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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 29, 2021
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-6365
_________________________________
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
_________________________________
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Minnesota | | | | 41-0919654 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
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4400 West 78th Street, Suite 520 | Minneapolis | Minnesota | | 55435 |
(Address of principal executive offices) | | | | (Zip Code) |
Registrant’s telephone number, including area code: (952) 835-1874
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, par value $0.33 1/3 per share | | APOG | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | o | | Accelerated filer | | x |
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Non-accelerated filer | | o | | Smaller reporting company | | ☐ |
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Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
As of June 28, 2021, 25,526,814 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
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PART I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
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(In thousands, except stock data) | | May 29, 2021 | | February 27, 2021 |
Assets | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 36,469 | | | $ | 47,277 | |
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Receivables, net | | 172,433 | | | 175,917 | |
Inventories | | 70,867 | | | 72,823 | |
Costs and earnings on contracts in excess of billings | | 28,390 | | | 29,497 | |
Other current assets | | 23,973 | | | 25,160 | |
Total current assets | | 332,132 | | | 350,674 | |
Property, plant and equipment, net | | 292,296 | | | 298,443 | |
Operating lease right-of-use assets | | 56,277 | | | 58,864 | |
Goodwill | | 131,461 | | | 130,098 | |
Intangible assets | | 131,980 | | | 130,053 | |
Other non-current assets | | 46,557 | | | 46,967 | |
Total assets | | $ | 990,703 | | | $ | 1,015,099 | |
Liabilities and Shareholders’ Equity | | | | |
Current liabilities | | | | |
Accounts payable | | $ | 74,312 | | | $ | 76,204 | |
Accrued payroll and related benefits | | 37,041 | | | 50,125 | |
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Billings on contracts in excess of costs and earnings | | 16,873 | | | 22,789 | |
Operating lease liabilities | | 12,438 | | | 13,251 | |
Current portion of debt | | 3,000 | | | 2,000 | |
Other current liabilities | | 44,541 | | | 53,183 | |
Total current liabilities | | 188,205 | | | 217,552 | |
Long-term debt | | 162,000 | | | 163,000 | |
Non-current operating lease liabilities | | 47,184 | | | 48,439 | |
Non-current self-insurance reserves | | 25,784 | | | 24,880 | |
Other non-current liabilities | | 69,979 | | | 68,483 | |
Commitments and contingent liabilities (Note 8) | | | | |
Shareholders’ equity | | | | |
Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 25,605,924 and 25,713,688 respectively | | 8,535 | | | 8,571 | |
Additional paid-in capital | | 158,341 | | | 154,958 | |
Retained earnings | | 352,130 | | | 357,243 | |
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Accumulated other comprehensive loss | | (21,455) | | | (28,027) | |
Total shareholders’ equity | | 497,551 | | | 492,745 | |
Total liabilities and shareholders’ equity | | $ | 990,703 | | | $ | 1,015,099 | |
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED RESULTS OF OPERATIONS
(unaudited)
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| | Three Months Ended | | |
(In thousands, except per share data) | | May 29, 2021 | | May 30, 2020 | | | | |
Net sales | | $ | 326,006 | | | $ | 289,095 | | | | | |
Cost of sales | | 258,296 | | | 228,844 | | | | | |
Gross profit | | 67,710 | | | 60,251 | | | | | |
Selling, general and administrative expenses | | 51,668 | | | 53,782 | | | | | |
Operating income | | 16,042 | | | 6,469 | | | | | |
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Interest expense, net | | 1,238 | | | 1,414 | | | | | |
Other expense, net | | 315 | | | 1,049 | | | | | |
Earnings before income taxes | | 14,489 | | | 4,006 | | | | | |
Income tax expense | | 3,672 | | | 1,130 | | | | | |
Net earnings | | $ | 10,817 | | | $ | 2,876 | | | | | |
Earnings per share - basic | | $ | 0.43 | | | $ | 0.11 | | | | | |
Earnings per share - diluted | | $ | 0.42 | | | $ | 0.11 | | | | | |
Weighted average basic shares outstanding | | 25,402 | | | 26,168 | | | | | |
Weighted average diluted shares outstanding | | 25,822 | | | 26,418 | | | | | |
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(unaudited)
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| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Net earnings | | $ | 10,817 | | | $ | 2,876 | | | | | |
Other comprehensive earnings (loss): | | | | | | | | |
Unrealized gain on marketable securities, net of $— and $26 of tax expense, respectively | | — | | | 97 | | | | | |
Unrealized gain (loss) on derivative instruments, net of $211 and $(189) of tax expense (benefit), respectively | | 692 | | | (617) | | | | | |
Foreign currency translation adjustments | | 5,880 | | | (6,151) | | | | | |
Other comprehensive earnings (loss) | | 6,572 | | | (6,671) | | | | | |
Total comprehensive earnings (loss) | | $ | 17,389 | | | $ | (3,795) | | | | | |
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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| | Three Months Ended |
(In thousands) | | May 29, 2021 | | May 30, 2020 |
Operating Activities | | | | |
Net earnings | | $ | 10,817 | | | $ | 2,876 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 12,980 | | | 12,540 | |
Share-based compensation | | 1,674 | | | 1,406 | |
Deferred income taxes | | 941 | | | (738) | |
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Noncash lease expense | | 3,098 | | | 2,945 | |
Other, net | | 58 | | | 1,039 | |
Changes in operating assets and liabilities: | | | | |
Receivables | | 4,455 | | | 39,650 | |
Inventories | | 2,252 | | | (4,700) | |
Costs and earnings on contracts in excess of billings | | 1,205 | | | 7,558 | |
Accounts payable and accrued expenses | | (22,449) | | | (22,334) | |
Billings on contracts in excess of costs and earnings | | (6,434) | | | (17,181) | |
Refundable and accrued income taxes | | 1,410 | | | 2,847 | |
Operating lease liability | | (3,113) | | | (2,781) | |
Other | | (11) | | | 849 | |
Net cash provided by operating activities | | 6,883 | | | 23,976 | |
Investing Activities | | | | |
Capital expenditures | | (4,705) | | | (8,606) | |
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Other | | 557 | | | (1,082) | |
Net cash used by investing activities | | (4,148) | | | (9,688) | |
Financing Activities | | | | |
Borrowings on line of credit | | — | | | 139,500 | |
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Payments on line of credit | | — | | | (146,500) | |
Proceeds from exercise of stock options | | 4,115 | | | — | |
Repurchase and retirement of common stock | | (12,625) | | | (4,731) | |
Dividends paid | | (5,035) | | | (4,872) | |
Other | | (712) | | | (731) | |
Net cash used by financing activities | | (14,257) | | | (17,334) | |
Decrease in cash and cash equivalents | | (11,522) | | | (3,046) | |
Effect of exchange rates on cash | | 714 | | | (270) | |
Cash, cash equivalents and restricted cash at beginning of year | | 47,277 | | | 14,952 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 36,469 | | | $ | 11,636 | |
Noncash Activity | | | | |
Capital expenditures in accounts payable | | $ | 1,058 | | | $ | 1,458 | |
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
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(In thousands) | | Common Shares Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Common Stock Held in Trust | | Deferred Compensation Obligation | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders' Equity |
Balance at February 27, 2021 | | 25,714 | | | $ | 8,571 | | | $ | 154,958 | | | $ | 357,243 | | | $ | (186) | | | $ | 186 | | | $ | (28,027) | | | $ | 492,745 | |
Net earnings | | — | | | — | | | — | | | 10,817 | | | — | | | — | | | — | | | 10,817 | |
Unrealized gain on marketable securities, net of $— tax expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Unrealized loss on foreign currency hedge, net of $211 tax expense | | — | | | — | | | — | | | — | | | — | | | — | | | 692 | | | 692 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | 5,880 | | | 5,880 | |
Issuance of stock, net of cancellations | | 90 | | | 30 | | | (7) | | | — | | | (3) | | | 3 | | | — | | | 23 | |
Share-based compensation | | — | | | — | | | 1,674 | | | — | | | — | | | — | | | — | | | 1,674 | |
Exercise of stock options | | 179 | | | 60 | | | 4,055 | | | — | | | — | | | — | | | — | | | 4,115 | |
Share repurchases | | (357) | | | (119) | | | (2,218) | | | (10,288) | | | — | | | — | | | — | | | (12,625) | |
Other share retirements | | (20) | | | (7) | | | (121) | | | (607) | | | — | | | — | | | — | | | (735) | |
Cash dividends | | — | | | — | | | — | | | (5,035) | | | — | | | — | | | — | | | (5,035) | |
Balance at May 29, 2021 | | 25,606 | | | $ | 8,535 | | | $ | 158,341 | | | $ | 352,130 | | | $ | (189) | | | $ | 189 | | | $ | (21,455) | | | $ | 497,551 | |
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(In thousands) | | Common Shares Outstanding | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Common Stock Held in Trust | | Deferred Compensation Obligation | | Accumulated Other Comprehensive (Loss) Income | | Total Shareholders' Equity |
Balance at February 29, 2020 | | 26,443 | | | $ | 8,814 | | | $ | 154,016 | | | $ | 388,010 | | | $ | (685) | | | $ | 685 | | | $ | (34,062) | | | $ | 516,778 | |
Net earnings | | — | | | — | | | — | | | 2,876 | | | — | | | — | | | — | | | 2,876 | |
Unrealized gain on marketable securities, net of $26 tax expense | | — | | | — | | | — | | | — | | | — | | | — | | | 97 | | | 97 | |
Unrealized loss on foreign currency hedge, net of $189 tax benefit | | — | | | — | | | — | | | — | | | — | | | — | | | (617) | | | (617) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (6,151) | | | (6,151) | |
Issuance of stock, net of cancellations | | 183 | | | 62 | | | (39) | | | — | | | (11) | | | 11 | | | — | | | 23 | |
Share-based compensation | | — | | | — | | | 1,406 | | | — | | | — | | | — | | | — | | | 1,406 | |
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Share repurchases | | (231) | | | (77) | | | (1,370) | | | (3,284) | | | — | | | — | | | — | | | (4,731) | |
Other share retirements | | (26) | | | (9) | | | (151) | | | (505) | | | — | | | — | | | — | | | (665) | |
Cash dividends | | — | | | — | | | — | | | (4,872) | | | — | | | — | | | — | | | (4,872) | |
Balance at May 30, 2020 | | 26,369 | | | $ | 8,790 | | | $ | 153,862 | | | $ | 382,225 | | | $ | (696) | | | $ | 696 | | | $ | (40,733) | | | $ | 504,144 | |
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See accompanying notes to consolidated financial statements.
8
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 27, 2021. 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-month period ended May 29, 2021 are not necessarily indicative of the results to be expected for the full year.
COVID-19 update
During fiscal 2021, as a result of the global COVID-19 pandemic, we experienced some delays in commercial construction projects and orders and other disruptions to our business, including various physical distancing and health-related precautions, and we were required to close operations at two facilities in our Large-Scale Optical (LSO) segment for a portion of fiscal 2021 due to governmental orders. We were also impacted by quarantine-related absenteeism among our production workforce, resulting in labor constraints at some of our facilities. In the first quarter of fiscal 2022, the negative impacts on our business due to the COVID-19 pandemic have moderated. The extent to which COVID-19 will continue to impact our business in the future will depend in part on the effectiveness of ongoing public health initiatives, which have been boosted by vaccine production and distribution.
Adoption of new accounting standards
In the current quarter, we adopted the guidance in ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU removed exceptions on intra-period tax allocations and reporting and provided simplification on accounting for franchise taxes, tax basis goodwill and tax law changes. The adoption of this ASU did not have a significant impact on the consolidated financial statements.
In the current quarter, we adopted the guidance in ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The adoption of this ASU did not have a significant impact on the consolidated financial statements.
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 86,933 shares of stock under our authorized share repurchase program, at a total cost of $3.4 million.
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 | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Recognized at shipment | | $ | 140,283 | | | $ | 116,163 | | | | | |
Recognized over time | | 185,723 | | | 172,932 | | | | | |
Total | | $ | 326,006 | | | $ | 289,095 | | | | | |
Receivables
Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released.
| | | | | | | | | | | | | | |
(In thousands) | | May 29, 2021 | | February 27, 2021 |
Trade accounts | | $ | 123,501 | | | $ | 120,534 | |
Construction contracts | | 2,181 | | | 12,163 | |
Contract retainage | | 49,006 | | | 45,167 | |
Total receivables | | 174,688 | | | 177,864 | |
Less: allowance for credit losses | | 2,255 | | | 1,947 | |
Net receivables | | $ | 172,433 | | | $ | 175,917 | |
The following table summarizes the activity in the allowance for credit losses:
| | | | | | | | | | | | | | |
(In thousands) | | May 29, 2021 | | February 27, 2021 |
Beginning balance | | $ | 1,947 | | | $ | 2,469 | |
Additions charged to costs and expenses | | 332 | | | 389 | |
Deductions from allowance, net of recoveries | | (69) | | | (887) | |
Other changes (1) | | 45 | | | (24) | |
Ending balance | | $ | 2,255 | | | $ | 1,947 | |
(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.
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(In thousands) | | May 29, 2021 | | February 27, 2021 |
Contract assets | | $ | 77,396 | | | $ | 74,664 | |
Contract liabilities | | 18,955 | | | 25,000 | |
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The change in contract assets and contract liabilities was mainly due to timing of project activity within our businesses that operate under long-term contracts.
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Other contract-related disclosures | | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Revenue recognized related to contract liabilities from prior year-end | | $ | 14,100 | | | $ | 13,011 | | | | | |
Revenue recognized related to prior satisfaction of performance obligations | | 2,164 | | | 2,877 | | | | | |
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 May 29, 2021, the transaction price associated with unsatisfied performance obligations was approximately $855.0 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
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(In thousands) | | May 29, 2021 |
Within one year | | $ | 464,123 | |
Within two years | | 306,360 | |
Beyond | | 84,478 | |
Total | | $ | 854,961 | |
3.Supplemental Balance Sheet Information
Inventories
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(In thousands) | | May 29, 2021 | | February 27, 2021 |
Raw materials | | $ | 36,751 | | | $ | 36,681 | |
Work-in-process | | 19,210 | | | 18,932 | |
Finished goods | | 14,906 | | | 17,210 | |
Total inventories | | $ | 70,867 | | | $ | 72,823 | |
Other current liabilities
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(In thousands) | | May 29, 2021 | | February 27, 2021 |
Warranties | | $ | 12,023 | | | $ | 12,298 | |
Accrued project losses | | 1,697 | | | 4,572 | |
Property and other taxes | | 7,265 | | | 7,459 | |
Accrued self-insurance reserves | | 2,620 | | | 6,482 | |
Other | | 20,936 | | | 22,372 | |
Total other current liabilities | | $ | 44,541 | | | $ | 53,183 | |
Other non-current liabilities
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(In thousands) | | May 29, 2021 | | February 27, 2021 |
Deferred benefit from New Market Tax Credit transactions | | $ | 15,717 | | | $ | 15,717 | |
Retirement plan obligations | | 7,706 | | | 7,730 | |
Deferred compensation plan | | 13,429 | | | 13,507 | |
Deferred tax liabilities | | 9,851 | | | 8,310 | |
Deferred payroll taxes | | 6,789 | | | 6,789 | |
Other | | 16,487 | | | 16,430 | |
Total other non-current liabilities | | $ | 69,979 | | | $ | 68,483 | |
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:
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(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
May 29, 2021 | | $ | 12,372 | | | $ | 384 | | | $ | 7 | | | $ | 12,749 | |
February 27, 2021 | | 12,517 | | | 386 | | | 10 | | | 12,893 | |
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 May 29, 2021, 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 | | $ | 713 | | | $ | 717 | |
Due after one year through five years | | 8,507 | | | 8,812 | |
Due after five years through 10 years | | 2,352 | | | 2,392 | |
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Due beyond 15 years | | 800 | | | 828 | |
Total | | $ | 12,372 | | | $ | 12,749 | |
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 May 29, 2021, the interest rate swap contract had a notional value of $40 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 May 29, 2021, we held foreign exchange forward contracts and aluminum fixed/floating swaps with U.S. dollar notional values of $10.5 million and $5.8 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.
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(In thousands) | | Quoted Prices in Active Markets (Level 1) | | Other Observable Inputs (Level 2) | | Total Fair Value |
May 29, 2021 | | | | | | |
Assets: | | | | | | |
Money market funds | | $ | 13,991 | | | $ | — | | | $ | 13,991 | |
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Municipal and corporate bonds | | — | | | 12,749 | | | 12,749 | |
Cash surrender value of life insurance | | — | | | 18,474 | | | 18,474 | |
Foreign currency forward/option contracts | | — | | | 577 | | | 577 | |
Aluminum hedge contracts | | — | | | 872 | | | 872 | |
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Liabilities: | | | | | | |
Deferred compensation | | — | | | 14,888 | | | 14,888 | |
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Interest rate swap contract | | — | | | 361 | | | 361 | |
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February 27, 2021 | | | | | | |
Assets: | | | | | | |
Money market funds | | $ | 26,034 | | | $ | — | | | $ | 26,034 | |
Municipal and corporate bonds | | — | | | 12,893 | | | 12,893 | |
Cash surrender value of life insurance | | — | | | 18,632 | | | 18,632 | |
Foreign currency forward/option contracts | | — | | | 606 | | | 606 | |
Aluminum hedge contracts | | — | | | 363 | | | 363 | |
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Liabilities: | | | | | | |
Deferred compensation | | — | | | 13,507 | | | 13,507 | |
| | | | | | |
Interest rate swap contract | | — | | | 504 | | | 504 | |
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.
5.Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of the cost over the net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually 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.
Based on the impairment analysis performed in the fourth quarter of fiscal 2021, estimated fair value was in excess of carrying value at six of our eight reporting units. However, estimated fair value did not exceed carrying value for two reporting units within the Architectural Framing Systems segment, EFCO and Sotawall. As a result, as of February 27, 2021, we incurred goodwill impairment expense of $46.7 million and $17.1 million in our EFCO and Sotawall reporting units, respectively. The goodwill impairment expense recorded during the year ended February 27, 2021, as reflected in the table below, represents the total accumulated goodwill impairment expenses recorded.
The carrying amount of goodwill attributable to each reporting segment was:
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(In thousands) | | Architectural Framing Systems | | Architectural Glass | | Architectural Services | | Large-Scale Optical | | Total |
Balance at February 29, 2020 | | $ | 148,183 | | | $ | 25,656 | | | $ | 1,120 | | | $ | 10,557 | | | $ | 185,516 | |
Adjustment (1) | | 6,315 | | | — | | | — | | | — | | | 6,315 | |
Impairment expense | | (63,769) | | | — | | | — | | | — | | | (63,769) | |
Foreign currency translation | | 2,370 | | | (334) | | | — | | | — | | | 2,036 | |
Balance at February 27, 2021 | | 93,099 | | | 25,322 | | | 1,120 | | | 10,557 | | | 130,098 | |
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Foreign currency translation | | 1,457 | | | (94) | | | — | | | — | | | 1,363 | |
Balance at May 29, 2021 | | $ | 94,556 | | | $ | 25,228 | | | $ | 1,120 | | | $ | 10,557 | | | $ | 131,461 | |
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(1) During the first quarter of fiscal 2021, we recorded a $6.3 million increase to goodwill and corresponding increase to deferred tax liabilities to correct an immaterial error related to prior periods. The error was not material to any previously reported annual or interim consolidated financial statements. |
Other 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 our analysis, the fair value of each of our trade names and trademarks exceeded carrying amount,
except for the EFCO tradename, within our Architectural Framing Systems segment. The fair value determined for the EFCO tradename was less than its carrying value by $6.3 million; this amount was recognized as impairment expense in the fourth quarter ended February 27, 2021, as reflected in the table below.
The gross carrying amount of other intangible assets and related accumulated amortization was:
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(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Impairment Expense | | Foreign Currency Translation | | Net |
May 29, 2021 | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | |
Customer relationships | | $ | 122,961 | | | $ | (43,192) | | | $ | — | | | $ | 3,973 | | | $ | 83,742 | |
Other intangibles | | 41,936 | | | (35,426) | | | — | | | 976 | | | 7,486 | |
Total definite-lived intangible assets | | 164,897 | | | (78,618) | | | — | | | 4,949 | | | 91,228 | |
Indefinite-lived intangible assets: | | | | | | | | | | |
Trademarks | | 39,832 | | | — | | | — | | | 920 | | | 40,752 | |
Total intangible assets | | $ | 204,729 | | | $ | (78,618) | | | $ | — | | | $ | 5,869 | | | $ | 131,980 | |
February 27, 2021 | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | |
Customer relationships | | $ | 119,647 | | | $ | (40,443) | | | $ | — | | | $ | 3,315 | | | $ | 82,519 | |
Other intangibles | | 41,293 | | | (34,234) | | | — | | | 643 | | | 7,702 | |
Total definite-lived intangible assets | | 160,940 | | | (74,677) | | | — | | | 3,958 | | | 90,221 | |
Indefinite-lived intangible assets: | | | | | | | | | | |
Trademarks | | 45,300 | | | — | | | (6,300) | | | 832 | | | 39,832 | |
Total intangible assets | | $ | 206,240 | | | $ | (74,677) | | | $ | (6,300) | | | $ | 4,790 | | | $ | 130,053 | |
Amortization expense on definite-lived intangible assets was $2.0 million and $1.8 million for the three-month periods ended May 29, 2021 and May 30, 2020, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At May 29, 2021, the estimated future amortization expense for definite-lived intangible assets was:
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(In thousands) | | Remainder of Fiscal 2022 | | Fiscal 2023 | | Fiscal 2024 | | Fiscal 2025 | | Fiscal 2026 |
Estimated amortization expense | | $ | 6,257 | | | $ | 8,302 | | | $ | 8,041 | | | $ | 7,651 | | | $ | 7,635 | |
6.Debt
As of May 29, 2021, we had a committed revolving credit facility with maximum borrowings of up to $235 million with a maturity of June 2024. There were no outstanding borrowings under the revolving credit facility as of May 29, 2021 and February 27, 2021. At May 29, 2021 and February 27, 2021, we also had a $150 million term loan with a maturity date of June 2024.
Our revolving credit facility and term loan contain two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At May 29, 2021, we were in compliance with both financial covenants. Additionally, at May 29, 2021, we had a total of $18.7 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2022 to 2023 and reduce borrowing capacity under the revolving credit facility.
At May 29, 2021, debt included $15.0 million of industrial revenue bonds that mature in fiscal years 2022 through 2043. The fair value of the industrial revenue bonds approximated carrying value at May 29, 2021, due to the variable interest rates on these instruments. All debt would be classified as Level 2 within the fair value hierarchy described in Note 4.
We also maintain two Canadian committed, revolving credit facilities totaling $25.0 million (USD). As of May 29, 2021 and February 27, 2021, there were no borrowings outstanding under the facilities.
Interest payments were $1.1 million and $1.4 million for the three months ended May 29, 2021 and May 30, 2020, respectively.
7. Leases
We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases. We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet and such leases are expensed on a straight-line basis over the lease term.
In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and 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:
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| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Operating lease cost | | $ | 3,381 | | | $ | 3,561 | | | | | |
Short-term lease cost | | 225 | | | 470 | | | | | |
Variable lease cost | | 723 | | | 747 | | | | | |
| | | | | | | | |
Total lease cost | | $ | 4,329 | | | $ | 4,778 | | | | | |
Other supplemental information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
(In thousands except weighted-average data) | | May 29, 2021 | | May 30, 2020 |
| | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 3,602 | | | $ | 3,327 | |
Lease assets obtained in exchange for new operating lease liabilities | | $ | 465 | | | $ | 158 | |
Weighted-average remaining lease term - operating leases | | 5.8 years | | 5.8 years |
Weighted-average discount rate - operating leases | | 2.96 | % | | 3.60 | % |
Future maturities of lease liabilities are as follows:
| | | | | | | | |
(In thousands) | | May 29, 2021 |
Remainder of Fiscal 2022 | | $ | 10,459 | |
Fiscal 2023 | | 12,689 | |
Fiscal 2024 | | 10,736 | |
Fiscal 2025 | | 9,458 | |
Fiscal 2026 | | 7,583 | |
Fiscal 2027 | | 6,097 | |
Thereafter | | 6,590 | |
Total lease payments | | 63,612 | |
Less: Amounts representing interest | | (3,990) | |
Present value of lease liabilities | | $ | 59,622 | |
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 May 29, 2021, $1.2 billion of these types of bonds were outstanding, of which $527.3 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.
Warranty and project-related contingencies
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on the warranty accrual in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. A warranty rollforward follows:
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| | Three Months Ended |
(In thousands) | | May 29, 2021 | | May 30, 2020 |
Balance at beginning of period | | $ | 14,999 | | | $ | 15,629 | |
Additional accruals | | 2,478 | | | 511 | |
Claims paid | | (2,930) | | | (939) | |
| | | | |
Balance at end of period | | $ | 14,547 | | | $ | 15,201 | |
Additionally, we are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses. We manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages. The liability for these types of project-related contingencies was $1.7 million and $4.6 million as of May 29, 2021 and February 27, 2021, respectively.
Letters of credit
At May 29, 2021, we had $18.7 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. We also have a $6.9 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 $235.9 million as of May 29, 2021.
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 non-current liabilities on 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 on our consolidated balance sheets. These costs will be recognized in conjunction with the recognition of the related proceeds on each arrangement. During the construction phase for each project, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash on our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.
The table below provides a summary of our outstanding NMTC transactions (in millions):
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Inception date | | Termination date | | Proceeds received | | Deferred costs | | Net benefit |
| | | | | | | | |
June 2016 | | June 2023 | | $ | 6.0 | | | $ | 1.2 | | | $ | 4.8 | |
August 2018 | | August 2025 | | 6.6 | | | 1.3 | | | 5.3 | |
September 2018 | | September 2025 | | 3.2 | | | 1.0 | | | 2.2 | |
Total | | | | $ | 15.8 | | | $ | 3.5 | | | $ | 12.3 | |
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 $1.7 million for the three-month period ended May 29, 2021 and $1.4 million for the three-month period ended May 30, 2020.
Stock options and SARs
Stock option and SAR activity for the current three-month period is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options and SARs | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
Outstanding at February 27, 2021 | | 633,700 | | | $ | 23.04 | | | | | |
| | | | | | | | |
Awards exercised | | (178,564) | | | 23.04 | | | | | |
Awards canceled | | (37,036) | | | 23.04 | | | | | |
Outstanding at May 29, 2021 | | 418,100 | | | $ | 23.04 | | | 9.1 years | | $ | 6,258,957 | |
Vested or expected to vest at May 29, 2021 | | 418,100 | | | $ | 23.04 | | | 9.1 years | | $ | 6,258,957 | |
| | | | | | | | |
For the three-months ended May 29, 2021, cash proceeds from the exercise of stock options were $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 $2.7 million. No awards were issued or exercised during the three-months ended May 30, 2020.
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 first quarter of 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 vesting date. The number of share units issued at grant is equal to the target number of performance shares and allows for the right to receive an additional 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 three-month period is summarized as follows:
| | | | | | | | | | | | | | |
Nonvested shares and units | | Number of Shares and Units | | Weighted Average Grant Date Fair Value |
Nonvested at February 27, 2021 | | 475,227 | | | $ | 27.52 | |
Granted(1) | | 141,956 | | | 34.71 | |
Vested | | (52,892) | | | 24.82 | |
| | | | |
Nonvested at May 29, 2021(1) | | 564,291 | | | $ | 29.58 | |
(1) Includes a total of 52,023 nonvested share units granted and outstanding at target level for the fiscal 2022-2024 performance period.
At May 29, 2021, there was $11.3 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 31 months. The total fair value of shares vested during the three months ended May 29, 2021 was $1.9 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 2018, 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 2017, and there is limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.
The total liability for unrecognized tax benefits was $3.8 million at May 29, 2021 and February 27, 2021, respectively. 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 | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Basic earnings per share – weighted average common shares outstanding | | 25,402 | | | 26,168 | | | | | |
Weighted average effect of nonvested share grants and assumed exercise of stock options | | 420 | | | 250 | | | | | |
Diluted earnings per share – weighted average common shares and potential common shares outstanding | | 25,822 | | | 26,418 | | | | | |
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) | | 8 | | | 150 | | | | | |
12.Business Segment Data
We have four reporting segments:
•The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings.
•The Architectural Glass segment fabricates coated, high-performance glass used globally in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.
•The Architectural Services segment provides full-service installation of the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.
•The Large-Scale Optical (LSO) segment manufactures value-added glass and acrylic products primarily for framing and display applications.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | | | |
Net sales | | | | | | | | |
Architectural Framing Systems | | $ | 151,840 | | | $ | 150,164 | | | | | |
Architectural Glass | | 83,031 | | | 76,911 | | | | | |
Architectural Services | | 75,656 | | | 63,551 | | | | | |
Large-Scale Optical | | 24,228 | | | 6,312 | | | | | |
Intersegment eliminations | | (8,749) | | | (7,843) | | | | | |
Net sales | | $ | 326,006 | | | $ | 289,095 | | | | | |
Operating income (loss) | | | | | | | | |
Architectural Framing Systems | | $ | 8,060 | | | $ | 7,296 | | | | | |
Architectural Glass | | 2,128 | | | (494) | | | | | |
Architectural Services | | 4,537 | | | 5,343 | | | | | |
Large-Scale Optical | | 5,847 | | | (3,132) | | | | | |
Corporate and other | | (4,530) | | | (2,544) | | | | | |
Operating income | | $ | 16,042 | | | $ | 6,469 | | | | | |
Due to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements
This Quarterly Report on Form 10-Q, including the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this document are “forward-looking statements,” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.
Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Information about factors that could materially affect our results can be found in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended February 27, 2021 and in subsequent filings with the U.S. Securities and Exchange Commission, including this Quarterly Report on Form 10-Q.
We also wish to caution investors that other factors might in the future prove to be important in affecting the Company’s results of operations. New factors emerge from time to time; it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leader in the design and development of value-added glass and metal products and services for enclosing commercial buildings and framing and displays. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).
The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended February 27, 2021 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of First Quarter of Fiscal 2022 Compared to First Quarter of Fiscal 2021
Net sales
Consolidated net sales increased 12.8 percent, or $36.9 million, for the three-month period ended May 29, 2021, compared to the same period in the prior year, primarily driven by volume growth in the LSO, Architectural Services and Architectural Glass segments. LSO was closed for most of the first quarter of fiscal 2021, due to COVID-19.
The relationship between various components of operations, as a percentage of net sales, is presented below:
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| Three Months Ended | | |
| May 29, 2021 | | May 30, 2020 | | | | |
Net sales | 100.0 | % | | 100.0 | % | | | | |
Cost of sales | 79.2 | | | 79.2 | | | | | |
Gross margin | 20.8 | | | 20.8 | | | | | |
Selling, general and administrative expenses | 15.8 | | | 18.6 | | | | | |
Operating income | 4.9 | | | 2.2 | | | | | |
Interest expense, net | 0.4 | | | 0.5 | | | | | |
Other income, net | 0.1 | | | 0.4 | | | | | |
Earnings before income taxes | 4.4 | | | 1.4 | | | | | |
Income tax expense | 1.1 | | | 0.4 | | | | | |
Net earnings | 3.3 | % | | 1.0 | % | | | | |
Effective tax rate | 25.3 | % | | 28.2 | % | | | | |
Gross profit
Gross profit as a percent of sales (gross margin) was 20.8 percent in each of the three-month periods ended May 29, 2021 and May 30, 2020. Gross margin was positively impacted by strong recovery of the LSO segment (which closed for most of the first quarter last year to comply with COVID-related directives) and improved margins in the Architectural Glass segment, which offset margin declines within the Architectural Framing Systems and Architectural Services segments. Each of our segments experienced inflation in operating costs, especially freight and materials costs, during the quarter. While we are undertaking measures to offset these costs, we expect this trend to continue through fiscal 2022.
Selling, general and administrative (SG&A) expenses
SG&A expenses as a percent of sales were 15.8 percent for the three-month period ended May 29, 2021, compared to 18.6 percent for the prior year three-month period. SG&A decreased as a percent of sales compared to the same period in the prior year primarily due to ongoing well controlled spending across all segments of the business, as well as a benefit of $2.7 million during the first quarter of fiscal 2022, from a Canadian wage subsidy program offered to support Canadian businesses due to the ongoing impacts of the COVID-19 pandemic.
Income tax expense
The effective tax rate in the first quarter of fiscal 2022 was 25.3 percent, compared to 28.2 percent in the same period last year, primarily due to favorable provisions in the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act") impacting the first quarter of fiscal 2022 and the negative impact of unfavorable permanent items in relation to reduced earnings in the first quarter of fiscal 2021.
Segment Analysis
Architectural Framing Systems
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| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | % Change | | | | | | |
Net sales | | $ | 151,840 | | | $ | 150,164 | | | 1.1 | % | | | | | | |
Operating income | | 8,060 | | | 7,296 | | | 10.5 | % | | | | | | |
Operating margin | | 5.3 | % | | 4.9 | % | | | | | | | | |
Architectural Framing Systems net sales increased $1.7 million, or 1.1 percent, for the three-month period ended May 29, 2021, compared to the prior-year period, primarily reflecting improved pricing. This improvement was partially offset by unfavorable project performance and mix, compared to the prior-year period.
Operating margin increased 40 basis points for the three-month period of the current year, compared to the same period in the prior year, reflecting benefits from cost-saving actions, which offset increased costs for materials and freight. In addition, this segment benefited from a Canadian wage subsidy of $2.7 million in the first quarter of fiscal 2022, as a result of a program to support Canadian businesses due to the ongoing impacts of the COVID-19 pandemic.
As of May 29, 2021, segment backlog was approximately $423 million, compared to approximately $411 million at the end of the prior quarter, and $421 million at the end of the first quarter of the prior year. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog.
Architectural Glass
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | % Change | | | | | | |
Net sales | | $ | 83,031 | | | $ | 76,911 | | | 8.0 | % | | | | | | |
Operating income | | 2,128 | | | (494) | | | N/M | | | | | | |
Operating margin | | 2.6 | % | | (0.6) | % | | | | | | | | |
Net sales increased $6.1 million, or 8.0 percent, for the three-month period ended May 29, 2021, compared to the same period in the prior year, driven by increased volume and a more favorable sales mix.
Segment operating income increased to $2.1 million, with operating margin of 2.6 percent, for the three-month period ended May 29, 2021, compared to an operating loss of $0.5 million and operating margin of (0.6) percent in the same period of the prior year. The improved profitability was driven by increased productivity in core glass operations, the more favorable sales mix, and higher volumes, which offset the impact of higher material and freight costs.
Architectural Services
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| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | % Change | | | | | | |
Net sales | | $ | 75,656 | | | $ | 63,551 | | | 19.0 | % | | | | | | |
Operating income | | 4,537 | | | 5,343 | | | (15.1) | % | | | | | | |
Operating margin | | 6.0 | % | | 8.4 | % | | | | | | | | |
Architectural Services net sales increased $12.1 million, or 19.0 percent, for the three-month period ended May 29, 2021, compared to the same period in the prior year, driven by increased volume from executing projects in backlog.
Operating margin decreased 240 basis points to 6.0 percent for the three-month period of the current year, compared to the same period in the prior year, primarily reflecting isolated performance challenges on certain projects and a less favorable project mix.
As of May 29, 2021, segment backlog was approximately $559 million, compared to approximately $571 million as of the end of the prior quarter, and $685 million at the end of the first quarter of the prior year. Backlog is described within the Architectural Framing Systems discussion above.
Large-Scale Optical (LSO)
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| | Three Months Ended | | |
(In thousands) | | May 29, 2021 | | May 30, 2020 | | % Change | | | | | | |
Net sales | | $ | 24,228 | | | $ | 6,312 | | | 283.8 | % | | | | | | |
Operating income (loss) | | 5,847 | | | (3,132) | | | N/M | | | | | | |
Operating margin | | 24.1 | % | | (49.6) | % | | | | | | | | |
LSO net sales increased $17.9 million or 283.8 percent, for the three-month period ended May 29, 2021, compared to the same period in the prior year. In the prior year first quarter, the segment's customers and manufacturing operations were closed for a large part of the quarter to comply with COVID-related government directives.
The segment had operating income of $5.8 million and operating margin of 24.1 percent for the three-month period ended May 29, 2021, compared to operating loss of $3.1 million and operating margin of (49.6) percent in the same period of the prior year primarily driven by the increased sales volume.
Liquidity and Capital Resources
| | | | | | | | | | | | | | |
Selected cash flow data | | Three Months Ended |
(In thousands) | | May 29, 2021 | | May 30, 2020 |
Operating Activities | | | | |
Net cash provided by operating activities | | $ | 6,883 | | | $ | 23,976 | |
Investing Activities | | | | |
Capital expenditures | | (4,705) | | | (8,606) | |
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Financing Activities | | | | |
Borrowings on line of credit | | — | | | 139,500 | |
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Payments on line of credit | | — | | | (146,500) | |
Repurchase and retirement of common stock | | (12,625) | | | (4,731) | |
Dividends paid | | (5,035) | | | (4,872) | |
Operating Activities. Net cash provided by operating activities was $6.9 million for the first three months of fiscal 2022, a decrease of $17.1 million compared to the prior-year period, reflecting increased working capital needs related to revenue growth.
Investing Activities. Net cash used by investing activities was $4.1 million for the first three months of fiscal 2022, driven by capital expenditures of $4.7 million. In the first three months of the prior year, net cash used by investing activities was $9.7 million, driven by capital expenditures of $8.6 million.
Financing Activities. Net cash used by financing activities was $14.3 million for the first three months of fiscal 2022, compared to $17.3 million in the prior-year period, reflecting both borrowings and debt repayments in the prior year, and higher share repurchases in the current year first quarter. At May 29, 2021, we were in compliance with the financial covenants under our revolving credit facility and term loan.
We paid dividends totaling $5.0 million ($0.2000 per share) in the first three months of fiscal 2022, compared to $4.9 million ($0.1875 per share) in the comparable prior-year period. During the first three months of fiscal 2022, we repurchased 341,000 shares under our authorized share repurchase program, for a total cost of $12.2 million. In the first three months of fiscal 2021, we repurchased 231,492 shares under the share repurchase program, for a total cost of $4.7 million. Since the inception of the share repurchase program in 2004, we have purchased a total of 7,473,616 shares, at a total cost of $219.5 million. We currently have remaining authority to repurchase an additional 776,384 shares under this program. We will continue to evaluate making future share repurchases, considering our cash flow, debt levels and market conditions, in the context of all our capital allocation options ensuring that we maximize the long-term value for our shareholders.
Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of May 29, 2021:
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| | Payments Due by Fiscal Period |
(In thousands) | | Remainder of Fiscal 2022 | | Fiscal 2023 | | Fiscal 2024 | | Fiscal 2025 | | Fiscal 2026 | | Thereafter | | Total |
Debt obligations | | $ | 2,000 | | | $ | 1,000 | | | $ | — | | | $ | 150,000 | | | $ | — | | | $ | 12,000 | | | $ | 165,000 | |
Operating leases (undiscounted) | | 10,459 | | | 12,689 | | | 10,736 | | | 9,458 | | | 7,583 | | | 12,687 | | | 63,612 | |
Purchase obligations | | 170,377 | | | 60,599 | | | 1,606 | | | 1,433 | | | 1,433 | | | 487 | | | 235,935 | |
Total cash obligations | | $ | 182,836 | | | $ | 74,288 | | | $ | 12,342 | | | $ | 160,891 | | | $ | 9,016 | | | $ | 25,174 | | | $ | 464,547 | |
We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Purchase obligations in the table above relate to raw material commitments and capital expenditures.
We expect to make contributions of $0.7 million to our defined-benefit pension plans in fiscal 2022, which will equal or exceed our minimum funding requirements.
As of May 29, 2021, we had reserves of $3.8 million for unrecognized tax benefits. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits will ultimately be settled.
We are required, in the ordinary course of business, to provide surety or performance bonds that commit payments to our customers for any non-performance. At May 29, 2021, $1.2 billion of these types of bonds were outstanding, of which $527.3 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.
During calendar 2020, we took advantage of the option to defer remittance of the employer portion of Social Security tax as provided in the CARES Act. This deferral allowed us to retain cash during calendar year 2020 that would have otherwise been remitted to the federal government. At the end of fiscal 2021, we had deferred tax payments of $13.6 million, which are included within accrued payroll and other benefits and other non-current liabilities on our consolidated balance sheets. The deferred tax payments will be repaid in two equal portions in calendar years 2021 and 2022.
Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facility, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments for at least the next 12 months. While we believe we have adequate sources of liquidity to continue to fund our business for at least the next 12 months, the extent to which the ongoing COVID-19 pandemic may impact our results of operations or liquidity is uncertain. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which have been buoyed by vaccine production and distribution.
Off-balance sheet arrangements. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Outlook
Our full-year earnings guidance is a range of $2.20 to $2.40 per diluted share. This guidance includes $7 to $10 million of expected pre-tax costs related to investments in transformation initiatives. We continue to expect a full-year tax rate of approximately 24.5 percent, and full-year capital expenditures of approximately $45 million.
Related Party Transactions
No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021.
Critical Accounting Policies
There have been no material changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended February 27, 2021 for a complete discussion on the Company’s market risk. There have been no material changes in market risk from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021.
Item 4.Controls and Procedures
a)Evaluation of disclosure controls and procedures: As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
b)Changes in internal controls: There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended May 29, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
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.
Item 1A.Risk Factors
There have been no material changes or additions to our risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases made by the Company of its own stock during the first quarter of fiscal 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (a) (c) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) | | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (b) |
February 28, 2021 to March 27, 2021 | | — | | | $ | — | | | — | | | 1,117,384 | |
March 28, 2021 to April 24, 2021 | | 202,369 | | | 35.82 | | | 201,000 | | | 916,384 | |
April 25, 2021 to May 29, 2021 | | 175,264 | | | 34.42 | | | 140,000 | | | 776,384 | |
Total | | 377,633 | | | $ | 35.08 | | | 341,000 | | | 776,384 | |
(a)The shares in this column represent the total number of shares that were repurchased by us pursuant to our publicly announced repurchase program, plus the shares surrendered to us by plan participants to satisfy withholding tax obligations related to share-based compensation.
(b)In fiscal 2004, announced on April 10, 2003, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock. The Board increased the authorization by 750,000 shares, announced on January 24, 2008; by 1,000,000 shares on each of the announcement dates of October 8, 2008, January 13, 2016, January 9, 2018, and January 14, 2020; and by 2,000,000 shares, announced on October 3, 2018. The repurchase program does not have an expiration date.
(c)This column includes 15,757 shares related to the stock purchase agreement between the Company and Joseph F. Puishys dated May 26, 2021.
Item 6.Exhibits
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101 | The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended May 29, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of May 29, 2021 and February 27, 2021, (ii) the Consolidated Results of Operations for the three-months ended May 29, 2021 and May 30, 2020, (iii) the Consolidated Statements of Comprehensive Earnings for the three-months ended May 29, 2021 and May 30, 2020, (iv) the Consolidated Statements of Cash Flows for the three-months ended May 29, 2021 and May 30, 2020, (v) the Consolidated Statements of Shareholders' Equity for the three-months ended May 29, 2021 and May 30, 2020, and (vi) Notes to Consolidated Financial Statements. |
104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) |
| Exhibits marked with a (#) sign are filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | APOGEE ENTERPRISES, INC. |
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Date: July 1, 2021 | | By: /s/ Ty R. Silberhorn |
| | | Ty R. Silberhorn President and Chief Executive Officer (Principal Executive Officer) |
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Date: July 1, 2021 | | By: /s/ Nisheet Gupta |
| | | Nisheet Gupta Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |