28, 2020 | $ | $ | ||||||||||||||||||||||||
| Vested or expected to vest at November 28, 2020 | $ | $ | ||||||||||||||||||||||||
For the nine-months ended November 28, 2020, cash proceeds from the exercise of stock options were $1.5 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 $1.8 million. No
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 February 29, 2020 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | |||||||||||||
| Canceled | ( | |||||||||||||
| Nonvested at November 28, 2020 | $ | |||||||||||||
At November 28, 2020, there was $8.6 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 25 months. The total fair value of shares vested during the nine months ended November 28, 2020 was $3.2 million.
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10.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 $4.3 million and $4.1 million at November 28, 2020 and February 29, 2020, 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 $0.4 million during the next 12 months due to lapsing of statutes.
11.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 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
Basic earnings per share – weighted average common shares outstanding | ||||||||||||||||||||||||||
Weighted average effect of nonvested share grants and assumed exercise of stock options | ||||||||||||||||||||||||||
Diluted earnings per share – weighted average common shares and potential common shares outstanding | ||||||||||||||||||||||||||
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) | ||||||||||||||||||||||||||
12.Segment Information
The Company has four reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and 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 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.
20
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Architectural Framing Systems | $ | $ | $ | $ | ||||||||||||||||||||||
| Architectural Glass | ||||||||||||||||||||||||||
| Architectural Services | ||||||||||||||||||||||||||
| Large-Scale Optical | ||||||||||||||||||||||||||
| Intersegment eliminations | ( | ( | ( | ( | ||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating income (loss) | ||||||||||||||||||||||||||
| Architectural Framing Systems | $ | $ | $ | $ | ||||||||||||||||||||||
| Architectural Glass | ||||||||||||||||||||||||||
| Architectural Services | ||||||||||||||||||||||||||
Large-Scale Optical(1) | ||||||||||||||||||||||||||
| Corporate and other | ( | ( | ( | ( | ||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | ||||||||||||||||||||||
(1) LSO operating income amounts for the three- and nine-month periods ended November 28, 2020 include a $19.3 million gain on the sale-lease back of a building.
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.
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,” "will," "continue" 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. 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. Information about factors that could materially affect our results can be found in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended February 29, 2020 and in subsequent filings with the U.S. Securities and Exchange Commission, including this Quarterly Report on Form 10-Q.
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 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 ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global and domestic markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as
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customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our Large-Scale Optical (LSO) segment, most customers reopened and the segment's two manufacturing locations resumed normal operations during our second fiscal quarter, after being shutdown for most of our first and second quarters due to governmental orders. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which have been buoyed recently by the commencement of vaccine production and distribution.
In response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs.
The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended February 29, 2020 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020
Net sales
Consolidated net sales decreased 7.2 percent, or $24.3 million, and decreased 12.2 percent, or $128.2 million, for the three- and nine-month periods ended November 28, 2020, respectively, compared to the same periods in the prior year, primarily reflecting end market and COVID-19-related volume declines in the Architectural Framing Systems and Architectural Glass segments.
The relationship between various components of operations, as a percentage of net sales, is presented below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| November 28, 2020 | November 30, 2019 | November 28, 2020 | November 30, 2019 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales | 77.8 | 78.0 | 77.7 | 77.0 | |||||||||||||||||||
| Gross profit | 22.2 | 22.0 | 22.3 | 23.0 | |||||||||||||||||||
| Selling, general and administrative expenses | 6.3 | 15.6 | 13.7 | 16.1 | |||||||||||||||||||
| Operating income | 15.9 | 6.4 | 8.6 | 6.9 | |||||||||||||||||||
| Interest expense, net | 0.5 | 0.6 | 0.5 | 0.7 | |||||||||||||||||||
| Other income, net | 0.2 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||
| Earnings before income taxes | 15.5 | 5.9 | 8.2 | 6.3 | |||||||||||||||||||
| Income tax expense | 3.7 | 1.4 | 2.0 | 1.5 | |||||||||||||||||||
| Net earnings | 11.9 | % | 4.5 | % | 6.2 | % | 4.8 | % | |||||||||||||||
| Effective tax rate | 23.5 | % | 23.2 | % | 23.8 | % | 23.9 | % | |||||||||||||||
Gross profit
Gross profit as a percent of sales was 22.2 percent and 22.3 percent for the three- and nine-month periods ended November 28, 2020, compared to 22.0 percent and 23.0 percent for the three- and nine-month periods ended November 30, 2019. The increase in the third quarter of fiscal 2021 compared to the same period in fiscal 2020 was driven by strong project execution in the Architectural Services segment. The decrease in the nine-month period of fiscal 2021 compared to fiscal 2020 was largely driven by lower volumes due to market-related and COVID-19 project delays.
Selling, general and administrative (SG&A) expenses
SG&A expenses as a percent of sales were 6.3 percent and 13.7 percent for the three- and nine-month periods ended November 28, 2020, compared to 15.6 percent and 16.1 percent for the prior year three- and nine-month periods. SG&A decreased as a percent of sales compared to the same periods in the prior year primarily due to a $19.3 million gain on the sale-leaseback of a building and $7.4 million of income related to a New Markets Tax Credit transaction, both of which were recognized in the third quarter of fiscal 2021. In addition, we received a benefit of $4.2 million during the third quarter of fiscal 2021, and $5.5 million year-to-date in fiscal 2021, from a Canadian wage subsidy program offered to support Canadian businesses due to the widespread impacts of the COVID-19 pandemic. In total, these items had a favorable impact on SG&A as a percentage of sales
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of 9.9 percentage points and 3.5 percentage points for the three- and nine-month periods ended November 28, 2020, respectively.
Income tax expense
The effective tax rate in the third quarter of fiscal 2021 was 23.5 percent, compared to 23.2 percent in the same period last year, and 23.8 percent for the first nine months of fiscal 2021, compared to 23.9 percent in the prior year period.
Segment Analysis
Architectural Framing Systems
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | % Change | November 28, 2020 | November 30, 2019 | % Change | ||||||||||||||||||||||||||||||||
| Net sales | $ | 136,688 | $ | 165,517 | (17.4) | % | $ | 439,779 | $ | 533,432 | (17.6) | % | ||||||||||||||||||||||||||
| Operating income | 7,218 | 6,345 | 13.8 | % | 26,211 | 34,141 | (23.2) | % | ||||||||||||||||||||||||||||||
| Operating margin | 5.3 | % | 3.8 | % | 6.0 | % | 6.4 | % | ||||||||||||||||||||||||||||||
Architectural Framing Systems net sales declined $28.8 million, or 17.4 percent, and $93.7 million, or 17.6 percent, for the three- and nine-month periods ended November 28, 2020, compared to the prior-year periods, primarily reflecting market-related and COVID-19 project delays and lower order volume for short lead-time products.
Operating margin increased 150 basis points for the three-month period of the current year and decreased 40 basis points for the nine-month period of the current year, compared to the same periods in the prior year. The increase in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 was due to cost actions and improved productivity that served to offset the impact of volume declines from end market softness and COVID-19. The decrease in the nine-month period in the current year compared to the same period in the prior year reflects leverage on the lower revenue, partially offset by cost reduction actions and improved productivity. In addition, this segment benefited from a Canadian wage subsidy of $4.2 million in the third quarter of fiscal 2021 and $5.5 million for the nine-month period of fiscal 2021, as a result of a Canadian program offered to support Canadian businesses due to the widespread impacts of the COVID-19 pandemic.
As of November 28, 2020, segment backlog was approximately $408 million, compared to approximately $404 million at the end of the prior quarter, and $375 million at the end of the third quarter of the prior year. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog.
Architectural Glass
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | % Change | November 28, 2020 | November 30, 2019 | % Change | ||||||||||||||||||||||||||||||||
| Net sales | $ | 84,779 | $ | 89,433 | (5.2) | % | $ | 248,274 | $ | 288,862 | (14.1) | % | ||||||||||||||||||||||||||
| Operating income | 10,825 | 4,092 | 164.5 | % | 15,306 | 16,951 | (9.7) | % | ||||||||||||||||||||||||||||||
| Operating margin | 12.8 | % | 4.6 | % | 6.2 | % | 5.9 | % | ||||||||||||||||||||||||||||||
Net sales decreased $4.7 million, or 5.2 percent, and $40.6 million, or 14.1 percent, for the three- and nine-month periods ended November 28, 2020, compared to the same periods in the prior year. The decreases reflect lower volumes primarily due to market-related and COVID-19 project delays.
Operating margin increased 820 and 30 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year. Fiscal 2021 third quarter results included $7.4 million of operating income related to a New Markets Tax Credit transaction. In addition, operating margins in both periods of the current year were impacted by volume declines due to end market softness and COVID-19.
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Architectural Services
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | % Change | November 28, 2020 | November 30, 2019 | % Change | ||||||||||||||||||||||||||||||||
| Net sales | $ | 76,690 | $ | 69,043 | 11.1 | % | $ | 213,911 | $ | 195,787 | 9.3 | % | ||||||||||||||||||||||||||
| Operating income | 8,558 | 6,533 | 31.0 | % | 20,470 | 15,082 | 35.7 | % | ||||||||||||||||||||||||||||||
| Operating margin | 11.2 | % | 9.5 | % | 9.6 | % | 7.7 | % | ||||||||||||||||||||||||||||||
Architectural Services net sales increased $7.6 million, or 11.1 percent, and $18.1 million, or 9.3 percent, for the three- and nine-month periods ended November 28, 2020, compared to the same periods in the prior year, driven by increased volume from executing projects in backlog.
Operating margin increased 170 and 190 basis points for the three- and nine-month periods of the current year, compared to the same periods in the prior year, primarily driven by strong project execution.
As of November 28, 2020, segment backlog was approximately $597 million, compared to approximately $665 million as of the end of the prior quarter, and $607 million at the end of the third quarter of the prior year. Backlog is described within the Architectural Framing Systems discussion above.
Large-Scale Optical (LSO)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | % Change | November 28, 2020 | November 30, 2019 | % Change | ||||||||||||||||||||||||||||||||
| Net sales | $ | 25,267 | $ | 24,405 | 3.5 | % | $ | 48,438 | $ | 66,449 | (27.1) | % | ||||||||||||||||||||||||||
| Operating income | 26,114 | 6,754 | 286.6 | % | 25,131 | 15,561 | 61.5 | % | ||||||||||||||||||||||||||||||
| Operating margin | 103.4 | % | 27.7 | % | 51.9 | % | 23.4 | % | ||||||||||||||||||||||||||||||
LSO net sales increased $0.9 million or 3.5 percent, and decreased $18.0 million, or 27.1 percent, for the three- and nine-month periods ended November 28, 2020, compared to the same periods in the prior year. In the third quarter, customer demand increased significantly following the segment's COVID-related shutdown earlier in the year. The decrease in sales for the current year nine-month period compared to the same period in the prior year reflects the required COVID-related closure of most of the segment’s customers and the segment’s manufacturing locations for most of the first and second quarters of fiscal 2021.
The segment had operating income of $26.1 million and $25.1 million and operating margin of 103.4 percent and 51.9 percent for the three- and nine-month periods ended November 28, 2020, respectively, compared to operating income of $6.8 million and $15.6 million and operating margin of 27.7 percent and 23.4 percent in the same periods in the prior year. The increases for the fiscal 2021 periods are primarily related to a $19.3 million gain on the sale-leaseback of a segment building during the current year third quarter. Additionally, operating margin in the nine-month period reflects the impact of the segment's temporary shutdown and the related impact from lower volume.
Liquidity and Capital Resources
| Selected cash flow data | Nine Months Ended | |||||||||||||
| (In thousands) | November 28, 2020 | November 30, 2019 | ||||||||||||
| Operating Activities | ||||||||||||||
| Net cash provided by operating activities | $ | 120,512 | $ | 53,601 | ||||||||||
| Investing Activities | ||||||||||||||
| Capital expenditures | (17,116) | (41,176) | ||||||||||||
| Proceeds from sale of property, plant and equipment | 23,724 | 591 | ||||||||||||
| Financing Activities | ||||||||||||||
| Borrowings on line of credit | 193,332 | 108,000 | ||||||||||||
| (Repayment) borrowings on debt | (5,400) | 150,000 | ||||||||||||
| Payments on line of credit | (237,500) | (252,500) | ||||||||||||
| Repurchase and retirement of common stock | (20,731) | (20,010) | ||||||||||||
| Dividends paid | (14,546) | (13,808) | ||||||||||||
Operating Activities. Cash provided by operating activities was $120.5 million for the first nine months of fiscal 2021, an increase of $66.9 million compared to the prior-year period, reflecting strong working capital management.
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Investing Activities. Net cash provided by investing activities was $5.5 million for the first nine months of fiscal 2021, driven by proceeds of $23.7 million on the sale-leaseback of a building, offset by capital expenditures of $17.1 million. In the first nine months of the prior year, net cash used by investing activities was $41.4 million, driven by capital expenditures of $41.2 million. Given the uncertain economic environment in fiscal 2021, we will continue to limit our capital spending to all health and safety related investments as well as the most critical high return projects that support our long-term strategic plan and profitable growth targets.
Financing Activities. Net cash used by financing activities was $85.7 million for the first nine months of fiscal 2021, compared to $30.9 million in the prior-year period, primarily due to $47.5 million of net payments in the current year, compared to net borrowings of $5.5 million in the prior-year period. At November 28, 2020, we were in compliance with the financial covenants under our revolving credit facility and term loan.
We paid dividends totaling $14.5 million ($0.5625 per share) in the first nine months of fiscal 2021, compared to $13.8 million ($0.5250 per share) in the comparable prior-year period. During the first nine months of fiscal 2021, we repurchased 852,029 shares under our authorized share repurchase program, for a total cost of $20.7 million. In the first nine months of fiscal 2020, we repurchased 531,997 shares under the share repurchase program, for a total cost of $20.0 million. Since the inception of the share repurchase program in 2004, we have purchased a total of 6,806,941 shares, at a total cost of $195.1 million. We currently have remaining authority to repurchase an additional 1,443,059 shares under this program. We will continue to evaluate making future share repurchases, considering our cash flow, debt levels and market conditions, including the continuing effects of the COVID-19 pandemic, in the context of all our capital allocation options ensuring that we maximize the long-term value for our shareholders.
Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of November 28, 2020:
| Payments Due by Fiscal Period | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Remainder of Fiscal 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 | Fiscal 2025 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Debt obligations | $ | — | $ | 2,000 | $ | 1,000 | $ | — | $ | 153,463 | $ | 12,000 | $ | 168,463 | ||||||||||||||||||||||||||||||
Operating leases (undiscounted) | 3,381 | 13,866 | 12,662 | 10,740 | 8,994 | 17,214 | 66,857 | |||||||||||||||||||||||||||||||||||||
| Purchase obligations | 47,263 | 142,186 | 14,073 | 939 | 770 | 2,310 | 207,541 | |||||||||||||||||||||||||||||||||||||
Total cash obligations | $ | 50,644 | $ | 158,052 | $ | 27,735 | $ | 11,679 | $ | 163,227 | $ | 31,524 | $ | 442,861 | ||||||||||||||||||||||||||||||
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 2021, which will equal or exceed our minimum funding requirements.
As of November 28, 2020, we had reserves of $4.3 million for unrecognized tax benefits. We expect approximately $0.4 million of the unrecognized tax benefits to lapse during the next 12 months. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits will ultimately be settled.
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 28, 2020, $1.1 billion of these types of bonds were outstanding, of which $527.8 million is in 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.
We are taking advantage of the option to defer remittance of the employer portion of Social Security tax as provided in the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act"), and estimate that this deferral will allow us to retain approximately $13 million in cash during calendar year 2020 that would have otherwise been remitted to the federal government. At the end of the third quarter of fiscal 2021, we had deferred tax payments of $11.8 million, which are included within other non-current liabilities on our consolidated balance sheets. The deferred tax payments will be repaid equally in calendar years 2021 and 2022. The CARES Act, along with other foreign government initiatives, also provides for job retention programs, which have allowed some of our businesses to receive payroll tax credits or subsidies during calendar year 2020.
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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.
COVID-19 Consideration. While we believe we have adequate sources of liquidity to continue to fund our business for at least the next 12 months, the extent to which the ongoing COVID-19 pandemic may impact our results of operations or liquidity is uncertain. To date, we have experienced some delays in commercial construction projects and orders due to COVID-19. While the construction and construction-related industries are considered an "essential business or service" in most jurisdictions in which we operate, the uncertain economic environment has resulted in order delays and there have been instances of site closures and project delays. Increased social distancing and health-related precautions are required on many work sites, which have caused and may continue to cause additional project delays and additional costs to be incurred. Within the LSO segment, after being closed for most of the first and second quarters, we resumed normal operations at the segment's two manufacturing locations and most of our customer's retail locations continue to operate after being required to close earlier this year. We expect this global pandemic to continue to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. At this time, we do not expect that the impact from the coronavirus pandemic will have a significant effect on our liquidity. As demonstrated so far this fiscal year, we have taken steps to increase available cash on hand including, but not limited to, active working capital management and targeted reductions in discretionary operating expenses and capital expenditures. Given the continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers are adversely impacted by the COVID-19 pandemic, this could reduce the availability, or result in delays, of materials or supplies, or delays in customer payments, which in turn could materially interrupt our business operations, thereby negatively affecting our results of operations, and/or impact our liquidity.
Off-balance sheet arrangements. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Related Party Transactions
No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020.
Critical Accounting Policies
No material changes have occurred in the disclosure of our critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020, other than as described in our Current Report on Form 10-Q for the fiscal quarter ended May 30, 2020 and as noted below.
Goodwill and indefinite-lived intangible asset impairment
Goodwill
We have historically evaluated goodwill for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. In the third quarter of fiscal 2021, we changed the date of our annual goodwill impairment testing from our year-end to the first day in our fiscal fourth quarter. This change results in better alignment of the annual impairment testing with our strategic and annual planning processes. This change was determined to not be material and had no impact on our current or historical consolidated financial statements.
During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including a significant decline in our stock price and market capitalization, along with concerns resulting from the COVID-19 pandemic at four of our nine identified reporting units. Therefore, we performed an interim goodwill impairment evaluation as of May 30, 2020.
Based on the results of the interim quantitative goodwill impairment analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated as of May 30, 2020. However, the estimated fair value did not exceed carrying value by a significant margin at two reporting units within the Architectural Framing Systems segment, EFCO and Sotawall, which had goodwill balances of $90.4 million and $26.7 million, respectively, at May 30, 2020. We utilized a discount rate of 11.0 percent in determining the discounted cash flows for EFCO and a discount rate of 10.4 percent in determining the discounted cash flows for Sotawall. We utilized a long-term growth rate of 3.0 percent in our fair value analysis for all reporting units. If our discount rates were to increase by 100 basis points at Sotawall and EFCO, the fair value of these reporting units would fall below carrying value, which would indicate impairment of the goodwill. Additionally, this discounted cash flow analysis is dependent upon achieving forecasted levels of revenue and profitability. If revenue or profitability were to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment could be indicated at these reporting units, and potentially at other reporting units.
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During the third quarter, we combined two reporting units into one reporting unit, following certain structural and leadership changes at the Company, specifically within the Architectural Framing Systems segment. Within this segment, as a result of integration efforts that are ongoing, leadership over our Tubelite and Alumicor reporting units has been combined and functional leaders in areas such as operations, sales, marketing and general and administrative areas are responsible for allocating resources and reviewing results of the combined business. The goodwill of these individual reporting units was aggregated to the combined reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change and have concluded that no adjustment to the carrying value of goodwill was necessary as a result of this change. In addition, no qualitative indicators of impairment were identified during the third quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.
Indefinite-lived intangible assets
We hold intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. Similar to the change in goodwill measurement date discussed above, we historically evaluated the reasonableness of the useful life and tested indefinite-lived intangible assets for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. In the third quarter of fiscal 2021, we changed the date of our annual impairment testing from our year-end to the first day in our fiscal fourth quarter.
During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including deteriorating macroeconomic conditions resulting from the COVID-19 pandemic. Therefore, the Company performed a quantitative indefinite-lived intangible asset impairment evaluation as of May 30, 2020. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If an impairment loss is recognized, the adjusted carrying amount becomes the asset's new accounting basis.
Fair value is measured using the relief-from-royalty method. This method assumes the trade name or trademark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. This method requires us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. In determining the discounted future revenue in our fair value analysis, we used discount rates that are appropriate with the risks and uncertainties inherent in the respective businesses in the range of 10.9 percent to 11.5 percent, royalty rates of 1.5 to 2.0 percent, and a long-term growth rate of 3.0 percent. Based on our analysis at May 30, 2020, the fair value of each of our trade names exceeded its carrying amount and impairment was not indicated.
During the third quarter of fiscal 2021, no additional qualitative indicators of impairment were identified and therefore, no interim quantitative indefinite-lived intangible asset impairment evaluation was completed. We continue to conclude that the useful life of our indefinite-lived intangible assets is appropriate. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, impairment could be indicated on one or more of our indefinite-lived intangible assets.
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 February 29, 2020.
Item 4.Controls and Procedures
a)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 28, 2020, 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
From time to time, 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.
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 February 29, 2020, except as noted below.
The novel coronavirus (COVID-19) pandemic, efforts to mitigate the pandemic, and the related weakening economic conditions, have impacted our business and could have a significant negative impact on our operations, liquidity, financial condition and financial results
In the last quarter of our fiscal 2020, a novel strain of coronavirus, COVID-19, started to impact the global economic environment causing extreme volatility and uncertainty in global markets. In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and we started to see certain impacts to our business. This contagious disease outbreak, which continues to spread, and the related adverse public health developments, and government orders to "stay in place" have adversely affected work forces, economies and financial markets globally. Quarantines and "stay in place" orders, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to our supply chain or our customers, have adversely impacted our sales and operating results and have resulted in some project delays. In addition, the pandemic has contributed to an economic downturn that could affect the ability of our customers to obtain financing for projects and therefore impact demand for our products and services. Order lead times have been and could continue to be extended or delayed and our pricing or pricing of suppliers for needed materials could increase. Some materials, products or services critical to our operations may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing.
To date, we have experienced some delays in commercial construction projects and orders due to COVID-19. While the construction and construction-related industries are considered an "essential business or service" in most jurisdictions in which we operate, site closures or project delays have occurred and increased social distancing and health-related precautions are required on many work sites, which may cause additional project delays and additional costs to be incurred. Within the LSO segment, we also experienced the temporary closure of many of our customer's retail locations and we temporarily shut down our factories in this segment to comply with government "stay in place" orders. We may see additional temporary closures, which may lead to a future temporary shutdown of our LSO segment factories. We reopened our factories in the LSO segment during the second half of our second quarter.
This global pandemic has had, and we expect it to continue to have, an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. The global outbreak of COVID-19 continues to evolve. The extent to which COVID-19 will impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate severity and spread of the disease, the duration or future outbreak surges, travel restrictions and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Given the continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers are adversely impacted by the coronavirus outbreak, this could reduce the availability, or result in delays, of materials or supplies, or delays in customer payments, which in turn could materially interrupt our business operations, thereby negatively affecting our results of operations, and/or impact our liquidity.
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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 2021:
| 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) | ||||||||||||||||||||||
| August 30, 2020 to September 26, 2020 | 14,113 | $ | 20.93 | — | 2,063,596 | |||||||||||||||||||||
| September 27, 2020 to October 24, 2020 | 419,388 | 25.62 | 412,214 | 1,651,382 | ||||||||||||||||||||||
| October 25, 2020 to November 28, 2020 | 208,649 | 25.74 | 208,323 | 1,443,059 | ||||||||||||||||||||||
| Total | 642,150 | $ | 25.16 | 620,537 | 1,443,059 | |||||||||||||||||||||
(a)The shares in this column represent the total number of shares that were repurchased by us pursuant to our publicly announced repurchase program, plus the shares surrendered to us by plan participants to satisfy withholding tax obligations related to share-based compensation.
(b)In fiscal 2004, announced on April 10, 2003, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock. The Board increased the authorization by 750,000 shares, announced on January 24, 2008; by 1,000,000 shares on each of the announcement dates of October 8, 2008, January 13, 2016, January 9, 2018, and January 14, 2020; and by 2,000,000 shares, announced on October 3, 2018. The repurchase program does not have an expiration date.
Item 6.Exhibits
Amendment No. 2 to Third Amended and Restated Credit Agreement dated as of November 6, 2020, by and among Apogee Enterprises, Inc., as the Borrower, the Lenders referred to therein, Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, and U.S. Bank National Association, as Syndication Agent and Issuing Lender. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 10, 2020) | |||||
| 101 | The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 28, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of November 28, 2020 and February 29, 2020, (ii) the Consolidated Results of Operations for the three- and nine-months ended November 28, 2020 and November 30, 2019, (iii) the Consolidated Statements of Comprehensive Earnings for the three- and nine-months ended November 28, 2020 and November 30, 2019, (iv) the Consolidated Statements of Cash Flows for the nine-months ended November 28, 2020 and November 30, 2019, (v) the Consolidated Statements of Shareholders' Equity for the nine-months ended November 28, 2020 and November 30, 2019, and (vi) Notes to Consolidated Financial Statements. | ||||
| 104 | Cover Page Interactive Data File (formatted as iXBRL 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 7, 2021 | By: /s/ Ty R. Silberhorn | ||||||||||
| Ty R. Silberhorn President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: January 7, 2021 | By: /s/ Nisheet Gupta | ||||||||||
| Nisheet Gupta Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||
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Exhibit 31.1
CERTIFICATION
I, Ty R. Silberhorn, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Apogee Enterprises, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 7, 2021
/s/ Ty R. Silberhorn | |||||
Ty R. Silberhorn President and Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION
I, Nisheet Gupta, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Apogee Enterprises, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 7, 2021
| /s/ Nisheet Gupta | |||||
| Nisheet Gupta Executive Vice President and Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Apogee Enterprises, Inc. (the “Company”) on Form 10-Q for the period ended November 28, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Ty R. Silberhorn, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Ty R. Silberhorn | |||||
| Ty R. Silberhorn President and Chief Executive Officer | |||||
| January 7, 2021 | |||||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Apogee Enterprises, Inc. (the “Company”) on Form 10-Q for the period ended November 28, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Nisheet Gupta, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Nisheet Gupta | |||||
| Nisheet Gupta Executive Vice President and Chief Financial Officer | |||||
| January 7, 2021 | |||||