UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________ 

FORM 10-Q

 _________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 0-6365

_________________________________ 

APOGEE ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 _________________________________

Minnesota			41-0919654
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
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:

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	NASDAQ Global Select Market

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.

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	☐
Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    x  No

As of July 7, 2020, 26,356,670 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

APOGEE ENTERPRISES, INC. AND SUBSIDIARIES

		Page
PART I	Financial Information
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets	4
	Consolidated Results of Operations	5
	Consolidated Statements of Comprehensive Earnings	6
	Consolidated Statements of Cash Flows	7
	Consolidated Statements of Shareholders' Equity	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II	Other Information
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	26
Signatures		27

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except stock data)	May 30, 2020			February 29, 2020
Assets
Current assets
Cash and cash equivalents	$	11,636		$	14,952
Receivables, net of allowance for doubtful accounts	156,304			196,806
Inventories	75,285			71,089
Costs and earnings on contracts in excess of billings	65,980			73,582
Other current assets	21,488			25,481
Total current assets	330,693			381,910
Property, plant and equipment, net	320,073			324,386
Operating lease right-of-use assets	49,911			52,892
Goodwill	190,544			185,516
Intangible assets	136,071			140,191
Other non-current assets	44,332			44,096
Total assets	$	1,071,624		$	1,128,991
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	62,369		$	69,056
Accrued payroll and related benefits	25,630			40,119
Billings on contracts in excess of costs and earnings	15,321			32,696
Operating lease liabilities	10,462			11,272
Current portion of debt	155,400			5,400
Other current liabilities	110,348			118,314
Total current liabilities	379,530			276,857
Long-term debt	55,500			212,500
Non-current operating lease liabilities	40,814			43,163
Non-current self-insurance reserves	24,140			22,831
Other non-current liabilities	67,496			56,862
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 26,368,864 and 26,443,166 respectively	8,790			8,814
Additional paid-in capital	153,862			154,016
Retained earnings	382,225			388,010
Common stock held in trust	(696		)	(685		)
Deferred compensation obligations	696			685
Accumulated other comprehensive loss	(40,733		)	(34,062		)
Total shareholders’ equity	504,144			516,778
Total liabilities and shareholders’ equity	$	1,071,624		$	1,128,991

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED RESULTS OF OPERATIONS

(unaudited)

	Three Months Ended
(In thousands, except per share data)	May 30, 2020		June 1, 2019
Net sales	$	289,095	$	355,365
Cost of sales	228,844		274,398
Gross profit	60,251		80,967
Selling, general and administrative expenses	53,782		57,926
Operating income	6,469		23,041
Interest and other expense, net	2,463		2,611
Earnings before income taxes	4,006		20,430
Income tax expense	1,130		4,987
Net earnings	$	2,876	$	15,443
Earnings per share - basic	$	0.11	$	0.58
Earnings per share - diluted	$	0.11	$	0.58
Weighted average basic shares outstanding	26,168		26,597
Weighted average diluted shares outstanding	26,418		26,843

See accompanying notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(unaudited)

	Three Months Ended
(In thousands)	May 30, 2020			June 1, 2019
Net earnings	$	2,876		$	15,443
Other comprehensive (loss) earnings:
Unrealized gain on marketable securities, net of $26 and $47 of tax expense, respectively	97			181
Unrealized (loss) gain on derivative instruments, net of ($189) and $2 of tax (benefit) expense, respectively	(617		)	5
Foreign currency translation adjustments	(6,151		)	(2,560		)
Other comprehensive loss	(6,671		)	(2,374		)
Total comprehensive (loss) earnings	$	(3,795	)	$	13,069

See accompanying notes to consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
(In thousands)	May 30, 2020			June 1, 2019
Operating Activities
Net earnings	$	2,876		$	15,443
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	12,540			11,102
Share-based compensation	1,406			1,618
Deferred income taxes	(738		)	6,438
Noncash lease expense	2,945			2,902
Other, net	1,039			(1,762		)
Changes in operating assets and liabilities:
Receivables	39,650			(16,982		)
Inventories	(4,700		)	835
Costs and earnings on contracts in excess of billings	7,558			(6,007		)
Accounts payable and accrued expenses	(22,334		)	(15,317		)
Billings on contracts in excess of costs and earnings	(17,181		)	(1,198		)
Refundable and accrued income taxes	2,847			(4,369		)
Operating lease liability	(2,781		)	(1,517		)
Other	849			(928		)
Net cash provided (used) by operating activities	23,976			(9,742		)
Investing Activities
Capital expenditures	(8,606		)	(11,198		)
Other	(1,082		)	(824		)
Net cash used by investing activities	(9,688		)	(12,022		)
Financing Activities
Borrowings on line of credit	139,500			103,000
Payments on line of credit	(146,500		)	(55,500		)
Repurchase and retirement of common stock	(4,731		)	(20,010		)
Dividends paid	(4,872		)	(4,598		)
Other	(731		)	(1,270		)
Net cash (used) provided by financing activities	(17,334		)	21,622
Decrease in cash and cash equivalents	(3,046		)	(142		)
Effect of exchange rates on cash	(270		)	(143		)
Cash, cash equivalents and restricted cash at beginning of year	14,952			29,241
Cash, cash equivalents and restricted cash at end of period	$	11,636		$	28,956
Noncash Activity
Capital expenditures in accounts payable	$	1,458		$	1,667

See accompanying notes to consolidated financial statements.

7

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)

(In thousands)	Common Shares Outstanding		Common Stock			Additional Paid-In Capital			Retained Earnings			Common Stock Held in Trust			Deferred Compensation Obligation		Accumulated Other Comprehensive (Loss) Income			Total Shareholders' Equity
Balance at February 29, 2020	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
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

(In thousands)	Common Shares Outstanding		Common Stock			Additional Paid-In Capital			Retained Earnings			Common Stock Held in Trust			Deferred Compensation Obligation		Accumulated Other Comprehensive (Loss) Income			Total Shareholders' Equity
Balance at March 2, 2019	27,015		$	9,005		$	151,842		$	367,597		$	(755	)	$	755	$	(32,127	)	$	496,317
Net earnings	—		—			—			15,443			—			—		—			15,443
Unrealized gain on marketable securities, net of $47 tax expense	—		—			—			—			—			—		181			181
Unrealized gain on foreign currency hedge, net of $2 tax expense	—		—			—			—			—			—		5			5
Foreign currency translation adjustments	—		—			—			—			—			—		(2,560		)	(2,560		)
Issuance of stock, net of cancellations	79		26			14			—			(12		)	12		—			40
Share-based compensation	—		—			1,618			—			—			—		—			1,618
Share repurchases	(532	)	(177		)	(3,051		)	(16,782		)	—			—		—			(20,010		)
Other share retirements	(32	)	(11		)	(183		)	(1,266		)	—			—		—			(1,460		)
Cash dividends	—		—			—			(4,598		)	—			—		—			(4,598		)
Balance at June 1, 2019	26,530		$	8,843		$	150,240		$	360,394		$	(767	)	$	767	$	(34,501	)	$	484,976

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 29, 2020. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. The results of operations for the three-month period ended May 30, 2020 are not necessarily indicative of the results to be expected for the full year.

COVID-19 considerations

The ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our LSO segment, temporary closure of many retail locations resulted in the shutdown of our factories for most of the first quarter, in response to governmental “stay at home” directives. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will impact our business will depend on future developments and public health advancements, which are highly uncertain and cannot be predicted with confidence. However, towards the end of our first quarter and into the second quarter, we began to see some early signs of improvement, including the gradual reopening of retailers, moderating project delays and fewer workforce absences.

Furthermore, in response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs.

Adoption of new accounting standards

In the current quarter, we adopted the guidance in ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The guidance provides for a new impairment model on financial instruments which is based on expected credit losses, which was applied following a modified retrospective approach. Additionally, the new guidance makes targeted improvements to the impairment model for certain available-for-sale debt securities, including eliminating the concept of "other than temporary" from that model. The portion of the guidance related to available-for-sale debt securities was adopted following a prospective approach. The adoption of this ASU did not have a significant impact on earnings or financial condition. Refer to additional disclosures in Notes 2 and 4.

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 other than as described in Note 8.

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 30, 2020		June 1, 2019
Recognized at shipment	$	116,163	$	155,265
Recognized over time	172,932		200,100
Total	$	289,095	$	355,365

9

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 30, 2020			February 29, 2020
Trade accounts	$	122,092		$	141,126
Construction contracts	12,630			20,808
Contract retainage	23,778			37,341
Total receivables	158,500			199,275
Less: allowance for credit losses	(2,196		)	(2,469		)
Net receivables	$	156,304		$	196,806

The following table summarizes the activity in the allowance for credit losses:

(In thousands)	May 30, 2020
Beginning balance	$	2,469
Additions charged to costs and expenses	69
Deductions from allowance, net of recoveries	(274		)
Other changes (1)	(68		)
Ending balance	$	2,196
(1) Result of foreign currency effects

Contract assets and liabilities

Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets.

The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released.

(In thousands)	May 30, 2020		February 29, 2020
Contract assets	$	89,757	$	110,923
Contract liabilities	18,209		35,954

The decrease in contract assets was mainly due to a reduction in contract retainage. The change in contract liabilities was due to timing of project activity within our businesses that operate under long-term contracts.

Other contract-related disclosures	Three Months Ended
(In thousands)	May 30, 2020		June 1, 2019
Revenue recognized related to contract liabilities from prior year-end	$	13,011	$	14,194
Revenue recognized related to prior satisfaction of performance obligations	2,877		1,949

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 30, 2020, the transaction price associated with unsatisfied performance obligations was approximately $995.9 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:

10

(In thousands)	May 30, 2020
Within one year	$	434,077
Within two years	417,457
Beyond	144,325
Total	$	995,859

3. Supplemental Balance Sheet Information

Inventories

(In thousands)	May 30, 2020		February 29, 2020
Raw materials	$	38,502	$	36,611
Work-in-process	17,221		17,520
Finished goods	19,562		16,958
Total inventories	$	75,285	$	71,089

Other current liabilities

(In thousands)	May 30, 2020		February 29, 2020
Warranties	$	12,421	$	12,822
Accrued project losses	48,054		48,962
Property and other taxes	6,315		5,952
Accrued self-insurance reserves	7,343		8,307
Other	36,215		42,271
Total other current liabilities	$	110,348	$	118,314

Other non-current liabilities

(In thousands)	May 30, 2020		February 29, 2020
Deferred benefit from New Market Tax Credit transactions	$	15,717	$	15,717
Retirement plan obligations	8,242		8,294
Deferred compensation plan	8,298		8,452
Deferred tax liabilities	13,915		7,940
Other	21,324		16,459
Total other non-current liabilities	$	67,496	$	56,862

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
May 30, 2020	$	12,595	$	403	$	5	$	12,993
February 29, 2020	11,692		275		—		11,967

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.

11

The amortized cost and estimated fair values of these bonds at May 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty.

(In thousands)	Amortized Cost		Estimated Fair Value
Due within one year	$	898	$	911
Due after one year through five years	7,017		7,255
Due after five years through 10 years	3,880		4,019
Due beyond 15 years	800		808
Total	$	12,595	$	12,993

Derivative instruments

In August 2019, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility. As of May 30, 2020, the interest rate swap contract had a notional value of $65 million.

We periodically enter into forward purchase foreign currency cash flow hedge contracts, generally with an original maturity date of less than one year, to hedge foreign currency exchange rate risk. As of May 30, 2020, we held foreign exchange forward contracts with a U.S. dollar notional value of $34.3 million, with the objective of reducing the exposure to fluctuations in the Canadian dollar and the Euro.

These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income.

Fair value measurements

Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.

(In thousands)	Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Total Fair Value
May 30, 2020
Assets:
Money market funds	$	3,689	$	—	$	3,689
Commercial paper	—		500		500
Municipal and corporate bonds	—		12,993		12,993
Cash surrender value of life insurance	—		15,777		15,777
Liabilities:
Deferred compensation	—		13,889		13,889
Foreign currency forward/option contract	—		239		239
Interest rate swap contract	—		1,085		1,085
February 29, 2020
Assets:
Money market funds	$	2,689	$	—	$	2,689
Commercial paper	—		1,500		1,500
Municipal and corporate bonds	—		11,967		11,967
Cash surrender value of life insurance	—		16,560		16,560
Liabilities:
Deferred compensation	—		14,042		14,042
Foreign currency forward/option contract	—		340		340
Interest rate swap contract	—		561		561

12

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 contracts are measured at fair value using other observable market inputs, such as quotations on forward foreign exchange points and foreign currency exchange rates. Derivative positions are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are our primary source for forward and spot rate information for both interest and currency rates.

Nonrecurring fair value measurements

Certain assets are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances. These include certain long-lived assets that are written down to estimated fair value when they are determined to be impaired, utilizing a valuation approach incorporating Level 3 inputs.

5. Goodwill and Other Identifiable Intangible Assets

The carrying amount of goodwill attributable to each reporting segment was:  

(In thousands)	Architectural Framing Systems			Architectural Glass			Architectural Services		Large-Scale Optical		Total
Balance at March 2, 2019	$	148,446		$	25,709		$	1,120	$	10,557	$	185,832
Foreign currency translation	(263		)	(53		)	—		—		(316		)
Balance at February 29, 2020	148,183			25,656			1,120		10,557		185,516
Adjustment (1)	6,315			—			—		—		6,315
Foreign currency translation	(955		)	(332		)	—		—		(1,287		)
Balance at May 30, 2020	$	153,543		$	25,324		$	1,120	$	10,557	$	190,544
(1) During the quarter ended May 30, 2020, we recorded a $6.3 million increase to goodwill and corresponding increase to deferred tax liabilities to correct an immaterial error related to prior periods. The error was not material to any previously reported annual or interim consolidated financial statements.

We evaluate goodwill for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including a significant decline in our stock price and market capitalization, along with concerns resulting from the COVID-19 pandemic at four of our nine identified reporting units. Therefore, we performed a quantitative goodwill impairment evaluation as of May 30, 2020 at these four reporting units, EFCO Corporation ("EFCO"), Alumicor Limited ("Alumicor"), Sotawall Limited ("Sotawall") and Viracon, Inc ("Viracon").

Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. If the fair value of a reporting unit exceeds the carrying value, goodwill impairment is not indicated.

13

We base our determination of fair value on a discounted cash flow methodology that involves significant judgment and projections of future performance. We also consider a market approach in our analysis by reviewing available data from recent transactions of comparable public companies when available. Assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on the annual operating plan and long-term business plan for each reporting unit. These plans take into consideration numerous factors, including historical experience, current and future operational plans, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. These plans also take into consideration our assessment of risks inherent in our projections of future cash flows. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts. Inputs used to estimate these fair values included significant unobservable inputs that reflect the Company's assumptions about the inputs that market participants would use and, therefore, the fair value assessments are classified within Level 3 of the fair value hierarchy. We derived the discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the cost of equity financing. We used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts, updated for recent events.

Based on the results of the interim quantitative goodwill impairment analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated as of May 30, 2020. We utilized a discount rate of 11.0 percent in determining the discounted cash flows for EFCO and Alumicor, and a discount rate of 10.4 percent in determining the discounted cash flows for Sotawall and Viracon. We utilized a long-term growth rate of 3.0 percent in our fair value analysis for all reporting units. While these discount rates have increased from the time of our annual goodwill impairment evaluation at year-end, impairment is not indicated at this time due to the long-term future performance expectations for these businesses.

The gross carrying amount of other intangible assets and related accumulated amortization was:

(In thousands)	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation			Net
May 30, 2020
Definite-lived intangible assets:
Customer relationships	$	119,647	$	(34,136	)	$	(2,304	)	$	83,207
Other intangibles	41,095		(32,271		)	(824		)	8,000
Total definite-lived intangible assets	160,742		(66,407		)	(3,128		)	91,207
Indefinite-lived intangible assets:
Trademarks	45,300		—			(436		)	44,864
Total intangible assets	$	206,042	$	(66,407	)	$	(3,564	)	$	136,071
February 29, 2020
Definite-lived intangible assets:
Customer relationships	$	120,239	$	(33,121	)	$	(592	)	$	86,526
Other intangibles	41,069		(32,516		)	(189		)	8,364
Total definite-lived intangible assets	161,308		(65,637		)	(781		)	94,890
Indefinite-lived intangible assets:
Trademarks	45,421		—			(120		)	45,301
Total intangible assets	$	206,729	$	(65,637	)	$	(901	)	$	140,191

We hold intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. We evaluate the reasonableness of the useful life and test indefinite-lived intangible assets for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including deteriorating macroeconomic conditions resulting from the COVID-19 pandemic. Therefore, we performed an interim impairment evaluation on indefinite-lived intangible assets as of May 30, 2020. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If an impairment loss is recognized, the adjusted carrying amount becomes the asset's new accounting basis.

Fair value is measured using the relief-from-royalty method. This method assumes the trade name or trademark has value to the

extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. This method requires

us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. In determining the discounted future revenue in our fair value analysis, we utilized a discount rate of 11.5 percent for EFCO and Alumicor and a discount rate

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of 10.9 percent for Sotawall. A royalty rate of 1.5 percent was utilized for Alumicor and EFCO and a royalty rate of 2.0 percent was utilized for Sotawall. We utilized a long-term growth rate of 3.0 percent in the fair value analysis for all reporting units. Based on our analysis, the fair value of each of our trade names and trademarks exceeded its carrying amount and impairment was not indicated. We continue to conclude that the useful life of our indefinite-lived intangible assets is appropriate. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, impairment could be indicated on one or more of our indefinite-lived intangible assets.

Amortization expense on definite-lived intangible assets was $1.8 million and $1.9 million for the three-month periods ended May 30, 2020 and June 1, 2019, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At May 30, 2020, the estimated future amortization expense for definite-lived intangible assets was:

(In thousands)	Remainder of Fiscal 2021		Fiscal 2022		Fiscal 2023		Fiscal 2024		Fiscal 2025
Estimated amortization expense	$	5,858	$	7,807	$	7,716	$	7,039	$	7,111

6. Debt

As of May 30, 2020, we had a committed revolving credit facility with maximum borrowings of up to $235 million, maturing in June 2024, and a $150 million term loan maturing in April 2021. As of May 30, 2020, our total debt outstanding was $210.9 million, compared to $217.9 million as of February 29, 2020. Outstanding borrowings under the revolving credit facility were $40.5 million, as of May 30, 2020, and $47.5 million, as of February 29, 2020.

Our revolving credit facility and term loan contain two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of interest expense-to-EBITDA. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At May 30, 2020, we were in compliance with both financial covenants. Additionally, at May 30, 2020, we had a total of $24.7 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2021 to 2032 and reduce borrowing capacity under the revolving credit facility.

At May 30, 2020, debt included $20.4 million of industrial revenue bonds that mature in fiscal years 2021 through 2043. The fair value of the industrial revenue bonds approximated carrying value at May 30, 2020, due to the variable interest rates on these instruments. All debt would be classified as Level 2 within the fair value hierarchy described in Note 4.

We also maintain two Canadian committed, revolving credit facilities totaling $25.0 million (USD). As of May 30, 2020 and February 29, 2020, no borrowings were outstanding under the facilities.

Interest payments were $1.4 million and $2.4 million for the three months ended May 30, 2020 and June 1, 2019, respectively.

7. Leases

We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases. We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet and such leases are expensed on a straight-line basis over the lease term.

In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and nonlease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions.

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The components of lease expense were as follows:

	Three Months Ended
(In thousands)	May 30, 2020		June 1, 2019
Operating lease cost	$	3,561	$	3,373
Short-term lease cost	470		682
Variable lease cost	747		713
Total lease cost	$	4,778	$	4,768

Other supplemental information related to leases was as follows:

	Three Months Ended
(In thousands except weighted-average data)	May 30, 2020			June 1, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	3,327		$	3,300
Lease assets obtained in exchange for new operating lease liabilities	$	158		$	706
Weighted-average remaining lease term - operating leases	5.8 years			5.5 years
Weighted-average discount rate - operating leases	3.60		%	3.74		%

Future maturities of lease liabilities are as follows:

(In thousands)	May 30, 2020
Remainder of Fiscal 2021	$	9,168
Fiscal 2022	10,933
Fiscal 2023	10,070
Fiscal 2024	8,090
Fiscal 2025	6,256
Fiscal 2026	5,008
Thereafter	6,378
Total lease payments	55,903
Less: Amounts representing interest	(4,627		)
Present value of lease liabilities	$	51,276

As of May 30, 2020, we have $5.7 million additional future operating lease commitments for leases that have not yet commenced.

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 30, 2020, $1.0 billion of these types of bonds were outstanding, of which $582.3 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:  

	Three Months Ended
(In thousands)	May 30, 2020			June 1, 2019
Balance at beginning of period	$	15,629		$	16,737
Additional accruals	511			1,787
Claims paid	(939		)	(2,771		)
Balance at end of period	$	15,201		$	15,753

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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 $48.1 million and $49.0 million as of May 30, 2020 and February 29, 2020, respectively. Subsequent to the end of the quarter, in June 2020, we settled contract claims related to a majority of these project-related contingencies on a legacy EFCO project for an amount equal to the contingency recorded at May 30, 2020.

Letters of credit

At May 30, 2020, we had $24.7 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. Subsequent to the end of the quarter, in connection with the settlement of contract claims related to a legacy EFCO project referenced above, the original project performance and payment bond was replaced, which required a $25.0 million letter of credit. The letter of credit for the replacement bond was issued outside of our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants.

Purchase obligations

Purchase obligations for raw material commitments and capital expenditures totaled $177.2 million as of May 30, 2020.

New Markets Tax Credit (NMTC) transactions

We have entered into four separate NMTC programs to support our operational expansion. Proceeds received from investors on these transactions are included within other current and non-current liabilities on our consolidated balance sheets. The NMTC arrangements are subject to 100 percent tax recapture for a period of seven years from the date of each respective transaction. Therefore, upon the termination of each arrangement, these proceeds will be recognized in earnings in exchange for the transfer of tax credits. The direct and incremental costs incurred in structuring these arrangements have been deferred and are included in other current and non-current assets on our consolidated balance sheets. These costs will be recognized in conjunction with the recognition of the related proceeds on each arrangement. During the construction phase, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash on our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics.

The table below provides a summary of our outstanding NMTC transactions (in millions):

Inception date	Termination date	Proceeds received		Deferred costs		Net benefit
November 2013	October 2020	$	10.7	$	3.3	$	7.4
June 2016	May 2023	6.0		1.2		4.8
August 2018	July 2025	6.6		1.3		5.3
September 2018	August 2025	3.2		1.0		2.2
Total		$	26.5	$	6.8	$	19.7

Litigation

On November 5, 2018, a shareholder filed a purported securities class action against the Company and certain named executive officers. On March 25, 2020, the District Court granted the Company's motion to dismiss without prejudice this matter. On May 5, 2020, the District Court entered final judgment.  Plaintiffs’ have waived their right to appeal. The Company views this matter as closed.

On December 17, 2018, a different shareholder filed a derivative lawsuit, purportedly on behalf of the Company, against certain of our executive officers and directors claiming breaches of fiduciary duty, waste of corporate assets and unjust enrichment. On May 29, 2020, the parties filed a joint stipulation and order dismissing this matter without prejudice. The Company views this matter as closed.

In addition to the foregoing, the Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company.

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9. Share-Based Compensation

Total share-based compensation expense included in the results of operations was $1.4 million for the three-month period ended May 30, 2020 and $1.6 million for the three-month period ended June 1, 2019.

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 29, 2020	100,341	$	8.34
Awards exercised	—	—
Outstanding and exercisable at May 30, 2020	100,341	$	8.34	1.3 years	$	1,235,198

No awards were issued or exercised during the three-months ended May 30, 2020 and June 1, 2019, respectively.

Nonvested shares and share units

Nonvested share activity 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 29, 2020	309,259		$	40.58
Granted	182,693		18.86
Vested	(61,318	)	43.61
Nonvested at May 30, 2020	430,634		$	30.93

At May 30, 2020, there was $2.7 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 26 months. The total fair value of shares vested during the three months ended May 30, 2020 was $1.3 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 2017, or state and local income tax examinations for years prior to fiscal 2013. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2016, and there is limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.

The total liability for unrecognized tax benefits was $4.1 million at May 30, 2020 and at February 29, 2020. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. The total liability for unrecognized tax benefits is expected to decrease by approximately $0.4 million during the next 12 months due to lapsing of statutes.

11. Earnings per Share

The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:

	Three Months Ended
(In thousands)	May 30, 2020	June 1, 2019
Basic earnings per share – weighted average common shares outstanding	26,168	26,597
Weighted average effect of nonvested share grants and assumed exercise of stock options	250	246
Diluted earnings per share – weighted average common shares and potential common shares outstanding	26,418	26,843
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)	150	104

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12. Segment Information

The Company has four reporting segments: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).

• The Architectural Framing Systems segment designs, engineers, fabricates and finishes the aluminum frames used in customized aluminum and glass window, curtainwall, storefront and entrance systems comprising the outside skin and entrances of commercial, institutional and high-end multi-family residential buildings. The Company has aggregated six operating segments into this reporting segment based on their similar products, customers, distribution methods, production processes and economic characteristics.

• The Architectural Glass segment fabricates coated, high-performance glass used in customized window and wall systems comprising the outside skin of commercial, institutional and high-end multi-family residential buildings.

• The Architectural Services segment designs, engineers, fabricates and installs the walls of glass, windows and other curtainwall products making up the outside skin of commercial and institutional buildings.

• The LSO segment manufactures value-added glass and acrylic products primarily for framing and display applications.

	Three Months Ended
(In thousands)	May 30, 2020			June 1, 2019
Net sales from operations
Architectural Framing Systems	$	150,164		$	180,522
Architectural Glass	76,911			100,291
Architectural Services	63,551			65,147
Large-Scale Optical	6,312			21,259
Intersegment eliminations	(7,843		)	(11,854		)
Net sales	$	289,095		$	355,365
Operating income (loss) from operations
Architectural Framing Systems	$	7,296		$	12,273
Architectural Glass	(494		)	6,399
Architectural Services	5,343			4,573
Large-Scale Optical	(3,132		)	4,177
Corporate and other	(2,544		)	(4,381		)
Operating income	$	6,469		$	23,041

Due to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking statements

This discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” 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 of the Company’s near-term results, based on current information available pertaining to the