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 3, 2018
. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. The results of operations for the
nine
-month period ended
December 1, 2018
are not necessarily indicative of the results to be expected for the full year.
Certain prior-year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations.
Significant accounting policies update
Our significant accounting policies are included in Note 1 "Summary of Significant Accounting Policies and Related Data" of our Annual Report on Form 10-K for the year ended March 3, 2018. On March 4, 2018, we adopted ASC 606,
Revenue from Contracts with Customers
, and as a result, made updates to our significant accounting policy for revenue recognition.
We generate revenue from the design, engineering and fabrication of architectural glass, curtainwall, window, storefront and entrance systems, and from installing those products on commercial buildings. We also manufacture value-added glass and acrylic products. Due to the diverse nature of our operations and various types of contracts with customers, we have businesses that recognize revenue over time and businesses that recognize revenue at a point in time.
In the current year-to-date period, approximately
46 percent
of our total revenue is recognized at the time products are shipped from our manufacturing facilities, which is when control is transferred to our customer, consistent with past practices. These businesses do not generate contract-related assets or liabilities. Variable consideration associated with these contracts and orders, generally related to early pay discounts or volume rebates, is not considered significant.
We also have
three
businesses which operate under long-term, fixed-price contracts, representing approximately
33 percent
of our total revenue in the current year. This includes
one
business which changed revenue recognition practices due to the adoption of the new guidance, moving from recognizing revenue at shipment to an over-time method of revenue recognition. The contracts
for these businesses have a single, bundled performance obligation, as these businesses generally provide interrelated products and services and integrate these products and services into a combined output specified by the customer. The customer obtains control of this combined output, generally integrated window systems or installed window and curtainwall systems, over time. We measure progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract, and record that proport
ion of the total contract price as revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe this method of recognizing revenue is consistent with our progress in satisfying our contract obligations.
Due to the nature of the work required under these long-term contracts, the estimation of total revenue and costs incurred throughout a project is subject to many variables and requires significant judgment. It is common for these contracts to contain potential bonuses or penalties which are generally awarded or charged upon certain project milestones or cost or timing targets, and can be based on customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on our assessments of anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Long-term contracts are often modified to account for changes in contract specifications and requirements of work to be performed. We consider contract modifications to exist when the modification, generally through a change order, either creates new or changes existing enforceable rights and obligations, and we evaluate these types of modifications to determine whether they may be considered distinct performance obligations. In many cases, these contract modifications are for goods or services that are not distinct from the existing contract, due to the significant integration service provided in the context of the contract. Therefore, these modifications are accounted for as part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress is recognized as an adjustment to revenue, generally on a cumulative catch-up basis.
Typically, under these fixed-price contracts, we bill our customers following an agreed-upon schedule based on work performed. Because the progress billings do not generally correspond to our measurement of revenue on a contract, we generate contract assets when we have recognized revenue in excess of the amount billed to the customer. We generate contract liabilities when we have billed the customer in excess of revenue recognized on a contract.
Finally, we h
ave
one
business, making up approximately
21 percent
of our to
tal revenue in the current year, that recognizes revenue following an over-time output method based upon units produced. The customer is considered to have control over the products at the time of production, as the products are highly customized with no alternative use, and we have an enforceable right to payment for performance completed over the production p
eriod. We believe this over-time output method of recognizing revenue reasonably depicts the fulfillment of our performance obligations under our contracts. Previo
usly, this business recognized revenue at the time of shipment. Billings still occur upon shipment. Therefore, contract assets are generated for the unbilled amounts on contracts when production is complete. Variable consideration associated with these orders, generally related to early pay discounts, is not considered significant.
As outlined within the new accounting guidance, we elected several practical expedients in our transition to ASC 606:
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•
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We have made an accounting policy election to account for shipping and handling activities that occur after control of the related goods transfers to the customer as fulfillment activities, instead of assessing such activities as performance obligations.
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•
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We have made an accounting policy election to exclude from the transaction price all sales taxes related to revenue-producing transactions that are collected from the customer for a government authority.
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•
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We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are included in selling, general and administrative expenses.
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•
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We have not adjusted contract price for a significant financing component, as we expect the period between when our goods and services are transferred to the customer and when the customer pays for those goods and services to be less than a year.
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Adoption of new accounting standards
We adopted the new guidance in ASC 606 using the modified retrospective transition method applied to those contracts which were not complete as of March 4, 2018. Prior period amounts were not adjusted and therefore continue to be reported in accordance with the accounting guidance and our accounting policies in effect for those periods.
Representing the cumulative effect of adopting ASC 606,
we recorded a
$3.0 million
increase to the opening
balance of retained earnings as of March 4, 2018. For the three- and
nine
-month periods ending
December 1, 2018
, the application of the new accounting guidance had the following impact on our consolidated financial statements:
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Three Months Ended December 1, 2018
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Nine Months Ended December 1, 2018
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In thousands
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As reported
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Without adoption of ASC 606
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|
As reported
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|
Without adoption of ASC 606
|
Net sales
|
|
$
|
357,718
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|
|
$
|
355,765
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|
|
$
|
1,056,382
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|
|
$
|
1,042,600
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Cost of sales
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|
273,628
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|
|
272,087
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|
807,096
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|
796,802
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Gross profit
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84,090
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|
83,678
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249,286
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|
245,798
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Selling, general and administrative expenses
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|
52,682
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|
52,692
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167,224
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|
|
166,560
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Operating income
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|
$
|
31,408
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$
|
30,986
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$
|
82,062
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$
|
79,238
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Income tax expense
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$
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6,730
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$
|
6,627
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$
|
18,030
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$
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17,355
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Net earnings
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$
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21,891
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$
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21,572
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$
|
57,778
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$
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55,628
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December 1, 2018
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|
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As reported
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Without adoption of ASC 606
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Inventories
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$
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79,847
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$
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89,250
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Costs and earnings on contracts in excess of billings
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60,140
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30,756
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Billings on contracts in excess of costs and earnings
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26,961
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25,923
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Other current liabilities
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59,230
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57,802
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Retained earnings
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400,289
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398,139
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These changes are primarily a result of the transition of certain of our businesses from recognizing revenue at the time of shipment to over-time methods of revenue recognition.
In the first quarter of fiscal 2019, we elected to early adopt ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This standard permits a company to reclassify the disproportionate income tax effects of the 2017 Tax Cuts and Jobs Act on items within accumulated other comprehensive income ("AOCI") to retained earnings. The FASB refers to these amounts as “stranded tax effects.” As a result of this adoption, we reclassified income tax effects of
$0.7 million
resulting from tax reform from AOCI to retained earnings following a portfolio approach. These stranded tax effects are derived from the deferred tax balances on our pension obligations as a result of the lower U.S. federal corporate tax rate.
Accounting standards not yet adopted
In February 2016, the FASB issued ASU 2016-02,
Leases
, which provides for comprehensive changes to lease accounting. The standard requires that a lessee recognize a lease obligation liability and a right-to-use asset for virtually all leases of property, plant and equipment, subsequently amortized over the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, our fiscal year 2020. In July 2018, the FASB issued an additional update which allows an entity the option to adopt the guidance on a modified retrospective basis. Under the modified retrospective approach, which we plan to adopt in implementing the new guidance, an entity would recognize a cumulative effect adjustment of initially applying the guidance to the opening balance of retained earnings in the period of adoption. Prior period amounts will not be adjusted.
We are in the process of analyzing our lease arrangements and evaluating our initial right-to-use asset and lease liability balances, including determining estimates and assumptions used in the calculation of the lease asset and liability. We are also in the process of determining modifications to our business processes, accounting policies and systems and controls that are needed to support measurement, recognition and disclosure under this new standard. We expect that the adoption of this standard will result in reflecting a material right-of-use asset and lease liability on our consolidated balance sheet. In adopting the new standard, we plan to elect the package of practical expedients, as well as the practical expedient to not separate nonlease components from lease components. We plan to adopt the new guidance following the modified retrospective application approach. We do not expect this standard to have a significant impact on our consolidated results of operations or consolidated statements of cash flows.
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 purchased
504,004
shares of stock under our authorized share repurchase program, at a total cost of
$14.9 million
.
On June 12, 2017, we acquired
100
percent of the stock of EFCO Corporation, a privately held U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects, for
$192 million
in cash, funded through our committed revolving credit facility. EFCO's results of operations have been included in our consolidated financial statements and within the Architectural Framing Systems segment since the date of acquisition.
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3.
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Revenue, Receivables and Contract Assets and Liabilities
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Revenue
The following table disaggregates total revenue by timing of recognition (see Note 13 for disclosure of revenue by segment):
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Three Months Ended
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Nine Months Ended
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In thousands
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December 1, 2018
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December 1, 2018
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Recognized at shipment
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$
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158,164
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$
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481,565
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Recognized over time
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199,554
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574,817
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Total
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$
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357,718
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$
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1,056,382
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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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December 1, 2018
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March 3, 2018
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Trade accounts
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$
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155,651
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$
|
157,562
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Construction contracts
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14,229
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|
26,545
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|
Construction contracts - retainage
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33,176
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26,388
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Other receivables
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—
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|
2,887
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Total receivables
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203,056
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|
213,382
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Less: allowance for doubtful accounts
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|
(1,558
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)
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|
(1,530
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)
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Net receivables
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|
$
|
201,498
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|
|
$
|
211,852
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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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|
December 1, 2018
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|
March 3, 2018
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Contract assets
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|
$
|
93,316
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|
|
$
|
30,508
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Contract liabilities
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|
30,447
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|
20,120
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|
The increase in contract assets was due to additional businesses recognizing revenue in advance of billings, as a result of changing accounting policies for revenue recognition upon adoption of ASC 606 and the timing of costs incurred in advance of billing on a large project. The increase in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.
In the first
nine
months of fiscal 2019, we recognized revenue of
$10.4 million
related to contract liabilities at March 4, 2018, and revenue of
$3.8 million
related to performance obligations satisfied in previous periods due to changes in contract estimates. For the third quarter of fiscal 2019, we did not recognize
any
revenue related to contract liabilities at March 4, 2018, and recognized revenue of
$1.5 million
related to performance obligations satisfied in previous periods due to changes in contract estimates.
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
December 1, 2018
, the transaction price associated with unsatisfied performance obligations was approximately
$706.3 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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|
|
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In thousands
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|
December 1, 2018
|
Within one year
|
|
$
|
421,778
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|
Within two years
|
|
236,037
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|
Beyond
|
|
48,493
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|
Total
|
|
$
|
706,308
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|
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|
4.
|
Supplemental Balance Sheet Information
|
Inventories
|
|
|
|
|
|
|
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In thousands
|
|
December 1, 2018
|
|
March 3, 2018
|
Raw materials
|
|
$
|
43,821
|
|
|
$
|
35,049
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|
Work-in-process
|
|
16,426
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|
|
17,406
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|
Finished goods
|
|
19,600
|
|
|
28,453
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|
Total inventories
|
|
$
|
79,847
|
|
|
$
|
80,908
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 1, 2018
|
|
March 3, 2018
|
Warranties
|
|
$
|
12,796
|
|
|
$
|
18,110
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|
Acquired contract liabilities
|
|
15,541
|
|
|
26,422
|
|
Deferred revenue
|
|
4,080
|
|
|
7,659
|
|
Other
|
|
26,813
|
|
|
27,505
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|
Total other current liabilities
|
|
$
|
59,230
|
|
|
$
|
79,696
|
|
Other non-current liabilities
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 1, 2018
|
|
March 3, 2018
|
Deferred benefit from New Market Tax Credit transactions
|
|
$
|
26,458
|
|
|
$
|
16,708
|
|
Retirement plan obligations
|
|
8,997
|
|
|
8,997
|
|
Deferred compensation plan
|
|
10,996
|
|
|
10,730
|
|
Other
|
|
38,954
|
|
|
34,211
|
|
Total other non-current liabilities
|
|
$
|
85,405
|
|
|
$
|
70,646
|
|
Marketable securities
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
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated
Fair Value
|
December 1, 2018
|
|
12,534
|
|
|
4
|
|
|
(249
|
)
|
|
12,289
|
|
March 3, 2018
|
|
9,183
|
|
|
8
|
|
|
(138
|
)
|
|
9,053
|
|
We have a wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), which holds these municipal and corporate bonds. Prism insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments, which are generally high-quality municipal and corporate bonds, for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements.
The amortized cost and estimated fair values of municipal bonds at
December 1, 2018
, 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
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Due within one year
|
|
$
|
447
|
|
|
$
|
441
|
|
Due after one year through five years
|
|
8,781
|
|
|
8,598
|
|
Due after five years through 10 years
|
|
2,541
|
|
|
2,493
|
|
Due after 10 years through 15 years
|
|
—
|
|
|
—
|
|
Due beyond 15 years
|
|
765
|
|
|
757
|
|
Total
|
|
$
|
12,534
|
|
|
$
|
12,289
|
|
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
|
December 1, 2018
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,145
|
|
|
$
|
—
|
|
|
$
|
2,145
|
|
Commercial paper
|
|
—
|
|
|
400
|
|
|
400
|
|
Total cash equivalents
|
|
2,145
|
|
|
400
|
|
|
2,545
|
|
Short-term securities
|
|
|
|
|
|
|
Municipal and corporate bonds
|
|
—
|
|
|
442
|
|
|
442
|
|
Long-term securities
|
|
|
|
|
|
|
Municipal and corporate bonds
|
|
—
|
|
|
11,847
|
|
|
11,847
|
|
Total assets at fair value
|
|
$
|
2,145
|
|
|
$
|
12,689
|
|
|
$
|
14,834
|
|
March 3, 2018
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,901
|
|
|
$
|
—
|
|
|
$
|
2,901
|
|
Commercial paper
|
|
—
|
|
|
400
|
|
|
400
|
|
Total cash equivalents
|
|
2,901
|
|
|
400
|
|
|
3,301
|
|
Short-term securities
|
|
|
|
|
|
|
Municipal and corporate bonds
|
|
—
|
|
|
423
|
|
|
423
|
|
Long-term securities
|
|
|
|
|
|
|
Municipal and corporate bonds
|
|
—
|
|
|
8,630
|
|
|
8,630
|
|
Total assets at fair value
|
|
$
|
2,901
|
|
|
$
|
9,453
|
|
|
$
|
12,354
|
|
Cash equivalents
Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets.
Short- and long-term securities
Mutual funds were measured at fair value based on quoted prices for identical assets in active markets. Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified as short-term or long-term based on maturity date.
Foreign currency instruments
We periodically enter into forward purchase foreign currency contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of
December 1, 2018
, we held foreign exchange forward contracts with a U.S. dollar notional value of
$16.0 million
, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro. The fair value of these contracts was a liability of
$0.4 million
as of
December 1, 2018
. These forward contracts are measured at fair value using unobservable market inputs, such as quotations on forward foreign exchange points and foreign currency exchange rates, and would be classified as Level 2 within the fair value hierarchy above.
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|
6.
|
Goodwill and Other Identifiable Intangible Assets
|
The carrying amount of goodwill attributable to each reporting segment was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Architectural Framing Systems
|
|
Architectural Glass
|
|
Architectural Services
|
|
Large-Scale
Optical
|
|
Total
|
Balance at March 4, 2017
|
|
$
|
63,701
|
|
|
$
|
25,956
|
|
|
$
|
1,120
|
|
|
$
|
10,557
|
|
|
$
|
101,334
|
|
Goodwill acquired
|
|
84,162
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84,162
|
|
Goodwill adjustments for purchase accounting
|
|
(5,859
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,859
|
)
|
Foreign currency translation
|
|
1,304
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
1,319
|
|
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
|
|
(1,110
|
)
|
|
(325
|
)
|
|
—
|
|
|
—
|
|
|
(1,435
|
)
|
Balance at December 1, 2018
|
|
$
|
148,465
|
|
|
$
|
25,646
|
|
|
$
|
1,120
|
|
|
$
|
10,557
|
|
|
$
|
185,788
|
|
The gross carrying amount of other intangible assets and related accumulated amortization was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
Currency
Translation
|
|
Net
|
December 1, 2018
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
122,816
|
|
|
$
|
(24,937
|
)
|
|
$
|
(2,609
|
)
|
|
$
|
95,270
|
|
Other intangibles
|
|
41,697
|
|
|
(31,033
|
)
|
|
(899
|
)
|
|
9,765
|
|
Total definite-lived intangible assets
|
|
164,513
|
|
|
(55,970
|
)
|
|
(3,508
|
)
|
|
105,035
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
49,077
|
|
|
—
|
|
|
(507
|
)
|
|
48,570
|
|
Total intangible assets
|
|
$
|
213,590
|
|
|
$
|
(55,970
|
)
|
|
$
|
(4,015
|
)
|
|
$
|
153,605
|
|
March 3, 2018
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
122,816
|
|
|
$
|
(20,277
|
)
|
|
$
|
(56
|
)
|
|
$
|
102,483
|
|
Other intangibles
|
|
41,697
|
|
|
(25,879
|
)
|
|
(30
|
)
|
|
15,788
|
|
Total definite-lived intangible assets
|
|
164,513
|
|
|
(46,156
|
)
|
|
(86
|
)
|
|
118,271
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
48,461
|
|
|
—
|
|
|
617
|
|
|
49,078
|
|
Total intangible assets
|
|
$
|
212,974
|
|
|
$
|
(46,156
|
)
|
|
$
|
531
|
|
|
$
|
167,349
|
|
Amortization expense on definite-lived intangible assets was
$10.5 million
and
$12.8 million
for the
nine
-month periods ended
December 1, 2018
and
December 2, 2017
. The amortization expense associated with debt issue costs is included in interest expense while the remainder is in selling, general and administrative expenses in the consolidated results of operations. At
December 1, 2018
, the estimated future amortization expense for definite-lived intangible assets was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Remainder of Fiscal 2019
|
|
Fiscal 2020
|
|
Fiscal 2021
|
|
Fiscal 2022
|
|
Fiscal 2023
|
Estimated amortization expense
|
|
$
|
2,266
|
|
|
$
|
8,091
|
|
|
$
|
8,084
|
|
|
$
|
7,928
|
|
|
$
|
7,539
|
|
We maintain a committed revolving credit facility with maximum borrowings of up to
$335.0 million
, maturing in
November 2021
. Outstanding borrowings under our committed revolving credit facility were
$211.5 million
, as of
December 1, 2018
, and
$195.0 million
, as of
March 3, 2018
. Under this facility, we are subject to two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At
December 1, 2018
, we were in compliance with both financial covenants. Additionally, at
December 1, 2018
, we had a total of
$25.1 million
of ongoing letters of credit related to industrial revenue bonds and construction contracts that expire in fiscal 2020 and reduce availability of funds under our committed credit facility.
At
December 1, 2018
, our debt also included
$20.4 million
of industrial revenue bonds that mature in fiscal years 2021 through 2043 and
$0.5 million
of long-term debt in Canada. The fair value of the industrial revenue bonds approximated carrying value at
December 1, 2018
, 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 5.
We also maintain two Canadian demand credit facilities totaling $
12.0 million
Canadian dollars. As of
December 1, 2018
,
$0.4 million
was outstanding under these facilities, and
no
borrowings were outstanding as of
March 3, 2018
. Borrowings under these facilities are made available at the sole discretion of the lenders and are payable on demand. The Company classifies any outstanding balances under these demand facilities as long-term debt, as outstanding amounts can be refinanced through our committed revolving credit facility.
Interest payments were
$7.2 million
and
$3.6 million
for the
nine
months ended
December 1, 2018
and
December 2, 2017
, respectively.
|
|
8.
|
Commitments and Contingent Liabilities
|
Operating lease commitments
As of
December 1, 2018
, the Company was obligated under non-cancelable operating leases for buildings and equipment. Certain leases provide for increased rental payments based upon increases in real estate taxes or operating costs. Future minimum rental payments under non-cancelable operating leases are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Remainder of Fiscal 2019
|
|
Fiscal 2020
|
|
Fiscal 2021
|
|
Fiscal 2022
|
|
Fiscal 2023
|
|
Thereafter
|
|
Total
|
Total minimum payments
|
|
$
|
3,890
|
|
|
$
|
14,759
|
|
|
$
|
11,522
|
|
|
$
|
9,353
|
|
|
$
|
8,459
|
|
|
$
|
23,308
|
|
|
$
|
71,291
|
|
Bond commitments and installation project contingencies
In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At
December 1, 2018
,
$224.0 million
of our backlog was bonded by these types of bonds with a face value of
$478.8 million
. These bonds do not have stated expiration dates, as we are generally released from the bonds upon completion of the contract. We have not been required to make any payments under these bonds with respect to our existing businesses.
Additionally, we also are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses, including those taken on with our acquisition of EFCO. We actively manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages.
Warranties
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on the warranty accrual in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. A warranty rollforward follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
In thousands
|
|
December 1, 2018
|
|
December 2, 2017
|
Balance at beginning of period
|
|
$
|
22,517
|
|
|
$
|
21,933
|
|
Additional accruals
|
|
3,437
|
|
|
3,443
|
|
Claims paid
|
|
(8,398
|
)
|
|
(8,254
|
)
|
Acquired reserves
|
|
—
|
|
|
5,571
|
|
Balance at end of period
|
|
$
|
17,556
|
|
|
$
|
22,693
|
|
Letters of credit
At
December 1, 2018
, we had
$25.1 million
of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 7.
Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled
$163.2 million
as of
December 1, 2018
.
New Markets Tax Credit transactions
In September 2018, we entered into a transaction with SunTrust Community Capital (STCC) under a qualified New Markets Tax Credit (NMTC) program related to an investment in plant and equipment within our Architectural Framing Systems segment. STCC contributed
$3.2 million
to this project, which is included in other non-current liabilities on our consolidated balance sheets. We have completed two NMTC transactions this fiscal year. Under the terms of these arrangements, we are required to hold cash dedicated to fund the related capital projects which is classified as restricted cash on our consolidated balance sheets.
Since fiscal 2014, we have entered into four separate NMTC programs to support our operational expansion. The NMTC arrangements are subject to 100 percent tax credit recapture for a period of seven years from the date of each respective transaction. Therefore, upon the termination of each arrangement at the end of the seven-year period, proceeds received from investors will be recognized in earnings in exchange for the transfer of tax credits. Direct and incremental costs incurred in structuring these arrangements have been deferred and will be recognized in conjunction with the recognition of the related profits.
Variable-interest entities have been created as a result of the transaction structure, which have been included within our consolidated financial statements as investors in the program do not have a material interest in the underlying economics of the respective projects.
Litigation
In November 2018, a purported class action lawsuit was filed claiming the Company and certain named executive officers made materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business and operations during the period June 28, 2018 to September 17, 2018. In December 2018, a derivative lawsuit was filed against certain of our executive officers and directors claiming breach of fiduciary duty, waste of corporate assets and unjust enrichment. We intend to vigorously defend against these matters. Due to the preliminary nature of these matters, we are unable to estimate any potential loss at this time.
In addition to the foregoing, the Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.
|
|
9.
|
Share-Based Compensation
|
Total share-based compensation expense included in the results of operations was
$4.7 million
for the
nine
-month period ended
December 1, 2018
and
$4.6 million
for the
nine
-month period ended
December 2, 2017
.
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 March 3, 2018
|
|
129,901
|
|
|
$
|
11.10
|
|
|
|
|
|
Awards exercised
|
|
(29,560
|
)
|
|
20.43
|
|
|
|
|
|
Outstanding and exercisable at December 1, 2018
|
|
100,341
|
|
|
8.34
|
|
|
2.8 years
|
|
$
|
2,820,586
|
|
Cash proceeds from the exercise of stock options were
$0.2 million
and
$0.8 million
for the
nine
months ended
December 1, 2018
and
December 2, 2017
, respectively. The aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was
$0.6 million
during the
nine
months ended
December 1, 2018
and
$4.8 million
during the prior-year period.
Nonvested shares and share units
Nonvested share activity for the current
nine
-month period is summarized as follows:
|
|
|
|
|
|
|
|
|
Nonvested shares and units
|
|
Number of Shares and Units
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at March 3, 2018
|
|
266,180
|
|
|
$
|
49.22
|
|
Granted
|
|
152,487
|
|
|
43.50
|
|
Vested
|
|
(116,266
|
)
|
|
46.57
|
|
Canceled
|
|
(17,942
|
)
|
|
48.65
|
|
Nonvested at December 1, 2018
|
|
284,459
|
|
|
47.24
|
|
At
December 1, 2018
, there was
$7.9 million
of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately
20
months. The total fair value of shares vested during the
nine
months ended
December 1, 2018
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
|
|
Nine Months Ended
|
In thousands
|
|
December 1, 2018
|
|
December 2, 2017
|
|
December 1,
2018
|
|
December 2,
2017
|
Interest cost
|
|
$
|
127
|
|
|
$
|
133
|
|
|
$
|
381
|
|
|
$
|
399
|
|
Expected return on assets
|
|
(10
|
)
|
|
(10
|
)
|
|
(30
|
)
|
|
(30
|
)
|
Amortization of unrecognized net loss
|
|
57
|
|
|
57
|
|
|
171
|
|
|
171
|
|
Net periodic benefit cost
|
|
$
|
174
|
|
|
$
|
180
|
|
|
$
|
522
|
|
|
$
|
540
|
|
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 2012. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2015, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.
The total liability for unrecognized tax benefits was approximately
$5.3 million
at
December 1, 2018
and
$5.1 million
at
March 3, 2018
. 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
$0.6 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
|
|
Nine Months Ended
|
In thousands
|
|
December 1, 2018
|
|
December 2, 2017
|
|
December 1,
2018
|
|
December 2,
2017
|
Basic earnings per share – weighted average common shares outstanding
|
|
27,836
|
|
|
28,736
|
|
|
28,030
|
|
|
28,812
|
|
Weighted average effect of nonvested share grants and assumed exercise of stock options
|
|
320
|
|
|
82
|
|
|
274
|
|
|
50
|
|
Diluted earnings per share – weighted average common shares and potential common shares outstanding
|
|
28,156
|
|
|
28,818
|
|
|
28,304
|
|
|
28,862
|
|
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)
|
|
170
|
|
|
—
|
|
|
92
|
|
|
—
|
|
The Company has
four
reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).
|
|
•
|
The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. The Company has aggregated
six
operating segments into this reporting segment based on their similar products, customers, distribution methods, production processes and economic characteristics.
|
|
|
•
|
The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.
|
|
|
•
|
The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.
|
|
|
•
|
The LSO segment manufactures value-added glass and acrylic products primarily for framing and display applications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
In thousands
|
|
December 1, 2018
|
|
December 2, 2017
|
|
December 1, 2018
|
|
December 2, 2017
|
Net sales from operations
|
|
|
|
|
|
|
|
|
Architectural Framing Systems
|
|
$
|
181,306
|
|
|
$
|
194,157
|
|
|
$
|
550,193
|
|
|
$
|
493,672
|
|
Architectural Glass
|
|
98,524
|
|
|
96,940
|
|
|
263,533
|
|
|
292,026
|
|
Architectural Services
|
|
72,828
|
|
|
49,077
|
|
|
220,051
|
|
|
146,056
|
|
Large-Scale Optical
|
|
23,377
|
|
|
26,003
|
|
|
64,522
|
|
|
64,897
|
|
Intersegment eliminations
|
|
(18,317
|
)
|
|
(9,671
|
)
|
|
(41,917
|
)
|
|
(23,930
|
)
|
Net sales
|
|
$
|
357,718
|
|
|
$
|
356,506
|
|
|
$
|
1,056,382
|
|
|
$
|
972,721
|
|
Operating income (loss) from operations
|
|
|
|
|
|
|
|
|
Architectural Framing Systems
|
|
$
|
12,903
|
|
|
$
|
18,452
|
|
|
$
|
43,554
|
|
|
$
|
46,958
|
|
Architectural Glass
|
|
5,851
|
|
|
9,107
|
|
|
9,168
|
|
|
28,687
|
|
Architectural Services
|
|
8,659
|
|
|
2,547
|
|
|
21,435
|
|
|
4,102
|
|
Large-Scale Optical
|
|
6,628
|
|
|
6,724
|
|
|
15,845
|
|
|
15,022
|
|
Corporate and other
|
|
(2,633
|
)
|
|
(2,295
|
)
|
|
(7,940
|
)
|
|
(8,354
|
)
|
Operating income
|
|
$
|
31,408
|
|
|
$
|
34,535
|
|
|
$
|
82,062
|
|
|
$
|
86,415
|
|
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.