APOGEE ENTERPRISES, INC. 10-Q

Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except stock data) August 27, 2022 February 26, 2022 Assets Current assets Cash and cash equivalents $ 22,065 $ 37,583 Restricted cash 8,684 — Receivables, net 231,853 168,592 Inventories 98,046 80,494 Costs and earnings on contracts in excess of billings 29,522 30,403 Other current assets 34,048 20,820 Total current assets 424,218 337,892 Property, plant and equipment, net 232,766 249,995 Operating lease right-of-use assets 42,505 47,912 Goodwill 129,476 130,102 Intangible assets 70,377 72,481 Other non-current assets 49,632 49,481 Total assets $ 948,974 $ 887,863 Liabilities and Shareholders’ Equity Current liabilities Accounts payable $ 86,871 $ 92,104 Accrued payroll and related benefits 41,338 50,977 Billings in excess of costs and earnings on uncompleted contracts 29,616 8,659 Operating lease liabilities 11,498 12,744 Current portion long-term debt — 1,000 Other current liabilities 64,060 67,462 Total current liabilities 233,383 232,946 Long-term debt 250,834 162,000 Non-current operating lease liabilities 34,625 39,591 Non-current self-insurance reserves 23,038 22,544 Other non-current liabilities 50,354 44,583 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 22,209,925 and 23,701,491 respectively 7,403 7,901 Additional paid-in capital 141,575 149,713 Retained earnings 240,245 254,825 Accumulated other comprehensive loss ( 32,483 ) ( 26,240 ) Total shareholders’ equity 356,740 386,199 Total liabilities and shareholders’ equity $ 948,974 $ 887,863 See accompanying notes to consolidated financial statements. 4 Table of Contents CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended (In thousands, except per share data) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Net sales $ 372,109 $ 325,797 $ 728,744 $ 651,803 Cost of sales 287,173 277,795 558,191 536,091 Gross profit 84,936 48,002 170,553 115,712 Selling, general and administrative expenses 52,864 51,070 105,265 102,739 Operating income (loss) 32,072 ( 3,068 ) 65,288 12,973 Interest expense, net 1,698 1,072 2,904 2,310 Other expense (income), net 173 ( 105 ) 1,483 209 Earnings (loss) before income taxes 30,201 ( 4,035 ) 60,901 10,454 Income tax (benefit) expense ( 7,188 ) ( 1,919 ) 781 1,753 Net earnings (loss) $ 37,389 $ ( 2,116 ) $ 60,120 $ 8,701 Earnings (loss) per share - basic $ 1.71 $ ( 0.08 ) $ 2.72 $ 0.34 Earnings (loss) per share - diluted $ 1.68 $ ( 0.08 ) $ 2.66 $ 0.34 Weighted average basic shares outstanding 21,860 25,140 22,129 25,271 Weighted average diluted shares outstanding 22,245 25,140 22,563 25,637 See accompanying notes to consolidated financial statements. 5 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (Unaudited) Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Net earnings (loss) $ 37,389 $ ( 2,116 ) $ 60,120 $ 8,701 Other comprehensive (loss) earnings: Unrealized (loss) gain on marketable securities, net of $( 28 ), $ 2 , $( 102 ) and $ 1 of tax (benefit) expense, respectively ( 106 ) 4 ( 382 ) 4 Unrealized (loss) gain on derivative instruments, net of $( 152 ), $( 203 ), $( 1,469 ) and $ 8 of tax (benefit) expense, respectively ( 500 ) ( 666 ) ( 4,816 ) 26 Foreign currency translation adjustments ( 2,777 ) ( 4,300 ) ( 1,045 ) 1,580 Other comprehensive (loss) earnings ( 3,383 ) ( 4,962 ) ( 6,243 ) 1,610 Total comprehensive earnings (loss) $ 34,006 $ ( 7,078 ) $ 53,877 $ 10,311 See accompanying notes to consolidated financial statements. 6 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (In thousands) August 27, 2022 August 28, 2021 Operating Activities Net earnings $ 60,120 $ 8,701 Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Depreciation and amortization 21,448 25,808 Share-based compensation 3,394 3,261 Deferred income taxes 6,858 ( 4,560 ) Asset impairment — 15,403 Gain on disposal of assets ( 695 ) ( 1,355 ) Proceeds from New Markets Tax Credit transaction, net of deferred costs 18,390 — Settlement of New Markets Tax Credit transaction ( 19,523 ) — Noncash lease expense 6,160 6,216 Other, net 2,653 578 Changes in operating assets and liabilities: Receivables ( 65,760 ) 15,520 Inventories ( 17,636 ) ( 3,607 ) Costs and earnings on contracts in excess of billings 840 3,212 Accounts payable and accrued expenses ( 8,226 ) ( 10,895 ) Billings in excess of costs and earnings on uncompleted contracts 21,051 ( 2,144 ) Refundable and accrued income taxes ( 20,486 ) 1,981 Operating lease liability ( 6,684 ) ( 6,240 ) Other, net ( 4,547 ) 3,028 Net cash (used) provided by operating activities ( 2,643 ) 54,907 Investing Activities Capital expenditures ( 9,255 ) ( 10,121 ) Proceeds from sales of property, plant and equipment 4,122 1,292 Other, net 450 66 Net cash used by investing activities ( 4,683 ) ( 8,763 ) Financing Activities Borrowings on line of credit 409,880 — Repayment on debt ( 151,000 ) ( 2,000 ) Payments on line of credit ( 171,000 ) — Payments on debt issue costs ( 687 ) — Proceeds from exercise of stock options — 4,115 Repurchase and retirement of common stock ( 74,312 ) ( 22,419 ) Dividends paid ( 9,602 ) ( 10,060 ) Other, net ( 2,815 ) ( 1,853 ) Net cash provided (used) by financing activities 464 ( 32,217 ) (Decrease) increase in cash, cash equivalents and restricted cash ( 6,862 ) 13,927 Effect of exchange rates on cash 28 617 Cash, cash equivalents and restricted cash at beginning of year 37,583 47,277 Cash, cash equivalents and restricted cash at end of period $ 30,749 $ 61,821 Noncash Activity Capital expenditures in accounts payable $ 2,019 $ 374 See accompanying notes to consolidated financial statements. 7 Table of Contents CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (In thousands) Common Shares Outstanding Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shareholders' Equity Balance at February 26, 2022 23,701 $ 7,901 $ 149,713 $ 254,825 $ ( 26,240 ) $ 386,199 Net earnings — — — 22,731 — 22,731 Unrealized loss on marketable securities, net of $ 74 tax benefit — — — — ( 276 ) ( 276 ) Unrealized loss on derivative instruments, net of $ 1,317 tax benefit — — — — ( 4,316 ) ( 4,316 ) Foreign currency translation adjustments — — — — 1,732 1,732 Issuance of stock, net of cancellations 100 33 23 — — 56 Share-based compensation — — 1,597 — — 1,597 Share repurchases ( 1,571 ) ( 524 ) ( 10,350 ) ( 63,438 ) — ( 74,312 ) Other share retirements ( 30 ) ( 10 ) ( 198 ) ( 1,120 ) — ( 1,328 ) Cash dividends — — — ( 4,793 ) — ( 4,793 ) Balance at May 28, 2022 22,200 $ 7,400 $ 140,785 $ 208,205 $ ( 29,100 ) $ 327,290 Net earnings — — — 37,389 — 37,389 Unrealized loss on marketable securities, net of $ 28 tax benefit — — — — ( 106 ) ( 106 ) Unrealized loss on derivative instruments, net of $ 152 tax benefit — — — — ( 500 ) ( 500 ) Foreign currency translation adjustments — — — — ( 2,777 ) ( 2,777 ) Issuance of stock, net of cancellations ( 14 ) ( 5 ) 61 — — 56 Share-based compensation — — 1,797 — — 1,797 Exercise of stock options 36 12 ( 954 ) — — ( 942 ) Other share retirements ( 13 ) ( 4 ) ( 114 ) ( 540 ) — ( 658 ) Cash dividends — — — ( 4,809 ) — ( 4,809 ) Balance at August 27, 2022 22,209 $ 7,403 $ 141,575 $ 240,245 $ ( 32,483 ) $ 356,740 See accompanying notes to consolidated financial statements. 8 Table of Contents CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (In thousands) Common Shares Outstanding Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shareholders' Equity Balance at February 27, 2021 25,714 $ 8,571 $ 154,958 $ 357,243 $ ( 28,027 ) $ 492,745 Net earnings — — — 10,817 — 10,817 Unrealized gain on marketable securities, net of $ 0 tax expense — — — — — — Unrealized gain on derivative instruments, net of $ 211 tax expense — — — — 692 692 Foreign currency translation adjustments — — — — 5,880 5,880 Issuance of stock, net of cancellations 90 30 ( 7 ) — — 23 Share-based compensation — — 1,674 — — 1,674 Exercise of stock options 179 60 4,055 — — 4,115 Share repurchases ( 357 ) ( 119 ) ( 2,218 ) ( 10,288 ) — ( 12,625 ) Other share retirements ( 20 ) ( 7 ) ( 121 ) ( 607 ) — ( 735 ) Cash dividends — — — ( 5,035 ) — ( 5,035 ) Balance at May 29, 2021 25,606 $ 8,535 $ 158,341 $ 352,130 $ ( 21,455 ) $ 497,551 Net loss — — — ( 2,116 ) — ( 2,116 ) Unrealized gain on marketable securities, net of $ 2 tax expense — — — — 4 4 Unrealized loss on derivative instruments, net of $ 203 tax benefit — — — — ( 666 ) ( 666 ) Foreign currency translation adjustments — — — — ( 4,300 ) ( 4,300 ) Issuance of stock, net of cancellations 67 22 — — — 22 Share-based compensation — — 1,587 — — 1,587 Share repurchases ( 249 ) ( 83 ) ( 1,616 ) ( 8,095 ) — ( 9,794 ) Other share retirements ( 30 ) ( 9 ) ( 197 ) ( 496 ) — ( 702 ) Cash dividends — — — ( 5,025 ) — ( 5,025 ) Balance at August 28, 2021 25,394 $ 8,465 $ 158,115 $ 336,398 $ ( 26,417 ) $ 476,561 See accompanying notes to consolidated financial statements. 9 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended February 26, 2022. We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein and are of a normal, recurring nature. The results of operations for the three- and six-month periods ended August 27, 2022 are not necessarily indicative of the results to be expected for the full year. At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The comparative fiscal 2022 segment results for the Architectural Framing Systems and Architectural Services segments have been recast to reflect the move of the Sotawall business into the Architectural Services segment from the Architectural Framing Systems segment, effective at the start of the first quarter of fiscal 2023. 2. Revenue, Receivables and Contract Assets and Liabilities Revenue The following table disaggregates total revenue by timing of recognition (see Note 12 for disclosure of revenue by segment): Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Recognized at shipment $ 174,693 $ 137,783 $ 335,857 $ 278,066 Recognized over time 197,416 188,014 392,887 373,737 Total $ 372,109 $ 325,797 $ 728,744 $ 651,803 Receivables Receivables reflected in the financial statements represent the net amount expected to be collected. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, current and forecast economic conditions and other relevant factors. Upon billing, aging of receivables is monitored until collection. An account is considered current when it is within agreed upon payment terms. An account is written off when it is determined that the asset is no longer collectible. Retainage on construction contracts represents amounts withheld by our customers on long-term projects until the project reaches a level of completion where amounts are released to us from the customer. (In thousands) August 27, 2022 February 26, 2022 Trade accounts $ 146,035 $ 129,085 Construction contracts 65,482 12,857 Contract retainage 22,267 28,782 Total receivables 233,784 170,724 Less: allowance for credit losses 1,931 2,132 Receivables, net $ 231,853 $ 168,592 The following table summarizes the activity in the allowance for credit losses: (In thousands) August 27, 2022 February 26, 2022 Beginning balance $ 2,132 $ 1,947 Additions charged to costs and expenses 45 729 Deductions from allowance, net of recoveries ( 244 ) ( 514 ) Other changes (1) ( 2 ) ( 30 ) Ending balance $ 1,931 $ 2,132 (1) Result of foreign currency effects 10 Table of Contents Contract assets and liabilities Contract assets consist of retainage, costs and earnings in excess of billings and other unbilled amounts typically generated when revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of billings in excess of costs and earnings and other deferred revenue on contracts. Retainage is classified within receivables and deferred revenue is classified within other current liabilities on our consolidated balance sheets. The time period between when performance obligations are complete and when payment is due is not significant. In certain of our businesses that recognize revenue over time, progress billings follow an agreed-upon schedule of values, and retainage is withheld by the customer until the project reaches a level of completion where amounts are released to us from the customer. (In thousands) August 27, 2022 February 26, 2022 Contract assets $ 51,789 $ 59,185 Contract liabilities 32,022 11,373 The changes in contract assets and contract liabilities were mainly due to timing of project activity within our businesses that operate under long-term contracts. Other contract-related disclosures Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Revenue recognized related to contract liabilities from prior year-end $ 4,978 $ 2,479 $ 33,157 $ 16,579 Revenue recognized related to prior satisfaction of performance obligations 4,770 5,354 4,946 7,518 Some of our contracts have an expected duration of longer than a year, with performance obligations extending over that time frame. Generally, these contracts are found in our businesses that typically operate with long-term contracts, which recognize revenue over time. The transaction prices associated with unsatisfied performance obligations at August 27, 2022 are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods: (In thousands) August 27, 2022 Within one year $ 501,856 Within two years 293,561 Beyond two years 117,867 Total $ 913,284 3. Supplemental Balance Sheet Information Inventories (In thousands) August 27, 2022 February 26, 2022 Raw materials $ 51,284 $ 42,541 Work-in-process 17,121 18,144 Finished goods 29,641 19,809 Total inventories $ 98,046 $ 80,494 Other current liabilities (In thousands) August 27, 2022 February 26, 2022 Warranties $ 13,482 $ 11,786 Income and other taxes 6,519 15,770 Accrued self-insurance reserves 12,471 8,796 Accrued freight 2,410 2,078 Deferred revenue 2,405 2,714 Other 26,773 26,318 Total other current liabilities $ 64,060 $ 67,462 11 Table of Contents Other non-current liabilities (In thousands) August 27, 2022 February 26, 2022 Deferred benefit from New Markets Tax Credit transactions $ 9,250 $ 9,165 Retirement plan obligations 6,857 7,041 Deferred compensation plan 7,290 9,483 Deferred tax liabilities 7,611 2,296 Other 19,346 16,598 Total other non-current liabilities $ 50,354 $ 44,583 4. Financial Instruments Marketable securities Through our wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), w e hold the following available-for-sale marketable securities, made up of municipal and corporate bonds: (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value August 27, 2022 $ 11,344 $ 3 $ 565 $ 10,782 February 26, 2022 11,862 45 123 11,784 Prism insures a portion of our general liability, workers’ compensation and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments for the purpose of providing collateral for Prism’s obligations under the reinsurance agreements. The amortized cost and estimated fair values of these bonds at August 27, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without penalty. (In thousands) Amortized Cost Estimated Fair Value Due within one year $ 1,430 $ 1,419 Due after one year through five years 9,578 9,069 Due after five years through 10 years 336 294 Total $ 11,344 $ 10,782 Derivative instruments We use interest rate swaps, foreign exchange forward contracts, commodity swaps and forward purchase contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments we use, how such instruments are accounted for, and how such instruments impact our financial position and performance. In fiscal 2020, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility and term loan. As of August 27, 2022, the interest rate swap contract had a notional value of $ 30.0 million. We periodically enter into forward purchase contracts and/or fixed/floating swaps to manage the risk associated with fluctuations in aluminum prices and fluctuations in foreign exchange rates (primarily related to the Canadian dollar). These contracts generally have an original maturity date of less than one year. As of August 27, 2022, we held foreign exchange forward contracts and aluminum fixed/floating swaps with U.S. dollar notional values of $ 3.2 million and $ 12.2 million, respectively. These derivative instruments are recorded within our consolidated balance sheets within other current assets and liabilities. Gains or losses associated with these instruments are recorded as a component of accumulated other comprehensive income. 12 Table of Contents Fair value measurements Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities. (In thousands) Quoted Prices in Active Markets (Level 1) Other Observable Inputs (Level 2) Total Fair Value August 27, 2022 Assets: Money market funds $ 15,034 $ — $ 15,034 Municipal and corporate bonds — 10,782 10,782 Cash surrender value of life insurance — 16,625 16,625 Interest rate swap contract — 1,584 1,584 Liabilities: Deferred compensation — 10,299 10,299 Foreign currency forward/option contract — 82 82 Aluminum hedging contract — 3,515 3,515 February 26, 2022 Assets: Money market funds $ 19,288 $ — $ 19,288 Municipal and corporate bonds — 11,784 11,784 Cash surrender value of life insurance — 17,831 17,831 Aluminum hedging contract — 2,133 2,133 Interest rate swap contract — 718 718 Liabilities: Deferred compensation — 12,491 12,491 Foreign currency forward/option contract — 161 161 Money market funds and commercial paper Fair value of money market funds was determined based on quoted prices for identical assets in active markets. Commercial paper was measured at fair value using inputs based on quoted prices for similar securities in active markets. These assets are included within cash and cash equivalents on our consolidated balance sheets. Municipal and corporate bonds Municipal and corporate bonds were measured at fair value based on market prices from recent trades of similar securities and are classified within our consolidated balance sheets as other current or other non-current assets based on maturity date. Cash surrender value of life insurance and deferred compensation Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. Changes in cash surrender value are recorded in other expense. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds. Derivative instruments The interest rate swap is measured at fair value using other observable market inputs, based off of benchmark interest rates. Forward foreign exchange and fixed/floating aluminum contracts are measured at fair value using other observable market inputs, such as quotations on forward foreign exchange points, foreign currency exchange rates, and forward purchase aluminum prices. Derivative positions are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are our primary source for forward and spot rate information for both interest and currency rates and aluminum prices. Nonrecurring fair value measurements We measure certain financial instruments at fair value on a nonrecurring basis including goodwill, intangible assets, property and equipment and right-of-use lease assets. These assets were initially measured and recognized at amounts equal to the fair 13 Table of Contents value determined as of the date of acquisition or purchase subject to changes in value only for foreign currency translation. Periodically, these assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these assets were to become impaired, we would recognize an impairment expense equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted cash flow models that contain certain Level 3 inputs requiring significant management judgment, including projections of economic conditions, customer demand and changes in competition, revenue growth rates, gross profit margins, operating margins, capital expenditures, working capital requirements, terminal growth rates and discount rates. Fair value measurements of the reporting units associated with our goodwill balances and our indefinite-lived intangible assets are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing if a quantitative analysis is performed. 5. Goodwill and Other Intangible Assets Goodwill Goodwill represents the excess of the cost over the value of net tangible and identified intangible assets of acquired businesses. We evaluate goodwill for impairment annually as of the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects which resulted in the combination of the Sotawall and Harmon reporting units into a single reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change for these reporting units and concluded that no adjustment to the carrying value of goodwill was necessary. Concurrent with the move of Sotawall from the Architectural Framing Systems segment to the Architectural Services segment effective at the start of our first quarter of fiscal 2023, goodwill was reallocated to the affected reporting units within each segment, using a relative fair value approach as outlined in ASC 350, Intangibles - Goodwill and Other . In addition, for all reporting units, no qualitative indicators of impairment were identified during the first quarter, and therefore, no interim quantitative goodwill impairment evaluation was performed. The following table presents the carrying amount of goodwill attributable to each reporting segment including the amount of goodwill that was reallocated from the Architectural Framing Systems segment to the Architectural Services segment using the relative fair value approach during the first quarter of fiscal 2023: (In thousands) Architectural Framing Systems Architectural Services Architectural Glass Large-Scale Optical Total Balance at February 27, 2021 $ 93,099 $ 1,120 $ 25,322 $ 10,557 $ 130,098 Foreign currency translation 82 — ( 78 ) — 4 Balance at February 26, 2022 93,181 1,120 25,244 10,557 130,102 Reallocation among reporting units (1) ( 2,048 ) 2,048 — — — Foreign currency translation ( 644 ) ( 53 ) 71 — ( 626 ) Balance at August 27, 2022 $ 90,489 $ 3,115 $ 25,315 $ 10,557 $ 129,476 (1) Represents the reallocation of goodwill as a result of transitioning Sotawall from the Architectural Framing Systems segment to the Architectural Services segment as of the start of the first quarter of fiscal 2023. Other intangible assets Indefinite-lived intangible assets We have intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. We test indefinite-lived intangible assets for impairment annually at the same measurement date as goodwill, the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Based on the impairment analysis performed in the fourth quarter of fiscal 2022, the fair value of each of our trade names and trademarks exceeded the carrying amount. However, due to triggering events identified in the fourth quarter of fiscal 2022, resulting from the finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the carrying value of the Sotawall trade name exceeded fair value by $ 12.7 million. We determined that Sotawall had an immaterial fair value, resulting in the trade name being fully impaired as of fiscal 2022 year-end. We recognized this amount as impairment expense in the fourth quarter ended February 26, 2022. Finite-lived intangible assets Long-lived assets or asset groups, including intangible assets subject to amortization and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be 14 Table of Contents recoverable. We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows to determine the fair value of long-lived assets. Due to triggering events identified during the fourth quarter of fiscal 2022, as a result of finalization of our plans for integrating the Sotawall business into the Architectural Services segment, beginning in fiscal 2023, we determined that the finite-lived intangible assets of Sotawall were impaired as of February 26, 2022. As such, we recognized a long-lived asset impairment charge of $ 36.7 million in finite-lived intangible assets in the fourth quarter of fiscal year 2022, within the Architectural Framing Systems segment. The gross carrying amount of other intangible assets and related accumulated amortization was: (In thousands) Gross Carrying Amount Accumulated Amortization Impairment Expense Foreign Currency Translation Net August 27, 2022 Definite-lived intangible assets: Customer relationships $ 89,495 $ ( 48,556 ) $ — $ ( 997 ) $ 39,942 Other intangibles 39,347 ( 35,572 ) — ( 361 ) 3,414 Total 128,842 ( 84,128 ) — ( 1,358 ) 43,356 Indefinite-lived intangible assets: Trademarks 27,129 — — ( 108 ) 27,021 Total intangible assets $ 155,971 $ ( 84,128 ) $ — $ ( 1,466 ) $ 70,377 February 26, 2022 Definite-lived intangible assets: Customer relationships $ 122,961 $ ( 47,226 ) $ ( 33,608 ) $ 141 $ 42,268 Other intangibles 41,838 ( 35,613 ) ( 3,127 ) ( 14 ) 3,084 Total 164,799 ( 82,839 ) ( 36,735 ) 127 45,352 Indefinite-lived intangible assets: Trademarks 39,832 — ( 12,738 ) 35 27,129 Total intangible assets $ 204,631 $ ( 82,839 ) $ ( 49,473 ) $ 162 $ 72,481 Amortization expense on definite-lived intangible assets was $ 2.1 million and $ 3.9 million for the six-month periods ended August 27, 2022 and August 28, 2021, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At August 27, 2022, the estimated future amortization expense for definite-lived intangible assets was: (In thousands) Remainder of 2023 2024 2025 2026 2027 Estimated amortization expense $ 2,258 $ 4,362 $ 4,332 $ 4,315 $ 4,313 6. Debt During the second quarter ended August 27, 2022, we amended and extended our committed revolving credit facility to include maximum borrowings of up to $ 385 million with a maturity of August 2027. As part of the amendment, we repaid the $ 150 million term loan with borrowings under the revolving credit facility. As of August 27, 2022, outstanding borrowings under our revolving credit facility were $ 235.0 million, while there were no outstanding borrowings under the revolving credit facility as of February 26, 2022. Our revolving credit facility contains two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of EBITDA-to-interest expense. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At August 27, 2022, we were in compliance with both financial covenants. Additionally, at August 27, 2022, we had a total of $ 12.3 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal years 2023 to 2032 and reduce borrowing capacity under the revolving credit facility. At August 27, 2022, debt included $ 12.0 million of industrial revenue bonds that mature in fiscal years 2036 through 2043. In March 2022, a $ 1.0 million industrial revenue bond matured and was repaid. The fair value of all industrial revenue bonds approximated carrying value at August 27, 2022, due to the variable interest rates on these instruments. Our credit facility, term loan and industrial revenue bonds would be classified as Level 2 within the fair value hierarchy described in Note 4. 15 Table of Contents We also maintain two Canadian committed, revolving credit facilities totaling $ 25.0 million (USD). At August 27, 2022, outstanding borrowings under our Canadian committed, revolving credit facilities were $ 3.8 million, while there were no outstanding borrowings under the Canadian facilities as of February 26, 2022. Interest payments were $ 2.8 million and $ 1.9 million for the six months ended August 27, 2022 and August 28, 2021, respectively. 7. Leases We lease certain of the buildings and equipment used in our operations. We determine if an arrangement contains a lease at inception. Currently, all of our lease arrangements are classified as operating leases. We elected the package of practical expedients permitted under the transition guidance in adopting ASC 842, which among other things, allowed us to carry forward our historical lease classification. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. Our leases have remaining lease terms of one to ten years, some of which include renewal options that can extend the lease for up to an additional ten years at our sole discretion. We have made an accounting policy election not to record leases with an original term of 12 months or less on our consolidated balance sheet; such leases are expensed on a straight-line basis over the lease term. In determining lease asset value, we consider fixed or variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. We use a discount rate for each lease based upon an estimated incremental borrowing rate over a similar term. We have elected the practical expedient to account for lease and non lease components (e.g., common-area maintenance costs) as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We are not a lessor in any transactions. The components of lease expense were as follows: Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Operating lease cost $ 2,954 $ 3,518 $ 6,005 $ 6,899 Short-term lease cost 346 240 660 464 Variable lease cost 857 734 1,763 1,457 Total lease cost $ 4,157 $ 4,492 $ 8,428 $ 8,820 Other supplemental information related to leases was as follows: Six Months Ended (In thousands except weighted-average data) August 27, 2022 August 28, 2021 Cash paid for amounts included in the measurement of operating lease liabilities $ 7,069 $ 7,186 Lease assets obtained in exchange for new operating lease liabilities $ 701 $ 1,281 Weighted-average remaining lease term - operating leases 5.0 years 5.7 years Weighted-average discount rate - operating leases 2.86 % 2.95 % Future maturities of lease liabilities are as follows: (In thousands) August 27, 2022 Remainder of Fiscal 2023 $ 6,676 Fiscal 2024 11,426 Fiscal 2025 10,018 Fiscal 2026 7,975 Fiscal 2027 6,479 Fiscal 2028 2,973 Thereafter 3,786 Total lease payments 49,333 Less: Amounts representing interest 3,210 Present value of lease liabilities $ 46,123 16 Table of Contents 8. Commitments and Contingent Liabilities Bond commitments In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At August 27, 2022, $ 1.1 billion of these types of bonds were outstanding, of which $ 361.1 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses. Warranty and project-related contingencies We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on these accruals in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. Six Months Ended (In thousands) August 27, 2022 August 28, 2021 Balance at beginning of period $ 13,923 $ 14,999 Additional accruals 6,918 4,400 Claims paid ( 4,201 ) ( 5,871 ) Balance at end of period $ 16,640 $ 13,528 Additionally, we are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services segment and certain of our Architectural Framing Systems businesses. We manage the risk of these exposures through contract negotiations, proactive project management and insurance coverages. Letters of credit At August 27, 2022, we had $ 12.3 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. We also have a $3.4 million letter of credit which has been issued outside our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants. Purchase obligations Purchase obligations for raw material commitments and capital expenditures totaled $ 225.2 million as of August 27, 2022. New Markets Tax Credit (NMTC) transactions We have three outstanding NMTC arrangements which help to support operational expansion. Proceeds received from investors on these transactions are included within other current and other non-current liabilities in our consolidated balance sheets. The NMTC arrangements are subject to 100 percent tax credit recapture for a period of seven years from the date of each respective transaction. Upon the termination of each arrangement, these proceeds will be recognized in earnings in exchange for the transfer of tax credits. The direct and incremental costs incurred in structuring these arrangements have been deferred and are included in other non-current assets in our consolidated balance sheets. These costs will be recognized in conjunction with the recognition of the related proceeds on each arrangement. During the construction phase or for working capital purposes for each project, we are required to hold cash dedicated to fund each capital project which is classified as restricted cash in our consolidated balance sheets. Variable-interest entities, which have been included within our consolidated financial statements, have been created as a result of the structure of these transactions, as investors in the programs do not have a material interest in their underlying economics. During the first quarter of fiscal 2023, one NMTC transaction was terminated, and a new NMTC transaction was established as a replacement. As a result of these transactions, $19.5 million in previous proceeds received were repaid and $19.5 million was contributed back to the Company as part of the newly established NMTC transaction. This NMTC transaction will be held for the remainder of the original seven-year term. 17 Table of Contents The table below provides a summary of our outstanding NMTC transactions (in millions): Inception date Termination date Deferred Benefit Deferred costs Net benefit June 2016 June 2023 $ 6.0 $ 1.2 $ 4.8 September 2018 September 2025 3.2 1.0 2.2 May 2022 August 2025 6.1 1.6 4.5 Total $ 15.3 $ 3.8 $ 11.5 Litigation The Company is a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction supply and services industry, the Company is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages or product replacement. We have in the past and are currently subject to product liability and warranty claims, including certain legal claims related to a commercial sealant product formerly incorporated into our products. The Company is also subject to litigation arising out of areas such as employment practices, workers compensation and general liability matters. Although it is very difficult to accurately predict the outcome of any such proceedings, facts currently available indicate that no matters will result in losses that would have a material adverse effect on the results of operations, cash flows or financial condition of the Company. 9. Share-Based Compensation Total share-based compensation expense included in the results of operations was $ 3.4 million for the six-month period ended August 27, 2022 and $ 3.3 million for the six-month period ended August 28, 2021. Stock options and SARs Stock option and SAR activity for the current six-month period is summarized as follows: Stock Options and SARs Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding at beginning of year 370,800 $ 23.04 Awards exercised ( 145,060 ) 23.04 Awards canceled/expired ( 67,740 ) 23.04 Outstanding at end of period 158,000 $ 23.04 0.9 years $ 2,000,280 Vested or expected to vest at end of period 158,000 $ 23.04 0.9 years $ 2,000,280 For the six-months ended August 27, 2022, there were no cash proceeds from the exercise of stock options as all stock options were exercised on a stock for stock basis. The aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $ 2.7 million. For the six-months ended August 28, 2021, cash proceeds from the exercise of stock options was $ 4.1 million and the aggregate intrinsic value of securities exercised (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) was $ 2.3 million. Executive Compensation Program In fiscal 2022, the Compensation Committee of the Board of Directors implemented an executive compensation program for certain key employees. In the each of the first quarters of fiscal 2023 and fiscal 2022, we issued performance shares in the form of nonvested share unit awards, which give the recipient the right to receive shares earned at the end of the respective performance periods. The number of share units issued at grant is equal to the target number of performance shares and allows for the right to receive a variable number of shares dependent on achieving a defined performance goal of return on invested capital and being employed at the end of the performance period. 18 Table of Contents Nonvested share awards and units Nonvested share activity, including performance share units, for the current six-month period is summarized as follows: Nonvested shares and units Number of Shares and Units Weighted Average Grant Date Fair Value Nonvested at February 26, 2022 (1) 488,944 $ 30.14 Granted (2) 174,393 46.45 Vested ( 134,499 ) 27.94 Canceled (3) ( 44,232 ) 36.00 Nonvested at August 27, 2022 (4) 484,606 $ 36.09 (1) Includes a total of 50,825 nonvested share units granted and outstanding at target level for the fiscal 2022-2024 performance period. (2) Includes a total of 38,564 nonvested share units granted and outstanding at target level for the fiscal 2023-2025 performance period. (3) Includes a total of 9,690 nonvested share units cancelled for the fiscal 2022-2024 and fiscal 2023-2025 performance periods. (4) Includes a total of 45,207 and 34,492 nonvested share units granted and outstanding at target level for the 2022-2024 and 2023-2025 performance periods, respectively. At August 27, 2022, there was $ 12.8 million of total unrecognized compensation cost related to nonvested share and nonvested share unit awards, which is expected to be recognized over a weighted average period of approximately 27 months. The total fair value of shares vested during the six months ended August 27, 2022 was $ 3.8 million. 10. Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2019, or state and local income tax examinations for years prior to fiscal 2013. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2018, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions. In the second quarter of fiscal 2023, the Company claimed certain tax deductions, including a worthless stock loss deduction, related to its investment in Sotawall Limited, a Canadian subsidiary. These deductions generated a net tax benefit of $ 13.7 million. The total liability for unrecognized tax benefits was $ 5.3 million at August 27, 2022, compared to $ 3.3 million at February 26, 2022. The increase was primarily related to the tax deductions claimed during the second quarter of fiscal 2023 associated with the Company's investment in Sotawall Limited, a Canadian subsidiary. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. 11. Earnings per Share The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Basic earnings per share – weighted average common shares outstanding 21,860 25,140 22,129 25,271 Weighted average effect of nonvested share grants and assumed exercise of stock options 385 — 434 366 Diluted earnings per share – weighted average common shares and potential common shares outstanding 22,245 25,140 22,563 25,637 Stock awards excluded from the calculation of earnings per share because the effect was anti-dilutive (award price greater than average market price of the shares) 120 4 120 8 12. Business Segment Data We have four reporting segments: 19 Table of Contents • The Architectural Framing Systems segment designs, engineers, fabricates and finishes aluminum window, curtainwall, storefront and entrance systems for the exterior of buildings. • The Architectural Services segment integrates technical services, project management, and field installation services to design, engineer, fabricate, and install building glass and curtainwall systems. • The Architectural Glass segment coats and fabricates, high-performance glass used in custom window and wall systems on commercial buildings. • The Large-Scale Optical (LSO) segment manufactures high-performance glass and acrylic products for custom framing, museum, and technical glass markets. At the beginning of the first quarter of fiscal 2023, we began management of the Sotawall and Harmon businesses under the Architectural Services segment in order to create a single, unified offering for larger custom curtainwall projects. The fiscal 2022 segment results were recast for comparability. Three Months Ended Six Months Ended (In thousands) August 27, 2022 August 28, 2021 August 27, 2022 August 28, 2021 Net sales Architectural Framing Systems $ 172,867 $ 136,973 $ 336,159 $ 273,741 Architectural Services 106,732 96,370 210,120 187,102 Architectural Glass 77,352 79,373 153,617 162,404 Large-Scale Optical 25,166 23,543 50,328 47,771 Intersegment eliminations ( 10,008 ) ( 10,462 ) ( 21,480 ) ( 19,215 ) Net sales $ 372,109 $ 325,797 $ 728,744 $ 651,803 Operating income (loss) Architectural Framing Systems $ 20,512 $ 8,381 $ 44,177 $ 16,752 Architectural Services 5,490 7,139 8,417 11,365 Architectural Glass 6,457 ( 16,995 ) 11,626 ( 14,867 ) Large-Scale Optical 5,991 5,483 12,489 11,330 Corporate and other ( 6,378 ) ( 7,076 ) ( 11,421 ) ( 11,607 ) Operating income (loss) $ 32,072 $ ( 3,068 ) $ 65,288 $ 12,973 Due to the varying combinations and integration of individual window, storefront and curtainwall systems, it is impractical to report product revenues generated by class of product, beyond the segment revenues currently reported. 13. Restructuring On August 11, 2021, we announced plans to realign and simplify our business structure. During the first quarter of fiscal 2023, we completed the execution of these plans with the sale of the remaining manufacturing assets at our Architectural Glass location, in Dallas, Texas, for $ 4.1 million. The remaining assets had a carrying value of $ 3.4 million, and we recognized a gain on the sale of approximately $ 0.6 million, net of associated transaction costs, which is included as a reduction of cost of sales within our consolidated statements of operations. The following table summarizes our restructuring related accrual balances included within accrued payroll and related costs and other current liabilities in the consolidated balance sheets. All balances are expected to be paid within the current fiscal year. (In thousands) Architectural Framing Architectural Glass Corporate & Other Total Balance at February 27, 2021 $ 2,872 $ 230 $ 161 $ 3,263 Restructuring expense 2,000 1,036 1,039 4,075 Payments ( 3,567 ) ( 529 ) ( 972 ) ( 5,068 ) Other adjustments ( 865 ) — — ( 865 ) Balance at February 26, 2022 440 737 228 1,405 Restructuring expense — 62 — 62 Payments ( 171 ) ( 531 ) ( 136 ) ( 838 ) Other adjustments ( 151 ) ( 17 ) — ( 168 ) Balance at August 27, 2022 $ 118 $ 251 $ 92 $ 461 20 Table of Contents 14. Subsequent Events We have evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events that required recognition or disclosure in the consolidated financial statements.