APOGEE ENTERPRISES, INC. Forward-Looking Statements This Annual Report on Form 10-K, including Management's Discussion and Analysis, 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 of the Company's near-term results, based on current information available pertaining to the Company, including the risk factors noted under Item 1A in this Form 10-K. From time to time, we also may 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. These uncertainties and other risk factors include, but are not limited to, the risks and uncertainties set forth under Item 1A in this Form 10-K, all of which are incorporated by reference into this Item 7. 16 -------------------------------------------------------------------------------- Table of Contents We 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. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical Technologies (LSO). During fiscal 2022, we conducted a strategic review of our business and the markets we serve in order to establish a new enterprise strategy with three key elements, as discussed in Item 1 on page 4 of this Form 10-K. As part of executing our enterprise strategy, during the second quarter of fiscal 2022, we announced plans to realign and simplify our business structure which resulted in the closure of two facilities within the Architectural Glass segment, inDallas, Texas andStatesboro, Georgia . These closures were made in order to focus the Architectural Glass segment on premium, high-performance products. During the fourth quarter of fiscal 2022, we finalized plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, and as a result, we recorded impairment expense of$49.5 million on indefinite- and finite-lived intangible assets. During fiscal 2022, we saw inflation on raw materials and freight, which we were able to largely offset with pricing actions by the end of our fiscal fourth quarter. We also have experienced supply chain challenges during fiscal 2022 but are actively working to ensure continued supply of key materials. Fiscal 2022 summary of results: •Consolidated net sales were$1.3 billion , an increase of 7 percent from$1.2 billion in fiscal 2021. •Operating income was$22.0 million , a decrease of 14 percent from$25.5 million in the prior year. •Diluted EPS was$0.14 , compared to$0.59 in the prior year, a decrease of 76 percent. •Adjusted operating income was$82.6 million , a decrease of 5 percent compared to the prior year, and adjusted diluted EPS was$2.48 in fiscal 2022, an increase of 3 percent compared to the prior year. Refer to the table below for a reconciliation to GAAP of these adjusted amounts. Reconciliation of Non-GAAP
Financial Information
Adjusted Operating Income and Adjusted Net Earnings per Diluted Common Share
(Unaudited)
Diluted per share amounts
Year-ended Year-ended
February 26, February 27, February 27,
(In thousands) 2022 2021 February 26, 2022 2021
Operating income $ 22,045 $ 25,527 $ 0.14 $ 0.59
Impairment expense on intangible assets and
goodwill 49,473 70,069 1.96 2.66
Restructuring 30,512 4,884 1.21 0.19
Gain on sale of building (19,456) (19,346) (0.77) (0.74)
Impairment of equity investment N/A N/A 0.12 -
COVID-19 - 4,988 - 0.19
Post-acquisition and acquired project
matters - 1,000 - 0.04
Income tax impact on above adjustments (1) N/A N/A (0.17) (0.53)
Adjusted operating income $ 82,574 $
87,122 $ 2.48
(1) Income tax impact calculated using an estimated statutory tax rate of 25%, which reflects the estimated blended statutory tax rate for the jurisdiction in which the charge or income occurred. Income tax impact in the current year excludes the tax benefit related to the impairment expense in certain jurisdictions due to a tax valuation allowance. In the prior year, income tax impact excludes the amount of impairment expense that is non-deductible in the applicable jurisdiction.
Adjusted operating income and adjusted earnings per diluted share (adjusted
diluted EPS) are supplemental non-GAAP financial measures provided by the
Company to assess performance on a more comparable basis from period-to-period
by excluding amounts that management does not consider part of core operating
results. Management uses these non-GAAP measures to evaluate the Company's
historical and prospective financial performance, measure operational
profitability on a consistent basis, and provide enhanced transparency to the
investment community.
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Return on average invested capital (ROIC) is a non-GAAP financial measure that
we define as operating income (adjusted for certain items that are unusual in
nature or whose fluctuations from period to period do not necessarily correspond
to changes in the operations of the Company) after tax, divided by average
invested capital. We believe this measure is useful in understanding operational
performance and capital allocation over time. This measure is not calculated in
accordance with GAAP. Certain information necessary to calculate this measure on
a GAAP basis is dependent on future events, some of which are beyond our
control, and cannot be predicted without unreasonable efforts. It is important
to note that these factors could be material to Apogee's results computed in
accordance with GAAP.
These non-GAAP measures should be viewed in addition to, and not as an
alternative to, the reported financial results of the Company prepared in
accordance with GAAP. Other companies may calculate these measures differently,
thereby limiting the usefulness of the measures for comparison with other
companies.
Results of Operations
Net Sales
(Dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net sales $ 1,313,977 $ 1,230,774 $ 1,387,439 6.8 % (11.3) %
Fiscal 2022 Compared to Fiscal 2021
Net sales in fiscal 2022 increased by 6.8 percent compared to fiscal 2021,
driven by record revenue in the LSO and Architectural Services segments and
growth in the Architectural Framing Systems segment, partially offset by
decreased volume in the Architectural Glass Segment.
Fiscal 2021 Compared to Fiscal 2020
Net sales in fiscal 2021 decreased by 11.3 percent compared to fiscal 2020,
reflecting end market softness and COVID-19 related volume declines in the
Architectural Framing Systems, Architectural Glass and LSO segments, partially
offset by increased volume in the Architectural Services segment, driven by
execution of projects in backlog.
Performance
The relationship between various components of operations, as a percentage of net sales, is provided below. (Percentage of net sales) 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 79.1 77.6 77.0 Gross margin 20.9 22.4 23.0 Selling, general and administrative expenses 15.4
14.6 16.7
Impairment expense on intangible assets and goodwill 3.8 5.7 - Operating income 1.7 2.1 6.3 Interest expense, net 0.3 0.4 0.7 Other (expense) income, net (0.3)
0.1 0.1
Earnings before income taxes 1.1 1.8 5.7 Income tax expense 0.8 0.6 1.3 Net earnings 0.3 % 1.3 % 4.5 % Effective income tax rate 74.9 % 31.7 % 22.4 % Fiscal 2022 Compared to Fiscal 2021 Gross margin was 20.9 percent in fiscal 2022, a decrease of 150 basis points from fiscal 2021. This decrease was driven by$28.2 million of restructuring costs included in cost of sales incurred during fiscal 2022 related to restructuring actions announced inAugust 2021 , as well as inflationary pressure on raw materials and freight within the Architectural Glass and Architectural Framing Systems segments. These costs were partially offset by$19.5 million of gain on sale of assets related to the sale of a manufacturing facility in the Architectural Glass segment and by positive impacts from continued recovery of the LSO segment (which closed for most of the first and second quarters of the prior year, based on COVID-related government directives).
Total selling, general and administrative (SG&A) expense for fiscal 2022,
including impairment expense on goodwill and intangible assets noted in the
table above, was 19.2 percent, a decrease of 110 basis points from fiscal 2021.
This was driven by a
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to a $70.1 million impairment expense taken within the Architectural Framing
Systems segment in the prior year. In addition, we received a benefit of $4.9
million in fiscal 2022 compared to $7.4 million in fiscal 2021, as a result of a
Canadian wage subsidy program offered to support Canadian business impacted by
the COVID-19 pandemic, thereby offsetting cost actions that would have been
taken had this subsidy not been secured.
Net interest expense declined by 10 basis points compared to the prior year, due to the lower average debt balance in fiscal 2022.
The effective tax rate for fiscal 2022 was 74.9 percent, compared to 31.7 percent in fiscal 2021, primarily due to the valuation allowance recorded against the tax benefit of the Sotawall impairment and the impact of certain permanent items in relation to reduced earnings in fiscal 2022.
Fiscal 2021 Compared to Fiscal 2020 Gross margin was 22.4 percent in fiscal 2021, a decrease of 60 basis points from fiscal 2020. This decrease was driven by the impact from lower volumes due to end market softness and COVID-19 related project delays, partially offset by strong project execution in the Architectural Services segment. SG&A expense for fiscal 2021 including impairment expense on goodwill and intangible assets noted in the table above, was 20.3 percent, an increase of 360 basis points from fiscal 2020. This was driven by a$70.1 million impairment expense taken within the Architectural Framing Systems segment, partially offset by a$19.3 million gain on the sale-leaseback of a building within the Large-Scale Optical segment and$7.4 million of income related to a New Markets Tax Credit transaction within the Architectural Glass segment. In addition, we received a benefit of$7.4 million in fiscal 2021, as a result of a Canadian wage subsidy program offered to support Canadian business impacted by the COVID-19 pandemic, thereby offsetting cost actions that would have been taken had this subsidy not been secured. Net interest expense declined by 30 basis points compared to the prior year, due to the lower average debt balance in fiscal 2021 and a favorable one-time legal settlement impacting interest. The effective tax rate for fiscal 2021 was 31.7 percent, compared to 22.4 percent in fiscal 2020, primarily due to nondeductible goodwill impairment inCanada and the impact of the unfavorable permanent items in relation to reduced earnings in fiscal 2021. Segment Analysis Architectural Framing Systems (In thousands) 2022 2021 2020
2022 vs. 2021 2021 vs. 2020
Net sales $ 596,608 $ 570,850 $ 686,596 4.5 % (16.9) %
Operating loss (16,726) (44,761) 36,110 (62.6) % N/M
Operating margin (2.8) % (7.8) % 5.3 %
Fiscal 2022 Compared to Fiscal 2021. Net sales increased 4.5 percent, or $25.8
million , from fiscal 2021, primarily reflecting flow through from pricing
actions taken to offset inflation, partially offset by lower volume. The segment
had an operating loss of $16.7 million and operating margin of (2.8) percent in
fiscal 2022 compared to an operating loss of $44.8 million and operating margin
of (7.8) percent in fiscal 2021, reflecting the impact of the $49.5 million and
$70.1 million impairment expense and $1.7 million and $4.4 million of
restructuring charges in fiscal 2022 and fiscal 2021, respectively, partially
offset by the benefit of $4.9 million and $7.4 million in fiscal 2022 and 2021,
respectively, from a Canadian wage subsidy program offered to Canadian
businesses impacted by the COVID-19 pandemic.
Fiscal 2021 Compared to Fiscal 2020. Net sales decreased 16.9 percent, or $115.7
million , from fiscal 2020, primarily reflecting lower order volume for short
lead-time products and market-related project delays. The segment had an
operating loss of $44.8 million and operating margin of (7.8) percent in fiscal
2021, compared to operating income of $36.1 million and operating margin of 5.3
percent in fiscal 2020, reflecting the impact of the $70.1 million impairment
expense and leverage on the lower revenue, partially offset by cost reduction
actions and the benefit of $7.4 million in fiscal 2021 from a Canadian wage
subsidy program offered to Canadian businesses impacted by the COVID-19
pandemic.
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Architectural Glass
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net sales $ 309,241 $ 330,256 $ 387,191 (6.4) % (14.7) %
Operating income 1,785 18,678 20,760 (90.4) % (10.0) %
Operating margin 0.6 % 5.7 % 5.4 %
Fiscal 2022 Compared to Fiscal 2021. Fiscal 2022 net sales decreased 6.4
percent, or $21.0 million , over the prior year, primarily reflecting lower
volume. Operating margin decreased 510 basis points for the fiscal year ended
2022 compared to the prior year period, as a result of $27.1 million of
restructuring costs during the current year, as well as the impact of higher
material and freight costs from inflation, partially offset by $19.5 million
gain on sale of a manufacturing facility in Georgia . The prior year period also
included $7.4 million of income related to a New Markets Tax Credit transaction.
Fiscal 2021 Compared to Fiscal 2020. Fiscal 2021 net sales decreased 14.7
percent, or $56.9 million , over fiscal 2020, due to market-related volume
declines and project delays. Operating margin increased 30 basis points for the
fiscal year ended 2021 compared to fiscal 2020, as a result of $7.4 million of
income related to a New Markets Tax Credit transaction, offset by the impacts of
lower volume and increased costs related to the small projects growth
initiative.
Architectural Services
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net sales $ 349,386 $ 295,807 $ 269,140 18.1 % 9.9 %
Operating income 32,743 31,182 23,582 5.0 % 32.2 %
Operating margin 9.4 % 10.5 % 8.8 %
Fiscal 2022 Compared to Fiscal 2021. Net sales increased 18.1 percent, or $53.6
million , compared to the prior year, driven by increased volume from executing
projects in backlog. Operating margin decreased 110 basis points over the prior
year, reflecting the impact of inflation and isolated performance challenges on
certain projects experienced during the first quarter of fiscal 2022.
Fiscal 2021 Compared to Fiscal 2020. Net sales increased 9.9 percent, or $26.7
million , compared to fiscal 2020, driven by increased volume from executing
projects in backlog. Operating margin increased 170 basis points over fiscal
2020, primarily driven by improved volume leverage and strong project execution.
Large-Scale Optical Technologies (LSO)
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net sales $ 101,673 $ 70,050 $ 87,911 45.1 % (20.3) %
Operating income 23,618 31,203 22,642 (24.3) % 37.8 %
Operating margin 23.2 % 44.5 % 25.8 %
Fiscal 2022 Compared to Fiscal 2021. Fiscal 2021 net sales increased 45.1
percent, or $31.6 million , compared to the prior year, reflecting a more
favorable sales mix, as demand recovered from the impact of COVID in the prior
year period. In fiscal 2021, most of the segment's customers and the segment's
manufacturing operations were closed for a large part of the first and second
quarters to comply with COVID-related government directives. The segment had
operating margin of 23.2 percent in fiscal 2022 compared to operating margin of
44.5 percent in fiscal 2021, reflecting the impact of a $19.3 million gain on
the sale-leaseback of a building recognized during the third quarter of the
prior year, partially offset by the impacts of the temporary shutdown and the
related lower volume.
Fiscal 2021 Compared to Fiscal 2020. Fiscal 2021 net sales decreased 20.3
percent, or $17.9 million , compared to fiscal 2020, as a result of the required
COVID-related closure of most of the segment's customers and the segment's
manufacturing locations for several months during the first half of fiscal 2021.
The segment had operating margin of 44.5 percent in fiscal 2021 compared to
operating margin of 25.8 percent in fiscal 2020, reflecting the impact of a
$19.3 million gain on the sale-leaseback of a building recognized during the
third quarter of fiscal 2021, partially offset by the impacts of the temporary
shutdown and the related lower volume.
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Liquidity and Capital Resources
(In thousands) 2022 2021 2020
Operating Activities Net cash provided by operating activities$ 100,471 $ 141,863 $ 107,262 Investing Activities Capital expenditures (21,841) (26,165) (51,428) Proceeds on sale of property 30,599 25,108 5,307 Financing Activities Payments on line of credit, net - (47,739)
(177,500)
(Repayment) borrowings on debt (2,000) (5,400)
150,000
Repurchase and retirement of common stock (100,414) (32,878)
(25,140)
Dividends paid (20,266) (19,601) (18,714)
Operating Activities. Cash provided by operating activities was $100.5 million
in fiscal 2022, a decrease of $41.4 million from fiscal 2021, primarily
reflecting a decline in net earnings during the current fiscal year and the
benefit in the prior year from reduced working capital and temporary actions
related to the pandemic.
Investing Activities. Net cash provided by investing activities was $9.3 million
in fiscal 2022, compared to net cash used by investing activities of $2.1
million in fiscal 2021, due to an increase of $5.5 million of proceeds from
property sales in fiscal 2022 compared to fiscal 2021, related to the sale of an
Architectural Glass manufacturing facility in Georgia in the fourth quarter of
fiscal 2022, and reduced capital expenditures by $4.3 million in fiscal 2022
compared to fiscal 2021. In fiscal 2021, we sold an LSO manufacturing facility
in Illinois , and in fiscal 2020, we sold an Architectural Framing manufacturing
facility in Toronto .
Financing Activities. Cash used by financing activities was $120.6 million in
fiscal 2022, compared to $107.9 million in fiscal 2021. In fiscal 2022, we paid
dividends totaling $20.3 million and repurchased 2,292,846 shares under our
authorized share repurchase program, at a total cost of $100.0 million . We
repurchased 1,177,704 shares under the program in fiscal 2021 and 686,997 shares
under the program in fiscal 2020. We have repurchased a total of 9,425,462
shares, at a total cost of $307.3 million , since the 2004 inception of this
program. We have remaining authority to repurchase 1,824,538 shares under this
program, which has no expiration date, and we will continue to evaluate making
future share repurchases, depending on our cash flow and debt levels, market
conditions, including the continuing effects of the COVID-19 pandemic, and other
potential uses of cash.
As of February 26, 2022 , no borrowings were outstanding under the revolving
credit facility. As defined within the credit facility, we have two affirmative
financial covenants which require us to stay below a maximum leverage ratio and
to maintain a minimum interest expense-to-EBITDA ratio. At February 26, 2022 , we
were in compliance with both financial covenants.
Other Financing Activities. The following summarizes our significant contractual
obligations that impact our liquidity as of
Payments Due by Fiscal Period
(In thousands) 2023 2024 2025 2026 2027 Thereafter Total
Debt obligations $ 1,000 $ -
13,604 11,311 9,950 7,929 6,423 6,735 55,952
Purchase obligations 199,918 5,976 1,433 1,433 487 - 209,247
Total cash obligations $ 214,522 $ 17,287 $ 161,383 $ 9,362 $ 6,910 $ 18,735 $ 428,199 Debt obligations in the table above include a
We acquire the use of certain assets through operating leases, such as warehouses, manufacturing equipment, office equipment, hardware, software and vehicles. While many of these operating leases have termination penalties, we consider the risk related to termination penalties to be minimal.
Purchase obligations in the table above relate to raw material commitments and capital expenditures.
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We expect to make contributions of approximately $0.7 million to our
defined-benefit pension plans in fiscal 2023, which will equal or exceed our
minimum funding requirements.
As of February 26, 2022 , we had reserves of $3.3 million and $0.5 million for
long-term unrecognized tax benefits and environmental liabilities, respectively.
We are unable to reasonably estimate in which future periods the remaining
unrecognized tax benefits will ultimately be settled.
At February 26, 2022 , we had ongoing letters of credit of $16.4 million related
to industrial revenue bonds, construction contracts and insurance collateral
that expire in fiscal 2023 and reduce borrowing capacity under the revolving
credit facility.
In addition to the above standby letters of credit, 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 February 26, 2022 , $352.5
million of our backlog was bonded by performance bonds with a face value of $1.2
billion . These bonds do not have stated expiration dates, as we are released
from the bonds upon completion of the contract. We have not been required to
make any payments under these bonds with respect to our existing businesses.
During calendar 2020, we took advantage of the option to defer remittance of the
employer portion of Social Security tax as provided in the Coronavirus, Aid,
Relief and Economic Security Act (CARES Act). This deferral allowed us to retain
cash during calendar year 2020 that would have otherwise been remitted to the
federal government. During the fourth quarter of fiscal 2022, we repaid half of
the deferred tax payments in the amount of $6.8 million , with a remaining amount
of $6.8 million included within accrued payroll and other benefits on our
consolidated balance sheets to be repaid in calendar year 2022.
We had total cash and short-term marketable securities of $37.6 million , and
$218.6 million available under our committed revolving credit facility, at
February 26, 2022 . We believe that cash flows from operating activities will be
adequate to meet our short-term and long-term liquidity and capital expenditure
needs. In addition, we believe we have the ability to obtain both short-term and
long-term debt to meet our financing needs for the foreseeable future. We also
believe we will continue to be in compliance with our existing debt covenants
over the next fiscal year.
We continually review our portfolio of businesses and their assets and how they
support our business strategy and performance objectives. As part of this
review, we may acquire other businesses, pursue geographic expansion, take
actions to manage capacity and further invest in, divest and/or sell parts of
our current businesses.
We had no off-balance sheet arrangements at February 26, 2022 or February 27,
2021 that had 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
The Company is providing initial guidance for fiscal year 2023, with full year adjusted earnings expected to be in the range of$2.90 to$3.30 per diluted share. The Company expects revenue growth in fiscal 2023, led by the flow through of inflation-related pricing actions in Architectural Framing Systems. The Company forecasts full year capital expenditures of$35 to$40 million . Recently Issued Accounting Pronouncements See Note 1 of the Notes to Consolidated Financial Statements within Item 8 of this Form 10-K for information pertaining to recently issued accounting pronouncements, incorporated herein by reference. Critical Accounting Policies and Estimates Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance withU.S. GAAP. Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. In developing these estimates and assumptions, a collaborative effort is undertaken involving management across the organization, including finance, sales, project management, quality, risk, legal and tax, as well as outside advisors, such as consultants, engineers, lawyers and actuaries. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other assumptions or circumstances.
We consider the following items in our consolidated financial statements to require significant estimation or judgment.
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Revenue recognition
We generate revenue from the design, engineering and fabrication of
architectural glass, curtainwall, window, storefront and entrance systems, and
from installing those products on commercial buildings. We also manufacture
value-added glass and acrylic products. Due to the diverse nature of our
operations and various types of contracts with customers, we have businesses
that recognize revenue over time and businesses that recognize revenue at a
point in time. We believe the most significant areas of estimation and judgment
relate to over-time revenue recognition on longer-term contracts.
We have three businesses which operate under long-term, fixed-price contracts,
representing approximately 38 percent of our total revenue in fiscal February
26, 2022 . The contracts for these businesses have a single, bundled performance
obligation, as these businesses generally provide interrelated products and
services and integrate these products and services into a combined output
specified by the customer. The customer obtains control of this combined output,
generally integrated window systems or installed window and curtainwall systems,
over time. We measure progress on these contracts following an input method, by
comparing total costs incurred to-date to the total estimated costs for the
contract, and record that proportion of the total contract price as revenue in
the period. Contract costs include materials, labor and other direct costs
related to contract performance. We believe this method of recognizing revenue
is consistent with our progress in satisfying our contract obligations.
Due to the nature of the work required under these long-term contracts, the
estimation of costs incurred and remaining to complete on a project is subject
to many variables and requires significant judgment. It is common for these
contracts to contain potential bonuses or penalties which are generally awarded
or charged upon certain project milestones or cost or timing targets, and can be
based on customer discretion. We estimate variable consideration at the most
likely amount to which we expect to be entitled. We include estimated amounts in
the transaction price to the extent that it is probable that a significant
reversal of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is resolved. Our estimates of
variable consideration and determination of whether to include estimated amounts
in the transaction price are based largely on our assessments of anticipated
performance and all information (historical, current and forecasted) that is
reasonably available to us.
Long-term contracts are often modified to account for changes in contract
specifications and requirements of work to be performed. We consider contract
modifications to exist when the modification, generally through a change order,
either creates new or changes existing enforceable rights and obligations, and
we evaluate these types of modifications to determine whether they may be
considered distinct performance obligations. In many cases, these contract
modifications are for goods or services that are not distinct from the existing
contract, due to the significant integration service provided in the context of
the contract. Therefore, these modifications are generally accounted for as part
of the existing contract. The effect of a contract modification on the
transaction price and our measure of progress is recognized as an adjustment to
revenue, generally on a cumulative catch-up basis.
Impairment of goodwill, indefinite-lived intangible assets and long-lived assets
Goodwill
We have historically evaluated 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. In the third quarter of fiscal
2021, we changed the date of our annual goodwill impairment test from our fiscal
year-end to the first day in our fiscal fourth quarter. This change results in
better alignment of the annual impairment test with our strategic and annual
planning processes, and we will follow this new cadence for our annual
impairment valuations going forward. This change was determined not to be
material to and had no impact on our current or historical consolidated
financial statements.
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 segment management on a regular basis. During the third quarter
of fiscal 2022, we combined certain reporting units to form two reporting units,
following certain structural and leadership changes at the Company, specifically
within the Architectural Framing Systems segment. Within this segment, as a
result of integration efforts that are ongoing, leadership over our Wausau, EFCO
and Sotawall reporting units were combined to form the Window and Wall Systems
reporting unit, and our Linetec and Tubelite reporting units were combined to
form the Storefront and Finishing Solutions reporting unit. With these
organizational changes, Architectural Framing Systems segment management
regularly reviews and evaluates the results of the Window and Wall Systems and
Storefront and Finishing Solutions reporting units. Additionally, functional
leaders in areas such as operations, sales, marketing and general and
administrative areas are responsible for allocating resources and reviewing
results of the Window and Wall Systems and Storefront and Finishing Solutions
reporting units. The goodwill of the five individual pre-integration reporting
units was aggregated to the respective combined reporting units. We evaluated
goodwill on a qualitative basis prior to and subsequent to this change and
concluded no adjustment to the carrying value of goodwill was necessary as a
result of this change. The
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reporting units for our fiscal 2022 annual impairment test align with reporting
segments, with the exception of our Architectural Framing Systems segment, which
contains two reporting units, Window and Wall Systems and Storefront and
Finishing Solutions, which represent $55.6 million and $37.6 million , of the
goodwill balance at February 26, 2022 , respectively.
For our fiscal 2022 annual impairment test, we elected to bypass the qualitative
assessment process and to proceed directly to comparing the fair value of each
of our reporting units to carrying value, including goodwill. If fair value
exceeds the carrying value, goodwill impairment is not indicated. If the
carrying amount of a reporting unit is higher than its estimated fair value, the
excess is recognized as an impairment expense.
We estimate the fair value of a reporting unit using both the income approach
and the market approach. The income approach uses a discounted cash flow
methodology that involves significant judgment and projections of future
performance. Assumptions about future revenues and future operating expenses,
capital expenditures and changes in working capital are based on the annual
operating plan and other business plans 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 projections are discounted using a weighted-average cost of capital, which
considers the risk inherent in our projections of future cash flows. We
determine the weighted-average cost of capital for this analysis by weighting
the required returns on interest bearing debt and common equity capital in
proportion to their estimated percentages in an expected capital structure,
using published data where possible. We used discount rates that are
commensurate with the risks and uncertainties inherent in the respective
businesses and in the internally developed forecasts. The market approach uses a
multiple of earnings and revenue based on guidelines for publicly traded
companies.
Based on these analyses, estimated fair value exceeded carrying value at all of
our reporting units. The discounted cash flow projections used in these analyses
are dependent upon achieving forecasted levels of revenue and profitability. If
revenue or profitability were to fall below forecasted levels, or if market
conditions were to decline in a material or sustained manner, impairment could
be indicated at these or our other reporting units and we could incur non-cash
impairment expense that would negatively impact our net earnings.
Indefinite-lived intangible assets
We have intangible assets for certain acquired trade names and trademarks which
are determined to have indefinite useful lives. We evaluate the reasonableness
of the useful lives and 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. We bypassed
a qualitative assessment and performed a quantitative impairment test to compare
the fair value of each indefinite-lived intangible asset with its carrying
value. If the carrying value of an indefinite-lived intangible asset exceeds its
fair value, an impairment expense is recognized in an amount equal to that
excess. If an impairment expense 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 estimation of 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 the fair value analysis, we assumed a discount rate of
12.3 percent, a royalty rate of 1.5 percent, and a long-term growth rate of 3.0
percent. Based on our annual analysis, the fair value of each of our trade names
and trademarks exceeded the carrying amount, however, based on the finalization
of our plans for integrating the Sotawall business into the Architectural
Services segment, beginning in fiscal 2023, it was determined that the carrying
value of the Sotawall trade name exceeded fair value by $12.7 million as it was
determined to have an immaterial fair value as of fiscal 2022 year end. This
amount was recognized as impairment expense in the fourth quarter ended February
26, 2022 .
We continue to conclude that the useful lives of our remaining 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, further impairment could be indicated on these indefinite-lived intangible assets.
Long-lived assets Long-lived assets or asset groups, including intangible assets subject to amortization and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows to determine the fair value of long-lived assets. Due to triggering events as a result of finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the finite-lived intangible assets were impaired as ofFebruary 26, 2022 . As such, a long-lived asset impairment charge of 24 -------------------------------------------------------------------------------- Table of Contents$36.7 million in finite-lived intangible assets was recognized in the fourth quarter of fiscal year 2022 within the Architectural Framing Systems segment. Reserves for disputes and claims regarding product liability, warranties and other project-related contingencies We are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our products, some of which may be covered under our warranty policies. 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. We also are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses, including those taken on with our acquisition of EFCO. The time period from when a claim is asserted to when it is resolved, either by negotiation, settlement or litigation, can be several years. While we maintain various types of product liability insurance, the insurance policies include significant self-retention of risk in the form of policy deductibles. In addition, certain claims could be determined to be uninsured. We also actively manage the risk of these exposures through contract negotiations and proactive project management.
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs, based on similar historical product liability claims, as a ratio of sales. We also reserve for estimated exposures on other claims as they are known and reasonably estimable.
Income taxes We are required to make judgments regarding the potential tax effects of various financial transactions and ongoing operations to estimate our obligation to taxing authorities. These tax obligations include income, real estate, franchise and sales/use taxes. Judgments related to income taxes require the recognition in our financial statements that a tax position is more-likely-than-not to be sustained on audit. Judgment and estimation is required in developing the provision for income taxes and the reporting of tax-related assets and liabilities and, if necessary, any valuation allowances. The interpretation of tax laws can involve uncertainty, since tax authorities may interpret such laws differently. Actual income tax could vary from estimated amounts and may result in favorable or unfavorable impacts to net income, cash flows and tax-related assets and liabilities. In addition, the effective tax rate may be affected by other changes including the allocation of property, payroll and revenues between states. We assess the deferred tax assets for recoverability taking into consideration historical and anticipated earnings levels; the reversal of other existing temporary differences; available net operating losses and tax carryforwards; and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, a valuation allowance against the deferred tax assets. As facts and circumstances change, adjustment to the valuation allowance may be required.
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