What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-04-22 compared with 2021-04-22 · 107 added, 89 removed, 197 unchanged (50% of the section changed)

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Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical Technologies (LSO).

During fiscal 2021, we responded quickly to a challenging environment for our business, driven by the evolving and ongoing impacts of the COVID-19 pandemic and slowness in certain of our end markets.

We adapted our business operations so we could continue to serve customers, while keeping the health and safety of our employees a top priority.

We focused on driving improvements throughout our business, while using this year to begin positioning the company for sustainable growth and improved profitability in the future.

In particular, we paid down a significant percentage of our long-term debt and strengthened our financial position, giving us better financial flexibility going forward.

We also made progress on actions to improve our overall cost structure.

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, in Dallas, Texas and Statesboro, 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 $1.2 billion, a decrease of 11 percent over fiscal 2020.

• 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.

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Refer to the table below for a reconciliation to GAAP of these adjusted amounts.

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.

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.

Reconciliation of Non-GAAP Financial Information

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Operating income $ 22,045 $ 25,527 $ 0.14 $ 0.59

Impairment expense on goodwill and intangible assets 70,069 — 2.66 —

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

Cooperation agreement advisory costs — 2,776 — 0.10

Income tax impact on above adjustments (1)

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Adjusted operating income $ 82,574 $ 87,122 $ 2.48 $ 2.40

(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 excludes the amount of each charge that is non-deductible in the applicable jurisdiction.

In prior periods, tax impacts were calculated using an effective tax rate.

All such periods were recalculated herein using the 25% estimated statutory tax rate for consistency and comparability with the current period presentation.

This change did not have a significant impact on the income tax impact or the adjusted net earnings or adjusted earnings per diluted common share amounts that had been reported for the three months or twelve months ended February 29, 2020.

(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.

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

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Fiscal 2022 Compared to Fiscal 2021

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.

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 2020 decreased by 1.1 percent compared to fiscal 2019, driven by expected project timing-related decreases within the Architectural Services segment and by lower volumes at certain businesses within the Architectural Framing Systems segment, partially offset by improved volume in the Architectural Glass segment.

The relationship between various components of operations, as a percentage of net sales, is provided below.

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Selling, general and administrative expenses 15.4 14.6 16.7

Impairment expense on goodwill and intangible assets 5.7 — 0.2

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 income (expense), net 0.1 0.1 —

Other (expense) income, net (0.3) 0.1 0.1

Earnings before income taxes 1.1 1.8 5.7

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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 in August 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 $49.4 million impairment expense taken within the Architectural Framing Systems segment during the current year compared

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.

Total selling, general and administrative (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.

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.

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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 in Canada and the impact of the unfavorable permanent items in relation to reduced earnings in fiscal 2021.

Fiscal 2020 Compared to Fiscal 2019

Gross margin was 23.0 percent in fiscal 2020, an increase of 210 basis points from fiscal 2019.

This increase was driven by project-related charges of $40.9 million incurred in fiscal 2019 on certain contracts acquired with the purchase of EFCO.

increase was also driven by operating improvements in the Architectural Glass segment, partially offset by manufacturing difficulties in certain of the businesses in the Architectural Framing Systems segment and reduced operating leverage in the Architectural Services segment, based on timing of project activity.

SG&A expense for fiscal 2020 was 16.7 percent, an increase of 60 basis points from fiscal 2019.

This was primarily driven by costs for outside advisors and legal fees, including cooperation agreement advisory costs, in addition to higher compensation and related costs compared to the prior year.

The effective tax rate for fiscal 2020 was 22.4 percent, compared to 22.1 percent in fiscal 2019, due to the impact of state taxes.

Segment Analysis

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Net sales $ 596,608 $ 570,850 $ 686,596 4.5 % (16.9) %

Operating income (44,761) 36,110 49,660 N/M (27.3) %

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.

Fiscal 2020 Compared to Fiscal 2019.

Net sales decreased 4.7 percent, or $34.2 million, from fiscal 2019, primarily due to lower volumes as a result of certain customer-driven schedule delays.

Operating margin declined 160 basis points from fiscal 2019, reflecting the impact of lower volumes and certain operational difficulties negatively impacting customer deliveries in two of the segment's businesses, which have since been addressed.

Architectural Glass

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Fiscal 2022 Compared to Fiscal 2021.

Fiscal 2021 net sales decreased 14.7 percent, or $56.9 million, over the prior year, due to market-related volume declines and project delays.

Operating margin increased 30 basis points for the fiscal year ended 2021 compared to the prior year period, 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.

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 2020 net sales increased 5.4 percent, or $20.0 million, over fiscal 2019, due to improved volume and mix, with growth in mid-size projects offsetting lower large project revenue due to increased foreign competition.

Operating margin increased 90 basis points for fiscal year 2020 compared to fiscal 2019, as a result of improved factory productivity and volume leverage and cost control.

This improvement was partially offset by 160 basis points of start-up costs related to a new manufacturing facility for the segment's small projects growth initiative.

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

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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 increased 170 basis points over the prior year, primarily driven by improved volume leverage and strong project execution.

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 decreased 6.0 percent, or $17.2 million, compared to fiscal 2019, as a result of lower volumes due to timing of project activity.

Operating margin decreased 190 basis points over fiscal 2019, due primarily to reduced leverage on the lower project volume and project mix.

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)

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Fiscal 2022 Compared to Fiscal 2021.

Fiscal 2021 net sales decreased 20.3 percent, or $17.9 million, compared to the prior year, 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.

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.

Net sales and operating margin were largely consistent compared to fiscal 2019, with good cost control and operational performance.

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.

Liquidity and Capital Resources

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Financing Activities

(Payments) borrowings on line of credit, net (47,739) (177,500) 30,000

Payments on line of credit, net — (47,739) (177,500)

(Repayment) borrowings on debt (2,000) (5,400) 150,000

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Operating Activities.

Cash provided by operating activities was $141.9 million in fiscal 2021, an increase of $34.6 million from fiscal 2020, primarily reflecting strong working capital management.

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 used in investing activities was $2.1 million in fiscal 2021, compared to $47.0 million in fiscal 2020, due to nearly $20 million of increased proceeds from property sales in fiscal 2021, related to the sale of an LSO manufacturing facility in Illinois in the third quarter of fiscal 2021, and reduced capital expenditures by $25 million in fiscal 2021 compared to fiscal 2020.

In fiscal 2020, we sold an Architectural Framing manufacturing facility in Toronto, and in fiscal 2019, we sold an Architectural Glass manufacturing facility in Utah.

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 in financing activities was $107.9 million in fiscal 2021, compared to $74.5 million in fiscal 2020.

In fiscal 2021, we made net repayments on debt of $53.1 million, paid dividends totaling $19.6 million and repurchased 1,177,704 shares under our authorized share repurchase program, at a total cost of $32.9 million.

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.

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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.

During the third quarter of fiscal 2021, we amended our term loan to extend the maturity date to June 2024, as further described in Note 7 of the Notes to Consolidated Financial Statements.

As of February 27, 2021, no borrowings were outstanding under

the revolving credit facility.

As defined within the credit facility, we have two financial covenants which require us to stay below a maximum leverage ratio and to maintain a minimum interest expense-to-EBITDA ratio.

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.

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Operating leases (undiscounted) 13,604 11,311 9,950 7,929 6,423 6,735 55,952

13,731 12,249 10,558 9,290 7,464 12,581 65,873

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

$ 225,999 $ 53,182 $ 11,599 $ 160,162 $ 8,336 $ 25,067 $ 484,345

Debt obligations in the table above include $15.0 million of industrial revenue bond obligations that mature in fiscal years 2022 through 2043.

Debt obligations in the table above include a $150.0 million term loan that matures in fiscal 2025 and $13.0 million of industrial revenue bond obligations that mature in fiscal years 2023 through 2043.

We acquire the use of certain assets through operating leases, such as warehouses, manufacturing equipment, office equipment, hardware, software and vehicles.

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This deferral allowed us to retain cash during calendar year 2020 that would have otherwise been remitted to the federal government.

At the end of fiscal 2021, we had deferred tax payments of $13.6 million, which are included within accrued payroll and other benefits and other non-current liabilities on our consolidated balance sheets.

The deferred tax payments will be repaid equally in calendar years 2021 and 2022.

The CARES Act, along with other foreign government initiatives, also provides for job retention programs, which have provided payroll tax credits or subsidies of $8.0 million during calendar year 2020.

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.

Due to our ability to generate cash from operations and our available sources of borrowing capacity, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements and necessary capital expenditures for at least the next 12 months.

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.

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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.

Off-balance Sheet Arrangements.

We had no off-balance sheet arrangements at February 27, 2021 or February 29, 2020.

For fiscal year 2022, we expect full-year earnings to be in the range of $2.10 to $2.35 per diluted share.

This includes $7 to $10 million of expected pre-tax costs related to investments in transformation initiatives.

The company currently expects a full-year tax rate of approximately 24.5 percent and capital expenditures of approximately $45 million.

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.

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

Critical Accounting Policies and Estimates

Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance with U.S.

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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.

Goodwill and indefinite-lived intangible asset impairment

Impairment of goodwill, indefinite-lived intangible assets and long-lived assets

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.

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 reporting units.

We performed a quantitative goodwill impairment evaluation at that time and the estimated fair value of each reporting unit exceeded its carrying value.

Therefore, goodwill impairment was not indicated in the first quarter of fiscal 2021.

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.

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.

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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 2021, we combined two reporting units into one reporting unit, 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 the Tubelite and Alumicor reporting units has been combined and functional leaders in areas such as operations, sales, marketing and administration are responsible for allocating resources and reviewing results of the combined business.

The goodwill of the individual reporting units was therefore aggregated to the combined reporting unit.

We evaluated goodwill on a qualitative basis prior to and subsequent to this change and concluded that no adjustment to the carrying value of goodwill was necessary as a result of this change.

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.

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.

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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 six of our eight reporting units.

However, driven by a decline in market conditions, partially due to COVID-19 and the ongoing uncertainty related to how some of our end markets will perform in a post-COVID environment, at two reporting units within the Architectural Framing Systems segment, EFCO and Sotawall, carrying value was in excess of the concluded fair value.

For these reporting units, we utilized a weighted-average cost of capital of 12.1 percent in determining the discounted cash flows and a long-term growth rate of 3.0 percent.

As a result, as of February 27, 2021, we incurred goodwill impairment expense of $46.7 million and $17.1 million in our EFCO and Sotawall reporting units, respectively.

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, further impairment could be indicated at these or our other reporting units and we could incur an additional non-cash impairment expense that would negatively impact our net earnings.

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

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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

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.

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The assessment of fair value involves significant judgment and projections about future performance.

In the fair value analysis, we assumed a discount rate of 12.6 percent, royalty rates ranging from 1.5 or 2.0 percent, and a long-term growth rate of 3.0 percent.

Based on our analysis, the fair value of each of our trade names and trademarks exceeded carrying amount, except for the EFCO tradename.

The fair value determined for the EFCO tradename exceeded carrying value by $6.3 million and this amount was recognized as impairment expense in the fourth quarter ended February 27, 2021.

In addition, the fair value determined for the Sotawall tradename did not exceed carrying value by a significant margin.

If our discount rate were to increase by 100 basis points, the fair value of this tradename would fall below carrying value, which would indicate impairment.

We continue to conclude that the useful lives 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, further impairment could be indicated on this or another indefinite-lived intangible asset.

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 of February 26, 2022.

As such, a long-lived asset impairment charge of

$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

8 unchanged sentences

We also reserve for estimated exposures on other claims as they are known and reasonably estimable.

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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What changed 10-K

Item 7. Management’s Discussion and Analysis