NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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1.
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Summary of Significant Accounting Policies
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Basis of presentation
The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended March 2, 2019. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. The results of operations for the six-month period ended August 31, 2019 are not necessarily indicative of the results to be expected for the full year.
Adoption of new accounting standards
At the beginning of fiscal 2020, we adopted the guidance in ASC 842, Leases, following a modified retrospective approach and elected not to restate prior periods. Adoption of the new standard resulted in recording operating lease assets and liabilities of approximately $50 million as of March 3, 2019 and did not materially impact our consolidated net earnings and cash flows. Refer to additional information in Note 7.
Accounting standards not yet adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an approach based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This ASU is effective for our fiscal year 2021. Entities are required to apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing this ASU's impact on our consolidated financial statements.
Subsequent events
We have evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events that required recognition or disclosure in the consolidated financial statements.
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2.
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Revenue, Receivables and Contract Assets and Liabilities
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Revenue
The following table disaggregates total revenue by timing of recognition (see Note 13 for disclosure of revenue by segment):
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|
|
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Three Months Ended
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Six Months Ended
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In thousands
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August 31, 2019
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September 1, 2018
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|
August 31, 2019
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|
September 1, 2018
|
Recognized at shipment
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$
|
164,336
|
|
|
$
|
166,534
|
|
|
$
|
319,602
|
|
|
$
|
323,401
|
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Recognized over time
|
|
192,722
|
|
|
195,599
|
|
|
392,822
|
|
|
375,263
|
|
Total
|
|
$
|
357,058
|
|
|
$
|
362,133
|
|
|
$
|
712,424
|
|
|
$
|
698,664
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Receivables
Trade and construction accounts receivable consist of amounts billed and due from customers. The amounts due are stated at their estimated net realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. This allowance is based on an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released.
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In thousands
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August 31, 2019
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March 2, 2019
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Trade accounts
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$
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153,765
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|
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$
|
145,693
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Construction contracts
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17,822
|
|
|
19,050
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Contract retainage
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35,047
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|
|
32,396
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Total receivables
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206,634
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197,139
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Less: allowance for doubtful accounts
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(4,721
|
)
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|
(4,372
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)
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Net receivables
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$
|
201,913
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|
|
$
|
192,767
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Contract assets and liabilities
Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.
The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released.
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In thousands
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August 31, 2019
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March 2, 2019
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Contract assets
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$
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110,018
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$
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87,491
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Contract liabilities
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22,980
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24,083
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The increase in contract assets was due to timing of costs incurred in advance of billings, primarily on a legacy EFCO project. The change in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.
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Other contract-related disclosures
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Three Months Ended
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Six Months Ended
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In thousands
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August 31, 2019
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September 1, 2018
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August 31, 2019
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September 1, 2018
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Revenue recognized related to contract liabilities from prior year-end
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$
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3,361
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$
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1,262
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$
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17,455
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$
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10,380
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Revenue recognized related to prior satisfaction of performance obligations
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4,481
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1,470
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6,430
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3,798
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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 August 31, 2019, the transaction price associated with unsatisfied performance obligations was approximately $775.7 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
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In thousands
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August 31, 2019
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Within one year
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$
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442,666
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Within two years
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286,223
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Beyond
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46,800
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Total
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$
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775,689
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3.
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Supplemental Balance Sheet Information
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Inventories
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In thousands
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August 31, 2019
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March 2, 2019
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Raw materials
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$
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40,810
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$
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43,890
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Work-in-process
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17,071
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15,533
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Finished goods
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16,403
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18,921
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Total inventories
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$
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74,284
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$
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78,344
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Other current liabilities
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In thousands
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August 31, 2019
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March 2, 2019
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Warranties
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$
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10,857
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$
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12,475
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Accrued project losses
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29,221
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37,085
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Taxes
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7,604
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8,026
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Accrued self-insurance reserves
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8,433
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9,537
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Other
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31,059
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25,573
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Total other current liabilities
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$
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87,174
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$
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92,696
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Other non-current liabilities
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In thousands
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August 31, 2019
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March 2, 2019
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Deferred benefit from New Market Tax Credit transactions
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$
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26,458
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$
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26,458
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Retirement plan obligations
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7,633
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7,633
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Deferred compensation plan
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10,979
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10,408
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Other
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34,058
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32,683
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Total other non-current liabilities
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$
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79,128
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$
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77,182
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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:
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In thousands
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Amortized Cost
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Gross Unrealized Gains
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Gross Unrealized Losses
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Estimated
Fair Value
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August 31, 2019
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$
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11,796
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$
|
192
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$
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3
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$
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11,985
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March 2, 2019
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12,481
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59
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|
108
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12,432
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Prism insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements.
The amortized cost and estimated fair values of these bonds at August 31, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.
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In thousands
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Amortized Cost
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Estimated Fair Value
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Due within one year
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$
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251
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$
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251
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Due after one year through five years
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9,124
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9,289
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Due after five years through 10 years
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2,015
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2,037
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Due after 10 years through 15 years
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—
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—
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Due beyond 15 years
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406
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|
408
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Total
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$
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11,796
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$
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11,985
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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 August 31, 2019, the interest rate swap contract had a notional value of $85 million.
We periodically enter into forward purchase foreign currency cash flow hedge contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of August 31, 2019, we held foreign exchange forward contracts with a U.S. dollar notional value of $27.8 million, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro.
These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income.
Fair value measurements
Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.
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In thousands
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Quoted Prices in
Active Markets
(Level 1)
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Other Observable Inputs (Level 2)
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Total Fair Value
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August 31, 2019
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Assets:
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Money market funds
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$
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3,589
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$
|
—
|
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$
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3,589
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Commercial paper
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|
—
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1,250
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1,250
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Municipal and corporate bonds
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—
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|
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11,985
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|
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11,985
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Liabilities:
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|
|
|
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Foreign currency forward/option contract
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—
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|
|
299
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|
|
299
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|
Interest rate swap contract
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—
|
|
|
179
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|
|
179
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|
|
|
|
|
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|
|
March 2, 2019
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Assets:
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Money market funds
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$
|
2,015
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|
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$
|
—
|
|
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$
|
2,015
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|
Commercial paper
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|
—
|
|
|
300
|
|
|
300
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|
Municipal and corporate bonds
|
|
—
|
|
|
12,432
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|
|
12,432
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|
Liabilities:
|
|
|
|
|
|
|
Foreign currency forward/option contract
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|
—
|
|
|
470
|
|
|
470
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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.
Derivative instruments
The interest rate swap is measured at fair value using unobservable market inputs, based off of benchmark interest rates. Forward foreign exchange contracts are measured at fair value using unobservable market inputs, such as quotations on forward foreign exchange points and foreign currency exchange rates. Derivative positions are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are our primary source for forward and spot rate information for both interest and currency rates.
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5.
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Goodwill and Other Identifiable Intangible Assets
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The carrying amount of goodwill attributable to each reporting segment was:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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In thousands
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|
Architectural Framing Systems
|
|
Architectural Glass
|
|
Architectural Services
|
|
Large-Scale
Optical
|
|
Total
|
Balance at March 3, 2018
|
|
$
|
143,308
|
|
|
$
|
25,971
|
|
|
$
|
1,120
|
|
|
$
|
10,557
|
|
|
$
|
180,956
|
|
Goodwill adjustments for purchase accounting
|
|
6,267
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,267
|
|
Foreign currency translation
|
|
(1,129
|
)
|
|
(262
|
)
|
|
—
|
|
|
—
|
|
|
(1,391
|
)
|
Balance at March 2, 2019
|
|
148,446
|
|
|
25,709
|
|
|
1,120
|
|
|
10,557
|
|
|
185,832
|
|
Foreign currency translation
|
|
(42
|
)
|
|
13
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
Balance at August 31, 2019
|
|
$
|
148,404
|
|
|
$
|
25,722
|
|
|
$
|
1,120
|
|
|
$
|
10,557
|
|
|
$
|
185,803
|
|
The gross carrying amount of other intangible assets and related accumulated amortization was:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Foreign
Currency
Translation
|
|
Net
|
August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
120,238
|
|
|
$
|
(29,939
|
)
|
|
$
|
—
|
|
|
$
|
(71
|
)
|
|
$
|
90,228
|
|
Other intangibles
|
|
40,974
|
|
|
(31,989
|
)
|
|
—
|
|
|
(10
|
)
|
|
8,975
|
|
Total definite-lived intangible assets
|
|
161,212
|
|
|
(61,928
|
)
|
|
—
|
|
|
(81
|
)
|
|
99,203
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
45,421
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
45,402
|
|
Total intangible assets
|
|
$
|
206,633
|
|
|
$
|
(61,928
|
)
|
|
$
|
—
|
|
|
$
|
(100
|
)
|
|
$
|
144,605
|
|
March 2, 2019
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
122,816
|
|
|
$
|
(26,637
|
)
|
|
$
|
—
|
|
|
$
|
(2,578
|
)
|
|
$
|
93,601
|
|
Other intangibles
|
|
41,697
|
|
|
(31,634
|
)
|
|
—
|
|
|
(850
|
)
|
|
9,213
|
|
Total definite-lived intangible assets
|
|
164,513
|
|
|
(58,271
|
)
|
|
—
|
|
|
(3,428
|
)
|
|
102,814
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
49,078
|
|
|
—
|
|
|
(3,141
|
)
|
|
(516
|
)
|
|
45,421
|
|
Total intangible assets
|
|
$
|
213,591
|
|
|
$
|
(58,271
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(3,944
|
)
|
|
$
|
148,235
|
|
Amortization expense on definite-lived intangible assets was $3.8 million and $7.9 million for the six-month periods ended August 31, 2019 and September 1, 2018, respectively. Amortization expense is included in selling, general and administrative expenses in the consolidated results of operations, other than amortization on debt issue costs, which is included in interest expense. At August 31, 2019, the estimated future amortization expense for definite-lived intangible assets was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Remainder of Fiscal 2020
|
|
Fiscal 2021
|
|
Fiscal 2022
|
|
Fiscal 2023
|
|
Fiscal 2024
|
Estimated amortization expense
|
|
$
|
3,961
|
|
|
$
|
7,916
|
|
|
$
|
7,911
|
|
|
$
|
7,746
|
|
|
$
|
7,665
|
|
As of August 31, 2019, our total debt outstanding was $272.8 million, compared to $245.8 million as of March 2, 2019. During the second quarter ended August 31, 2019, we amended the borrowing capacity of our prior credit facility to be $235 million with a maturity of June 2024 and we established a $150 million term loan with a maturity of June 2020. Outstanding borrowings under the revolving credit facility were $102.0 million, as of August 31, 2019, and $225.0 million, as of March 2, 2019.
Consistent with our prior facility, our amended revolving credit facility and term loan contains two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 31, 2019, we were in compliance with both financial covenants. Additionally, at August 31, 2019, we had a total of $24.7 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2021 to 2032 and reduce borrowing capacity under the revolving credit facility.
At August 31, 2019, debt included $20.4 million of industrial revenue bonds that mature in fiscal years 2021 through 2043 and $0.4 million of long-term debt in Canada. The fair value of the industrial revenue bonds approximated carrying value at August 31, 2019, due to the variable interest rates on these instruments. All debt would be classified as Level 2 within the fair value hierarchy described in Note 4.
We also maintain two Canadian demand credit facilities totaling $12.0 million Canadian dollars. As of August 31, 2019 and March 2, 2019, no borrowings were outstanding under the facilities. Borrowings under these facilities are made available at the sole discretion of the lenders and are payable on demand.
Interest payments were $5.3 million and $4.3 million for the six months ended August 31, 2019 and September 1, 2018, respectively.
7. Leases
We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases. We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet and such leases are expensed on a straight-line basis over the lease term.
In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and nonlease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
In thousands
|
|
August 31, 2019
|
|
August 31, 2019
|
Operating lease cost
|
|
$
|
3,490
|
|
|
$
|
6,863
|
|
Short-term lease cost
|
|
496
|
|
|
1,179
|
|
Variable lease cost
|
|
667
|
|
|
1,380
|
|
Total lease cost
|
|
$
|
4,653
|
|
|
$
|
9,422
|
|
Other supplemental information related to leases was as follows:
|
|
|
|
|
|
|
|
Six Months Ended
|
In thousands except weighted-average data
|
|
August 31, 2019
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
6,791
|
|
Lease assets obtained in exchange for new operating lease liabilities
|
|
$
|
8,970
|
|
Weighted-average remaining lease term - operating leases
|
|
6.0 years
|
|
Weighted-average discount rate - operating leases
|
|
3.70
|
%
|
Future maturities of lease liabilities are as follows:
|
|
|
|
|
|
In thousands
|
|
August 31, 2019
|
Remainder of Fiscal 2020
|
|
$
|
8,481
|
|
Fiscal 2021
|
|
11,256
|
|
Fiscal 2022
|
|
9,891
|
|
Fiscal 2023
|
|
8,989
|
|
Fiscal 2024
|
|
7,067
|
|
Fiscal 2025
|
|
5,331
|
|
Thereafter
|
|
10,659
|
|
Total lease payments
|
|
61,674
|
|
Less: Amounts representing interest
|
|
(7,536
|
)
|
Present value of lease liabilities
|
|
$
|
54,138
|
|
We have two operating leases with a related party; total rent paid for these facilities was approximately $1.0 million for the six months ended August 31, 2019, and the future minimum lease commitment is $12.2 million. As of August 31, 2019, we have additional future operating lease commitments of $6.0 million for leases that have not yet commenced, with terms ranging from one to seven years.
Aggregate annual future rental commitments under operating leases with noncancellable terms of more than one year at March 2, 2019 were reported under previous lease accounting standards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Total minimum payments
|
|
$
|
14,888
|
|
|
11,787
|
|
|
9,669
|
|
|
8,772
|
|
|
6,735
|
|
|
16,806
|
|
|
$
|
68,657
|
|
|
|
8.
|
Commitments and Contingent Liabilities
|
Bond commitments
In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At August 31, 2019, $695.7 million of these types of bonds were outstanding on our backlog and recently completed projects. These bonds do not have stated expiration dates. We have not been required to make any payments under these 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:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
In thousands
|
|
August 31, 2019
|
|
September 1, 2018
|
Balance at beginning of period
|
|
$
|
16,737
|
|
|
$
|
22,517
|
|
Additional accruals
|
|
3,606
|
|
|
2,087
|
|
Claims paid
|
|
(5,481
|
)
|
|
(4,580
|
)
|
Balance at end of period
|
|
$
|
14,862
|
|
|
$
|
20,024
|
|
Additionally, we are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses. We manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages. We have recorded an estimated liability related to legacy EFCO projects of $34.2 million and $42.8 million as of August 31, 2019 and March 2, 2019, respectively. We are actively pursuing available options to recover costs related to these exposures.
Letters of credit
At August 31, 2019, we had $24.7 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6.
Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $124.2 million as of August 31, 2019.
New Markets Tax Credit (NMTC) transactions
We have entered into four separate NMTC programs to support our operational expansion, including two transactions completed in fiscal 2019. Proceeds received from investors on these transactions are included within other 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 classified as restricted cash on our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.
The table below provides a summary of our outstanding NMTC transactions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception date
|
|
Termination date
|
|
Proceeds received
|
|
Deferred costs
|
Net benefit
|
November 2013
|
|
October 2020
|
|
$
|
10.7
|
|
|
$
|
3.0
|
|
$
|
7.7
|
|
June 2016
|
|
May 2023
|
|
6.0
|
|
|
0.9
|
|
5.1
|
|
August 2018
|
|
July 2025
|
|
6.6
|
|
|
0.9
|
|
5.7
|
|
September 2018
|
|
August 2025
|
|
3.2
|
|
|
0.8
|
|
2.4
|
|
Total
|
|
|
|
$
|
26.5
|
|
|
$
|
5.6
|
|
$
|
20.9
|
|
Litigation
On November 5, 2018, a shareholder filed a purported securities class action against the Company and certain named executive officers. On April 26, 2019, the new lead plaintiff filed an amended complaint, alleging that, during the purported class period of May 1, 2017 to April 10, 2019, the Company and the named executive officers made materially false or misleading statements or omissions about the Company's acquisition of EFCO Corporation on June 12, 2017, and about the Company's Architectural Glass business segment, in violation of the federal securities laws. We intend to vigorously defend this matter.
On December 17, 2018, a different shareholder filed a derivative lawsuit, purportedly on behalf of the Company, against certain of our executive officers and directors claiming breaches of fiduciary duty, waste of corporate assets and unjust enrichment. This complaint alleges that the officers and directors allegedly made materially false or misleading statements or omissions about the Company's business, operations and prospects, particularly with respect to our Architectural Glass business segment, during the period between June 28, 2018 and September 17, 2018. This matter has been stayed, pending resolution of a motion to dismiss the foregoing matter. We intend to vigorously defend this matter.
In addition to the foregoing, the Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.
|
|
9.
|
Share-Based Compensation
|
Total share-based compensation expense included in the results of operations was $3.2 million for the six-month period ended August 31, 2019 and $3.1 million for the six-month period ended September 1, 2018.
Stock options and SARs
Stock option and SAR activity for the current six-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 March 2, 2019
|
|
100,341
|
|
|
$
|
8.34
|
|
|
|
|
|
Awards exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding and exercisable at August 31, 2019
|
|
100,341
|
|
|
8.34
|
|
|
2.0 years
|
|
$
|
2,868,749
|
|
No awards were exercised for the six-months ended August 31, 2019. For the six-months ended September 1, 2018, cash proceeds from the exercise of stock options were $0.2 million and the aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $0.6 million.
Nonvested shares and share units
Nonvested share activity for the current six-month period is summarized as follows:
|
|
|
|
|
|
|
|
|
Nonvested shares and units
|
|
Number of Shares and Units
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at March 2, 2019
|
|
286,613
|
|
|
$
|
47.00
|
|
Granted
|
|
125,571
|
|
|
39.53
|
|
Vested
|
|
(124,533
|
)
|
|
49.21
|
|
Canceled
|
|
(1,500
|
)
|
|
47.35
|
|
Nonvested at August 31, 2019
|
|
286,151
|
|
|
42.76
|
|
At August 31, 2019, there was $8.5 million of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately 22 months. The total fair value of shares vested during the six months ended August 31, 2019 was $4.9 million.
|
|
10.
|
Employee Benefit Plans
|
The Company sponsors two frozen defined-benefit pension plans: an unfunded Officers’ Supplemental Executive Retirement Plan and the Tubelite Inc. Hourly Employees’ Pension Plan. Components of net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
In thousands
|
|
August 31, 2019
|
|
September 1, 2018
|
|
August 31,
2019
|
|
September 1,
2018
|
Interest cost
|
|
$
|
123
|
|
|
$
|
127
|
|
|
$
|
246
|
|
|
$
|
254
|
|
Expected return on assets
|
|
(46
|
)
|
|
(10
|
)
|
|
(92
|
)
|
|
(20
|
)
|
Amortization of unrecognized net loss
|
|
55
|
|
|
57
|
|
|
110
|
|
|
114
|
|
Net periodic benefit cost
|
|
$
|
132
|
|
|
$
|
174
|
|
|
$
|
264
|
|
|
$
|
348
|
|
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 2016, 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 2015, and there is limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.
The total liability for unrecognized tax benefits was approximately $5.5 million at August 31, 2019 and $5.1 million at March 2, 2019. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. The total liability for unrecognized tax benefits is expected to decrease by approximately $0.5 million during the next 12 months due to lapsing of statutes.
The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
In thousands
|
|
August 31, 2019
|
|
September 1, 2018
|
|
August 31,
2019
|
|
September 1,
2018
|
Basic earnings per share – weighted average common shares outstanding
|
|
26,413
|
|
|
28,128
|
|
|
26,505
|
|
|
28,127
|
|
Weighted average effect of nonvested share grants and assumed exercise of stock options
|
|
323
|
|
|
251
|
|
|
284
|
|
|
250
|
|
Diluted earnings per share – weighted average common shares and potential common shares outstanding
|
|
26,736
|
|
|
28,379
|
|
|
26,789
|
|
|
28,377
|
|
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)
|
|
186
|
|
|
106
|
|
|
186
|
|
|
108
|
|
The Company has four reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).
|
|
•
|
The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. The Company has aggregated six operating segments into this reporting segment based on their similar products, customers, distribution methods, production processes and economic characteristics.
|
|
|
•
|
The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.
|
|
|
•
|
The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.
|
|
|
•
|
The LSO segment manufactures value-added glass and acrylic products primarily for framing and display applications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
In thousands
|
|
August 31, 2019
|
|
September 1, 2018
|
|
August 31, 2019
|
|
September 1, 2018
|
Net sales from operations
|
|
|
|
|
|
|
|
|
Architectural Framing Systems
|
|
$
|
187,394
|
|
|
$
|
189,850
|
|
|
$
|
367,916
|
|
|
$
|
368,887
|
|
Architectural Glass
|
|
99,138
|
|
|
88,084
|
|
|
199,429
|
|
|
165,009
|
|
Architectural Services
|
|
61,597
|
|
|
76,496
|
|
|
126,744
|
|
|
147,223
|
|
Large-Scale Optical
|
|
20,785
|
|
|
20,383
|
|
|
42,045
|
|
|
41,145
|
|
Intersegment eliminations
|
|
(11,856
|
)
|
|
(12,680
|
)
|
|
(23,710
|
)
|
|
(23,600
|
)
|
Net sales
|
|
$
|
357,058
|
|
|
$
|
362,133
|
|
|
$
|
712,424
|
|
|
$
|
698,664
|
|
Operating income (loss) from operations
|
|
|
|
|
|
|
|
|
Architectural Framing Systems
|
|
$
|
15,523
|
|
|
$
|
18,312
|
|
|
$
|
27,796
|
|
|
$
|
30,650
|
|
Architectural Glass
|
|
6,460
|
|
|
1,739
|
|
|
12,859
|
|
|
3,317
|
|
Architectural Services
|
|
3,976
|
|
|
7,621
|
|
|
8,549
|
|
|
12,775
|
|
Large-Scale Optical
|
|
4,630
|
|
|
4,236
|
|
|
8,807
|
|
|
9,218
|
|
Corporate and other
|
|
(3,013
|
)
|
|
(3,248
|
)
|
|
(7,395
|
)
|
|
(5,306
|
)
|
Operating income
|
|
$
|
27,576
|
|
|
$
|
28,660
|
|
|
$
|
50,616
|
|
|
$
|
50,654
|
|
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.