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Form 10-Q APOGEE ENTERPRISES, INC. For: May 28

July 1, 2022 2:12 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________ 
FORM 10-Q
 _________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 28, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 0-6365
_________________________________ 
APOGEE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Minnesota41-0919654
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4400 West 78th Street, Suite 520MinneapolisMinnesota55435
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (952835-1874
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.33 1/3 per shareAPOGThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  Accelerated filer
Non-accelerated filero  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes    x  No
As of June 27, 2022, 22,156,827 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.



APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
 
3

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except stock data)May 28, 2022February 26, 2022
Assets
Current assets
Cash and cash equivalents$15,186 $37,583 
Restricted cash8,685  
Receivables, net193,741 168,592 
Inventories98,517 80,494 
Costs and earnings on contracts in excess of billings35,701 30,403 
Other current assets19,331 20,820 
Total current assets371,161 337,892 
Property, plant and equipment, net237,412 249,995 
Operating lease right-of-use assets45,021 47,912 
Goodwill130,251 130,102 
Intangible assets71,419 72,481 
Other non-current assets51,686 49,481 
Total assets$906,950 $887,863 
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable$88,908 $92,104 
Accrued payroll and related benefits38,212 50,977 
Billings in excess of costs and earnings on uncompleted contracts6,505 8,659 
Operating lease liabilities12,178 12,744 
Current portion long-term debt 1,000 
Other current liabilities61,262 67,462 
Total current liabilities207,065 232,946 
Long-term debt261,000 162,000 
Non-current operating lease liabilities36,978 39,591 
Non-current self-insurance reserves21,677 22,544 
Other non-current liabilities52,940 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 22,200,680 and 23,701,491 respectively
7,400 7,901 
Additional paid-in capital140,785 149,713 
Retained earnings208,205 254,825 
Accumulated other comprehensive loss(29,100)(26,240)
Total shareholders’ equity327,290 386,199 
Total liabilities and shareholders’ equity$906,950 $887,863 
See accompanying notes to consolidated financial statements.

4

CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
Three Months Ended
(In thousands, except per share data)May 28, 2022May 29, 2021
Net sales$356,635 $326,006 
Cost of sales271,018 258,296 
Gross profit85,617 67,710 
Selling, general and administrative expenses52,401 51,668 
Operating income33,216 16,042 
Interest expense, net1,206 1,238 
Other expense, net1,310 315 
Earnings before income taxes30,700 14,489 
Income tax expense7,969 3,672 
Net earnings$22,731 $10,817 
Earnings per share - basic$1.01 $0.43 
Earnings per share - diluted$1.00 $0.42 
Weighted average basic shares outstanding22,399 25,402 
Weighted average diluted shares outstanding22,651 25,822 
See accompanying notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
Three Months Ended
(In thousands)May 28, 2022May 29, 2021
Net earnings$22,731 $10,817 
Other comprehensive (loss) earnings:
Unrealized (loss) gain on marketable securities, net of $(74) and $0 of tax (benefit) expense, respectively
(276) 
Unrealized (loss) gain on derivative instruments, net of $(1,317) and $211 of tax (benefit) expense, respectively
(4,316)692 
Foreign currency translation adjustments1,732 5,880 
Other comprehensive (loss) earnings(2,860)6,572 
Total comprehensive earnings$19,871 $17,389 

See accompanying notes to consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
(In thousands)May 28, 2022May 29, 2021
Operating Activities
Net earnings$22,731 $10,817 
Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
Depreciation and amortization10,849 12,980 
Share-based compensation1,597 1,674 
Deferred income taxes4,400 941 
Gain on disposal of assets(660)(421)
Proceeds from New Markets Tax Credit transaction, net of deferred costs18,390  
Settlement of New Markets Tax Credit transaction(19,523) 
Noncash lease expense3,088 3,098 
Other, net952 479 
Changes in operating assets and liabilities:
Receivables(26,671)4,455 
Inventories(17,744)2,252 
Costs and earnings on contracts in excess of billings(5,325)1,205 
Accounts payable and accrued expenses(18,331)(22,449)
Billings in excess of costs and earnings on uncompleted contracts(2,152)(6,434)
Refundable and accrued income taxes4,238 1,410 
Operating lease liability(3,333)(3,113)
Other, net(2,968)(11)
Net cash (used) provided by operating activities(30,462)6,883 
Investing Activities
Capital expenditures(5,125)(4,705)
Proceeds from sales of property, plant and equipment4,087 438 
Other, net100 119 
Net cash used by investing activities(938)(4,148)
Financing Activities
Borrowings on line of credit161,000  
Repayment on debt(1,000) 
Payments on line of credit(62,000) 
Proceeds from exercise of stock options 4,115 
Repurchase and retirement of common stock(74,312)(12,625)
Dividends paid(4,793)(5,035)
Other, net(1,271)(712)
Net cash provided (used) by financing activities17,624 (14,257)
Decrease in cash, cash equivalents and restricted cash(13,776)(11,522)
Effect of exchange rates on cash64 714 
Cash, cash equivalents and restricted cash at beginning of year37,583 47,277 
Cash, cash equivalents and restricted cash at end of period$23,871 $36,469 
Noncash Activity
Capital expenditures in accounts payable$766 $1,058 
See accompanying notes to consolidated financial statements.

7

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)Common Shares OutstandingCommon StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' Equity
Balance at February 26, 202223,701 $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 cancellations100 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, 202222,200 $7,400 $140,785 $208,205 $(29,100)$327,290 



(In thousands)Common Shares OutstandingCommon StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Shareholders' Equity
Balance at February 27, 202125,714 $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 $211tax expense
— — — — 692 692 
Foreign currency translation adjustments— — — — 5,880 5,880 
Issuance of stock, net of cancellations90 30 (7)— — 23 
Share-based compensation— — 1,674 — — 1,674 
Exercise of stock options179 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, 202125,606 $8,535 $158,341 $352,130 $(21,455)$497,551 



See accompanying notes to consolidated financial statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.Summary of Significant Accounting Policies

Basis of presentation
The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) have been prepared in accordance with accounting principles generally accepted in the United States. The information included in this Form 10-Q should be read in conjunction with the Company’s Form 10-K for the year ended February 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-month period ended May 28, 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
(In thousands)May 28, 2022May 29, 2021
Recognized at shipment$161,164 $140,283 
Recognized over time195,471 185,723 
Total$356,635 $326,006 

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)May 28, 2022February 26, 2022
Trade accounts$139,846 $129,085 
Construction contracts19,002 12,857 
Contract retainage36,985 28,782 
Total receivables195,833 170,724 
Less: allowance for credit losses2,092 2,132 
Receivables, net$193,741 $168,592 

The following table summarizes the activity in the allowance for credit losses:
(In thousands)May 28, 2022February 26, 2022
Beginning balance$2,132 $1,947 
Additions charged to costs and expenses(174)729 
Deductions from allowance, net of recoveries117 (514)
Other changes (1)
17 (30)
Ending balance$2,092 $2,132 
      (1) Result of foreign currency effects
9


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)May 28, 2022February 26, 2022
Contract assets$72,686 $59,185 
Contract liabilities9,464 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 disclosuresThree Months Ended
(In thousands)May 28, 2022May 29, 2021
Revenue recognized related to contract liabilities from prior year-end$35,926 $14,100 
Revenue recognized related to prior satisfaction of performance obligations175 2,164 

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. As of May 28, 2022, the transaction price associated with unsatisfied performance obligations was approximately $810.6 million. The performance obligations are expected to be satisfied, and the corresponding revenue to be recognized, over the following estimated time periods:
(In thousands)May 28, 2022
Within one year
$505,055 
Within two years
247,752 
Beyond two years
57,786 
Total$810,593 

3.Supplemental Balance Sheet Information

Inventories
(In thousands)May 28, 2022February 26, 2022
Raw materials$51,967 $42,541 
Work-in-process18,774 18,144 
Finished goods27,776 19,809 
Total inventories$98,517 $80,494 

Other current liabilities
(In thousands)May 28, 2022February 26, 2022
Warranties$12,521 $11,786 
Income and other taxes19,074 15,770 
Accrued self-insurance reserves4,300 8,796 
Accrued freight2,485 2,078 
Other22,882 29,032 
Total other current liabilities$61,262 $67,462 
10


Other non-current liabilities
(In thousands)May 28, 2022February 26, 2022
Deferred benefit from New Markets Tax Credit transactions$15,217 $9,165 
Retirement plan obligations6,978 7,041 
Deferred compensation plan8,468 9,483 
Deferred tax liabilities4,430 2,296 
Other17,847 16,598 
Total other non-current liabilities$52,940 $44,583 

4.Financial Instruments

Marketable securities
Through our wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism), we hold the following available-for-sale marketable securities, made up of municipal and corporate bonds: 
(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated
Fair Value
May 28, 2022$11,731 $7 $435 $11,303 
February 26, 202211,862 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 May 28, 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 CostEstimated Fair Value
Due within one year$1,401 $1,396 
Due after one year through five years9,991 9,610 
Due after five years through 10 years339 297 
Total$11,731 $11,303 

Derivative instruments
We use interest rate swaps, foreign exchange forward contracts, commodity swaps and forward purchase contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments we use, how such instruments are accounted for, and how such instruments impact our financial position and performance.

In fiscal 2020, we entered into an interest rate swap to hedge exposure to variability in cash flows from interest payments on our floating-rate revolving credit facility and term loan. As of May 28, 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 May 28, 2022, we held foreign exchange forward contracts and aluminum fixed/floating swaps with U.S. dollar notional values of $5.2 million and $13.2 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.



11

Fair value measurements
Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: Level 1 (unadjusted quoted prices in active markets for identical assets or liabilities); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). We do not have any Level 3 financial assets or liabilities.
(In thousands)Quoted Prices in
Active Markets
(Level 1)
Other Observable Inputs (Level 2)Total Fair Value
May 28, 2022
Assets:
Money market funds$7,409 $— $7,409 
Municipal and corporate bonds— 11,303 11,303 
Cash surrender value of life insurance— 16,656 16,656 
Foreign currency forward/option contract— 13 13 
Interest rate swap contract— 1,218 1,218 
Liabilities:
Deferred compensation— 11,476 11,476 
Aluminum hedging contract— 2,776 2,776 
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
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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. In connection with the transition, leadership of our Sotawall and Harmon businesses have been combined to form the Architectural Services reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change for these reporting units and concluded no adjustment to the carrying value of goodwill was necessary as a result of this change. Concurrent with this change in composition of the operating segments effective at the start of our first quarter of fiscal 2023, goodwill was reallocated to the affected reporting units within each operating 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 has been reallocated from the Architectural Framing Systems segment to the Architectural Services segment using the relative fair value approach as of the start of fiscal 2023:
(In thousands)Architectural Framing SystemsArchitectural ServicesArchitectural GlassLarge-Scale
Optical
Total
Balance at February 27, 2021$93,099 $1,120 $25,322 $10,557 $130,098 
Foreign currency translation82  (78) 4 
Balance at February 26, 202293,181 1,120 25,244 10,557 130,102 
Reallocation among reporting units (1)
(2,048)2,048    
Foreign currency translation(38)(3)190  149 
Balance at May 28, 2022$91,095 $3,165 $25,434 $10,557 $130,251 
(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
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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 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 ExpenseForeign
Currency
Translation
Net
May 28, 2022
Definite-lived intangible assets:
Customer relationships$89,494 $(48,297)$ $148 $41,345 
Other intangibles38,659 (35,865) 157 2,951 
Total128,153 (84,162) 305 44,296 
Indefinite-lived intangible assets:
Trademarks27,129 —  (6)27,123 
Total intangible assets$155,282 $(84,162)$ $299 $71,419 
February 26, 2022
Definite-lived intangible assets:
Customer relationships$122,961 $(47,226)$(33,608)$141 $42,268 
Other intangibles41,838 (35,613)(3,127)(14)3,084 
Total164,799 (82,839)(36,735)127 45,352 
Indefinite-lived intangible assets:
Trademarks39,832 — (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 $1.1 million and $2.0 million for the three-month periods ended May 28, 2022 and May 29, 2021, respectively. Amortization expense of other identifiable intangible assets is included in selling, general and administrative expenses. At May 28, 2022, the estimated future amortization expense for definite-lived intangible assets was:
(In thousands)Remainder of 20232024202520262027
Estimated amortization expense$3,464 $4,483 $4,164 $4,051 $4,049 

6.Debt

As of May 28, 2022, we had a committed revolving credit facility with maximum borrowings of up to $235 million with a maturity of June 2024. As of May 28, 2022, outstanding borrowings under our revolving credit facility were $99.0 million, while there were no outstanding borrowings under the revolving credit facility as of February 26, 2022. At May 28, 2022 and February 26, 2022, we also had a $150 million term loan with a maturity date of June 2024.

Our revolving credit facility and term loan contain two financial covenants that require us to stay below a maximum debt-to-EBITDA ratio and maintain a minimum ratio of EBITDA-to-interest expense. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At May 28, 2022, we were in compliance with both financial covenants. Additionally, at May 28, 2022, we had a total of $16.4 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 May 28, 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 May 28, 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.

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We also maintain two Canadian committed, revolving credit facilities totaling $25.0 million (USD). As of May 28, 2022 and February 26, 2022, there were no borrowings outstanding under the facilities.

Interest payments were $1.1 million for each of the three-months ended May 28, 2022 and May 29, 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
(In thousands)May 28, 2022May 29, 2021
Operating lease cost$3,051 $3,381 
Short-term lease cost314 225 
Variable lease cost906 723 
Total lease cost$4,271 $4,329 

Other supplemental information related to leases was as follows:
Three Months Ended
(In thousands except weighted-average data)May 28, 2022May 29, 2021
Cash paid for amounts included in the measurement of operating lease liabilities$3,537 $3,602 
Lease assets obtained in exchange for new operating lease liabilities$168 $465 
Weighted-average remaining lease term - operating leases5.2 years5.8 years
Weighted-average discount rate - operating leases2.86 %2.96 %

Future maturities of lease liabilities are as follows:
(In thousands)May 28, 2022
Remainder of Fiscal 2023$10,208 
Fiscal 202411,280 
Fiscal 20259,918 
Fiscal 20267,897 
Fiscal 20276,396 
Fiscal 20282,950 
Thereafter3,295 
Total lease payments51,944 
Less: Amounts representing interest2,788 
Present value of lease liabilities$49,156 

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8.Commitments and Contingent Liabilities

Bond commitments
In the ordinary course of business, predominantly in our Architectural Services and Architectural Framing Systems segments, we are required to provide surety or performance bonds that commit payments to our customers for any non-performance. At May 28, 2022, $1.2 billion of these types of bonds were outstanding, of which $409.3 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses.

Warranty and project-related contingencies
We reserve estimated exposures on known claims, as well as on a portion of anticipated claims, for product warranty and rework cost, based on historical product liability claims as a ratio of sales. Claim costs are deducted from the accrual when paid. Factors that could have an impact on the warranty accrual in any given period include the following: changes in manufacturing quality, changes in product mix and any significant changes in sales volume. A warranty rollforward follows:  
 Three Months Ended
(In thousands)May 28, 2022May 29, 2021
Balance at beginning of period$13,923 $14,999 
Additional accruals4,069 2,478 
Claims paid(2,525)(2,930)
Balance at end of period$15,467 $14,547 

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 May 28, 2022, we had $16.4 million of ongoing letters of credit, all of which have been issued under our committed revolving credit facility, as discussed in Note 6. We also have a $6.9 million letter of credit which has been issued outside our committed revolving credit facility, with no impact on our borrowing capacity and debt covenants.

Purchase obligations
Purchase obligations for raw material commitments and capital expenditures totaled $196.5 million as of May 28, 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 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.






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The table below provides a summary of our outstanding NMTC transactions (in millions):
Inception dateTermination dateDeferred BenefitDeferred costsNet benefit
June 2016June 2023$6.0 $1.2 $4.8 
September 2018September 20253.2 1.0 2.2 
May 2022August 20256.0 1.6 4.4 
Total$15.2 $3.8 $11.4 

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

9.Share-Based Compensation

Total share-based compensation expense included in the results of operations was $1.6 million for the three-month period ended May 28, 2022 and $1.7 million for the three-month period ended May 29, 2021.

Stock options and SARs
Stock option and SAR activity for the current three-month period is summarized as follows:
Stock Options and SARsNumber of SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual LifeAggregate Intrinsic Value
Outstanding at beginning of period370,800 $23.04 
Outstanding at end of period370,800 $23.04 8.1 years$4,694,328 
Vested or expected to vest at end of period370,800 $23.04 8.1 years$4,694,328 

No awards were issued or exercised during the three-months ended May 28, 2022. For the three-months ended May 29, 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 $2.7 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 vesting date. The number of share units issued at grant is equal to the target number of performance shares and allows for the right to receive an additional number of shares dependent on achieving a defined performance goal of return on invested capital and being employed at the end of the performance period.

Nonvested share awards and units
Nonvested share activity, including performance share units, for the current three-month period is summarized as follows:
Nonvested shares and unitsNumber of Shares and UnitsWeighted Average Grant Date Fair Value
Nonvested at February 26, 2022 (1)
488,944 $30.14 
Granted (2)
147,417 48.01 
Vested(72,845)27.60 
Canceled(7,878)29.36 
Nonvested at May 28, 2022(1) (2)
555,638 $35.23 
(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.
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At May 28, 2022, there was $14.8 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 29 months. The total fair value of shares vested during the three months ended May 28, 2022 was $2.0 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.

The total liability for unrecognized tax benefits was $3.4 million at May 28, 2022, compared to $3.3 million at February 26, 2022. Penalties and interest related to unrecognized tax benefits are recorded in income tax expense.

11.Earnings per Share

The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:
Three Months Ended
(In thousands)May 28, 2022May 29, 2021
Basic earnings per share – weighted average common shares outstanding
22,399