NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended February 26, 2022. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein and are of a normal, recurring nature. The results of operations for the three- and six-month periods ended August 27, 2022 are not necessarily indicative of the results to be expected for the full year.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The comparative fiscal 2022 segment results for the Architectural Framing Systems and Architectural Services segments have been recast to reflect the move of the Sotawall business into the Architectural Services segment from the Architectural Framing Systems segment, effective at the start of the first quarter of fiscal 2023.
2.Revenue, Receivables and Contract Assets and Liabilities
Revenue
The following table disaggregates total revenue by timing of recognition (see Note 12 for disclosure of revenue by segment):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 | | August 27, 2022 | | August 28, 2021 |
Recognized at shipment | | $ | 174,693 | | | $ | 137,783 | | | $ | 335,857 | | | $ | 278,066 | |
Recognized over time | | 197,416 | | | 188,014 | | | 392,887 | | | 373,737 | |
Total | | $ | 372,109 | | | $ | 325,797 | | | $ | 728,744 | | | $ | 651,803 | |
Receivables
Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released to us from the customer.
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Trade accounts | | $ | 146,035 | | | $ | 129,085 | |
Construction contracts | | 65,482 | | | 12,857 | |
Contract retainage | | 22,267 | | | 28,782 | |
Total receivables | | 233,784 | | | 170,724 | |
Less: allowance for credit losses | | 1,931 | | | 2,132 | |
Receivables, net | | $ | 231,853 | | | $ | 168,592 | |
The following table summarizes the activity in the allowance for credit losses:
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Beginning balance | | $ | 2,132 | | | $ | 1,947 | |
Additions charged to costs and expenses | | 45 | | | 729 | |
Deductions from allowance, net of recoveries | | (244) | | | (514) | |
Other changes (1) | | (2) | | | (30) | |
Ending balance | | $ | 1,931 | | | $ | 2,132 | |
(1) Result of foreign currency effects | | | | |
Contract assets and liabilities
Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.
The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released to us from the customer.
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Contract assets | | $ | 51,789 | | | $ | 59,185 | |
Contract liabilities | | 32,022 | | | 11,373 | |
| | | | |
The changes in contract assets and contract liabilities were mainly due to timing of project activity within our businesses that operate under long-term contracts.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other contract-related disclosures | | Three Months Ended | | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 | | August 27, 2022 | | August 28, 2021 |
Revenue recognized related to contract liabilities from prior year-end | | $ | 4,978 | | | $ | 2,479 | | | $ | 33,157 | | | $ | 16,579 | |
Revenue recognized related to prior satisfaction of performance obligations | | 4,770 | | | 5,354 | | | 4,946 | | | 7,518 | |
Some of our contracts have an expected duration of longer than a year, with performance obligations extending over that time frame. Generally, these contracts are found in our businesses that typically operate with long-term contracts, which recognize revenue over time. The transaction prices associated with unsatisfied performance obligations at August 27, 2022 are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
| | | | | | | | |
(In thousands) | | August 27, 2022 |
Within one year | | $ | 501,856 | |
Within two years | | 293,561 | |
Beyond two years | | 117,867 | |
Total | | $ | 913,284 | |
3.Supplemental Balance Sheet Information
Inventories
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Raw materials | | $ | 51,284 | | | $ | 42,541 | |
Work-in-process | | 17,121 | | | 18,144 | |
Finished goods | | 29,641 | | | 19,809 | |
Total inventories | | $ | 98,046 | | | $ | 80,494 | |
Other current liabilities
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Warranties | | $ | 13,482 | | | $ | 11,786 | |
| | | | |
Income and other taxes | | 6,519 | | | 15,770 | |
Accrued self-insurance reserves | | 12,471 | | | 8,796 | |
Accrued freight | | 2,410 | | | 2,078 | |
Deferred revenue | | 2,405 | | | 2,714 | |
Other | | 26,773 | | | 26,318 | |
Total other current liabilities | | $ | 64,060 | | | $ | 67,462 | |
Other non-current liabilities
| | | | | | | | | | | | | | |
(In thousands) | | August 27, 2022 | | February 26, 2022 |
Deferred benefit from New Markets Tax Credit transactions | | $ | 9,250 | | | $ | 9,165 | |
Retirement plan obligations | | 6,857 | | | 7,041 | |
Deferred compensation plan | | 7,290 | | | 9,483 | |
Deferred tax liabilities | | 7,611 | | | 2,296 | |
| | | | |
Other | | 19,346 | | | 16,598 | |
Total other non-current liabilities | | $ | 50,354 | | | $ | 44,583 | |
4.Financial Instruments
Marketable securities
Through our wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), we hold the following available-for-sale marketable securities, made up of municipal and corporate bonds:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
August 27, 2022 | | $ | 11,344 | | | $ | 3 | | | $ | 565 | | | $ | 10,782 | |
February 26, 2022 | | 11,862 | | | 45 | | | 123 | | | 11,784 | |
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 27, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.
| | | | | | | | | | | | | | |
(In thousands) | | Amortized Cost | | Estimated Fair Value |
Due within one year | | $ | 1,430 | | | $ | 1,419 | |
Due after one year through five years | | 9,578 | | | 9,069 | |
Due after five years through 10 years | | 336 | | | 294 | |
| | | | |
| | | | |
Total | | $ | 11,344 | | | $ | 10,782 | |
Derivative instruments
We use interest rate swaps, foreign exchange forward contracts, commodity swaps and forward purchase contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments we use, how such instruments are accounted for, and how such instruments impact our financial position and performance.
In fiscal 2020, 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 and term loan. As of August 27, 2022, the interest rate swap contract had a notional value of $30.0 million.
We periodically enter into forward purchase contracts and/or fixed/floating swaps to manage the risk associated with fluctuations in aluminum prices and fluctuations in foreign exchange rates (primarily related to the Canadian dollar). These contracts generally have an original maturity date of less than one year. As of August 27, 2022, we held foreign exchange forward contracts and aluminum fixed/floating swaps with U.S. dollar notional values of $3.2 million and $12.2 million, respectively.
These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income.
Fair value measurements
Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Quoted Prices in Active Markets (Level 1) | | Other Observable Inputs (Level 2) | | Total Fair Value |
August 27, 2022 | | | | | | |
Assets: | | | | | | |
Money market funds | | $ | 15,034 | | | $ | — | | | $ | 15,034 | |
| | | | | | |
Municipal and corporate bonds | | — | | | 10,782 | | | 10,782 | |
Cash surrender value of life insurance | | — | | | 16,625 | | | 16,625 | |
| | | | | | |
| | | | | | |
Interest rate swap contract | | — | | | 1,584 | | | 1,584 | |
Liabilities: | | | | | | |
Deferred compensation | | — | | | 10,299 | | | 10,299 | |
Foreign currency forward/option contract | | — | | | 82 | | | 82 | |
Aluminum hedging contract | | — | | | 3,515 | | | 3,515 | |
| | | | | | |
| | | | | | |
February 26, 2022 | | | | | | |
Assets: | | | | | | |
Money market funds | | $ | 19,288 | | | $ | — | | | $ | 19,288 | |
| | | | | | |
Municipal and corporate bonds | | — | | | 11,784 | | | 11,784 | |
Cash surrender value of life insurance | | — | | | 17,831 | | | 17,831 | |
| | | | | | |
Aluminum hedging contract | | — | | | 2,133 | | | 2,133 | |
Interest rate swap contract | | — | | | 718 | | | 718 | |
Liabilities: | | | | | | |
Deferred compensation | | — | | | 12,491 | | | 12,491 | |
Foreign currency forward/option contract | | — | | | 161 | | | 161 | |
| | | | | | |
Money market funds and commercial paper
Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets. These assets are included within cash and cash equivalents on our consolidated balance sheets.
Municipal and corporate bonds
Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified within our consolidated balance sheets as other current or other non-current assets based on maturity date.
Cash surrender value of life insurance and deferred compensation
Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. Changes in cash surrender value are recorded in other expense. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.
Derivative instruments
The interest rate swap is measured at fair value using other observable market inputs, based off of benchmark interest rates. Forward foreign exchange and fixed/floating aluminum contracts are measured at fair value using other observable market inputs, such as quotations on forward foreign exchange points, foreign currency exchange rates, and forward purchase aluminum prices. 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 and aluminum prices.
Nonrecurring fair value measurements
We measure certain financial instruments at fair value on a nonrecurring basis including goodwill, intangible assets, property and equipment and right-of-use lease assets. These assets were initially measured and recognized at amounts equal to the fair
value determined as of the date of acquisition or purchase subject to changes in value only for foreign currency translation. Periodically, these assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these assets were to become impaired, we would recognize an impairment expense equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted cash flow models that contain certain Level 3 inputs requiring significant management judgment, including projections of economic conditions, customer demand and changes in competition, revenue growth rates, gross profit margins, operating margins, capital expenditures, working capital requirements, terminal growth rates and discount rates. Fair value measurements of the reporting units associated with our goodwill balances and our indefinite-lived intangible assets are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing if a quantitative analysis is performed.
5.Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the cost over the value of net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually as of the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects which resulted in the combination of the Sotawall and Harmon reporting units into a single reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change for these reporting units and concluded that no adjustment to the carrying value of goodwill was necessary. Concurrent with the move of Sotawall from the Architectural Framing Systems segment to the Architectural Services segment effective at the start of our first quarter of fiscal 2023, goodwill was reallocated to the affected reporting units within each segment, using a relative fair value approach as outlined in ASC 350, Intangibles - Goodwill and Other. In addition, for all reporting units, no qualitative indicators of impairment were identified during the first quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed.
The following table presents the carrying amount of goodwill attributable to each reporting segment including the amount of goodwill that was reallocated from the Architectural Framing Systems segment to the Architectural Services segment using the relative fair value approach during the first quarter of fiscal 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Architectural Framing Systems | | Architectural Services | | Architectural Glass | | Large-Scale Optical | | Total |
Balance at February 27, 2021 | | $ | 93,099 | | | $ | 1,120 | | | $ | 25,322 | | | $ | 10,557 | | | $ | 130,098 | |
| | | | | | | | | | |
| | | | | | | | | | |
Foreign currency translation | | 82 | | | — | | | (78) | | | — | | | 4 | |
Balance at February 26, 2022 | | 93,181 | | | 1,120 | | | 25,244 | | | 10,557 | | | 130,102 | |
| | | | | | | | | | |
Reallocation among reporting units (1) | | (2,048) | | | 2,048 | | | — | | | — | | | — | |
| | | | | | | | | | |
Foreign currency translation | | (644) | | | (53) | | | 71 | | | — | | | (626) | |
Balance at August 27, 2022 | | $ | 90,489 | | | $ | 3,115 | | | $ | 25,315 | | | $ | 10,557 | | | $ | 129,476 | |
| | | | | | | | | | |
(1) Represents the reallocation of goodwill as a result of transitioning Sotawall from the Architectural Framing Systems segment to the Architectural Services segment as of the start of the first quarter of fiscal 2023. |
Other intangible assets
Indefinite-lived intangible assets
We have intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. We test indefinite-lived intangible assets for impairment annually at the same measurement date as goodwill, the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Based on the impairment analysis performed in the fourth quarter of fiscal 2022, the fair value of each of our trade names and trademarks exceeded the carrying amount. However, due to triggering events identified in the fourth quarter of fiscal 2022, resulting from the finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the carrying value of the Sotawall trade name exceeded fair value by $12.7 million. We determined that Sotawall had an immaterial fair value, resulting in the trade name being fully impaired as of fiscal 2022 year-end. We recognized this amount as impairment expense in the fourth quarter ended February 26, 2022.
Finite-lived intangible assets
Long-lived assets or asset groups, including intangible assets subject to amortization and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be
recoverable. We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows to determine the fair value of long-lived assets. Due to triggering events identified during the fourth quarter of fiscal 2022, as a result of finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the finite-lived intangible assets of Sotawall were impaired as of February 26, 2022. As such, we recognized a long-lived asset impairment charge of $36.7 million in finite-lived intangible assets in the fourth quarter of fiscal year 2022, within the Architectural Framing Systems segment.
The gross carrying amount of other intangible assets and related accumulated amortization was:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Impairment Expense | | Foreign Currency Translation | | Net |
August 27, 2022 | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | |
Customer relationships | | $ | 89,495 | | | $ | (48,556) | | | $ | — | | | $ | (997) | | | $ | 39,942 | |
Other intangibles | | 39,347 | | | (35,572) | | | — | | | (361) | | | 3,414 | |
Total | | 128,842 | | | (84,128) | | | — | | | (1,358) | | | 43,356 | |
Indefinite-lived intangible assets: | | | | | | | | | | |
Trademarks | | 27,129 | | | — | | | — | | | (108) | | | 27,021 | |
Total intangible assets | | $ | 155,971 | | | $ | (84,128) | | | $ | — | | | $ | (1,466) | | | $ | 70,377 | |
February 26, 2022 | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | |
Customer relationships | | $ | 122,961 | | | $ | (47,226) | | | $ | (33,608) | | | $ | 141 | | | $ | 42,268 | |
Other intangibles | | 41,838 | | | (35,613) | | | (3,127) | | | (14) | | | 3,084 | |
Total | | 164,799 | | | (82,839) | | | (36,735) | | | 127 | | | 45,352 | |
Indefinite-lived intangible assets: | | | | | | | | | | |
Trademarks | | 39,832 | | | — | | | (12,738) | | | 35 | | | 27,129 | |
Total intangible assets | | $ | 204,631 | | | $ | (82,839) | | | $ | (49,473) | | | $ | 162 | | | $ | 72,481 | |
Amortization expense on definite-lived intangible assets was $2.1 million and $3.9 million for the six-month periods ended August 27, 2022 and August 28, 2021, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At August 27, 2022, the estimated future amortization expense for definite-lived intangible assets was:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Remainder of 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Estimated amortization expense | | $ | 2,258 | | | $ | 4,362 | | | $ | 4,332 | | | $ | 4,315 | | | $ | 4,313 | |
6.Debt
During the second quarter ended August 27, 2022, we amended and extended our committed revolving credit facility to include maximum borrowings of up to $385 million with a maturity of August 2027. As part of the amendment, we repaid the $150 million term loan with borrowings under the revolving credit facility. As of August 27, 2022, outstanding borrowings under our revolving credit facility were $235.0 million, while there were no outstanding borrowings under the revolving credit facility as of February 26, 2022.
Our revolving credit facility contains two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of EBITDA-to-interest expense. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 27, 2022, we were in compliance with both financial covenants. Additionally, at August 27, 2022, we had a total of $12.3 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2023 to 2032 and reduce borrowing capacity under the revolving credit facility.
At August 27, 2022, debt included $12.0 million of industrial revenue bonds that mature in fiscal years 2036 through 2043. In March 2022, a $1.0 million industrial revenue bond matured and was repaid. The fair value of all industrial revenue bonds approximated carrying value at August 27, 2022, due to the variable interest rates on these instruments. Our credit facility, term loan and industrial revenue bonds would be classified as Level 2 within the fair value hierarchy described in Note 4.
We also maintain two Canadian committed, revolving credit facilities totaling $25.0 million (USD). At August 27, 2022, outstanding borrowings under our Canadian committed, revolving credit facilities were $3.8 million, while there were no outstanding borrowings under the Canadian facilities as of February 26, 2022.
Interest payments were $2.8 million and $1.9 million for the six months ended August 27, 2022 and August 28, 2021, 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. 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; such leases are expensed on a straight-line basis over the lease term.
In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and non lease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 | | August 27, 2022 | | August 28, 2021 |
Operating lease cost | | $ | 2,954 | | | $ | 3,518 | | | $ | 6,005 | | | $ | 6,899 | |
Short-term lease cost | | 346 | | | 240 | | | 660 | | | 464 | |
Variable lease cost | | 857 | | | 734 | | | 1,763 | | | 1,457 | |
| | | | | | | | |
Total lease cost | | $ | 4,157 | | | $ | 4,492 | | | $ | 8,428 | | | $ | 8,820 | |
Other supplemental information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands except weighted-average data) | | August 27, 2022 | | August 28, 2021 |
| | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 7,069 | | | $ | 7,186 | |
Lease assets obtained in exchange for new operating lease liabilities | | $ | 701 | | | $ | 1,281 | |
Weighted-average remaining lease term - operating leases | | 5.0 years | | 5.7 years |
Weighted-average discount rate - operating leases | | 2.86 | % | | 2.95 | % |
Future maturities of lease liabilities are as follows:
| | | | | | | | |
(In thousands) | | August 27, 2022 |
Remainder of Fiscal 2023 | | $ | 6,676 | |
Fiscal 2024 | | 11,426 | |
Fiscal 2025 | | 10,018 | |
Fiscal 2026 | | 7,975 | |
Fiscal 2027 | | 6,479 | |
Fiscal 2028 | | 2,973 | |
Thereafter | | 3,786 | |
Total lease payments | | 49,333 | |
Less: Amounts representing interest | | 3,210 | |
Present value of lease liabilities | | $ | 46,123 | |
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 27, 2022, $1.1 billion of these types of bonds were outstanding, of which $361.1 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.
Warranty and project-related contingencies
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on these accruals in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume.
| | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 |
Balance at beginning of period | | $ | 13,923 | | | $ | 14,999 | |
Additional accruals | | 6,918 | | | 4,400 | |
| | | | |
Claims paid | | (4,201) | | | (5,871) | |
Balance at end of period | | $ | 16,640 | | | $ | 13,528 | |
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.
Letters of credit
At August 27, 2022, we had $12.3 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. We also have a $3.4 million letter of credit which has been issued outside our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants.
Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $225.2 million as of August 27, 2022.
New Markets Tax Credit (NMTC) transactions
We have three outstanding NMTC arrangements which help to support operational expansion. Proceeds received from investors on these transactions are included within other current and other non-current liabilities in our consolidated balance sheets. The NMTC arrangements are subject to 100 percent tax credit recapture for a period of seven years from the date of each respective transaction. 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 in 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 or for working capital purposes for each project, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash in our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.
During the first quarter of fiscal 2023, one NMTC transaction was terminated, and a new NMTC transaction was established as a replacement. As a result of these transactions, $19.5 million in previous proceeds received were repaid and $19.5 million was contributed back to the Company as part of the newly established NMTC transaction. This NMTC transaction will be held for the remainder of the original seven-year term.
The table below provides a summary of our outstanding NMTC transactions (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Inception date | | Termination date | | Deferred Benefit | | Deferred costs | | Net benefit |
June 2016 | | June 2023 | | $ | 6.0 | | | $ | 1.2 | | | $ | 4.8 | |
September 2018 | | September 2025 | | 3.2 | | | 1.0 | | | 2.2 | |
May 2022 | | August 2025 | | 6.1 | | | 1.6 | | | 4.5 | |
Total | | | | $ | 15.3 | | | $ | 3.8 | | | $ | 11.5 | |
Litigation
The Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. We have in the past and are currently subject to product liability and warranty claims, including certain legal claims related to a commercial sealant product formerly incorporated into our products. 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 $3.4 million for the six-month period ended August 27, 2022 and $3.3 million for the six-month period ended August 28, 2021.
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 beginning of year | | 370,800 | | | $ | 23.04 | | | | | |
| | | | | | | | |
Awards exercised | | (145,060) | | | 23.04 | | | | | |
Awards canceled/expired | | (67,740) | | | 23.04 | | | | | |
Outstanding at end of period | | 158,000 | | | $ | 23.04 | | | 0.9 years | | $ | 2,000,280 | |
Vested or expected to vest at end of period | | 158,000 | | | $ | 23.04 | | | 0.9 years | | $ | 2,000,280 | |
| | | | | | | | |
For the six-months ended August 27, 2022, there were no cash proceeds from the exercise of stock options as all stock options were exercised on a stock for stock basis. 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 $2.7 million. For the six-months ended August 28, 2021, cash proceeds from the exercise of stock options was $4.1 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 $2.3 million.
Executive Compensation Program
In fiscal 2022, the Compensation Committee of the Board of Directors implemented an executive compensation program for certain key employees. In the each of the first quarters of fiscal 2023 and fiscal 2022, we issued performance shares in the form of nonvested share unit awards, which give the recipient the right to receive shares earned at the end of the respective performance periods. The number of share units issued at grant is equal to the target number of performance shares and allows for the right to receive a variable number of shares dependent on achieving a defined performance goal of return on invested capital and being employed at the end of the performance period.
Nonvested share awards and units
Nonvested share activity, including performance share units, 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 February 26, 2022 (1) | | 488,944 | | | $ | 30.14 | |
Granted (2) | | 174,393 | | | 46.45 | |
Vested | | (134,499) | | | 27.94 | |
Canceled (3) | | (44,232) | | | 36.00 | |
Nonvested at August 27, 2022(4) | | 484,606 | | | $ | 36.09 | |
(1) Includes a total of 50,825 nonvested share units granted and outstanding at target level for the fiscal 2022-2024 performance period.
(2) Includes a total of 38,564 nonvested share units granted and outstanding at target level for the fiscal 2023-2025 performance period.
(3) Includes a total of 9,690 nonvested share units cancelled for the fiscal 2022-2024 and fiscal 2023-2025 performance periods.
(4) Includes a total of 45,207 and 34,492 nonvested share units granted and outstanding at target level for the 2022-2024 and 2023-2025 performance periods, respectively.
At August 27, 2022, there was $12.8 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 27 months. The total fair value of shares vested during the six months ended August 27, 2022 was $3.8 million.
10.Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2019, 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 2018, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.
In the second quarter of fiscal 2023, the Company claimed certain tax deductions, including a worthless stock loss deduction, related to its investment in Sotawall Limited, a Canadian subsidiary. These deductions generated a net tax benefit of $13.7 million.
The total liability for unrecognized tax benefits was $5.3 million at August 27, 2022, compared to $3.3 million at February 26, 2022. The increase was primarily related to the tax deductions claimed during the second quarter of fiscal 2023 associated with the Company's investment in Sotawall Limited, a Canadian subsidiary. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense.
11.Earnings per Share
The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 | | August 27, 2022 | | August 28, 2021 |
Basic earnings per share – weighted average common shares outstanding | | 21,860 | | | 25,140 | | | 22,129 | | | 25,271 | |
Weighted average effect of nonvested share grants and assumed exercise of stock options | | 385 | | | — | | | 434 | | | 366 | |
Diluted earnings per share – weighted average common shares and potential common shares outstanding | | 22,245 | | | 25,140 | | | 22,563 | | | 25,637 | |
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) | | 120 | | | 4 | | | 120 | | | 8 | |
12.Business Segment Data
We have four reporting segments:
•The Architectural Framing Systems segment designs, engineers, fabricates and finishes aluminum window, curtainwall, storefront and entrance systems for the exterior of buildings.
•The Architectural Services segment integrates technical services, project management, and field installation services to design, engineer, fabricate, and install building glass and curtainwall systems.
•The Architectural Glass segment coats and fabricates, high-performance glass used in custom window and wall systems on commercial buildings.
•The Large-Scale Optical (LSO) segment manufactures high-performance glass and acrylic products for custom framing, museum, and technical glass markets.
At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The fiscal 2022 segment results were recast for comparability.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | August 27, 2022 | | August 28, 2021 | | August 27, 2022 | | August 28, 2021 |
Net sales | | | | | | | | |
Architectural Framing Systems | | $ | 172,867 | | | $ | 136,973 | | | $ | 336,159 | | | $ | 273,741 | |
Architectural Services | | 106,732 | | | 96,370 | | | 210,120 | | | 187,102 | |
Architectural Glass | | 77,352 | | | 79,373 | | | 153,617 | | | 162,404 | |
Large-Scale Optical | | 25,166 | | | 23,543 | | | 50,328 | | | 47,771 | |
Intersegment eliminations | | (10,008) | | | (10,462) | | | (21,480) | | | (19,215) | |
Net sales | | $ | 372,109 | | | $ | 325,797 | | | $ | 728,744 | | | $ | 651,803 | |
Operating income (loss) | | | | | | | | |
Architectural Framing Systems | | $ | 20,512 | | | $ | 8,381 | | | $ | 44,177 | | | $ | 16,752 | |
Architectural Services | | 5,490 | | | 7,139 | | | 8,417 | | | 11,365 | |
Architectural Glass | | 6,457 | | | (16,995) | | | 11,626 | | | (14,867) | |
Large-Scale Optical | | 5,991 | | | 5,483 | | | 12,489 | | | 11,330 | |
Corporate and other | | (6,378) | | | (7,076) | | | (11,421) | | | (11,607) | |
Operating income (loss) | | $ | 32,072 | | | $ | (3,068) | | | $ | 65,288 | | | $ | 12,973 | |
| | | | | | | | |
|
|
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.
13. Restructuring
On August 11, 2021, we announced plans to realign and simplify our business structure. During the first quarter of fiscal 2023, we completed the execution of these plans with the sale of the remaining manufacturing assets at our Architectural Glass location, in Dallas, Texas, for $4.1 million. The remaining assets had a carrying value of $3.4 million, and we recognized a gain on the sale of approximately $0.6 million, net of associated transaction costs, which is included as a reduction of cost of sales within our consolidated statements of operations.
The following table summarizes our restructuring related accrual balances included within accrued payroll and related costs and other current liabilities in the consolidated balance sheets. All balances are expected to be paid within the current fiscal year.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Architectural Framing | | Architectural Glass | | Corporate & Other | | Total |
Balance at February 27, 2021 | | $ | 2,872 | | | $ | 230 | | | $ | 161 | | | $ | 3,263 | |
Restructuring expense | | 2,000 | | | 1,036 | | | 1,039 | | | 4,075 | |
Payments | | (3,567) | | | (529) | | | (972) | | | (5,068) | |
Other adjustments | | (865) | | | — | | | — | | | (865) | |
Balance at February 26, 2022 | | 440 | | | 737 | | | 228 | | | 1,405 | |
Restructuring expense | | — | | | 62 | | | — | | | 62 | |
Payments | | (171) | | | (531) | | | (136) | | | (838) | |
Other adjustments | | (151) | | | (17) | | | — | | | (168) | |
Balance at August 27, 2022 | | $ | 118 | | | $ | 251 | | | $ | 92 | | | $ | 461 | |
14. 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.