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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 2, 2012

 

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

For the transition period from             to             

Commission File Number: 0-6365

 

 

APOGEE ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota   41-0919654

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4400 West 78th Street – Suite 520,

Minneapolis, MN

  55435
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (952) 835-1874

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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, 2012, 28,341,506 shares of the registrant’s common stock, par value $0.33 1/3 per share, were outstanding.

 

 

 


Table of Contents

APOGEE ENTERPRISES, INC. AND SUBSIDIARIES

 

          Page  

PART I

  Financial Information   

Item 1.

  Financial Statements (Unaudited):   
  Consolidated Balance Sheets as of June 2, 2012 and March 3, 2012      3   
  Consolidated Results of Operations for the three months ended June 2, 2012 and May 28, 2011      4   
  Consolidated Statements of Comprehensive Earnings for the three months ended June 2, 2012 and May 28, 2011      5   
  Consolidated Statements of Cash Flows for the three months ended June 2, 2012 and May 28, 2011      6   
  Notes to Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      15   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      20   

Item 4.

  Controls and Procedures      20   

PART II

  Other Information   

Item 1.

  Legal Proceedings      21   

Item 1A.

  Risk Factors      21   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      21   

Item 6.

  Exhibits      22   

Signatures

       23   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

(In thousands, except per share data)

   June 2, 2012     March 3, 2012  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 23,028      $ 54,027   

Short-term marketable securities available for sale

     20,909        11,664   

Restricted short-term investments

     13,611        13,603   

Receivables, net of allowance for doubtful accounts

     112,046        108,424   

Inventories

     38,876        34,045   

Refundable income taxes

     2,046        —     

Deferred tax assets

     3,745        4,294   

Other current assets

     3,903        3,382   
  

 

 

   

 

 

 

Total current assets

     218,164        229,439   
  

 

 

   

 

 

 

Property, plant and equipment, net

     162,921        159,547   

Marketable securities available for sale

     10,279        7,936   

Restricted investments

     17,794        9,533   

Goodwill

     61,694        61,617   

Intangible assets

     15,767        16,092   

Other assets

     8,967        8,940   
  

 

 

   

 

 

 

Total assets

   $ 495,586      $ 493,104   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 33,665      $ 34,025   

Accrued payroll and related benefits

     15,072        23,699   

Accrued self-insurance reserves

     4,630        4,668   

Other accrued expenses

     17,406        19,017   

Current liabilities of discontinued operations

     776        799   

Billings in excess of costs and earnings on uncompleted contracts

     27,760        22,550   

Current portion long-term debt

     83        108   

Accrued income taxes

     —          905   
  

 

 

   

 

 

 

Total current liabilities

     99,392        105,771   
  

 

 

   

 

 

 

Long-term debt

     30,912        20,916   

Unrecognized tax benefits

     8,627        8,918   

Long-term self-insurance reserves

     8,679        9,605   

Deferred tax liabilities

     2,414        2,247   

Other long-term liabilities

     24,121        23,929   

Liabilities of discontinued operations

     509        520   

Commitments and contingent liabilities (Note 13)

    

Shareholders’ equity

    

Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding 28,287,722 and 28,062,049, respectively

     9,429        9,354   

Additional paid-in capital

     113,898        113,046   

Retained earnings

     201,844        203,558   

Common stock held in trust

     (753     (745

Deferred compensation obligations

     753        745   

Accumulated other comprehensive loss

     (4,239     (4,760
  

 

 

   

 

 

 

Total shareholders’ equity

     320,932        321,198   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 495,586      $ 493,104   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS

(unaudited)

 

     Three Months Ended  

(In thousands, except per share data)

   June 2, 2012      May 28, 2011  

Net sales

   $ 154,134       $ 153,338   

Cost of sales

     123,059         129,652   
  

 

 

    

 

 

 

Gross profit

     31,075         23,686   

Selling, general and administrative expenses

     28,757         27,114   
  

 

 

    

 

 

 

Operating income (loss )

     2,318         (3,428

Interest income

     272         277   

Interest expense

     363         309   

Other income, net

     17         3   
  

 

 

    

 

 

 

Earnings (loss) before income taxes

     2,244         (3,457

Income tax expense (benefit)

     638         (1,280
  

 

 

    

 

 

 

Net earnings (loss)

   $ 1,606       $ (2,177
  

 

 

    

 

 

 

Earnings (loss) per share – basic

   $ 0.06       $ (0.08
  

 

 

    

 

 

 

Earnings (loss) per share – diluted

   $ 0.06       $ (0.08
  

 

 

    

 

 

 

Weighted average basic shares outstanding

     27,788         27,862   

Weighted average diluted shares outstanding

     28,223         27,862   
  

 

 

    

 

 

 

Cash dividends declared per common share

   $ 0.0900       $ 0.0815   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(unaudited)

 

     Three Months Ended  

(In thousands)

   June 2, 2012      May 28, 2011  

Net earnings (loss)

   $ 1,606       $ (2,177

Other comprehensive earnings:

     

Unrealized gain on marketable securities, net of $12 and $49 tax expense, respectively

     24         93   

Foreign currency translation adjustments

     497         492   
  

 

 

    

 

 

 

Other comprehensive earnings

     521         585   
  

 

 

    

 

 

 

Total comprehensive earnings (loss)

   $ 2,127       $ (1,592
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Three Months Ended  

(In thousands)

   June 2, 2012     May 28, 2011  

Operating Activities

    

Net earnings (loss)

   $ 1,606      $ (2,177

Adjustments to reconcile net earnings to net cash used in operating activities:

    

Depreciation and amortization

     6,528        7,022   

Stock-based compensation

     1,028        410   

Deferred income taxes

     570        403   

Excess tax benefits from stock-based compensation

     (25     —     

Gain on disposal of assets

     (296     (203

Other, net

     239        74   

Changes in operating assets and liabilities:

    

Receivables

     (3,590     (5,686

Inventories

     (4,804     (5,698

Accounts payable and accrued expenses

     (10,476     (8,882

Billings in excess of costs and earnings on uncompleted contracts

     5,210        (3,853

Refundable and accrued income taxes

     (3,083     (1,903

Other, net

     (530     (43
  

 

 

   

 

 

 

Net cash used in continuing operating activities

     (7,623     (20,536
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (9,509     (1,614

Proceeds from sales of property, plant and equipment

     14        10,306   

Purchases of restricted investments

     (10,000     (12,328

Sales/maturities of restricted investments

     1,740        12,947   

Purchases of marketable securities

     (17,040     (6,341

Sales/maturities of marketable securities

     5,915        8,954   

Investments in corporate-owned life insurance policies

     (900     (1,435
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (29,780     10,489   
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from issuance of debt

     10,000        —     

Payments on debt

     (45     (200

Payments on debt issue costs

     (193     (32

Shares withheld for taxes, net of stock issued to employees

     (817     (658

Excess tax benefits from stock-based compensation

     25        —     

Dividends paid

     (2,643     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,327        (890
  

 

 

   

 

 

 

Cash Flows of Discontinued Operations

    

Net cash used in operating activities

     (34     (3,272
  

 

 

   

 

 

 

Net cash used in discontinued operations

     (34     (3,272
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (31,110     (14,209

Effect of exchange rates on cash

     111        17   

Cash and cash equivalents at beginning of year

     54,027        24,302   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 23,028      $ 10,110   
  

 

 

   

 

 

 

Noncash Activity

    

Capital expenditures in accounts payable

   $ 149      $ 174   

Dividends in accounts payable

     —          2,287   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation

The consolidated financial statements of Apogee Enterprises, Inc. (we, us, our or the Company) included herein have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements and notes are presented as permitted by the regulations of the Securities and Exchange Commission (Form 10-Q) and do not contain certain information included in the Company’s annual financial statements and notes. The information included in this Form 10-Q should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Company’s Form 10-K for the year ended March 3, 2012. The results of operations for the three-month period ended June 2, 2012 are not necessarily indicative of the results to be expected for the full year.

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of June 2, 2012 and March 3, 2012, and the results of operations, comprehensive earnings and cash flows for the three-month periods ended June 2, 2012 and May 28, 2011.

The Company’s fiscal year ends on the Saturday closest to the last day of February. Each interim quarter ends on the Saturday closest to the end of the months of May, August and November.

The results of GlassecViracon are reported on a two-month lag. There were no significant intervening events which would have materially affected our consolidated financial statements had they been recorded during the three months ended June 2, 2012.

In connection with preparing the unaudited consolidated financial statements for the three months ended June 2, 2012, the Company has evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events which required recognition or disclosure in the consolidated financial statements.

 

2. New Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance was effective for fiscal years and interim periods beginning after December 15, 2011, Apogee’s fiscal year 2013. The Company has adopted this guidance as of March 4, 2012 and has presented total comprehensive income in the Consolidated Statements of Comprehensive Earnings.

In September 2011, the FASB amended U.S. GAAP on testing goodwill for impairment. Under this new guidance, entities testing goodwill for impairment now have an option of performing a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The amendments were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, Apogee’s fiscal year 2013. The adoption of this new standard in the first quarter of fiscal 2013 did not have an impact on Apogee’s consolidated financial position, results of operations or cash flows.

No other new accounting pronouncements issued or effective during the first three months of fiscal 2013 have had or are expected to have a material impact on the consolidated financial statements.

 

3. Stock-Based Compensation

Stock Incentive Plan

The 2009 Stock Incentive Plan, the 2009 Non-Employee Director Stock Incentive Plan, the 2002 Omnibus Stock Incentive Plan and the 1997 Omnibus Stock Incentive Plan (the Plans) provide for the issuance of 1,888,000; 250,000;

 

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Table of Contents

3,400,000; and 2,500,000 shares, respectively, for various forms of stock-based compensation to employees and non-employee directors. Awards under these Plans, either in the form of incentive stock options, nonstatutory options or stock-settled stock appreciation rights (SARs), are granted with an exercise price equal to the fair market value of the Company’s stock at the date of award. Nonvested share awards and nonvested share unit awards are also included in these Plans. Outstanding options issued to employees generally vest over a four-year period, outstanding SARs vested over a three-year period and outstanding options issued to non-employee directors vested at the end of six months. Outstanding options and SARs have a 10-year term. Nonvested share awards and nonvested share unit awards generally vest over a two, three or four-year period.

The 2002 Omnibus Stock Incentive Plan was terminated in June 2009 and the 1997 Omnibus Stock Incentive Plan was terminated in January 2006; no new grants may be made under either of these plans, although exercises of SARs and options, and vesting of nonvested share awards previously granted thereunder will still occur in accordance with the terms of the various grants.

Total stock-based compensation expense under all Plans included in the results of operations for the three months ended June 2, 2012 and May 28, 2011, was $1.0 million and $0.4 million, respectively. At June 2, 2012, there was $1.0 million of total unrecognized compensation cost related to stock option awards, which is expected to be recognized over a weighted average period of approximately 27 months. Cash proceeds from the exercise of stock options were $0.2 million and $0.1 million for the three months ended June 2, 2012 and May 28, 2011, respectively.

There were no options or SARs issued in the first three months of fiscal 2013 or 2012. The aggregate intrinsic value of securities (the amount by which the stock price on the date of exercise exceeded the stock price of the award on the date of grant) exercised was minimal during both the three months ended June 2, 2012 and May 28, 2011.

The following table summarizes the award transactions for the three months ended June 2, 2012:

 

     Options/SARs Outstanding  
     Number of
Shares
    Weighted
Average

Exercise  Price
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
 

Outstanding at March 3, 2012

     1,815,293      $ 15.71         

Awards exercised

     (13,500     11.93         

Awards canceled

     (15,100     12.82         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at June 2, 2012

     1,786,693      $ 15.77         5.1 years       $ 3,446,035   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at June 2, 2012

     1,786,693      $ 15.77         5.1 years       $ 3,446,035   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 2, 2012

     1,336,181      $ 18.27         3.7 years       $ 729,448   

Executive Compensation Program

In fiscal 2006, the Company implemented an executive compensation program to provide for a greater portion of total compensation to be delivered to key employees selected by the Compensation Committee of the Board of Directors through long-term incentives using performance shares, SARs and nonvested shares. From fiscal 2010 through fiscal 2012, performance shares were issued at the beginning of each fiscal year 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, or fewer, shares based on meeting pre-determined Company three-year performance goals. In fiscal 2013, this plan was changed to issue cash-based performance awards in lieu of nonvested share unit awards; the cash-based awards are based on a two-year performance period and will be paid in two annual installments after completion of the performance period. Vesting of outstanding nonvested share unit awards will continue through fiscal 2015. The expense for the cash-based performance awards is included in selling, general and administrative expenses in the consolidated results of operations and the liability is included in other long-term liabilities in the consolidated balance sheet.

 

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Table of Contents

The following table summarizes the nonvested share award transactions, including performance share units, for the three months ended June 2, 2012:

 

     Nonvested Shares and Units  
     Number of
Shares and
Units
    Weighted
Average
Grant Date
Fair Value
 

Nonvested at March 3, 2012

     981,813      $ 12.64   

Granted

     185,849        14.51   

Vested

     (202,136     13.54   

Canceled(1)

     (61,703     13.43   
  

 

 

   

 

 

 

Nonvested at June 2, 2012(2)

     903,823      $ 12.77   
  

 

 

   

 

 

 

 

(1) Includes 61,403 performance share units canceled under the 2010-2012 performance period because Apogee performed below target level for that performance period. Performance share units of 160,196 (at target) were previously granted in fiscal 2010 for this performance period.
(2) Includes a total of 292,118 performance share units granted and outstanding at target level for fiscal 2011-2013 and 2012-2014.

At June 2, 2012, there was $7.2 million of total unrecognized compensation cost related to nonvested share and performance share unit awards, which is expected to be recognized over a weighted average period of approximately 26 months. The total fair value of shares vested during the three months of fiscal 2013 was $2.8 million.

 

4. Earnings per Share

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

 

     Three months ended  

(In thousands)

   June 2,
2012
     May 28,
2011
 

Basic earnings per share – weighted common shares outstanding

     27,788         27,862   

Weighted common shares assumed upon exercise of stock options

     127         —     

Unvested shares for deferred compensation plans

     308         —     
  

 

 

    

 

 

 

Diluted earnings per share – weighted common shares and potential common shares outstanding

     28,223         27,862   
  

 

 

    

 

 

 

Earnings (loss) per share – basic

   $ 0.06       $ (0.08

Earnings (loss) per share – diluted

     0.06         (0.08
  

 

 

    

 

 

 

Stock options excluded from the calculation of earnings per share because the exercise price was greater than the average market price of the common shares

     970         1,126   
  

 

 

    

 

 

 

Due to the net loss in fiscal 2012, there was no dilutive impact from unvested shares in the three-month period ended May 28, 2011.

 

5. Inventories

 

(In thousands)

   June 2,
2012
     Mar. 3,
2012
 

Raw materials

   $ 14,498       $ 12,772   

Work-in-process

     9,182         7,956   

Finished goods

     11,201         10,386   

Costs and earnings in excess of billings on uncompleted contracts

     3,995         2,931   
  

 

 

    

 

 

 

Total inventories

   $ 38,876       $ 34,045   
  

 

 

    

 

 

 

 

6. Marketable Securities

At June 2, 2012, the Company has investments in municipal bonds of $31.2 million; $20.9 million is current and $10.3 million is non-current. The Company’s wholly owned insurance subsidiary, Prism Assurance, Ltd. (Prism), holds $10.5 million of the municipal bonds. Prism insures a portion of the Company’s workers’ compensation, general liability and automobile liability risks using reinsurance agreements to meet statutory requirements. The reinsurance carrier requires Prism to maintain fixed-maturity investments, which are generally high-quality municipal bonds, for the purpose of providing collateral for Prism’s obligations under the reinsurance agreement. All of the Company’s fixed maturity investments are classified as “available-for-sale,” are carried at fair value and are reported as short-term marketable securities available for sale or marketable securities available for sale in the consolidated balance sheet.

 

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Table of Contents

The amortized cost, gross unrealized gains and losses, and estimated fair values of investments available for sale at June 2, 2012 and March 3, 2012, are as follows:

 

            Gross      Gross     Estimated  
     Amortized      Unrealized      Unrealized     Fair  

(In thousands)

   Cost      Gains      Losses     Value  

June 2, 2012

          

Municipal bonds

   $ 31,222       $ 224       $ (258   $ 31,188   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 31,222       $ 224       $ (258   $ 31,188   
  

 

 

    

 

 

    

 

 

   

 

 

 

March 3, 2012

          

Municipal bonds

   $ 19,670       $ 188       $ (258   $ 19,600   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 19,670       $ 188       $ (258   $ 19,600   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities.

The following table presents the length of time that available-for-sale securities were in continuous unrealized loss positions, but were not deemed to be other than temporarily impaired, as of June 2, 2012:

 

     Less Than 12 Months     Greater Than or Equal  to
12 Months
    Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(In thousands)

   Value      Losses     Value      Losses     Value      Losses  

Municipal bonds

   $ 8,461       $ (9   $ 1,001       $ (249   $ 9,462       $ (258
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 8,461       $ (9   $ 1,001       $ (249   $ 9,462       $ (258
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost and estimated fair values of investments at June 2, 2012, 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 call or prepayment penalties.

 

     Amortized      Estimated  

(In thousands)

   Cost      Market Value  

Due within one year

   $ 20,899       $ 20,909   

Due after one year through five years

     1,975         2,017   

Due after five years through 10 years

     3,092         3,188   

Due after 10 years through 15 years

     2,019         2,041   

Due beyond 15 years

     3,237         3,033   
  

 

 

    

 

 

 

Total

   $ 31,222       $ 31,188   
  

 

 

    

 

 

 

There were immaterial amounts of realized gains and realized losses during the three-month periods of fiscal 2013 and 2012.

 

7. Fair Value Measurements

The Company accounts for financial assets and liabilities in accordance with accounting standards that define fair value and establish a framework for measuring fair value. The hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

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Financial assets and liabilities measured at fair value as of June 2, 2012 and March 3, 2012, are summarized below:

 

(In thousands)

   Quoted Prices in
Active Markets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
     Total Fair
Value
 

June 2, 2012

           

Cash equivalents

           

Money market funds

   $ 11,504       $ —         $ —         $ 11,504   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

     11,504         —           —           11,504   

Short-term marketable securities available for sale

           

Municipal bonds

   $ —         $ 20,909       $ —         $ 20,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities available for sale

     —           20,909         —           20,909   

Marketable securities available for sale

           

Municipal bonds

   $ —         $ 10,279       $ —         $ 10,279   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities available for sale

     —           10,279         —           10,279   

Restricted investments

           

Money market funds

   $ 31,405       $ —         $ —         $ 31,405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted investments

     31,405         —           —           31,405   

Mutual fund investments

           

Mutual funds

   $ 592       $ —         $ —         $ 592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mutual fund investments

     592         —           —           592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets and liabilities at fair value

   $ 43,501       $ 31,188       $ —         $ 74,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 3, 2012

           

Cash equivalents

           

Money market funds

   $ 46,141       $ —         $ —         $ 46,141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

     46,141         —           —           46,141   

Short-term marketable securities available for sale

           

Municipal bonds

   $ —         $ 11,664       $ —         $ 11,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities available for sale

     —           11,664         —           11,664   

Marketable securities available for sale

           

Municipal bonds

   $ —         $ 7,936       $ —         $ 7,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities available for sale

     —           7,936         —           7,936   

Restricted investments

           

Money market funds

   $ 23,136       $ —         $ —         $ 23,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted investments

     23,136         —           —           23,136   

Mutual fund investments

           

Mutual funds

   $ 1,150       $ —         $ —         $ 1,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mutual fund investments

     1,150         —           —           1,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets and liabilities at fair value

   $ 70,427       $ 19,600       $ —         $ 90,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less, and consist primarily of money market funds. The cash equivalents are held at fair value based on quoted market prices, which approximates stated cost.

Short-term marketable securities available for sale

The Company has short-term marketable securities available for sale of $20.9 million as of June 2, 2012, consisting of municipal bonds. The Company classifies these short-term marketable securities as “available-for-sale,” and they are carried at fair market value based on market prices from recent trades of similar securities.

Marketable securities available for sale

The Company has $10.3 million of marketable securities available for sale, consisting of municipal bonds. All of the Company’s fixed maturity investments are classified as “available-for-sale,” are carried at fair value and are reported as marketable securities available for sale in the consolidated balance sheet. These investments are held at fair value based on prices from recent trades of similar securities.

 

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Restricted investments

The Company has $13.6 million of current restricted investments consisting of money market funds that were required to be made available to cover our exposure for letters of credit outside of our revolving credit facility and credit-card programs. The Company has $17.8 million of long-term restricted investments consisting of money market funds, which are short-term in nature but are restricted for future investment in the Company’s architectural glass fabrication facility in Utah and storefront and entrance business in Michigan, and are therefore classified as long-term. The restricted investments are held at fair value based on quoted market prices, which approximates stated cost.

Mutual fund investments

The Company has $0.6 million of mutual fund investments as a long-term funding source for the deferred compensation plan. The mutual fund investments are recorded at estimated fair value, based on quoted market prices, and are included in other non-current assets in the consolidated balance sheet.

 

8. Goodwill and Other Identifiable Intangible Assets

The carrying amount of goodwill attributable to each business segment as of the three months ended June 2, 2012 is detailed below.

 

(In thousands)

   Architectural     Large-Scale
Optical
     Total  

Balance at February 26, 2011

   $ 51,447      $ 10,557       $ 62,004   

Foreign currency translation

     (387     —           (387
  

 

 

   

 

 

    

 

 

 

Balance at March 3, 2012

     51,060        10,557         61,617   

Foreign currency translation

     77        —           77   
  

 

 

   

 

 

    

 

 

 

Balance at June 2, 2012

   $ 51,137      $ 10,557       $ 61,694   
  

 

 

   

 

 

    

 

 

 

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows:

 

     June 2, 2012  

(In thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Foreign
Currency
Translation
    Net  

Debt issue costs

   $ 3,117       $ (1,989   $ —        $ 1,128   

Non-compete agreements

     6,809         (5,638     14        1,185   

Customer relationships

     15,627         (8,641     81        7,067   

Purchased intellectual property

     8,210         (1,880     57        6,387   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 33,763       $ (18,148   $ 152      $ 15,767   
  

 

 

    

 

 

   

 

 

   

 

 

 
     March 3, 2012  

(In thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Foreign
Currency
Translation
    Net  

Debt issue costs

   $ 2,923       $ (1,897   $ —        $ 1,026   

Non-compete agreements

     6,889         (5,488     (64     1,337   

Customer relationships

     16,069         (8,376     (396     7,297   

Purchased intellectual property

     8,517         (1,794     (291     6,432   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 34,398       $ (17,555   $ (751   $ 16,092   
  

 

 

    

 

 

   

 

 

   

 

 

 

Amortization expense on these identifiable intangible assets was $0.7 million and $0.8 million for the three months ended June 2, 2012 and May 28, 2011, respectively. The amortization expense associated with the debt issue costs is included in interest expense while the remainder is in selling, general and administrative expenses in the consolidated results of operations. At June 2, 2012, the estimated future amortization expense for identifiable intangible assets for the remainder of fiscal 2013 and all of the following four fiscal years is as follows:

 

(In thousands)

   Remainder
of Fiscal
2013
     Fiscal
2014
     Fiscal
2015
     Fiscal
2016
     Fiscal
2017
 

Estimated amortization expense

   $ 2,010       $ 1,979       $ 1,485       $ 1,154       $ 985   

 

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9. Debt

The Company maintains an $80.0 million revolving credit facility, which expires in January 2014. No borrowings were outstanding as of June 2, 2012 or March 3, 2012. The credit facility requires the Company to maintain a minimum level of net worth as defined in the credit facility based on certain quarterly financial calculations. The minimum required net worth computed in accordance with the credit agreement at June 2, 2012 was $275.7 million, whereas the Company’s net worth as defined in the credit facility was $320.9 million. The credit facility also requires that the Company maintain an adjusted debt-to-EBITDA ratio of not more than 2.75. This ratio is computed quarterly, with EBITDA computed on a rolling four-quarter basis. For purposes of calculating the adjusted debt in the adjusted debt-to-EBITDA ratio, the Company reduces non-credit facility debt for up to $25 million to the extent of unrestricted cash balances, cash equivalents and short-term marketable securities available for sale in excess of $15 million. The Company’s ratio was 0.16 at June 2, 2012. If the Company is not in compliance with either of these covenants, the lenders may terminate the commitment and/or declare any loan then outstanding to be immediately due and payable. At June 2, 2012, the Company was in compliance with the financial covenants of the credit facility.

During the first quarter of fiscal 2013, $10.0 million of industrial development bonds were issued and made available for current and future investment in the Company’s storefront and entrance business in Michigan. The interest rate on the bonds resets weekly and is equal to the market rate of interest earned for similar revenue bonds or other tax-free securities. The bonds will mature in April, 2042. The proceeds are reported as restricted investments in the consolidated balance sheet until disbursed, as $1.7 million was during the quarter.

Debt at June 2, 2012, consists of $12.0 million of recovery zone facility bonds, $18.4 million of industrial development bonds and other debt held by GlassecViracon. The industrial development and recovery zone facility bonds mature in fiscal years 2021 through 2043, and the other debt matures in fiscal years 2013 through 2021. The fair value of the industrial development and recovery zone facility bonds approximates carrying value at June 2, 2012 due to the variable interest rates on these instruments. The bonds are classified as level 2 within the fair value hierarchy.

Interest payments were $0.2 million in each of the three-month periods ended June 2, 2012 and May 28, 2011.

 

10. Employee Benefit Plans

Components of net periodic benefit cost for the Company’s Officers’ Supplemental Executive Retirement Plan and Tubelite, Inc. Hourly Employees’ Pension Plan for the three-month periods ended June 2, 2012 and May 28, 2011, were as follows:

 

     Three months ended  

(In thousands)

   June 2,
2012
    May 28,
2011
 

Interest cost

   $ 142      $ 164   

Expected return on assets

     (44     (54

Amortization of unrecognized net loss

     53        30   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 151      $ 140   
  

 

 

   

 

 

 

The Company maintains a deferred compensation plan that allows participants to defer compensation and assist in saving for retirement and other short-term needs. The deferred compensation liability was $2.6 million at June 2, 2012 and is included in other long-term liabilities in the consolidated balance sheet. The Company has investments in corporate-owned life insurance policies (COLI) of $2.4 million and mutual funds of $0.6 million with the intention of utilizing them as a long-term funding source for the deferred compensation plan. The COLI assets are recorded at their net cash surrender values and are included in other non-current assets in the consolidated balance sheet. The mutual fund investments are recorded at estimated fair value, based on quoted market prices, and are included in other non-current assets in the consolidated balance sheet.

 

11. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2009, or state and local income tax examinations for years prior to fiscal 2005. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2008, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.

 

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Table of Contents

The total liability for unrecognized tax benefits at June 2, 2012 and March 3, 2012, was approximately $8.6 million and $8.9 million, respectively. The decrease in the unrecognized tax benefits was due to releasing reserves upon entering into a settlement agreement with the IRS with respect to certain issues for fiscal years 2009 through 2011. The Company records the impact of penalties and interest related to unrecognized tax benefits in income tax expense, which is consistent with past practices. As a result of the federal statute for fiscal 2009 being extended during the first quarter of fiscal 2013, no federal or state statutes are expected to lapse within the next year, and the total liability for unrecognized tax benefits is not expected to change materially during the next 12 months.

 

12. Discontinued Operations

In several transactions in fiscal years 1998 through 2000, the Company completed the sale of its large-scale domestic curtainwall business, the sale of the Company’s detention/security business and its exit from international curtainwall operations. The remaining estimated cash expenditures related to discontinued operations are recorded as liabilities of discontinued operations and cover warranty issues relating to domestic and international construction projects that the Company expects will be resolved over the next five years.

 

(In thousands)

   June 2,
2012
     March 3,
2012
 

Summary Balance Sheets of Discontinued Businesses

     

Accounts payable and accrued liabilities

   $ 776       $ 799   

Long-term liabilities

     509         520   
  

 

 

    

 

 

 

 

13. Commitments and Contingent Liabilities

Operating lease commitments. As of June 2, 2012, the Company was obligated under noncancelable operating leases for buildings and equipment. Certain leases provide for increased rentals based upon increases in real estate taxes or operating costs. Future minimum rental payments under noncancelable operating leases are:

 

(In thousands)

   Remainder
of Fiscal
2013
     Fiscal
2014
     Fiscal
2015
     Fiscal
2016
     Fiscal
2017
     Thereafter      Total  

Total minimum payments

   $ 5,098       $ 6,044       $ 5,230       $ 5,111       $ 3,301       $ 3,693       $ 28,477   

Bond commitments. In the ordinary course of business, predominantly in the Company’s installation business, the Company is required to provide a surety or performance bond that commits payments to its customers for any non-performance by the Company. At June 2, 2012, $101.1 million of the Company’s backlog was bonded by performance bonds with a face value of $340.7 million. Performance bonds do not have stated expiration dates, as the Company is released from the bonds upon completion of the contract. The Company has never been required to pay on these performance-based bonds with respect to any of the current portfolio of businesses.

Guarantees and warranties. The Company accrues for warranty and claim costs as a percentage of sales based on historical trends and for specific sales credits as they become known and estimable. Actual warranty and claim costs are deducted from the accrual when incurred. The Company’s warranty and claim accruals are detailed below.

 

     Three months ended  

(In thousands)

   June 2,
2012
    May 28,
2011
 

Balance at beginning of period

   $ 7,210      $ 9,887   

Additional accruals

     766        903   

Claims paid

     (823     (2,362
  

 

 

   

 

 

 

Balance at end of period

   $ 7,153      $ 8,428   
  

 

 

   

 

 

 

Letters of credit. At June 2, 2012, the Company had ongoing letters of credit related to its construction contracts and certain industrial development and recovery zone facility bonds. The total value of letters of credit under which the Company was obligated as of June 2, 2012, was approximately $35.8 million. The Company’s total availability under its $80.0 million credit facility is reduced by borrowings under the facility and also by letters of credit issued under the facility. As of June 2, 2012, letters of credit in the amount of $23.4 million had been issued under the facility.

Purchase obligations. The Company has purchase obligations for raw material commitments and capital expenditures. As of June 2, 2012, these obligations totaled $50.6 million.

 

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Table of Contents

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

 

14. Segment Information

The following table presents sales and operating income data for the Company’s two segments, and on a consolidated basis, for the three months ended June 2, 2012, as compared to the corresponding period a year ago.

 

     Three months ended  

(In thousands)

   June 2,
2012
    May 28,
2011
 

Net Sales from Continuing Operations

    

Architectural

   $ 134,877      $ 135,287   

Large-Scale Optical

     19,258        18,052   

Intersegment eliminations

     (1     (1
  

 

 

   

 

 

 

Net sales

   $ 154,134      $ 153,338   
  

 

 

   

 

 

 

Operating Income (Loss) from Continuing Operations

    

Architectural

   $ (1,889   $ (7,053

Large-Scale Optical

     5,268        4,632   

Corporate and other

     (1,061     (1,007
  

 

 

   

 

 

 

Operating income (loss)

   $ 2,318      $ (3,428
  

 

 

   

 

 

 

Due to the varying combinations of individual window systems and curtainwall, the Company has determined that it is impractical to report product and service revenues generated by the Architectural segment by class of product, beyond the segment revenues currently reported.

 

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

Forward-Looking Statements

This discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this document are “forward-looking statements,” and are based on management’s current expectations or beliefs of the Company’s near-term results, based on current information available pertaining to the Company, including the risk factors noted under Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2012. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.

Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to, the risks and uncertainties set forth under Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2012.

We wish to caution investors that other factors might in the future prove to be important in affecting the Company’s results of operations. New factors emerge from time to time; it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a leader in certain technologies involving the design and development of value-added glass products, services and systems. The Company is comprised of two segments: Architectural Products and Services (Architectural) and Large-Scale Optical Technologies (LSO). Our Architectural segment companies design, engineer, fabricate, install,

 

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Table of Contents

maintain and renovate the walls of glass, windows, storefront and entrances comprising the outside skin of commercial and institutional buildings. Businesses in this segment are: Viracon, Inc., including GlassecViracon, a fabricator of coated, high-performance architectural glass for global markets; Harmon, Inc., one of the largest U.S. full-service building glass installation and renovation companies; Wausau Window and Wall Systems, a manufacturer of standard and custom aluminum window systems and curtainwall for the North American commercial construction market; Linetec, a paint and anodizing finisher of architectural aluminum and PVC shutters for U.S. markets; and Tubelite, Inc, a fabricator of aluminum storefront, entrance and curtainwall products for the U.S. commercial construction industry. Our LSO segment consists of Tru Vue, Inc., a manufacturer of value-added glass and acrylic for the custom picture framing market.

The following selected financial data should be read in conjunction with the Company’s Form 10-K for the year ended March 3, 2012 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.

Sales and Earnings

The relationship between various components of operations, stated as a percent of net sales, is illustrated below for the three-month periods of the current and prior fiscal year.

 

     Three months ended  

(Percent of net sales)

   June 2,
2012
    May 28,
2011
 

Net sales

     100.0     100.0

Cost of sales

     79.8        84.6   
  

 

 

   

 

 

 

Gross profit

     20.2        15.4   

Selling, general and administrative expenses

     18.7        17.6   
  

 

 

   

 

 

 

Operating income (loss)

     1.5        (2.2

Interest income

     0.2        0.1   

Interest expense

     0.2        0.2   

Other income, net

     —          —     
  

 

 

   

 

 

 

Earnings (loss) before income taxes

     1.5        (2.3

Income tax expense (benefit)

     0.5        (0.9
  

 

 

   

 

 

 

Net earnings (loss)

     1.0     (1.4 )% 
  

 

 

   

 

 

 

Effective tax rate for continuing operations

     28.4     37.0

Highlights of First-Quarter Fiscal 2013 Compared to First-Quarter Fiscal 2012

 

   

Consolidated net sales increased $0.8 million, or 0.5 percent, for the first quarter ended June 2, 2012, compared to the prior-year period. The increase over the prior year was due to growth in the installation and storefront businesses and a better mix of value-added glass and acrylic in the LSO segment. These improvements were offset by the anticipated first-quarter gap in architectural glass project timing.

 

   

Gross profit as a percent of sales for the quarter ended June 2, 2012 increased to 20.2 percent from 15.4 percent in the prior-year period, an increase of 4.8 percentage points. The increase in gross margins for the quarter was largely due to higher architectural glass pricing, the margin impact from volume growth in the storefront business, and the impact of an improved mix of higher value-added picture framing glass and acrylic in the LSO segment, partially offset by lower project margins in our installation business.

 

   

Selling, general and administrative expenses for the first quarter increased by $1.6 million, and increased as a percent of net sales to 18.7 percent from 17.6 percent in the prior-year period. The increase, both in dollars and as a percent of sales, was driven by increased expense for incentive and long-term executive compensation programs as Company operating performance has increased, as well as by increased promotional costs in our LSO segment as we invest in new markets.

 

   

Income tax expense for the first quarter of fiscal 2013 included a benefit of approximately $0.3 million due to releasing reserves upon entering into a settlement agreement with the IRS with respect to certain issues for fiscal years 2009 through 2011.

 

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Table of Contents

Segment Analysis

The following table presents sales and operating income data for our two segments and on a consolidated basis for the three-month period ended June 2, 2012, when compared to the corresponding period a year ago.

 

     Three months ended  

(In thousands)

   June 2,
2012
    May 28,
2011
    %
Change
 

Net Sales from Continuing Operations

      

Architectural

   $ 134,877      $ 135,287        (0.3 )% 

Large-Scale Optical

     19,258        18,052        6.7   

Intersegment eliminations

     (1     (1     0.0   
  

 

 

   

 

 

   

 

 

 

Net sales

   $ 154,134      $ 153,338        0.5
  

 

 

   

 

 

   

 

 

 

Operating Income (Loss) from Continuing Operations

      

Architectural

   $ (1,889   $ (7,053     73.2

Large-Scale Optical

     5,268        4,632        13.7   

Corporate and other

     (1,061     (1,007     (5.4
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 2,318      $ (3,428     NM   
  

 

 

   

 

 

   

 

 

 

NM = not meaningful

Due to the varying combinations of individual window systems and curtainwall, the Company has determined that it is impractical to report product and service revenues generated by the Architectural segment by class of product, beyond the segment revenues currently reported.

Architectural Products and Services (Architectural)

 

   

First-quarter net sales of $134.9 million were flat to prior year net sales of $135.3 million. Growth in the installation and storefront businesses from expanding our domestic geographic footprint was offset by the anticipated first-quarter gap in architectural glass project timing.

 

   

The segment reported an operating loss of $1.9 million in the current quarter, compared to a loss of $7.1 million in the prior-year quarter. The improvement in the quarter was due to improved architectural glass pricing and the impact of the volume growth in our storefront business, partially offset by lower margin work in the installation business that we anticipated.

 

   

Architectural backlog at June 2, 2012, increased to $267.3 million, up approximately 13 percent over both the prior-year period and the fourth quarter of fiscal 2012. We expect approximately $188 million of the June 2, 2012 backlog to flow during the remainder of fiscal 2013.

Large-Scale Optical Technologies (LSO)

 

   

First quarter net sales were $19.3 million, up 6.7 percent over prior year net sales of $18.1 million. The increase was due to a better mix of value-added picture framing products across all markets.

 

   

Operating income of $5.3 million in the quarter was up 13.7 percent over the prior-year period and operating margins for the quarter improved 1.7 percentage points to 27.4 percent, compared to 25.7. The strong mix of value-added picture framing products resulted in the increase in operating income and margins for the quarter.

Consolidated Backlog

 

   

At June 2, 2012, our consolidated backlog was $269.1 million, up approximately 13 percent over both the prior-year period and year-end fiscal 2012.

 

   

The backlog of the Architectural segment represented more than 99 percent of consolidated backlog.

 

   

We view backlog as an important statistic in evaluating the level of sales activity and short-term sales trends in our business. However, as backlog is only one indicator, and is not an effective indicator of our ultimate profitability, we do not believe that backlog should be used as the sole indicator of future earnings of the Company.

Discontinued Operations

In several transactions in fiscal years 1998 through 2000, we completed the sale of our large-scale domestic curtainwall business, the sale of our detention/security business and the exit from international curtainwall operations. The remaining estimated cash expenditures related to discontinued operations are recorded as liabilities of discontinued operations and cover warranty issues relating to domestic and international construction projects that we expect to be resolved over the next five years.

 

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Liquidity and Capital Resources

 

     Three months ended  

(Cash effect, in thousands)

   June 2,
2012
    May 28,
2011
 

Operating Activities

    

Net cash used in continuing operating activities

   $ (7,623   $ (20,536

Investing Activities

    

Capital expenditures

     (9,509     (1,614

Proceeds from sales of property, plant and equipment

     14        10,306   

Change in restricted investments, net

     (8,260     619   

Net (purchases) sales of marketable securities

     (11,125     2,613   

Financing Activities

    

Proceeds from issuance of debt

     10,000        —     

Dividends paid

     (2,643     —     

Operating activities. Cash used by operating activities of continuing operations was $7.6 million for the first three months of fiscal 2013, compared to $20.5 million in the prior-year period. Fiscal 2013 operating cash flows were positively impacted by the income reported for the year as compared to the prior-year loss. Both periods were negatively impacted by seasonally high cash outflow in the first quarter as a result of payments made to fund annual incentive compensation, annual insurance premiums and tax payments. Additionally, in the current-year period, we were able to pre-bill more of our installation projects compared to delayed billing in the prior-year period.

Non-cash working capital (current assets, excluding cash and short-term marketable securities available for sale and short-term restricted investments, less current liabilities) was $61.2 million at June 2, 2012, or 9.2 percent of last 12-month sales, our key metric for measuring working capital efficiency. This compares to $44.4 million at March 3, 2012 or 6.7 percent of fiscal 2012 sales and 10.7 percent at May 28, 2011. The dollar change from year-end was due to working capital outflows for current quarter as described above and added working capital for future growth. As indicated in our Form 10-K for the year ended March 3, 2012, we expect non-cash working capital to increase during fiscal 2013 as we anticipate that our Architectural businesses will require more working capital to support increasing business activities.

Investing Activities. Through the first three months of fiscal 2013, investing activities used $29.8 million of cash, compared to cash provided of $10.5 million in the same period last year. The current year included new capital investments of $9.5 million for growth and productivity improvements as well as new product introductions and maintenance capital. The net position of our investments for the three-month period resulted in $11.1 million in net purchases. Net purchases of $8.3 million for restricted investments in the quarter were related to the funds received as a result of the industrial development bonds that were made available for current and future investment in our storefront and entrance business in Michigan.

Fiscal 2012 investing activities included $10.3 million in proceeds from the sale and leaseback of equipment. The net position of our investments for the three-month period resulted in $2.6 million in net sale proceeds, as we sold investments to fund operating activities. New capital investments through the first three months of fiscal 2012 totaled $1.6 million, primarily for safety and maintenance projects. In the first quarter of fiscal 2012, we invested in corporate-owned life insurance policies of $1.4 million with the intention of utilizing them as a long-term funding source for our deferred compensation plan.

We expect fiscal 2013 capital expenditures to be approximately $25 million for investments to improve productivity, increase capacity and introduce new products, as well as for maintenance requirements.

We continue to review our portfolio of businesses and their assets in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses, further invest in, fully divest and/or sell parts of our current businesses.

Financing Activities. Total outstanding borrowings at June 2, 2012, were $31.0 million compared to $21.0 million as of March 3, 2012 and $22.3 million at May 28, 2011. Long-term debt consists of $12.0 million of recovery zone facility bonds, $18.4 million of industrial development bonds and other debt held by GlassecViracon. The industrial development and recovery zone facility bonds mature in fiscal years 2021 through 2043 and the other debt matures in fiscal years 2013 through 2021. Our debt-to-total-capital ratio was 8.8 percent at June 2, 2012 and 6.1 percent at March 3, 2012.

 

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We maintain an $80.0 million revolving credit facility, which expires in January 2014. No borrowings were outstanding as of June 2, 2012 or March 3, 2012. The credit facility requires that we maintain a minimum level of net worth as defined in the credit facility based on certain quarterly financial calculations. The minimum required net worth computed in accordance with the credit agreement at June 2, 2012 was $275.7 million, whereas our net worth as defined in the credit facility was $320.9 million. The credit facility also requires that we maintain an adjusted debt-to-EBITDA ratio of not more than 2.75. This ratio is computed quarterly, with EBITDA computed on a rolling four-quarter basis. For purposes of calculating the adjusted debt in the debt-to-EBITDA ratio, we reduce non-credit facility debt for up to $25 million to the extent of unrestricted cash balances, cash equivalents and short-term marketable securities available for sale in excess of $15 million. Our ratio was 0.16 at June 2, 2012. If we are not in compliance with either of these covenants, the lenders may terminate the commitment and/or declare any loan then outstanding to be immediately due and payable. At June 2, 2012, we were in compliance with the financial covenants of the credit facility.

We paid dividends of $2.6 million in the first quarter of fiscal 2013. In the first quarter of fiscal 2012, we did not pay any dividends; although declared, no payments were made in the quarter due to timing of those payments.

During fiscal 2004, the Board of Directors authorized a share repurchase program of 1,500,000 shares of common stock. The Board of Directors increased this authorization by 750,000 shares in January 2008 and by 1,000,000 in October 2008. There were no share repurchases during the first three months of fiscal 2013 or 2012. We have purchased a total of 2,279,123 shares, at a total cost of $29.7 million, since the inception of this program. We have remaining authority to repurchase 970,877 shares under this program, which has no expiration date.

Other Financing Activities. The following summarizes our significant contractual obligations that impact our liquidity as of June 2, 2012:

 

     Future Cash Payments Due by Fiscal Period  

(In thousands)

   2013
Remaining
     2014      2015      2016      2017      Thereafter      Total  

Continuing operations

                    

Industrial revenue bonds

   $ —         $ —         $ —         $ —         $ —         $ 18,400       $ 18,400   

Recovery zone facility bonds

     —           —           —           —           —           12,000         12,000   

Other debt obligations

     83         64         64         64         64         256         595   

Operating leases (undiscounted)

     5,098         6,044         5,230         5,111         3,301         3,693         28,477   

Purchase obligations

     50,573         75         —           —           —           —           50,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash obligations

   $ 55,754       $ 6,183       $ 5,294       $ 5,175       $ 3,365       $ 34,349       $ 110,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

From time to time, we acquire the use of certain assets, such as warehouses, automobiles, forklifts, vehicles, office equipment, hardware, software and some manufacturing equipment through operating leases. Many of these operating leases have termination penalties. However, because the assets are used in the conduct of our business operations, it is unlikely that any significant portion of these operating leases would be terminated prior to the normal expiration of their lease terms. Therefore, we consider the risk related to termination penalties to be minimal.

We have purchase obligations for raw material commitments and capital expenditures. As of June 2, 2012, these obligations totaled $50.6 million.

We expect to make contributions of $0.9 million to our defined-benefit pension plans in fiscal 2013, which will equal or exceed our minimum funding requirements.

As of June 2, 2012, we had $8.6 million and $2.0 million of unrecognized tax benefits and environmental liabilities, respectively. We are unable to reasonably estimate in which future periods these amounts will ultimately be settled.

At June 2, 2012, we had ongoing letters of credit related to construction contracts and certain industrial development and recovery zone facility bonds. The Company’s $18.4 million of industrial revenue bonds are supported by $18.9 million of letters of credit that reduce availability of funds under our $80.0 million credit facility. The $12.0 million of recovery zone facility bonds are supported by $12.3 million of letters of credit. The letters of credit by expiration period were as follows at June 2, 2012:

 

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Table of Contents
     Amount of Commitment Expiration Per Fiscal Period  

(In thousands)

   2013
Remaining
     2014      2015      2016      2017      Thereafter      Total  

Standby letters of credit

   $ 8,653       $ 24,603       $       $       $       $ 2,500       $ 35,756   

In addition to the above standby letters of credit, which were predominantly issued for our industrial development and recovery zone facility bonds, we are required, in the ordinary course of business, to provide a surety or performance bond that commits payments to our customers for any non-performance by us. At June 2, 2012, $101.1 million of our backlog was bonded by performance bonds with a face value of $340.7 million. Performance bonds do not have stated expiration dates, as we are released from the bonds upon completion of the contract. We have never been required to pay on these performance-based bonds with respect to any of our current portfolio of businesses.

We self-insure our third-party product liability coverages. As a result, a material construction project rework event would have a material adverse effect on our operating results.

For fiscal 2013, we believe that current cash on hand and available capacity under our committed revolving credit facility, as well as the expected cash to be generated from future operating activities will be adequate to fund our working capital requirements, planned capital expenditures and dividend payments. We have total cash and short-term marketable securities available for sale of $43.9 million, and $67.7 million available under our credit facility at June 2, 2012. We believe that this will provide us with the financial strength to work through the ongoing weak market conditions and to continue our growth strategy through the recovery.

Outlook

The following statements are based on our current expectations for full-year fiscal 2013 results. These statements are forward-looking, and actual results may differ materially.

 

   

Overall revenues for the year are expected to grow by mid-single digits over fiscal 2012.

 

   

We anticipate earnings per share of $0.48 to $0.58.

 

   

Capital expenditures are projected to be approximately $25 million.

Related Party Transactions

No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year ended March 3, 2012.

Critical Accounting Policies

No material changes have occurred in the disclosure of our critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 3, 2012.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

No material changes have occurred to the disclosures of quantitative and qualitative market risk set forth in our Annual Report on Form 10-K for the fiscal year ended March 3, 2012.

Item 4: Controls and Procedures

 

  a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

  b) Changes in internal controls: There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 2, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes or additions to our risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended March 3, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases made by the Company of its own stock during the first quarter of fiscal 2013:

 

Period

   Total Number
of Shares
Purchased (a)
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (b)
     Maximum
Number of
Shares that May
Yet Be
Purchased
under the Plans
or Programs
 

March 4, 2012 through March 31, 2012

     —         $ —           —           970,877   

April 1, 2012 through April 28, 2012

     71,089         13.67         —           970,877   

April 29, 2012 through June 2, 2012

     1,080         15.05         —           970,877   

Total

     72,169       $ 14.02         —           970,877   

 

(a) The shares in this column represent shares that were surrendered to us by plan participants to satisfy stock-for-stock option exercises or withholding tax obligations related to stock-based compensation.
(b) In April 2003, the Board of Directors authorized the repurchase of 1,500,000 shares of Company stock, which was announced on April 10, 2003. In January 2008, the Board of Directors increased the authorization by 750,000 shares, which was announced on January 24, 2008. In October 2008, the Board of Directors increased the authorization by 1,000,000 shares, which was announced on October 8, 2008. The Company’s repurchase program does not have an expiration date.

 

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Item 6. Exhibits

 

10.1    Apogee Enterprises, Inc. 2012 Executive Management Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on June 27, 2012.
10.2    Form of Bonus Pool Award Agreement under the Apogee Enterprises, Inc. 2012 Executive Management Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 2, 2012.
10.3    Form of Performance Award Agreement under the Apogee Enterprises, Inc. 2009 Stock Incentive Plan, as amended and restated (2011). Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on May 2, 2012.
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 2, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of June 2, 2012 and March 3, 2012, (ii) the Consolidated Results of Operations for the three months ended June 2, 2012 and May 28, 2011, (iii) the Consolidated Statements of Comprehensive Earnings for the three months ended June 2, 2012 and May 28, 2011, (iv) the Consolidated Statements of Cash Flows for the three months ended June 2, 2012 and May 28, 2011, and (v) Notes to Consolidated Financial Statements.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    APOGEE ENTERPRISES, INC.

Date: July 12, 2012

    By:   /s/ Joseph F. Puishys
     

Joseph F. Puishys

President and Chief

Executive Officer

(Principal Executive Officer)

 

Date: July 12, 2012     By:   /s/ James S. Porter
     

James S. Porter

Chief Financial Officer

(Principal Financial and

Accounting Officer)

 

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Table of Contents

Exhibit Index to Form 10-Q for the Period Ended June 2, 2012

 

10.1    Apogee Enterprises, Inc. 2012 Executive Management Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on June 27, 2012.
10.2    Form of Bonus Pool Award Agreement under the Apogee Enterprises, Inc. 2012 Executive Management Incentive Plan. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 2, 2012.
10.3    Form of Performance Award Agreement under the Apogee Enterprises, Inc. 2009 Stock Incentive Plan, as amended and restated (2011). Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on May 2, 2012.
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Apogee Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 2, 2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of June 2, 2012 and March 3, 2012, (ii) the Consolidated Results of Operations for the three months ended June 2, 2012 and May 28, 2011, (iii) the Consolidated Statements of Comprehensive Earnings for the three months ended June 2, 2012 and May 28, 2011, (iv) the Consolidated Statements of Cash Flows for the three months ended June 2, 2012 and May 28, 2011, and (v) Notes to Consolidated Financial Statements.

 

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