Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 3, 2012

or

 

¨ 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)

 

(IRS Employer

Identification No.)

4400 West 78th Street—Suite 520,

Minneapolis, Minnesota 55435

(Address of principal executive offices, including zip code)

(952) 835-1874

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.33 1/3 Par Value   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨    Yes  x    No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨    Yes  x    No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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. (Check one):

 

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 Act).  ¨    Yes  x    No

As of August 27, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, the approximate aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $252,321,000 (based on the closing price of $8.91 per share as reported on the NASDAQ Stock Market LLC as of that date).

As of April 11, 2012, there were 28,078,799 shares of the registrant’s Common Stock, $0.33 1/3 par value per share, outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III hereof is incorporated by reference to the Proxy Statement for the registrant’s 2012 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

 

 


Table of Contents

APOGEE ENTERPRISES, INC.

Annual Report on Form 10-K

For the fiscal year ended March 3, 2012

TABLE OF CONTENTS

 

         Page  
  PART I   

Item 1.

  Business      3   
  Executive Officers of the Registrant      9   

Item 1A.

  Risk Factors      10   

Item 1B.

  Unresolved Staff Comments      12   

Item 2.

  Properties      13   

Item 3.

  Legal Proceedings      13   

Item 4.

  Mine Safety Disclosures      13   
  PART II   

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      14   

Item 6.

  Selected Financial Data      16   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      26   

Item 8.

  Financial Statements and Supplementary Data      27   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      56   

Item 9A.

  Controls and Procedures      56   

Item 9B.

  Other Information      57   
  PART III   

Item 10.

  Directors, Executive Officers and Corporate Governance      57   

Item 11.

  Executive Compensation      57   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      57   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      57   

Item 14.

  Principal Accountant Fees and Services      57   
  PART IV   

Item 15.

  Exhibits and Financial Statement Schedules      58   
  Signatures      62   

 

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PART I

 

ITEM 1. BUSINESS

The Company

Apogee Enterprises, Inc. was incorporated under the laws of the State of Minnesota in 1949. The Company believes it is a world leader in certain technologies involving the design and development of value-added glass products, services and systems. Unless the context otherwise requires, the terms “Company,” “Apogee,” “we,” “us” and “our” as used herein refer to Apogee Enterprises, Inc. and its subsidiaries.

The Company is comprised of two reporting segments to match the markets it serves:

 

   

The Architectural Products and Services segment designs, engineers, fabricates, installs, maintains and renovates the walls of glass and windows comprising the outside skin and entrances of commercial and institutional buildings. For fiscal 2012, our Architectural Products and Services segment accounted for approximately 88 percent of our net sales.

 

   

The Large-Scale Optical Technologies segment manufactures value-added glass and acrylic products primarily for the custom picture framing market. For fiscal 2012, our Large-Scale Optical Technologies segment accounted for approximately 12 percent of our net sales.

On November 19, 2010, the Company acquired 100 percent of the stock of Glassec Vidros de Segurança Ltda. (Glassec). The business operates under the name GlassecViracon and its results of operations are included in our Architectural Products and Services segment and represent the only non-domestic business within Apogee. For further information, see “Acquisition of Glassec” below.

Financial information about the Company’s segments and geographic regions can be found in Item 8, Note 16 to the Consolidated Financial Statements of the Company contained elsewhere in this report.

Products

Apogee provides distinctive value-added glass solutions for enclosing commercial buildings and framing art. We operate in two product segments as described in the following paragraphs.

Architectural Products and Services (Architectural) Segment. The Architectural segment primarily fabricates, installs and renovates the outside skin of commercial buildings. Through complex processes, we add ultra-thin coatings to uncoated architectural glass to create colors and energy efficiency, especially important with the industry trend of “green” buildings. We also laminate layers of glass and vinyl to create glass that helps protect against hurricanes and bomb blasts. Glass can also be tempered to provide additional strength. We have the ability to design, build and install windows, curtainwall, storefront and entrances using our coated glass and metal products or those supplied by others. We also provide finishing services for the metal and plastic components used to frame architectural glass windows and walls and other products.

Our product choices allow architects to create distinctive looks for office towers, hotels, education facilities and dormitories, health care facilities, government buildings, retail centers and multi-family buildings. Our services allow our customers to meet the timing and cost requirements of their jobs.

 

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The following table describes the products and services provided by the Architectural segment.

 

Products and
Services

  

Product

Attributes

  

Description

Architectural Glass Fabrication    High-Performance Glass    We offer a wide range of glass colors and high-performance coatings that allow us to create unique designs, achieve specific light transmission levels and provide solar options. Additional value-added processes, such as silk-screening and heat soaking, can be incorporated into the glass. High-performance glass is typically fabricated into custom insulating units and/or laminated units to allow for installation into window frames, curtainwall, storefront or entrance systems.
Aluminum Framing Systems    Standard, Custom and Engineered-to-Order    Varying degrees of customization of our window, curtainwall, storefront and entrance systems are available depending on the customer’s project requirements. In-house engineering capabilities allow us to meet the architect’s design requirements. Our window systems can be operable or non-operable. Our curtainwall systems may be unitized (shop fabricated) or field fabricated. Depending on the requirements, we apply paint to the aluminum components. Alternatively, we can use anodizing to create a strong, weather-resistant film of aluminum oxide, often colored, on the surface of the aluminum. Our capabilities also allow us to apply ultra-violet (UV) protection and durable paint to polyvinyl chloride parts, such as interior shutters.
Glass Installation    New Construction and Renovation Services    We install curtainwall, window, storefront and entrance systems for non-monumental, new commercial and institutional buildings as well as for renovating existing buildings. By integrating technical capabilities, project management skills and shop and field installation services, we provide design, engineering, fabrication and installation expertise for the building envelope to owners, architects and general contractors.

All of the businesses within the Architectural segment manufacture their products by fabricating glass and/or metals in a job-shop environment. Products are shipped to the job site or other location where further assembly or installation may be required.

Large-Scale Optical Technologies (LSO) Segment. The LSO segment primarily provides coated glass and acrylic for use in custom picture framing applications. The variables in the glass used for picture framing products are the size and coatings to give the glass UV protection and/or anti-reflective properties. The following table describes the products provided by the LSO segment.

 

Products and
Services

  

Product
Attributes

  

Description

Value-Added Picture Framing Glass and Acrylic    UV, Anti-Reflective and/ or Security Features    Our coatings reduce the reflectivity of picture framing glass and protect pictures and art from the sun’s damaging UV rays. Anti-reflective coatings on acrylic reduce glare and static charge on the surface.

Markets and Distribution Channels

Architectural Segment. Our customers and those that influence the projects include architects, building owners, general contractors and glazing subcontractors in the commercial construction market. Our high-performance architectural glass is marketed using a direct sales force and independent sales representatives. We market our custom and standard windows, curtainwall, storefront and entrance systems using a combination of a direct sales force, independent sales representatives and directly to distributors. Our installation and renovation services are marketed by a direct sales force, primarily in the major metropolitan areas we serve in the United States and also where we have the ability to work with our customers in other markets. The market for Architectural products and services is a subset of the construction industry and is differentiated by building type, geographic location, project size and level of customization required. Published market data are not readily available for the market segments that we serve; however, we estimate market size by analyzing overall construction industry data.

Building type – The construction industry is typically represented by residential construction and non-residential construction, which includes commercial, industrial and institutional construction. Apogee is a leading supplier of architectural glass products and services to the non-residential construction industry. Our architectural glass products and services are primarily used in commercial buildings (office towers, hotels and retail centers) and institutional buildings (education facilities and dormitories, health care facilities and government buildings), as well as high-end multi-family buildings (a subset of residential construction).

 

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Geographic location – From our domestic glass fabrication locations, we supply products primarily to the U.S. market, with some international distribution of our high-performance architectural glass. We estimate the U.S. market for architectural glass fabrication in commercial buildings is approximately $1.5 billion in annual sales. From our Brazilian glass fabrication facility, we primarily supply architectural glass to the Brazilian market. We estimate this market to be approximately $0.4 billion in annual sales. Our aluminum framing systems, including custom and standard windows, storefront and entrances, are marketed in North America, where we estimate the market size is approximately $2.0 billion in annual sales. We estimate the U.S. market for installation services is approximately $7.5 billion in annual sales. Within the installation services market, Apogee is one of only a few companies to have a national presence, with offices in eight locations serving multiple U.S. markets, and will be expanding into two locations in the Texas market. We estimate that these areas represent approximately 20 percent of the total installation market. Although installation of building glass in new commercial and institutional construction projects is the primary focus of our business, we also offer installation retrofits or renovations for the outside skin of older commercial and institutional buildings.

Project size – The projects on which our Architectural segment businesses bid and work vary in size. Our aluminum framing systems, storefront and entrance systems, and glass installation products and services, are targeted toward mid-size projects, while our high-performance architectural glass fabrication products range from mid-size to monumental high-profile projects.

Level of customization – Most projects have some degree of customization, as the end product or service is based on customer specifications. The only constant is the substrates of the products and the processes we utilize to fabricate, manufacture or install the products. However, within our aluminum framing systems businesses, we also produce glass windows and storefront and entrance products in standard, modified standard and custom configurations.

LSO Segment. The Company’s Tru Vue brand is the largest domestically manufactured brand for value-added glass and acrylic for the custom picture framing market. Under this brand, products are distributed primarily in North America through independent distributors, which supply national and regional chains and local picture framing shops, as well as through national retailers. The Company has also been successful in supplying products directly to museums and public and private galleries. We also have limited distribution in global markets through independent distributors, and we view this as a focus area for future growth of this segment.

Through the Company’s leadership, the custom picture framing industry continues to convert from clear glass to value-added picture framing glass and acrylic, a trend that is expected to continue and has helped the Company offset market softness over the past several years. We believe that our share of the U.S. market for custom picture framing glass is approximately 70 percent, and that we have the majority of the market share for the valued-added glass market, which is our target sector.

Warranties

We offer product warranties which we believe are competitive for the markets in which those products are sold. The nature and extent of these warranties depend upon the product, the market and, in some cases, the customer being served. Our standard warranties are generally from two to 10 years for our architectural glass, curtainwall and window system products, while we offer warranties of two years or less on our other products and installation services. In the event of a claim against a product for which we have received a warranty from the supplier, we pass the claim back to our supplier. Although we carry liability insurance with very high deductibles for product failures, we reserve for warranty exposures, as our insurance does not cover warranty claims. There can be no assurance that our insurance will be sufficient to cover all product failure claims in the future; that the costs of this insurance and the related deductibles will not increase materially; or that liability insurance for product failures will be available on terms acceptable to the Company in the future.

Sources and Availability of Raw Materials

Materials used within the Architectural segment include raw glass, aluminum billet and extrusions, vinyl, metal targets, insulated glass spacer frames, silicone, plastic extrusions, desiccant, chemicals, paints, lumber and urethane. All of these materials are readily available from a number of sources, and no supplier delays or shortages are anticipated. While certain glass products may only be available at certain times of the year, all standard glass types and colors are available throughout the year in reasonable quantities from multiple suppliers. Glass manufacturers have applied surcharges to the cost of glass over the past several years to help offset increases in energy and fuel costs, which we try to pass on to our customers through surcharges. We have also seen recent volatility in the cost and supply of aluminum that is used in our window, storefront, entrance and curtainwall systems. Where applicable, we have passed the changes in cost of materials on to our customers in the form of pricing adjustments and/or surcharges. Chemicals purchased range from commodity to specifically formulated chemistries.

 

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Materials used within the LSO segment include glass, hard-coated acrylic, acrylic substrates, coating materials and chemicals. This segment has also incurred energy surcharges from glass manufacturers over the past several years. Historically, we have passed on these costs to our customers in the form of price increases where possible.

A majority of our raw materials are available from a variety of domestic and international sources.

Trademarks and Patents

The Company has several trademarks and trade names which it believes have significant value in the marketing of its products, including APOGEE®. Trademark registrations in the United States are generally for a term of 10 years, renewable every 10 years as long as the trademark is used in the regular course of trade. Within the Architectural segment, VIRACON®, LINETEC®, WAUSAU WINDOW AND WALL SYSTEMS®, TUBELITE®, HARMON GLASS®, FINISHER OF CHOICE®, VIRAGUARD®, ADVANTAGE BY WAUSAU®, VIRACON VUE-50®, 300ES®, GUARDVUE®, STORMGUARD®, DFG®, ECOLUMINUM®, HI—5000®, HI—7000®, THE LEADER IN GLASS FABRICATION®, ALUMINATE®, FORCEFRONT®, and VIRACONSULTING® are registered trademarks of the Company. In addition, GLASSEC®, INSULATTO® and BLINDATTO® are registered trademarks in Brazil. 500LS™, THERML=BLOCK™, CLEAR POINT™, CYBERSHIELD™, MAXBLOCK™ and INvent™ are unregistered trademarks of the Company.

Within the LSO segment, TRU VUE®, CONSERVATION CLEAR®, CONSERVATION MASTERPIECE ACRYLIC®, CONSERVATION REFLECTION CONTROL®, SCRATCH GUARD®, MUSEUM GLASS®, OPTIUM®, PREMIUM CLEAN®, REFLECTION CONTROL®, AR REFLECTION – FREE®, TRU VUE AR®, OPTIUM ACRYLIC®, OPTIUM MUSEUM ACRYLIC®, and CONSERVATION MASTERPIECE® are registered trademarks. ULTRAVUE™ is an unregistered trademark of the Company.

The Company has several patents pertaining to our glass coating methods and products, including our UV coating and etch processes for anti-reflective glass for the picture framing industry. Despite being a point of differentiation from its competitors, no single patent is considered to be material to the Company.

Seasonality

Within the Architectural segment, our domestic businesses experience a slight seasonal effect following the domestic commercial construction industry, with higher demand May through December. Our non-domestic Architectural segment business does not have a significant seasonal trend. A bigger impact to net sales is the fact that the construction industry is highly cyclical in nature and can be influenced differently by the effects of the localized economy in geographic markets.

Within the LSO segment, picture framing glass sales tend to increase in the September to December timeframe. However, the timing of customer promotional activities may offset some of this seasonal impact.

Working Capital Requirements

Within the Architectural segment, receivables relating to contractual retention amounts can be outstanding throughout the project duration. Payment terms offered to our customers are similar to those offered by others in the industry. Inventory requirements are not significant to the businesses within this segment since we make-to-order rather than build-to-stock for the majority of our products. As a result, inventory levels follow customer demand for the products produced.

Since the LSO segment builds-to-stock for the majority of its products, it requires greater inventory levels to meet the demands of its customers.

Dependence on a Single Customer

We do not have any one customer that exceeds 10 percent of the Company’s consolidated net sales. However, there are important customers within each of our segments; the loss of one or more customers could have an adverse effect on the Company.

 

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Backlog

At March 3, 2012, the Company’s total backlog of orders considered to be firm was $243.9 million, compared with $238.4 million at February 26, 2011. Of these amounts, approximately $242.0 million and $237.2 million of the orders were in the Architectural segment at March 3, 2012 and February 26, 2011, respectively. We expect to produce and ship $183.4 million, or 76 percent, of the Company’s March 3, 2012 backlog in fiscal 2013 compared to $199.9 million, or 84 percent, of the February 26, 2011 backlog that was expected to be produced and shipped in fiscal 2012.

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

Competitive Conditions

Architectural Segment. The markets served by the businesses within the Architectural segment are very competitive, price and lead-time sensitive, and are primarily affected by changes in the North American commercial construction industry as well as changes in general economic conditions. Specifically, interest rates, credit availability for commercial construction projects, material costs, employment rates, office vacancy rates, building construction starts and office absorption rates are key indicators to the commercial construction market conditions. As each of these economic indicators moves favorably, our businesses typically experience sales growth, and vice-versa. The U.S. and world economies over the past three years have had a significant adverse impact on the commercial construction industry as a whole. As a result, the competitive environment in which the Architectural segment operates has become more competitive, increasing the number of re-bid construction projects and length of time between bidding and award of a project, reducing selling prices and causing competitors to expand the geographic scope and type of projects on which they bid. The companies within the Architectural segment primarily serve the custom portion of the commercial construction market, which is generally highly fragmented. The primary competitive factors are price, product quality, reliable service, on-time delivery, warranty and the ability to provide technical engineering and design services. The competitive environment in Brazil is similar to that of the United States; however, the Brazilian commercial construction market appears to be relatively strong as the Brazilian economy has recovered from the recent worldwide economic downturn. Additionally, we believe we are in the midst of an increasing worldwide trend in commercial construction – building with energy efficient or “green” products. This has the potential to increase demand for some of our segment’s products and services due to their premium energy-efficiency properties combined with custom aesthetics. The potential for increased renovation of the exteriors of commercial and institutional buildings for improved energy efficiency may also offset some competitive pressures.

Throughout a construction project, the Architectural segment must maintain significant relationships with general contractors, who are normally each business’ direct or indirect customers, and architects, who influence the selection of products and services on a project. This is due to the high degree of dependence on general contractors and architects for project initiation and development of specifications. Additionally, the timing of a project depends on the schedule established by the general contractors and their ability to maintain this schedule. If a general contractor fails to keep a construction project on its established timeline, the timing and profitability of the project for our Architectural segment could be negatively impacted.

We believe that our domestic competition does not provide the same level of custom coatings to the market, but regional glass fabricators can provide somewhat similar products with similar attributes. Regional fabricators incorporate high performance, post-temperable glass products, procured from primary glass suppliers, into their insulated glass products. The availability of these products has enabled regional fabricators in some cases to bid on more complex projects than in the past. Since we typically target the more complex projects, of which there are currently fewer in the market because of the recent economic downturn, we have encountered significant competition from these glass suppliers. Conversely, since the commercial construction cycle has slowed and demand for high-end products is lower, our architectural glass fabrication business increasingly competes for business at the lower end of the high-performance spectrum, where these regional fabricators vigorously compete and pricing is generally lower.

The commercial window manufacturing market is highly fragmented, and we compete against several major aluminum window and storefront manufacturers in various market niches. With window products at the high-end of the performance scale and one of the industry’s best standard window warranties for repair or replacement of defective product, we effectively leverage a reputation for engineering quality and delivery dependability into a position as a preferred provider for high-performance products. Our custom and standard windows business and storefront and entrance business typically compete on quality and service levels, price, lead-time and delivery services. Within the architectural finishing market, we compete against regional paint and anodizing companies, typically on price and delivery. With the slowdown in the commercial construction markets, there is a higher level of competition for these products.

 

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When providing glass installation and services, we largely compete against local and regional construction companies and installation contractors, and more recently against other larger national companies. The primary competitive factors are quality, engineering, price and service.

LSO Segment. Product attributes, pricing, quality, marketing, and marketing services and support are the primary competitive factors in the markets within the LSO segment. The Company’s competitive strengths include our excellent relationships with our customers and the product performance afforded by our proprietary and/or patented processes. While there is significant price sensitivity in regard to sales of clear glass to picture framers, there is somewhat less price sensitivity on our value-added glass products since there is less competition for these products.

Although there has been recent activity with respect to new entrants in the North American valued-added products market for picture framing, this segment competes against many suppliers of clear glass. Our customers’ selection of value-added products is driven by product attributes, price, quality and service.

Research and Development

The amount spent on research and development activities was $7.2 million, $6.3 million and $6.8 million in fiscal 2012, 2011 and 2010, respectively. Of this amount, $0.8 million, $1.8 million and $3.2 million, respectively, was focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and is included in cost of sales in the accompanying consolidated financial statements.

Environment

We use hazardous materials in our manufacturing operations, and have air and water emissions that require controls. As a result, we are subject to stringent federal, state and local regulations governing the storage, use and disposal of wastes. We contract with outside vendors to collect and dispose of waste at our production facilities in compliance with applicable environmental laws. In addition, we have procedures in place that we believe enable us to properly manage the regulated materials used in our manufacturing processes and wastes created by the production processes, and we have implemented a program to monitor our compliance with environmental laws and regulations. Although we believe we are currently in material compliance with such laws and regulations, current or future laws and regulations could require us to make substantial expenditures for compliance with chemical exposure, waste treatment or disposal regulations. During fiscal 2012, we spent approximately $0.2 million, and in each of fiscal 2011 and 2010, we spent $0.3 million, to reduce wastewater solids and hazardous air emissions at our facilities. We expect to incur costs to continue to comply with laws and regulations in the future for our ongoing manufacturing operations but do not expect these to be material to our financial statements.

As part of the acquisition of Tubelite Inc. (Tubelite) on December 21, 2007, we acquired a manufacturing facility which has historical environmental conditions. We believe that Tubelite is a “responsible party” for certain of these historical environmental conditions, and the Company intends to remediate those conditions. The Company believes the remediation activities can be conducted without significant disruption to manufacturing operations at this facility. As of March 3, 2012, the environmental reserve balance was $2.0 million.

Employees

The Company employed 3,636 and 3,555 persons on March 3, 2012 and February 26, 2011, respectively. At March 3, 2012, 449 of these employees were represented by U.S. labor unions and 274 of these employees were represented by labor unions in Brazil.

The Company is a party to approximately 50 collective bargaining agreements in the United States with several different unions. The number of collective bargaining agreements to which the Company is a party varies with the number of cities in which our glass installation and services business has active construction contracts. The Company considers its employee relations to be very good, and has not experienced any loss of workdays due to strike. We are highly dependent upon the continued employment of certain technical and management personnel.

Acquisition of Glassec

On November 19, 2010, the Company acquired 100 percent of the stock of Glassec Vidros de Segurança Ltda., a privately held business, for $20.6 million, net of cash acquired of $1.1 million. Glassec is a leading architectural glass fabricator in Brazil. The business operates under the name GlassecViracon as part of the Company’s architectural glass business.

 

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GlassecViracon’s fiscal year ends December 31 and is reported in the consolidated financial statements within our Architectural segment on a two-month lag. The purchase is part of our strategy to increase our architectural glass penetration in international markets. Item 8, Note 6 of the Notes to Consolidated Financial Statements contains further information regarding this acquisition.

Foreign Operations and Export Sales

During the years ended March 3, 2012, February 26, 2011 and February 27, 2010, the Company’s export sales from domestic operations, principally from the sale of architectural glass, amounted to approximately $75.7 million, $79.4 million and $68.3 million, respectively, or 11 percent of net sales in fiscal 2012, 14 percent of net sales in fiscal 2011, and 10 percent of net sales in fiscal 2010. Fiscal 2012 and 2011 consolidated net sales included GlassecViracon sales of $34.1 million and $3.7 million, respectively, or five percent of net sales in fiscal 2012 and approximately one percent of net sales in fiscal 2011, all of which were non-U.S. sales.

Available Information

The Company maintains a website at www.apog.com. Through a link to a third-party content provider, this corporate website provides free access to the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after electronic filing such material with, or furnishing it to, the Securities and Exchange Commission. Also available on our website are various corporate governance documents, including our Code of Business Ethics and Conduct, Corporate Governance Guidelines, and charters for the Audit, Compensation, Strategy and Enterprise Risk, and Nominating and Corporate Governance Committees of the Board of Directors.

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Name

   Age   

Positions with Apogee Enterprises and Five-Year Employment History

Joseph F. Puishys    53    Chief Executive Officer and President of the Company since August 2011. President of Honeywell’s Environmental and Combustion Controls division from 2008 through 2011, President of Honeywell’s Building Solutions from 2005 through 2008 and President of Honeywell Building Solutions, America from 2004 to 2005.
James S. Porter    51    Chief Financial Officer since October 2005. Vice President of Strategy and Planning from 2002 through 2005. Various management positions within the Company since 1997.
Patricia A. Beithon    58    General Counsel and Secretary since September 1999.
Gary R. Johnson    50    Vice President, Treasurer since January 2001. Various management positions within the Company since 1995.
Mark A. Augdahl    46    Vice President, Finance and Corporate Controller since May 2011. Corporate Controller from 2004 through 2011 and Assistant Corporate Controller from 2000 through 2004.

Executive officers are elected annually by the Board of Directors and serve for a one-year period. There are no family relationships between any of the executive officers or directors of the Company.

 

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ITEM 1A. RISK FACTORS

Our business faces many risks. Any of the risks discussed below, or elsewhere in the Form 10-K or our other filings with the Securities and Exchange Commission, could have a material adverse impact on our business, financial condition or results of operations.

Operational Risks

Architectural Segment

Global economic conditions and the cyclical nature of the commercial construction industry have had and could continue to have an adverse impact on the profitability of this segment. There has traditionally been a lag between the general domestic economy and the North American commercial construction industry, and an additional lag of approximately eight months to when the products and services of our domestic-based Architectural segment businesses record net sales. Accordingly, these domestic Architectural segment businesses, which represented approximately 94 percent of the segment’s net sales during fiscal 2012, are primarily impacted by changes in the North American commercial construction industry, including unforeseen delays in project timing, work flow and lower prices. These and other economic conditions could impact the overall commercial construction industry and may adversely impact the markets we serve or the timing of the lag, resulting in lower net sales and earnings.

Our Brazilian operation is subject to the economic, political and tax conditions prevalent in the region. The economic conditions in this region are subject to different growth expectations, market weaknesses and business practices. We cannot predict how changing market conditions in this region will impact our financial results.

The Architectural segment’s markets are very competitive and actions of competitors, or new market entrants, as well as product or service preferences could result in a loss of customers or share of that customer’s purchases that would negatively impact our net sales and earnings. The markets that the Architectural segment serves are product-attribute, price and lead-time sensitive. The segment competes with several large, integrated glass manufacturers; numerous specialty architectural glass and window fabricators; and major contractors and subcontractors. Some of our competitors may have greater financial or other resources than the Company. Changes in our competitor’s products, prices or services could negatively impact our market share, net sales or margins. We have seen an increase in imports of our products from lower-cost, international suppliers that, if this were to continue, could impact our net sales or margins. Architectural trends or building code changes that reduce window-to-wall ratios could also negatively impact our net sales or margins.

The Architectural segment results could be adversely impacted by product quality and performance reliability problems. We manufacture and/or install a significant portion of our products based on specific requirements of each of our customers. We believe that future orders of our products or services will depend on our ability to maintain the performance, reliability and quality standards required by our customers. If our products or services have performance, reliability or quality problems, we may experience additional warranty and service expense; reduced, cancelled or discontinued orders; higher manufacturing or installation costs; or delays in the collection of accounts receivable. Additionally, performance, reliability or quality claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages that could negatively impact our financial results.

The Architectural results could be adversely impacted by capacity utilization and changes in technology impacting capacity utilization. The Architectural segment’s near-term performance depends, to a significant degree, on its ability to utilize capacity at its production facilities. The failure to successfully utilize or manage capacity, and the impact of closing a facility in the future, or re-opening a currently closed facility, could adversely affect our operating results. Additionally, advances in product or process technologies on the part of existing or prospective competitors could have a significant impact on our ability to utilize our capacity and, therefore, have an adverse impact on our operating results.

The Architectural results could be adversely impacted by installation issues. The Company’s installation business typically is awarded as a fixed-price contract. Often, bids are required before all aspects of a construction project are known. An underestimate in the amount of labor required and/or cost of materials for a project; a change in the timing of the delivery of product; difficulties or errors in execution; or significant delays could result in failure to achieve the expected results. Any such issues could result in losses on individual contracts that could impact our operating results.

 

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LSO Segment

The LSO segment is highly dependent on a relatively small number of customers for its sales. We continue to expect to derive a significant portion of our net sales from a small number of customers. Accordingly, loss of a significant customer or a significant reduction in pricing, or a shift to a less favorable mix of value-added picture framing glass products for one of those customers could materially reduce LSO net sales and operating results in any one year.

The LSO segment is highly dependent on U.S. consumer confidence and the U.S. economy. Our business in this segment depends on the strength of the retail picture framing market. This market is highly dependent on consumer confidence and the conditions of the U.S. economy. We have been able to partially offset the impact of economic slowdowns in the recent past with an increase in the mix of higher value-added picture framing products. If consumer confidence further declines, whether as a result of an economic slowdown, uncertainty regarding the future or other factors, our use of these strategies may not be as successful in the future, resulting in a potentially significant decrease in net sales and operating income.

The LSO segment results could be adversely impacted by capacity utilization. The LSO segment’s near-term performance depends, to a significant degree, on its ability to utilize its production capacity to manufacture our highest value-added picture framing glass and acrylic products. The failure to successfully manage this capacity could adversely impact operating results.

The LSO segment’s markets are becoming more competitive and actions of competitors, or new market entrants, could negatively impact our net sales and earnings. The markets that the LSO segment serves are product-attribute and price sensitive. The segment competes with several small international specialty glass manufacturers that have traditionally not penetrated the domestic markets. Although these competitors tend to be low price providers and have not been able to meet the specification level of our products, upgrades to our competitor’s products could drive prices down which could have a negative impact on our market share, net sales or margins.

Other Operational Risks

The Company’s results may be adversely impacted by implementation of an Enterprise Resource Planning (ERP) system. Since fiscal 2008, the Company has been implementing an ERP system to modernize its information system technologies and business processes at its business units. The complexities of an ERP implementation and large-scale process changes that are required could result in costs that exceed the project budget, business interruptions or reduced financial performance, adversely impacting operating results. To date we have completed a considerable portion of the project but still have significant modules at some of our larger business units to implement.

Financial Risks

Volatility in the global economy could adversely affect results of operations and our financial condition. Global financial markets have been experiencing disruption over the past several years, including, among other things, volatility in securities prices; diminished liquidity and credit availability; rating downgrades of certain investments; and changes in valuation of foreign currency against the U.S. dollar. These conditions have negatively impacted the markets we serve and as a result have had an adverse impact on our recent results of operations. Further volatility could lead to challenges in our business and negatively impact our financial condition or results of operations or lead to impairment of long-lived assets, including goodwill. The tightening of credit in financial markets could adversely affect our ability, as well as the ability of our customers and suppliers, to obtain and maintain financing. In addition, lack of financing for commercial construction projects could further result in a decrease in orders and spending for our products and services. We also maintain a significant amount of assets in the form of investments, primarily municipal bonds. The value of these investments and the timing of our need for cash could have a significant negative impact on our operating results.

Our quarterly and annual net sales and operating results are volatile and difficult to predict. Our net sales and operating results may fall below the expectations of securities analysts or investors, and Company-provided guidance in future periods. Our annual net sales and operating results may vary depending on a number of factors, including, but not limited to, fluctuating customer demand, delay or timing of shipments, construction delays or cancellations due to lack of financing for construction projects, changes in product and project mix or market acceptance of new products. Manufacturing or operational difficulties that may arise due to quality control, capacity utilization of our production equipment or staffing requirements may also adversely impact our annual net sales and operating results. In addition, competition, including new entrants into our markets, the introduction of new products by competitors, adoption of competitive technologies by our customers, and competitive pressures on prices of our products and services, could adversely impact our annual net sales and operating results. Finally, our annual net sales and operating results may vary depending on raw material pricing and the potential for disruption of supply, and changes in legislation that could have an adverse impact on our labor or other costs. Our failure to meet net sales and operating result expectations would likely adversely affect the market price of our common stock.

 

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Self-Insurance and Product Liability Risk

We retain a high level of uninsured risk; a material claim could impact our financial results. We obtain substantial amounts of commercial insurance for potential losses for general liability, employment practices, workers’ compensation and automobile liability risk. However, a high amount of risk is retained on a self-insured basis through a wholly-owned insurance subsidiary. Therefore, a material product liability event, such as a material rework event, could have a material adverse effect on our operating results.

Environmental Regulation Risks

We are subject to potential environmental remediation regulation and compliance risks that could adversely affect our financial results. We use hazardous chemicals in producing products at three facilities (two in our Architectural segment and one in our LSO segment). One facility in our Architectural segment has certain historical environmental conditions which we believe require remediation. Our inability to remediate the historical environmental conditions at the Architectural segment facility at or below the amounts estimated as part of the purchase price allocation could have a material adverse impact on future financial results. Additionally, we are subject to a variety of local, state and federal governmental regulations relating to storage, discharge, handling, emission, generation and disposal of toxic or other hazardous substances used to manufacture our products, compliance with which is expensive. Our failure to comply with current or future environmental regulations could result in the imposition of substantial fines on us, suspension of production, alteration of our manufacturing processes or increased costs. Our financial results could also be adversely impacted by rising energy and material costs associated with environmental regulations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

 

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ITEM 2. PROPERTIES

The following table lists, by segment, the Company’s major facilities as of March 3, 2012, the general use of the facility and whether it is owned or leased by the Company.

 

Facility

  

Location

  

Owned/
Leased

  

Size (sq. ft.)

    

Function

Architectural Segment

           

Viracon

   Owatonna, MN    Owned      765,500       Mfg/Admin

Viracon

   Owatonna, MN    Owned      136,050       Mfg/Admin

Viracon

   Owatonna, MN    Leased      160,000       Warehouse

Viracon

   Owatonna, MN    Leased      6,400       Maintenance

Viracon

   Statesboro, GA    Owned      397,200       Mfg/Warehouse

Viracon

   St. George, UT    Owned      236,000       Mfg/Warehouse

GlassecViracon

   Nazaré Pulista, Brazil    Owned(1)      100,000       Mfg/Admin

Harmon, Inc. Headquarters

   Minneapolis, MN    Leased      12,954       Admin

Wausau Window and Wall Systems

   Wausau, WI    Owned      370,400       Mfg/Admin

Wausau Window and Wall Systems

   Stratford, WI    Owned      67,000       Mfg

Linetec

   Wausau, WI    Owned      430,000       Mfg/Admin

Tubelite

   Reed City, MI    Owned      245,000       Mfg

Tubelite

   Walker, MI    Leased      123,125       Mfg/Admin

LSO Segment

           

Tru Vue

   McCook, IL    Owned      300,000       Mfg/Admin

Tru Vue

   Faribault, MN    Owned      274,600       Mfg/Admin

Other

           

Apogee Headquarters

   Minneapolis, MN    Leased      13,492       Admin

 

(1) This is an owned facility; however, the land is leased from the city.

In addition to the locations indicated above, the Architectural segment’s Harmon, Inc. operates eight leased locations, serving multiple markets.

One of the Viracon facilities, a portion of the Wausau Window and Wall Systems facility, a portion of the Linetec facility and the Tru Vue facilities were constructed with the use of proceeds from industrial revenue bonds issued by their applicable cities. These properties are considered owned since, at the end of the bond term, title reverts to the Company.

 

ITEM 3. 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 construction supply 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 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 financial condition of the Company.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Apogee common stock is traded on the NASDAQ Stock Market LLC (Nasdaq) under the ticker symbol APOG.

As of April 11, 2012, there were approximately 1,511 shareholders of record and 7,652 shareholders for whom securities firms acted as nominees.

The following chart shows the quarterly range and year-end closing prices for one share of the Company’s common stock over the past five fiscal years.

 

     Quarter         
     First      Second      Third      Fourth      Year-end  
     Low             High      Low             High      Low             High      Low             High      Close  

2012

   $ 12.42         —         $ 14.82       $ 8.21         —         $ 13.45       $ 7.79         —         $ 11.54       $ 9.42         —         $ 15.05       $ 12.60   

2011

     12.57         —           16.89         9.05         —           13.89         8.76         —           12.05         10.79         —           14.72         13.92   

2010

     8.12         —           14.61         11.17         —           15.14         12.50         —           16.48         12.91         —           16.35         14.29   

2009

     14.08         —           24.22         15.07         —           25.99         5.32         —           21.46         6.08         —           12.77         9.47   

2008

     18.41         —           25.75         24.23         —           30.30         20.04         —           28.96         14.30         —           23.25         15.39   

Dividends

The Board of Directors quarterly evaluates declaring dividends based on operating results, available funds and the Company’s financial condition. Cash dividends have been paid each quarter since 1974. The chart below shows quarterly and annual cumulative cash dividends per share for the past five fiscal years.

 

     First      Second      Third      Fourth      Total  

2012

   $  0.0815       $  0.0815       $  0.0815       $  0.0815       $  0.3260   

2011

     0.0815         0.0815         0.0815         0.0815         0.3260   

2010

     0.0815         0.0815         0.0815         0.0815         0.3260   

2009

     0.0740         0.0740         0.0815         0.0815         0.3110   

2008

     0.0675         0.0675         0.0740         0.0740         0.2830   

Purchases of Equity Securities by the Company

The following table provides information with respect to purchases made by the Company of its own stock during the fourth quarter of fiscal 2012:

 

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 (b)
 

Nov. 27, 2011 through Dec. 31, 2011

     89       $ 10.41         —           970,877   

Jan. 1, 2012 through Jan. 28, 2012

     —           —           —           970,877   

Jan. 29, 2012 through Mar. 3, 2012

     25,392         13.43         —           970,877   

Total

     25,481       $ 12.67         —           970,877   

 

  (a) The shares in this column represent shares that were surrendered to us by plan participants in order 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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Comparative Stock Performance

The line graph below compares the cumulative total shareholder return on our common stock for the last five fiscal years with cumulative total return on the Standard & Poor’s Small Cap 600 Index and the Russell 2000 Index. This graph assumes a $100 investment in each of Apogee, the Standard & Poor’s Small Cap 600 Index and the Russell 2000 Index at the close of trading on March 3, 2007, and also assumes the reinvestment of all dividends.

 

LOGO

 

     Fiscal 2007      Fiscal 2008      Fiscal 2009      Fiscal 2010      Fiscal 2011      Fiscal 2012  

Apogee

   $ 100.00       $ 80.38       $ 50.71       $ 78.52       $ 76.48       $ 69.23   

S&P Small Cap 600 Index

     100.00         91.60         51.87         84.29         109.18         112.38   

Russell 2000 Index

     100.00         88.49         50.17         81.06         106.00         103.48   

For the fiscal year ended March 3, 2012, our primary business activities included architectural glass products and services (approximately 88 percent of net sales) and large-scale optical technologies (approximately 12 percent of net sales). We are not aware of any competitors, public or private, that are similar to us in size and scope of business activities. Most of our direct competitors are either privately owned or divisions of larger, publicly owned companies.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following information should be read in conjunction with Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8—Financial Statements and Supplementary Data.

 

(In thousands, except per share data and percentages)

   2012 (1)     2011(2)     2010      2009      2008      2007(1)  

Results from Operations Data

               

Net sales

   $ 662,463      $ 582,777      $ 696,703       $ 925,502       $ 881,809       $ 778,847   

Gross profit

     117,120        83,120        162,095         200,748         185,150         148,414   

Operating income (loss)

     3,816        (20,972     45,430         77,655         66,459         47,725   

Earnings (loss) from continuing operations

     4,697        (14,157     31,217         51,195         43,170         31,652   

Net earnings (loss)

     4,645        (10,332     31,742         51,035         48,551         31,653   

Earnings (loss) per share – basic

               

Continuing operations

     0.17        (0.51     1.14         1.85         1.52         1.14   

Net earnings (loss)

     0.17        (0.37     1.16         1.84         1.71         1.14   

Earnings (loss) per share – diluted

               

Continuing operations

     0.17        (0.51     1.13         1.82         1.49         1.12   

Net earnings (loss)

     0.17        (0.37     1.15         1.81         1.67         1.12   

Balance Sheet Data

               

Current assets

   $ 229,439      $ 213,923      $ 246,586       $ 228,688       $ 259,229       $ 222,484   

Total assets (3)

     493,104        511,098        526,854         527,684         563,508         449,161   

Current liabilities

     105,771        113,946        128,887         157,292         177,315         145,859   

Long–term debt

     20,916        21,442        8,400         8,400         58,200         35,400   

Shareholders’ equity

     321,198        327,677        343,590         316,624         284,582         235,668   

Cash Flow Data

               

Depreciation and amortization

   $ 27,246      $ 28,218      $ 29,601       $ 29,307       $ 22,776       $ 18,536   

Net cash provided by (used in) continuing operating activities

     27,981        (7,985     97,234         116,298         86,235         48,071   

Capital expenditures

     9,650        9,126        9,765         55,184         55,208         39,893   

Dividends*

     9,153        9,161        9,112         8,800         8,192         9,312   

Other Data

               

Gross margin – % of sales

     17.7        14.3        23.3         21.7         21.0         19.1   

Operating margin – % of sales

     0.6        (3.6     6.5         8.4         7.5         6.1   

Effective tax rate – %

     (28.8     32.0        32.1         35.0         30.7         35.1   

Non–cash working capital

   $ 44,374      $ 39,426      $ 15,064       $ 44,336       $ 69,650       $ 70,438   

Debt as a % of total capital

     6.1        6.4        2.4         2.6         17.0         13.1   

Return on:

               

Average shareholders’ equity – %

     1.4        (3.1     9.6         17.0         18.7         14.6   

Average invested capital**– %

     0.6        (3.4     7.5         12.6         11.4         10.0   

Dividend yield at year–end – %

     2.6        2.3        2.3         3.3         1.8         1.4   

Book value per share

     11.45        11.66        12.29         11.40         9.90         8.25   

Price/earnings ratio at year–end

     76:1        NM        12:1         5:1         9:1         17:1   

Average monthly trading volume

     2,830        4,790        5,900         8,400         7,740         3,500   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

* See Item 5 for dividend per share data.
** [(Operating income + equity in earnings of affiliated companies) x (.65)]/average invested capital

NM=Not meaningful

 

  (1) Fiscal 2012 and 2007 each included 53 weeks compared to 52 weeks in each of the other periods presented.
  (2) See Item 8, Note 6 to the Consolidated Financial Statements for additional information related to the acquisition of Glassec in November 2010.
  (3) Fiscal 2011 includes a retrospective adjustment of $4.2 million as described in Item 8, Note 6 to the Consolidated Financial Statements.

 

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ITEM 7. 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 in this Form 10-K. From time to time, we also may provide oral and written forward-looking statements in other materials we release to the public such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.

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

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, 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, 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. (Tubelite), 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 are the key items that impacted fiscal 2012:

 

   

The Architectural segment’s net sales were up 15.1 percent, or 9.1 percent excluding the impact of GlassecViracon, which was acquired late in fiscal 2011, over the prior year even as we continued to be impacted by difficult U.S. commercial construction market conditions. Growth was driven by initiatives to improve market share in our metal fabrication businesses and improved pricing in our architectural glass fabrication business. Operating results were also favorable to last year largely due to the impact of the items above, partially offset by project margin declines at our installation business.

 

   

Despite soft market conditions, our LSO segment was able to increase net sales 4.1 percent, while operating income was down slightly due to spending on growth initiatives during fiscal 2012.

 

   

Our backlog was $243.9 million at March 3, 2012, compared to $238.4 million at February 26, 2011.

 

   

The Architectural segment backlog represents more than 99 percent of the backlog. Bidding activity has remained solid; however, bid-to-award and contract timing continues to be slow.

 

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Strategy. The following describes our business strategy for each of our segments.

Architectural segment. Our Architectural segment serves the commercial construction market, which is highly cyclical. We have five business units within this segment that participate at various stages of the glass fabrication, window and curtainwall supply chain – each with nationally recognized brands and leading positions in their target market segments. The glass and window and curtainwall systems enclose commercial buildings such as offices, hospitals, educational facilities, government facilities, high-end multi-family buildings and retail centers. We believe building contractors value our ability to deliver quality, customized window and curtainwall solutions to projects on time and on budget, helping to minimize costly job-site labor overruns. Their customers – building owners and developers – value the distinctive look, energy efficiency, and hurricane and blast protection features of our glass systems. These benefits can contribute to higher lease rates, lower operating costs due to the energy efficiency of our value-added glass, a more comfortable environment for building occupants, and protection for buildings and occupants from hurricanes and blasts.

We look at several market indicators, such as office space vacancy rates, architectural billing statistics, employment, and other economic indicators, to gain insight into the commercial construction market. One of our primary indicators is U.S. non-residential construction market activity as documented by McGraw-Hill Construction (McGraw-Hill), a leading independent provider of construction industry analysis, forecasts and trends. We utilize the information for the building types that we typically supply (office towers, hotels, retail centers, education facilities and dormitories, health care facilities, government buildings and high-end multi-family buildings) and adjust this information (which is based on construction starts) to align with our fiscal year and the lag that is required to account for when our products and services typically are initiated in a construction project – approximately eight months after project start. From the McGraw-Hill data, our U.S. markets had an annual compounded growth rate of negative 14 percent over our past three fiscal years, consistent with our segment’s domestic compounded annual growth rate over that same period.

Our overall strategy in this segment is to defend and grow market share over a cycle by extending our presence while remaining focused on distinctive solutions for enclosing commercial buildings. We draw upon our leading brands, energy-efficient products and reputation for high quality and service in pursuit of our strategy. Each of our existing businesses has the ability to grow through geographic or product line expansion, and we regularly evaluate acquisition opportunities in adjacent segments. Finally, we aspire to lead our markets in the development of practical, energy-efficient products for “green” buildings and the ability to deliver them in a sustainable manner. Our architectural businesses have introduced products and services designed to meet the growing demand for green building materials. These products have included new energy-efficient glass coatings, thermally enhanced aluminum framing systems and systems with a high percentage of recycled content.

While our lag-adjusted markets are projected to continue to contract slightly into fiscal 2013, we are pursuing the same basic strategy with some adjustment for market conditions. In fiscal 2011 we raised the pricing of our U.S. architectural glass products to better reflect the value our products deliver to the marketplace, and expect to see the full benefits of the price increases in fiscal 2013. In addition, we have been and continue to take measures to keep our cost structure in line with revenue, including continuing to focus on productivity while maintaining and upgrading our capacity to gain market share when our markets recover. We acquired Glassec, a leading architectural glass fabricator in Brazil, in November 2010, establishing an architectural glass footprint in a developing and fast-growing market where we can provide technical and operational excellence. We have been successful in winning and profitably executing installation work in new metropolitan markets to offset declines in core markets. We are focusing on renovation of window and curtainwall systems where all sectors are increasing their interest in upgrading their facades. We have tightened our capital spending criteria, although we continue to have cash available, and will be spending during fiscal 2013 for strategic investments for both international and domestic initiatives to drive growth and improve productivity. We expect to emerge from the current downturn poised to win market share from competitors who were not as well positioned or do not have funds available to weather the current down cycle.

LSO segment. Our basic strategy in this segment is to convert the custom picture framing market from clear uncoated glass to value-added glass that protects art from UV damage while minimizing reflection from the glass so that viewers see the art rather than the glass. We estimate that over 50 percent of the retail picture framing market has converted to value-added glass, and although we are finding it more difficult to convert, the ultimate potential is significantly higher. We offer a variety of products with varying levels of reflection control and promote the benefits to consumers with point-of-purchase displays and other promotional materials. We also work to educate the fragmented custom picture framing market regarding the opportunity to improve the profitability of their framing business by selling value-added glass.

Over the past two years, we have been extending our strategy to the fine art market, which includes museums and private collections. We also made capital investments to support the conversion to value-added picture framing products as well as to grow the fine art market. As part of that extension, we developed value-added acrylic products in addition to glass. Acrylic is a preferred material in the fine art markets because the art can be much larger and weight is an important consideration. In fiscal 2010, we expanded our strategies to include other markets that can be served with anti-reflective acrylic products.

 

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In fiscal 2011, we established an initiative to begin selling our products in Europe, and in fiscal 2012, we began executing against this initiative. Historically, we have had very little presence in Europe. We believe our products and distribution networks will enable us to grow at a faster pace in Europe than in the United States.

Results of Operations

Net Sales

 

(Dollars in thousands)

   2012      2011      2010      2012 vs. 2011     2011 vs. 2010  

Net sales

   $ 662,463       $ 582,777       $ 696,703         13.7     (16.4 )% 

Fiscal 2012 Compared to Fiscal 2011

Sales increased 13.7 percent during fiscal 2012 despite flat market conditions due to market share gains in the window and storefront businesses and improved architectural glass pricing. The GlassecViracon business that was acquired in the third quarter of fiscal 2011 accounted for 5.2 percentage points of the increase in fiscal 2012. In addition, fiscal 2012 included 53 weeks compared to the prior-year 52-week period, which had a 2 percent impact on current year sales.

Fiscal 2011 Compared to Fiscal 2010

Sales decreased 16.4 percent due to challenging commercial construction market conditions during fiscal 2011. This resulted in lower demand, driving lower volume across all Architectural segment business lines, and lower pricing, largely in our architectural glass business. GlassecViracon contributed $3.7 million of sales to our Architectural segment in fiscal 2011 for the period subsequent to acquisition.

Performance

The relationship between various components of operations, as a percentage of net sales, is illustrated below for the past three fiscal years.

 

(Percentage of net sales)

   2012     2011     2010  

Net sales

     100.0     100.0     100.0

Cost of sales

     82.3        85.7        76.7   
  

 

 

   

 

 

   

 

 

 

Gross profit

     17.7        14.3        23.3   

Selling, general and administrative expenses

     17.1        17.9        16.8   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     0.6        (3.6     6.5   

Interest income

     0.2        0.1        0.1   

Interest expense

     0.2        0.1        0.1   

Other income (expense), net

     —          —          0.1   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     0.6        (3.6     6.6   

Income tax (benefit) expense

     (0.1     (1.2     2.1   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     0.7        (2.4     4.5   

Earnings from discontinued operations, net of income taxes

     —          0.6        0.1   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     0.7     (1.8 )%      4.6
  

 

 

   

 

 

   

 

 

 

Effective income tax rate for continuing operations

     (28.8 )%      32.0     32.1

Fiscal 2012 Compared to Fiscal 2011

Consolidated gross profit was up 3.4 percentage points due to the higher architectural glass pricing and the margin impact from the revenue growth in the window and storefront businesses, partially offset by lower margin work in the installation business. During fiscal 2011, we incurred unusually high costs to resolve architectural glass product quality issues from a vendor-supplied material, as well as other quality issues, which negatively impacted gross profit by approximately $3.4 million, or 0.6 percentage points.

Selling, general and administrative (SG&A) expenses decreased as a percent of sales to 17.1 percent in fiscal 2012 from 17.9 percent in fiscal 2011, while spending was up $9.2 million. Approximately half of the increase in spending relates to the impact of the addition of the GlassecViracon business. Transition costs related to our retiring CEO and hiring our new CEO, increased commissions as a result of increased sales, and increased promotional costs in our LSO segment also contributed to the increase in spending.

 

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In the current year, income tax expense on pre-tax income was more than offset by tax benefits from credits and deductions on a low base of earnings and the impact of statute of limitation expirations for prior fiscal years.

Fiscal 2011 Compared to Fiscal 2010

Consolidated gross profit was down 9.0 percentage points due to lower pricing, primarily in our architectural glass business, as well as lower project margins and the impact of low capacity utilization from lower volume in our Architectural segment. During fiscal 2011, we incurred unusually high costs to resolve architectural glass product quality issues from a vendor-supplied material, as well as other quality issues, which negatively impacted gross profit by approximately $3.4 million, or 0.6 percentage points. Our LSO segment had favorable results for fiscal 2011 compared to fiscal 2010 due to the ongoing strong mix of value-added picture framing product and positive operating performance, partially offsetting the items above.

SG&A expenses increased as a percent of sales to 17.9 percent in fiscal 2011 from 16.8 percent in fiscal 2010, while spending decreased by $12.6 million. The decrease in spending relates to reduced accruals for incentive and long-term executive compensation expenses; lower spending on discretionary items as we focused on cost management; and reduced salaries and employee-related expenses as a result of headcount reductions. The increase as a percent of sales was largely due to our inability to leverage expenses over a lower level of sales dollars.

Fiscal 2011 earnings from discontinued operations of $3.8 million reflect favorable resolution of an outstanding tax exposure related to a foreign operation discontinued in 1998. The resolution of this exposure provided non-cash income from discontinued operations of $4.9 million in the second quarter. Fiscal 2011 also included a pre-tax charge of $1.6 million in the fourth quarter for expected settlement of an exposure related to a foreign operation discontinued in 1998. This settlement was finalized in March 2011, and we paid $3.0 million in the first half of fiscal 2012 for final resolution of this matter. The settlements of these two items represent the last significant remaining items with respect to our international curtainwall business. Fiscal 2010 income of $0.5 million was due to the favorable resolution of an outstanding lease claim and a reduction in reserves related to the expiration of warranty periods.

Segment Analysis

Architectural Products and Services (Architectural)

 

(In thousands)

   2012     2011     2010  

Net sales

   $ 583,933      $ 507,392      $ 626,007   

Operating (loss) income

     (12,072     (37,668     31,591   

Operating (loss) income as a percent of sales

     (2.1 )%      (7.4 )%      5.0
  

 

 

   

 

 

   

 

 

 

Fiscal 2012 Compared to Fiscal 2011. Fiscal 2012 net sales increased $76.5 million or 15.1 percent from fiscal 2011, compared to growth of approximately 1 percent in our markets served, according to McGraw-Hill data. The addition of GlassecViracon accounted for 6.0 percentage points of the increase for the year. Volume growth and increased market share in our window and storefront businesses and improved architectural glass pricing contributed to the year-on-year improvement. In addition, the extra week in fiscal 2012 had an impact of 2 percent on current year sales.

For fiscal 2012, the segment incurred an operating loss of $12.1 million, with an operating margin of negative 2.1 percent compared to an operating loss of $37.7 million in fiscal 2011, with a negative operating margin of 7.4 percent. The improvement was due to the improved architectural glass pricing and the impact of the increased revenue in our window and storefront businesses. These items were partially offset by lower margin work in the installation business as this business was working off projects that were bid at lower margins. In fiscal 2011, we incurred costs to resolve architectural glass product quality issues from a vendor-supplied material, as well as other quality issues, which negatively impacted segment gross profit by approximately $3.4 million, or 0.7 percentage points. Fiscal 2011 was also impacted by costs to implement architectural glass productivity improvements. GlassecViracon was minimally accretive to segment results in fiscal 2012.

Fiscal 2011 Compared to Fiscal 2010. Fiscal 2011 net sales decreased $118.6 million or 18.9 percent from fiscal 2010, a decline that was in line with the 18 percent decline in our markets served, according to McGraw-Hill data. We continued to be impacted by difficult U.S. commercial construction market conditions during fiscal 2011, with low employment levels and high vacancy rates for commercial buildings. Volume and pricing decreased across all of our architectural businesses, with our architectural glass business significantly impacted by lower pricing. GlassecViracon contributed $3.7 million of sales to our Architectural segment in fiscal 2011 for the period subsequent to acquisition.

For fiscal 2011, the segment incurred an operating loss of $37.7 million, with an operating margin of negative 7.4 percent compared to operating income of $31.6 million in fiscal 2010, with an operating margin of 5.0 percent. The decrease in operating margin was due to lower pricing in our architectural glass business, lower project margins, the impact of low

 

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capacity utilization from lower volume, expenses related to architectural glass quality issues and costs to implement architectural glass productivity improvements. During fiscal 2011, we incurred costs to resolve architectural glass product quality issues from a vendor-supplied material, as well as other quality issues, which negatively impacted gross profit by approximately $3.4 million, or 0.7 percentage points. GlassecViracon’s contribution to the operating loss was minimal.

Large-Scale Optical Technologies (LSO)

 

(In thousands)

   2012     2011     2010  

Net sales

   $ 78,532      $ 75,426      $ 70,707   

Operating income

     19,605        20,540        16,870   

Operating income as a percent of sales

     25.0     27.2     23.9
  

 

 

   

 

 

   

 

 

 

Fiscal 2012 Compared to Fiscal 2011. LSO revenues increased $3.1 million, or 4.1 percent, in fiscal 2012 to $78.5 million from $75.4 million in fiscal 2011 with an increase in sales to independent framers. The extra week in fiscal 2012 had an impact of 2 percent on current year sales. LSO segment operating income as a percent of sales decreased to 25.0 percent in fiscal 2012 from 27.2 percent in fiscal 2011 and operating income was down $0.9 million. Although we maintained a strong mix of value-added picture framing product sales in fiscal 2012, margins were negatively impacted by spending on sales, marketing and new market development initiatives, including international expansion.

Fiscal 2011 Compared to Fiscal 2010. LSO revenues increased $4.7 million, or 6.7 percent, in fiscal 2011 to $75.4 million from $70.7 million in fiscal 2010 on volume growth of 5.0 percent. LSO segment operating income as a percent of sales improved to 27.2 percent in fiscal 2011 from 23.9 percent in fiscal 2010 with a $3.7 million increase in operating income. Throughout fiscal 2011, we continued to see new and ongoing value-added product customers convert to our best picture framing products. Operating income benefited from increased volume, a stronger mix of value-added products and improved productivity. Fiscal 2010 results included the write-off of certain production equipment which negatively impacted fiscal 2010 margins by 1.2 percentage points.

Consolidated Backlog

At March 3, 2012, our consolidated backlog was $243.9 million, up 2 percent over the $238.4 million reported at February 26, 2011. The backlog of the Architectural segment represented more than 99 percent of consolidated backlog. We expect 76 percent of our total March 3, 2012 backlog to be recognized in fiscal 2013 revenue, compared to 84 percent of the February 26, 2011 backlog that was expected to be produced and shipped in fiscal 2012. 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.

Acquisitions

On November 19, 2010, we acquired 100 percent of the stock of Glassec Vidros de Segurança Ltda., a privately held business, for $20.6 million, net of cash acquired of $1.1 million. Glassec is a leading architectural glass fabricator in Brazil. The business operates under the name GlassecViracon as part of the Company’s architectural glass business. GlassecViracon’s fiscal year ends December 31 and is reported in the consolidated financial statements within our Architectural segment on a two-month lag. The purchase is part of our strategy to increase our architectural glass penetration in international markets. Goodwill recorded as part of the purchase price allocation was $3.3 million and is not tax deductible. Identifiable intangible assets acquired as part of the acquisition were $7.3 million and include customer relationships, trademarks, patents and non-compete agreements with a weighted average useful life of 18 years.

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 these 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.

In the fourth quarter of fiscal 2011, settlement of an outstanding legal claim related to a foreign discontinued operation resulted in a $1.6 million increase in reserves and a pre-tax loss from discontinued operations, which was finalized and paid in March 2011. In the second quarter of fiscal 2011, the favorable resolution of an outstanding tax exposure related to a foreign operation discontinued in 1998 resulted in the release of $4.9 million of uncertain tax positions and non-cash income from discontinued operations. The settlements of these two items represent the last significant remaining items with respect to our international curtainwall business. During fiscal 2010, a favorable resolution of an outstanding lease claim and a reduction in reserves related to the expiration of warranty periods resulted in pre-tax income from discontinued operations of $0.8 million.

 

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Liquidity and Capital Resources

 

(Cash effect, in thousands)

   2012     2011     2010  

Operating Activities

      

Net cash provided by (used in) continuing operating activities

   $ 27,981      $ (7,985   $ 97,234   

Investing Activities

      

Capital expenditures

     (9,650     (9,126     (9,765

Proceeds from sales of property, plant and equipment

     10,320        190        276   

Acquisition of businesses, net of cash acquired

     —          (20,629     —     

Change in restricted investments, net

     12,726        (35,794     —     

Net sales (purchases) of marketable securities

     6,605        50,978        (43,506

Financing Activities

      

(Repayment) borrowing activities, net

     (1,316     11,707        —     

Purchases and retirement of Company common stock

     (2,392     —          —     

Dividends paid

     (9,153     (9,161     (9,112
  

 

 

   

 

 

   

 

 

 

Operating activities. Cash provided by operating activities was $28.0 million in fiscal 2012, while cash used by operating activities was $8.0 million in fiscal 2011 and cash provided by operating activities was $97.2 million in fiscal 2010. Fiscal 2012 operating cash flows were positively impacted by the income reported for the year as compared to the prior-year, and were impacted less by the seasonally high cash outflow from operations in the first half of the year than in fiscal 2011. Fiscal 2011 operating cash flows were negatively impacted by the loss from operations and seasonally high cash outflow from operations in the first half of the year as a result of payments made to fund annual incentive compensation, retirement plan contributions and annual insurance premiums. The cash provided by operating activities in fiscal 2010 was the result of higher earnings.

Non-cash working capital (current assets, excluding cash, short-term marketable securities available for sale and short-term restricted investments, less current liabilities) was $44.4 million at March 3, 2012 or 6.7 percent of fiscal 2012 sales. This compares to $39.4 million at February 26, 2011 or 6.8 percent of fiscal 2011 sales and $15.1 million at February 27, 2010 or 2.2 percent of fiscal 2010 sales. The dollar change compared to fiscal 2011 was due to cash outflows for current and future growth. We expect non-cash working capital as a percent of sales to increase during fiscal 2013 as we anticipate that our Architectural businesses will require more working capital to support increasing business activities.

Investing activities. Investing activities provided net cash of $18.5 million in fiscal 2012, and used cash of $14.4 million in fiscal 2011 and $53.2 million in fiscal 2010. The current year included $10.3 million in proceeds from the sale and leaseback of equipment. Net proceeds of $12.7 million from restricted investments impacted the current year as some of the letters of credit that were being held outside of our credit facility were moved under the facility, releasing the money market funds we had been required to maintain to cover those exposures. The net position of our investments resulted in $6.6 million in net sales proceeds in fiscal 2012, as we sold investments to fund current operating activities. New capital investments were $9.7 million for fiscal 2012, primarily for safety and maintenance projects, and productivity improvements. 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 obligations.

The prior-year period included $20.6 million for the acquisition of the GlassecViracon business. Prior-year investing activities also included net purchases of restricted investments of $35.8 million related to the funds received as a result of the recovery zone facility bonds that were made available for future investment in our architectural glass fabrication facility in Utah. The net position of our investments resulted in $51.0 million in net sales proceeds on marketable securities as we converted those investments to cash equivalents to support higher working capital. New capital investments for fiscal 2011 were $9.1 million, primarily for safety and maintenance projects.

Fiscal 2010 investing activities included $43.5 million of net purchases of investments as we invested in liquid securities at that time to be used during the market downturn and for strategic investment. Fiscal 2010 capital expenditures were $9.8 million, focused on safety and maintenance projects, as well as quick payback productivity improvements.

We anticipate that our fiscal 2013 capital expenditures will be approximately $25 million for investments in new products, capacity, productivity improvements and international, 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.

 

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At March 3, 2012, we had two sale and leaseback agreements, one for a building that provides an option to purchase the building at projected future fair market value upon expiration of the lease in 2014 and one for equipment that provides an option to purchase the equipment at projected future fair market value upon expiration of the lease in 2018. The leases are classified as operating leases. We had a deferred gain of $5.9 million under the sale and leaseback transactions, which is included in the balance sheet as accrued expenses and other long-term liabilities. The average annual lease payments over the life of the remaining leases are $2.0 million.

Financing activities. Total outstanding borrowings at March 3, 2012 were $21.0 million, compared to $22.4 million at February 26, 2011 and $8.4 million at February 27, 2010. Long-term debt consists of $12.0 million of recovery zone facility bonds, $8.4 million of industrial development bonds and other debt incurred by GlassecViracon. Our debt-to-total-capital ratio was 6.1 percent at March 3, 2012, compared to 6.4 percent at February 26, 2011.

We maintain an $80.0 million revolving credit facility, which expires in January 2014, with borrowings secured by a pledge of certain assets of the Company. No borrowings were outstanding as of March 3, 2012 or February 26, 2011. 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 March 3, 2012 was $274.2 million, whereas our net worth as defined in the credit facility was $321.2 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 0.00 at March 3, 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 March 3, 2012, we were in compliance with the financial covenants of the credit facility.

We assumed debt of $2.3 million as part of the Glassec acquisition, of which $0.6 million was outstanding at March 3, 2012 and $0.1 million of which was recorded as current maturities of long-term debt. The acquired debt matures in fiscal years 2013 through 2021 and has a weighted average interest rate of 8.6 percent.

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 shares in October 2008. We purchased 275,000 shares under the program during fiscal 2012. There were no share repurchases in fiscal 2011. 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.

In addition to the shares repurchased under the repurchase plan, we also reacquired $1.3 million and $1.7 million of Company stock from employees in order to satisfy stock-for-stock option exercises or withholding tax obligations related to stock-based compensation, pursuant to terms of Board and shareholder-approved compensation plans during fiscal 2012 and 2011, respectively.

Other financing activities. The following summarizes significant contractual obligations that impact our liquidity:

 

     Future Cash Payments Due by Period  

(In thousands)

   2013      2014      2015      2016      2017      Thereafter      Total  

Industrial revenue bonds

   $ —         $ —         $ —         $ —         $ —         $ 8,400       $ 8,400   

Recovery zone facility bonds

                                             12,000         12,000   

Other debt obligations

     108         62         62         62         62         268         624   

Operating leases (undiscounted)

     6,737         5,650         4,848         4,735         3,041         3,309         28,320   

Purchase obligations

     46,502         —           —           —           —           —           46,502   

Other obligations

     1,225         —           —           —           —           —           1,225   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash obligations

   $ 54,572       $ 5,712       $ 4,910       $ 4,797       $ 3,103       $ 23,977       $ 97,071   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

As of March 3, 2012, we have purchase obligations totaling $46.5 million, the majority of which are for raw material commitments.

 

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The other obligations in the table above relate to non-compete and consulting agreements with current and former employees.

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 March 3, 2012, we had $8.9 million and $2.0 million of unrecognized tax benefits and environmental liabilities, respectively. We expect $1.8 million of the unrecognized tax benefits to lapse in fiscal 2013. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits and environmental liabilities will ultimately be settled.

At March 3, 2012, we had ongoing letters of credit related to construction contracts and certain industrial development bonds. The Company’s $8.4 million of industrial revenue bonds are supported by $8.7 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 March 3, 2012:

 

     Amount of Commitment Expiration Per Period  

(In thousands)

   2013      2014      2015      2016      2017      Thereafter      Total  

Standby letters of credit

   $  20,982       $  2,000       $  —       $  —       $  —       $  2,500       $  25,482   

In addition to the above standby letters of credit, which were predominantly issued for our industrial development bonds, we are required, in the ordinary course of business, to obtain surety or performance bonds that commit payments to our customers for any non-performance by us. At March 3, 2012, $100.5 million of our backlog was bonded by performance bonds with a face value of $309.9 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.

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 had total cash and short-term marketable securities available for sale of $65.7 million at March 3, 2012 and $66.8 million of available capacity under our revolving credit facility. 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.

Off-balance sheet arrangements. With the exception of operating leases, we had no off-balance sheet financing arrangements at March 3, 2012 or February 26, 2011.

Outlook

The following statements are based on current expectations for fiscal 2013. 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 $0.40 to $0.50.

 

   

Capital expenditures are projected to be approximately $25 million.

Recently Issued Accounting Pronouncements

See New Accounting Standards set forth in Note 1 of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future, which is incorporated by reference herein.

Critical Accounting Policies

Management has evaluated the accounting policies and estimates used in the preparation of the accompanying financial statements and related notes, and believes those policies and estimates to be reasonable and appropriate. We believe that the most critical accounting policies and estimates applied in the presentation of our financial statements relate to accounting for future events. Future events and their effects cannot be determined with absolute certainty. Therefore, management is required to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. We have identified the following accounting policies as critical to our business and in the understanding of our results of operations and financial position:

 

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Revenue recognition – Our standard product sales terms are “free on board” (FOB) shipping point or FOB destination, and revenue is recognized when title has transferred. However, our installation business records revenue on a percentage-of-completion basis as it relates to revenues earned from construction contracts. During fiscal 2012, approximately 23 percent of our consolidated sales and 26 percent of our Architectural segment sales were recorded on a percentage-of-completion basis. Under this methodology, we compare the total costs incurred to date to the total estimated costs for the contract, and record that proportion of the total contract revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in contract revenue only when customers have approved them. A significant number of estimates are used in these computations.

Goodwill impairment – To determine if there has been any impairment in accordance with accounting standards, we evaluate the goodwill on our balance sheet annually or more frequently if impairment indicators exist through a two-step process. In step one, we value each of our reporting units and compare these values to the reporting units’ net book value, including goodwill. If the fair value is less than the net book value, we perform step two, which determines the amount of goodwill to impair. We were not required to perform step two for fiscal 2012.

Although we consider public information for transactions made on similar businesses to ours, since there were no market comparables identified, we base our determination of fair value using a discounted cash flow methodology that involves significant judgments based upon projections of future performance. In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. These assumptions are determined over a five-year, long-term planning period. The five-year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond the five-year period are projected to grow at a nominal perpetual growth rate for all reporting units. The discount rate calculations are determined by assuming a company beta, market premium risk, size premium, the cost of debt and debt-to-capital ratio of a market participant. The amount by which the estimated fair value of the reporting units exceeded their book value utilizing the discounted cash flow methodology was more than 25 percent at March 3, 2012.

A significant change in the factors noted above could cause us to reduce the estimated fair value of some or all of our reporting units and recognize a corresponding impairment of our goodwill in connection with a future goodwill impairment test. There can be no assurances that these forecasts will be attained. Adverse changes in strategy, market conditions or assumed market capitalization may result in an impairment of goodwill.

Reserves for disputes and claims regarding product liability and warranties – From time to time, we are subject to claims associated with our products and services, principally as a result of disputes with our customers involving the performance or aesthetics of our Architectural products. The time period from when a claim is asserted to when it is resolved, either by dismissal, negotiation, settlement or litigation, can be several years. While we maintain product liability insurance, the insurance policies include significant self-retention of risk in the form of policy deductibles. In addition, certain claims could be determined to be uninsured. We reserve based on our estimates of known claims, as well as on anticipated claims for possible product warranty and rework costs based on historical product liability claims as a ratio of sales.

Self-insurance reserves – We obtain substantial amounts of commercial insurance for potential losses for general liability, workers’ compensation, automobile liability, employment practices, architect’s and engineer’s errors and omissions risk, and other miscellaneous coverages. However, an amount of risk is retained on a self-insured basis through a wholly-owned insurance subsidiary. Reserve requirements are established based on actuarial projections of ultimate losses.

Income taxes – We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.

 

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As part of our ongoing financial reporting process, a collaborative effort is undertaken involving our management with responsibility for financial reporting, product and project management, quality, legal, tax and outside advisors such as consultants, engineers, lawyers and actuaries. The results of this effort provide management with the necessary information on which to base its judgments on these future events and develop the estimates used to prepare the financial statements. We believe that the amounts recorded in the accompanying financial statements related to these events are based on the best estimates and judgments of Apogee management. However, outcomes could differ from our estimates and could materially adversely affect our future operating results, financial position and cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolio consists of municipal bonds. At March 3, 2012, we had total investments of $19.6 million, which are considered available-for-sale securities. Although these investments are subject to the credit risk of the issuer and/or letter of credit issuer, we manage our investment portfolio to limit our exposure to any one issuer.

We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. Accordingly, a rise in interest rates could negatively affect the fair value of our municipal bond portfolio. To manage our direct risk from changes in market interest rates, management actively monitors the interest-sensitive components of our balance sheet, primarily debt obligations and fixed income securities, as well as market interest rates, to minimize the impact of changes in interest rates on net earnings and cash flow.

The primary measure of interest rate risk is the simulation of net income under different interest rate environments. The approach used to quantify interest rate risk is a sensitivity analysis. This approach calculates the impact on net earnings, relative to a base case scenario, of rates increasing or decreasing gradually over the next 12 months by 200 basis points. This change in interest rates affecting our financial instruments at March 3, 2012 would result in an approximately $0.4 million impact to net earnings. The Company’s investments exceeded its debt at March 3, 2012, so as interest rates increase, net earnings increase; as interest rates decrease, net earnings decrease.

In addition to the market risk related to interest rate changes, the commercial construction markets in which our businesses operate are highly affected by changes in interest rates and, therefore, significant interest rate fluctuations could materially impact our operating results.

Through our acquisition of Glassec in fiscal 2011, we conduct business in a location outside of the United States, and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We generally do not use derivative financial instruments to manage these risks. The functional currency of GlassecViracon is the local currency in the country of domicile, the Brazilian real. We manage these operating activities at the local level and revenues, costs, assets and liabilities are generally denominated in local currencies, thereby mitigating the risk associated with changes in foreign exchange. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between Brazilian real and the U.S. dollar.

Our domestic businesses generally sell within the United States, with sales made outside of the United States generally denominated in U.S. dollars.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control over Financial Reporting

Management of Apogee Enterprises, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 3, 2012, using criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management believes that, as of March 3, 2012, the Company’s internal control over financial reporting was effective based on those criteria.

The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of March 3, 2012. That report is set forth immediately following the report of Deloitte & Touche LLP on the consolidated financial statements included herein.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Apogee Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of Apogee Enterprises, Inc. and subsidiaries (the “Company”) as of March 3, 2012 and February 26, 2011, and the related consolidated results of operations, statements of cash flows, and statements of shareholders’ equity for each of the three years in the period ended March 3, 2012. Our audits also included the financial statement schedule listed in the Table of Contents at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Apogee Enterprises, Inc. and subsidiaries at March 3, 2012 and February 26, 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 3, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 3, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 30, 2012, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

April 30, 2012

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Apogee Enterprises, Inc.:

We have audited the internal control over financial reporting of Apogee Enterprises, Inc. and subsidiaries (the “Company”) as of March 3, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 3, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Table of Contents at Item 15 as of and for the year ended March 3, 2012, of the Company, and our report dated April 30, 2012, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

April 30, 2012

 

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CONSOLIDATED BALANCE SHEETS

 

     March 3,     February 26,  

(In thousands, except per share data)

   2012     2011  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 54,027      $ 24,302   

Short-term marketable securities available for sale

     11,664        11,163   

Restricted short-term investments

     13,603        25,086   

Receivables, net of allowance for doubtful accounts

     108,424        100,967   

Inventories

     34,045        32,608   

Refundable income taxes

     —          11,567   

Deferred tax assets

     4,294        5,180   

Other current assets

     3,382        3,050   
  

 

 

   

 

 

 

Total current assets

     229,439        213,923   
  

 

 

   

 

 

 

Property, plant and equipment, net

     159,547        179,201   

Marketable securities available for sale

     7,936        15,709   

Restricted investments

     9,533        10,717   

Goodwill

     61,617        62,004   

Intangible assets

     16,092        19,655   

Other assets

     8,940        9,889   
  

 

 

   

 

 

 

Total assets

   $ 493,104      $ 511,098   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 34,025      $ 34,943   

Accrued payroll and related benefits

     23,699        20,140   

Accrued self-insurance reserves

     4,668        6,330   

Other accrued expenses

     19,017        24,117   

Current liabilities of discontinued operations

     799        4,023   

Billings in excess of costs and earnings on uncompleted contracts

     22,550        23,406   

Current portion long-term debt

     108        987   

Accrued income taxes

     905        —     
  

 

 

   

 

 

 

Total current liabilities

     105,771        113,946   
  

 

 

   

 

 

 

Long-term debt

     20,916        21,442   

Unrecognized tax benefits

     8,918        13,848   

Long-term self-insurance reserves

     9,605        9,270   

Deferred tax liabilities

     2,247        4,863   

Other long-term liabilities

     23,929        19,410   

Liabilities of discontinued operations

     520        642   

Commitments and contingent liabilities (Note 17)

    

Shareholders’ equity

    

Common stock of $0.33-1/3 par value; authorized 50,000,000 shares; issued and outstanding, 28,062,049 and 28,104,627, respectively

     9,354        9,368   

Additional paid-in capital

     113,046        108,991   

Retained earnings

     203,558        210,203   

Common stock held in trust

     (745     (751

Deferred compensation obligations

     745        751   

Accumulated other comprehensive loss

     (4,760     (885
  

 

 

   

 

 

 

Total shareholders’ equity

     321,198        327,677   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 493,104      $ 511,098   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

     Year-Ended     Year-Ended     Year-Ended  

(In thousands, except per share data)

   Mar. 3, 2012
(53 weeks)
    Feb. 26, 2011
(52 weeks)
    Feb. 27, 2010
(52 weeks)
 

Net sales

   $ 662,463      $ 582,777      $ 696,703   

Cost of sales

     545,343        499,657        534,608   
  

 

 

   

 

 

   

 

 

 

Gross profit

     117,120        83,120        162,095   

Selling, general and administrative expenses

     113,304        104,092        116,665   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     3,816        (20,972     45,430   

Interest income

     1,066        912        853   

Interest expense

     1,427        719        606   

Other income (expense), net

     193        (54     285   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     3,648        (20,833     45,962   

Income tax (benefit) expense

     (1,049     (6,676     14,745   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     4,697        (14,157     31,217   

(Loss) earnings from discontinued operations, net of income taxes

     (52     3,825        525   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 4,645      $ (10,332   $ 31,742   
  

 

 

   

 

 

   

 

 

 

Earnings per share – basic

      

Earnings (loss) from continuing operations

   $ 0.17      $ (0.51   $ 1.14   

Earnings from discontinued operations

     —          0.14        0.02   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 0.17      $ (0.37   $ 1.16   
  

 

 

   

 

 

   

 

 

 

Earnings per share – diluted

      

Earnings (loss) from continuing operations

   $ 0.17      $ (0.51   $ 1.13   

Earnings from discontinued operations

     —          0.14        0.02   
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 0.17      $ (0.37   $ 1.15   
  

 

 

   

 

 

   

 

 

 

Weighted average basic shares outstanding

     27,741        27,637        27,381   

Weighted average diluted shares outstanding

     28,048        27,637        27,716   
  

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.326      $ 0.326      $ 0.326   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year-Ended     Year-Ended     Year-Ended  

(In thousands)

   Mar. 3, 2012
(53 weeks)
    Feb. 26, 2011
(52 weeks)
    Feb. 27, 2010
(52 weeks)
 

Operating Activities

      

Net earnings (loss)

   $ 4,645      $ (10,332   $ 31,742   

Adjustments to reconcile net earnings to net cash provided by

operating activities:

      

Net loss (earnings) from discontinued operations

     52        (3,825     (525

Depreciation and amortization

     27,246        28,218        29,601   

Stock-based compensation

     4,412        5,215        6,055   

Deferred income taxes

     (1,115     (207     763   

Excess tax benefits from stock-based compensation

     (92     —          (162

(Gain) loss on disposal of assets

     (916     (246     770   

Other, net

     516        280        92   

Changes in operating assets and liabilities:

      

Receivables

     (7,931     7,580        44,209   

Inventories

     (1,635     (320     8,953   

Accounts payable and accrued expenses

     (3,905     (10,033     (12,844

Billings in excess of costs and earnings on uncompleted contracts

     (856     (15,330     (16,109

Refundable and accrued income taxes

     7,887        (9,677     3,980   

Other, net

     (327     692        709   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operating activities

     27,981        (7,985     97,234   
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Capital expenditures

     (9,650     (9,126     (9,765

Proceeds from sales of property, plant and equipment

     10,320        190        276   

Acquisition of intangibles

     (68     (10     (250

Acquisition of businesses, net of cash acquired

     —          (20,629     —     

Purchases of restricted investments

     (12,628     (37,087     —     

Sales/maturities of restricted investments

     25,354        1,293        —     

Purchases of marketable securities

     (28,966     (29,030     (71,214

Sales/maturities of marketable securities

     35,571        80,008        27,708   

Investments in corporate-owned life insurance policies

     (1,435     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing investing activities

     18,498        (14,391     (53,245
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Proceeds from issuance of debt

     121        12,000        —     

Payments on debt

     (1,437     (293     —     

Payments of debt issue costs

     (159     (1,039     (6

Shares withheld for taxes, net of stock issued to employees

     (188     (1,298     (876

Excess tax benefits from stock-based compensation

     92        —          162   

Repurchase and retirement of common stock

     (2,392     —          —     

Dividends paid

     (9,153     (9,161     (9,112
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by continuing financing activities

     (13,116     209        (9,832
  

 

 

   

 

 

   

 

 

 

Cash Flows of Discontinued Operations

      

Net cash used in operating activities

     (3,427     (466     (222
  

 

 

   

 

 

   

 

 

 

Net cash used in discontinued operations

     (3,427     (466     (222
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     29,936        (22,633     33,935   

Effect of exchange rates on cash

     (211     6        —     

Cash and cash equivalents at beginning of year

     24,302        46,929        12,994   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 54,027      $ 24,302      $ 46,929   
  

 

 

   

 

 

   

 

 

 

Noncash Activity

      

Capital expenditures in accounts payable

   $ 546      $ 354      $ 311   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

(In thousands, except per share data)

   Common
Shares
Outstanding
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Common
Stock Held in
Trust
    Deferred
Compensation
Obligation
    Accumulated
Other
Comprehensive
(Loss) Income
    Comprehensive
Earnings (Loss)
 

Bal. at Feb. 28, 2009

     27,781      $ 9,260      $ 97,852      $ 209,537      $ (1,046   $ 1,046      $ (25  

Net earnings

     —          —          —          31,742        —          —          —        $ 31,742   

Unrealized gain on marketable securities, net of $129 tax expense

     —          —          —          —          —          —          240        240   

Unrealized loss on pension obligation, net of $573 tax benefit

     —          —          —          —          —          —          (1,005     (1,005

Issuance of stock, net of cancellations

     230        77        170        7        246        (246     —          —     

Stock-based comp.

     —          —          6,055        —          —          —          —          —     

Tax deficit associated with stock plans

     —          —          (78     —          —          —          —          —     

Exercise of stock options

     86        29        694        —          —          —          —          —     

Other share retirements

     (138     (46     (489     (1,318     —          —          —          —     

Cash dividends ($0.326 per share)

     —          —          —          (9,112     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Bal. at Feb. 27, 2010

     27,959      $ 9,320      $ 104,204      $ 230,856      $ (800   $ 800      $ (790   $ 30,977   
                

 

 

 

Net loss

     —          —          —          (10,332     —          —          —        $ (10,332

Unrealized loss marketable securities, net of $88 tax benefit

     —          —          —          —          —          —          (165     (165

Unrealized loss on pension obligation, net of $288 tax benefit

     —          —          —          —          —          —          (506     (506

Foreign currency translation adjustments

     —          —          —          —          —          —          576        576   

Issuance of stock, net of cancellations

     246        82        40        55        49        (49     —          —     

Stock-based comp.

     —          —          5,215        —          —          —          —          —     

Tax deficit associated with stock plans

     —          —          (242     —          —          —          —          —     

Exercise of stock options

     28        9        241        —          —          —          —          —     

Other share retirements

     (128     (43     (467     (1,215     —          —          —          —     

Cash dividends ($0.326 per share)

     —          —          —          (9,161     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Bal. at Feb. 26, 2011

     28,105      $ 9,368      $ 108,991      $ 210,203      $ (751   $ 751      $ (885   $ (10,427
                

 

 

 

Net earnings

     —          —          —          4,645        —          —          —        $ 4,645   

Unrealized loss on marketable securities, net of $8 tax benefit

     —          —          —          —          —          —          (15     (15

Unrealized loss on pension obligation, net of $759 tax benefit

     —          —          —          —          —          —          (1,331     (1,331

Foreign currency translation adjustments

     —          —          —          —          —          —          (2,529     (2,529

Issuance of stock, net of cancellations

     249        83        35        7        6        (6     —          —     

Stock-based comp.

     —          —          4,412        —          —          —          —          —     

Tax benefit associated with stock plans

     —          —          72        —          —          —          —          —     

Exercise of stock options

     89        30        1,027        —          —          —          —          —     

Share repurchases

     (275     (92     (1,077     (1,223     —          —          —          —     

Other share retirements

     (106     (35     (414     (921     —          —          —          —     

Cash dividends ($0.326 per share)

     —          —          —          (9,153     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Bal. at Mar. 3, 2012

     28,062      $ 9,354      $ 113,046      $ 203,558      $ (745   $ 745      $ (4,760   $ 770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 Summary of Significant Accounting Policies and Related Data

Basis of Consolidation. The accompanying consolidated financial statements include the accounts of Apogee Enterprises, Inc., a Minnesota corporation, and all majority-owned subsidiaries (the Company). Transactions between Apogee and its subsidiaries have been eliminated in consolidation.

The Company acquired 100 percent of the stock of Glassec Vidros de Segurança Ltda. (Glassec), a privately held business, on November 19, 2010. Glassec’s fiscal year ends December 31 and its results are incorporated into the consolidated financial statements 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 year ended March 3, 2012. Refer to Note 6 for further information regarding the acquisition of Glassec.

Fiscal Year. Apogee’s fiscal year ends on the Saturday closest to the last day of February. Fiscal 2012 consisted of 53 weeks while fiscal 2011 and 2010 each consisted of 52 weeks.

Financial Instruments. Unless otherwise noted, the carrying amount of the Company’s financial instruments approximates fair value.

Cash and Cash Equivalents. Investments with an original maturity of three months or less are included in cash and cash equivalents. Cash equivalents are stated at cost, which approximates fair value, and consist primarily of money market funds.

Investments. The Company has marketable securities consisting of high-quality municipal bonds. The securities are classified as “available for sale” and are carried at fair value based on prices from recent trades of similar securities. The Company tests for other than temporary losses on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If a decline in the fair value of a security is deemed by management to be other-than-temporary, the investment is written down to fair value, and the amount of the write-down is included in net earnings.

The Company has investments in money market funds that are considered restricted investments. The short-term restricted investments were required to be made available to cover exposures for letters of credit issued outside of the revolving credit facility and credit-card programs. The long-term restricted investments are restricted for future investment in the Company’s architectural glass fabrication facility in Utah. The restricted investments are held at fair value based on quoted market prices.

The Company also has investments in mutual funds 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

Inventories. Inventories, which consist primarily of purchased glass and aluminum, are valued at the lower of cost or market. Approximately 46 percent of the inventories are valued by use of the last-in, first-out (LIFO) method, which does not exceed market. If the first-in, first-out method had been used, inventories would have been $5.5 million and $6.6 million higher than reported at March 3, 2012, and February 26, 2011, respectively. During fiscal 2012, 2011 and 2010, inventory quantities were reduced, resulting in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of current purchases. The effect of inventory liquidations was to increase net income by approximately $0.1 million in fiscal 2012, $0.3 million in fiscal 2011 and $1.1 million in fiscal 2010.

Property, Plant and Equipment. Property, plant and equipment are recorded at cost. Significant improvements and renewals that extend the useful life of the asset are capitalized. Repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income as a reduction to or increase in selling, general and administrative expenses. Depreciation is computed on a straight-line basis, based on the following estimated useful lives:

 

     Years  

Buildings and improvements

     15 to 25   

Machinery and equipment

     3 to 15   

Office equipment and furniture

     3 to 10   
  

 

 

 

 

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Table of Contents

Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost over the net tangible and identified intangible assets of acquired businesses. The Company accounts for goodwill and intangible assets in accordance with applicable accounting standards, and has determined that it does not have any intangible assets with indefinite useful lives other than goodwill. Goodwill and other intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or more frequently if events warrant. Intangible assets with discrete useful lives are amortized over their estimated useful lives.

The Company tests goodwill of each of its reporting units for impairment annually in connection with its fourth quarter planning process or more frequently if impairment indicators exist. During the fourth quarter of fiscal 2012, the Company completed its annual impairment test using discounted cash flow methodologies for valuing its reporting units as no market comparables were identified. There have not been any material changes in the impairment loss assessment methodology made during the past three fiscal years. The estimates of fair value for the reporting units were found to be in excess of their carrying value, and, therefore, no impairment charge was recorded. The amount by which the estimated fair value of the reporting units exceeded their book value utilizing the discounted cash flow methodology was more than 25 percent at March 3, 2012.

In addition, the Company reassessed the useful lives of its identifiable intangible assets and determined that the remaining lives were appropriate.

Long-Lived Assets. The carrying value of long-lived assets, such as property, plant and equipment, and intangible assets is reviewed when impairment indicators exist as required under generally accepted accounting principles. We consider many factors, including short- and long-term projections of future performance associated with these assets. If this review indicates that the long-lived assets will not be recoverable, the carrying value of such assets will be reduced to estimated fair value.

Self-Insurance. The Company obtains commercial insurance for potential losses for general liability, workers’ compensation, automobile liability, employment practices, architect’s and engineer’s errors and omissions risk, and other miscellaneous coverages. However, a reasonable amount of risk is retained on a self-insured basis primarily through a wholly-owned insurance subsidiary, Prism Assurance, Ltd. (Prism). Reserve requirements are established based on actuarial projections of ultimate losses. Losses estimated to be paid within 12 months are classified as accrued self-insurance reserves, while losses expected to be payable in later periods are included in long-term self-insurance liabilities. Additionally, we maintain a self-insurance reserve for our health insurance programs maintained for the benefit of our eligible employees. We estimate a reserve based on historical levels of amounts incurred but not reported, which is included in accrued self-insurance reserves.

Environmental Liability. In accordance with accounting standards, we recognize environmental clean-up liabilities on an undiscounted basis when loss is probable and can be reasonably estimated. The cost of the clean-up is estimated by engineering, financial and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required, and the likelihood that, where applicable, other potentially responsible parties will not be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. As part of the acquisition of Tubelite Inc. (Tubelite) in fiscal 2008, the Company acquired property which contains historical environmental conditions that the Company intends to remediate. At March 3, 2012, the reserve was $2.0 million. The reserve for environmental liabilities is included in other accrued expenses and other long-term liabilities in the consolidated balance sheets.

Foreign Currency. For foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the period-end exchange rates and income statement accounts are translated using the average exchange rates prevailing during the year. Translation adjustments are reflected in accumulated other comprehensive loss in the consolidated balance sheets.

 

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Table of Contents

Revenue Recognition. Generally, our sales terms are “free on board” (FOB) shipping point or FOB destination for our product-type sales, and revenue is recognized when title has transferred. Revenue excludes sales taxes as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. The Company recognizes revenue from construction contracts on a percentage-of-completion basis, measured by the percentage of costs incurred to date to estimated total costs for each contract, and records that proportion of the total contract revenue in that period. Contract costs include materials, labor and other direct costs related to contract performance. Provisions are established for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in contract revenue only when they have been approved by customers. Approximately 23 percent, 26 percent and 30 percent of our consolidated net sales in fiscal 2012, 2011 and 2010, respectively, were recorded on a percentage-of-completion basis.

Pricing and Sales Incentives. The Company records estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to customers are recorded as a reduction to net sales unless (1) the Company receives an identifiable benefit for goods or services in exchange for the consideration and (2) the Company can reasonably estimate the fair value of the benefit received.

Shipping and Handling. All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and are reported as revenues. The costs incurred by the Company for shipping and handling are reported as cost of sales.

Research and Development. Research and development expenses are charged to operations as incurred and were $7.2 million, $6.3 million and $6.8 million for fiscal 2012, 2011 and 2010, respectively. Of these amounts, $0.8 million, $1.8 million and $3.2 million, respectively, were focused primarily upon design of custom window and curtainwall systems in accordance with customer specifications and are included in cost of sales.

Advertising. Advertising expenses are charged to operations as incurred and were $1.4 million, $1.0 million and $0.9 million in fiscal 2012, 2011 and 2010, respectively. They are included in selling, general and administrative expenses in the consolidated results of operations.

Stock-Based Compensation. The Company accounts for share-based compensation by estimating the fair value of each share-based payment award on the date of grant and, in the case of performance-based awards, updating those values throughout the year and life of the award. For these performance-based awards, the future performance of the Company is estimated as an input into the determination of expense. See Note 11 for additional information regarding share-based compensation.

Income Taxes. The Company accounts for income taxes as prescribed by applicable accounting standards, which requires use of the asset and liability method. This method recognizes deferred tax assets and liabilities based upon the future tax consequences of temporary differences between financial and tax reporting. See Note 12 for additional information regarding income taxes.

Accounting Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Amounts subject to significant estimates and assumptions include, but are not limited to, assessment of recoverability of long-lived assets, including goodwill, insurance reserves, warranty reserves, reserves related to discontinued operations, net sales recognition for construction contracts, income tax provisions and liabilities, and the status of outstanding disputes and claims. Actual results could differ from those estimates.

New Accounting Standards. In January 2010, the Financial Accounting Standards Board (FASB) amended U.S. GAAP with respect to disclosures about fair value measurements. The amendments add new requirements for disclosures about transfers into and out of Levels 1 and 2, and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The amendments were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The adoption of the additional disclosures required for Level 3 fair value measurements in the first quarter of fiscal 2012 had no impact on the Company’s fair value disclosures (see Note 5).

 

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Table of Contents

In June 2011, the 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 is effective for fiscal years and interim periods beginning after December 15, 2011, Apogee’s fiscal year 2013. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. The adoption of the new guidance in the first quarter of fiscal 2013 will not have an impact on Apogee’s consolidated financial position, results of operations or cash flows.

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 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, Apogee’s fiscal year 2013, with early adoption permitted. The adoption of this new standard in the first quarter of fiscal 2013 will 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 fiscal 2012 have had or are expected to have a material impact on the consolidated financial statements.

Subsequent Events. In connection with preparing the audited consolidated financial statements for the year ended March 3, 2012, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing. Subsequent to year-end, $10.0 million of industrial development bonds were issued and made available for 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.

2 Working Capital

Receivables

 

(In thousands)

   2012     2011  

Trade accounts

   $ 78,234      $ 69,976   

Construction contracts

     19,693        21,723   

Contract retainage

     11,348        9,550   

Other receivables

     2,258        2,452   
  

 

 

   

 

 

 

Total receivables

     111,533        103,701   

Less allowance for doubtful accounts

     (3,109     (2,734
  

 

 

   

 

 

 

Net receivables

   $ 108,424      $ 100,967   
  

 

 

   

 

 

 

 

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Table of Contents

Inventories

 

(In thousands)

   2012      2011  

Raw materials

   $ 12,772       $ 12,244   

Work-in-process

     7,956         7,807   

Finished goods

     10,386         11,182   

Costs and earnings in excess of billings on uncompleted contracts

     2,931         1,375   
  

 

 

    

 

 

 

Total inventories

   $ 34,045       $ 32,608   
  

 

 

    

 

 

 

Other Accrued Expenses

 

(In thousands)

   2012      2011  

Retirement savings plan

   $ 7       $ 4,494   

Interest

     74         59   

Volume and pricing discounts

     1,004         856   

Deferred gain on sale leaseback transactions – current portion

     1,125         111   

Unearned revenue

     1,984         1,681   

Taxes, other than income taxes

     3,362         3,488   

Warranties

     7,210         9,887   

Other

     4,251         3,541   
  

 

 

    

 

 

 

Total other accrued expenses

   $ 19,017       $ 24,117   
  

 

 

    

 

 

 

3 Property, Plant and Equipment

 

(In thousands)

   2012     2011  

Land

   $ 6,954      $ 7,100   

Buildings and improvements

     129,282        131,929   

Machinery and equipment

     215,892        232,718   

Office equipment and furniture

     43,550        42,032   

Construction in progress

     7,308        5,022   
  

 

 

   

 

 

 

Total property, plant and equipment

     402,986        418,801   

Less accumulated depreciation

     (243,439     (239,600
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 159,547      $ 179,201   
  

 

 

   

 

 

 

Depreciation expense was $24.6 million, $25.9 million and $26.8 million in fiscal 2012, 2011 and 2010, respectively.

4 Marketable Securities

The Company has investments in municipal bonds of $19.6 million; $11.7 million is current and $7.9 million is non-current. The Company’s wholly owned insurance subsidiary, Prism, holds $7.9 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 and marketable securities available for sale in the consolidated balance sheet.

The amortized cost, gross unrealized gains and losses, and estimated fair values of investments available for sale at March 3, 2012 and February 26, 2011 are as follows:

 

            Gross      Gross     Estimated  
     Amortized      Unrealized      Unrealized     Fair  

(In thousands)

   Cost      Gains      Losses     Value  

March 3, 2012

          

Municipal bonds

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

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
            Gross      Gross     Estimated  
     Amortized      Unrealized      Unrealized     Fair  

(In thousands)

   Cost      Gains      Losses     Value  

February 26, 2011

          

Variable rate demand notes

   $ 7,300       $ —         $ —        $ 7,300   

Municipal bonds

     19,619         313         (360     19,572   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments

   $ 26,919       $ 313       $ (360   $ 26,872   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 March 3, 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

   $ 3,753       $ (5   $ 996       $ (253   $ 4,749       $ (258
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 3,753       $ (5   $ 996       $ (253   $ 4,749       $ (258
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost and estimated fair values of investments at March 3, 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

   $ 11,647       $ 11,664   

Due after one year through five years

     2,153         2,206   

Due after five years through 10 years

     2,711         2,793   

Due after 10 years through 15 years

     1,592         1,603   

Due beyond 15 years

     1,567         1,334   
  

 

 

    

 

 

 

Total

   $ 19,670       $ 19,600   
  

 

 

    

 

 

 

Gross realized gains of $0.8 million, $0.4 million and $0.3 million in fiscal 2012, 2011 and 2010, respectively, and gross realized losses of $0.1 million in each of fiscal 2011 and 2010 were recognized and are included in other income (expense), net in the accompanying consolidated results of operations. There were immaterial amounts of gross realized losses in fiscal 2012.

5 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 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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Table of Contents

Financial assets and liabilities measured at fair value as of March 3, 2012, and February 26, 2011, are summarized below:

 

(In thousands)

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

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In thousands)

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

February 26, 2011

           

Cash equivalents

           

Money market funds

   $ 13,787       $ —         $ —         $ 13,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

     13,787         —           —           13,787   

Short-term marketable securities available for sale

           

Variable rate demand notes

   $ —         $ 7,300       $ —         $ 7,300   

Municipal bonds

     —           3,863         —           3,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities available for sale

     —           11,163         —           11,163   

Marketable securities available for sale

           

Municipal bonds

   $ —         $ 15,709       $ —         $ 15,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities available for sale

     —           15,709         —           15,709   

Restricted investments

           

Money market funds

   $ 35,803       $ —         $ —         $ 35,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted investments

     35,803         —           —           35,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets and liabilities at fair value

   $ 49,590       $ 26,872       $ —         $ 76,462   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 investments

The Company has short-term marketable securities available for sale of $11.7 million as of March 3, 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.

 

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Marketable securities available for sale

The Company has $7.9 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.

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 exposures for letters of credit outside of the revolving credit facility and credit-card programs. The Company has $9.5 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 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 $1.2 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.

6 Acquisitions

On November 19, 2010, the Company acquired 100 percent of the stock of Glassec Vidros de Segurança Ltda., a privately held business, for $20.6 million, net of cash acquired of $1.1 million. Glassec is a leading architectural glass fabricator in Brazil. The business operates under the name GlassecViracon as part of the Company’s architectural glass business. GlassecViracon’s fiscal year ends December 31 and is reported in the consolidated financial statements within the Architectural segment on a two-month lag.

In the third quarter of fiscal 2012, the Company recorded a measurement period adjustment of $4.2 million, reducing the fair values of goodwill and long-term deferred tax liabilities assumed in the acquisition as of the acquisition date. The Company has retrospectively adjusted the previously reported acquisition-date fair values of goodwill and long-term deferred tax liabilities to reflect these amounts.

The assets and liabilities of Glassec were recorded in the consolidated balance sheet within the Architectural segment as of the acquisition date, at their respective fair values. The purchase price allocation, as adjusted for the item described above, was based on the estimated fair value of assets acquired and liabilities assumed and were allocated as follows:

 

(In thousands)

   Nov. 19,
2010
 

Current assets

   $ 6,276   

Property, plant and equipment

     10,203   

Deferred tax assets(1)

     112   

Intangible assets

     7,265   

Goodwill(1)

     3,284   

Other long-term assets

     9,612   
  

 

 

 

Total assets

     36,752   

Current liabilities

   $ 5,605   

Long-term debt

     1,113   

Unrecognized tax benefits

     2,393   

Other long-term liabilities

     7,012   
  

 

 

 

Total liabilities

     16,123   
  

 

 

 

Net assets acquired

   $ 20,629   
  

 

 

 

 

(1) Includes a retrospective adjustment of $4.2 million described above.

Identifiable intangible assets are definite-lived assets. These assets include customer relationships, trademarks, patents and non-compete agreements, and have a weighted average amortization period of 18 years which matches the weighted average useful life of the assets. Goodwill recorded as part of the purchase price allocation is not tax deductible. The sellers have agreed to indemnify the Company for certain contingent liabilities. For contingent liabilities determined to be probable, a liability and an indemnification asset have been recorded. Total of such liabilities and indemnification assets, primarily related to various tax matters, of $9.4 million were recorded.

 

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7 Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill attributable to each business segment for the year ended March 3, 2012 and February 26, 2011 is detailed below.

 

(In thousands)

   Architectural     Large-Scale
Optical
     Total  

Balance at February 27, 2010

   $ 47,961      $ 10,557       $ 58,518   

Goodwill acquired(1)

     3,284        —           3,284   

Foreign currency translation

     202        —           202   
  

 

 

   

 

 

    

 

 

 

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   
  

 

 

   

 

 

    

 

 

 

 

(1) Includes a retrospective adjustment of $4.2 million within the Architectural segment as described above in Note 6.

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

 

     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   
  

 

 

    

 

 

   

 

 

   

 

 

 
     February 26, 2011  

(In thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Foreign
Currency
Translation
    Net  

Debt issue costs

   $ 2,763       $ (1,534   $ —        $ 1,229   

Non-compete agreements

     6,803         (4,712     19        2,110   

Customer relationships

     15,966         (6,906     103        9,163   

Purchased intellectual property

     8,487         (1,406     72        7,153   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 34,019       $ (14,558   $ 194      $ 19,655   
  

 

 

    

 

 

   

 

 

   

 

 

 

Amortization expense on these identifiable intangible assets was $3.0 million, $2.5 million and $2.9 million in fiscal 2012, 2011 and 2010, 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. The estimated future amortization expense for identifiable intangible assets during the next five fiscal years is as follows:

 

(In thousands)

   2013      2014      2015      2016      2017  

Estimated amortization expense

   $ 2,680       $ 1,975       $ 1,481       $ 1,149       $ 980   

8 Debt

The Company maintains an $80.0 million revolving credit facility, which expires in January 2014, with borrowings secured by a pledge of certain assets of the Company. No borrowings were outstanding as of March 3, 2012 or February 26, 2011. 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 March 3, 2012 was $274.2 million, whereas the Company’s net worth as defined in the credit facility was $321.2 million. The credit facility also requires that the Company maintain an

 

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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 0.00 at March 3, 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 March 3, 2012, the Company was in compliance with the financial covenants of the credit facility.

 

(In thousands)

   2012     2011  

Borrowings under revolving credit agreement

   $      $   

Other, interest at 0.6% and 1.4% for 2012 and 2011, respectively

     21,024        22,429   
  

 

 

   

 

 

 

Total long-term debt

     21,024        22,429   

Less current installments

     (108     (987
  

 

 

   

 

 

 

Net long-term debt

   $ 20,916      $ 21,442   
  

 

 

   

 

 

 

Included in the totals above are $8.4 million of industrial revenue bonds, $12.0 million of recovery zone facility bonds and other debt held by GlassecViracon. The industrial development and recovery zone facility bonds mature in fiscal years 2021 through 2036, and the other debt matures in fiscal years 2013 through 2021. The $8.4 million of industrial revenue bonds are supported by $8.7 million of letters of credit, and the $12.0 million of recovery zone facility bonds are supported by a $12.3 million letter of credit. The fair value of debt approximates carrying value at March 3, 2012.

Debt maturities are as follows:

 

(In thousands)

   2013      2014      2015      2016      2017      Thereafter      Total  

Maturities

   $ 108       $ 62       $ 62       $ 62       $ 62       $ 20,668       $ 21,024   

Selected information related to long-term debt is as follows:

 

(In thousands, except percentages)

   2012     2011  

Average daily borrowings during the year

   $ 21,414      $ 9,156   

Maximum borrowings outstanding during the year

     22,268        23,524   

Weighted average interest rate during the year

     0.95     1.7
  

 

 

   

 

 

 

Interest expense was as follows for fiscal 2012, 2011 and 2010:

 

(In thousands)

   2012      2011      2010  

Interest on debt

   $ 942       $ 421       $ 54   

Other interest expense

     485         298         552   
  

 

 

    

 

 

    

 

 

 

Net interest expense

   $ 1,427       $ 719       $ 606   
  

 

 

    

 

 

    

 

 

 

Interest payments were $1.0 million, $0.6 million and $0.9 million in fiscal 2012, 2011 and 2010, respectively.

9 Employee Benefit Plans

401(k) Retirement Plan

The Company sponsors a single 401(k) retirement plan covering substantially all full-time non-union employees, as well as union employees at two of its manufacturing facilities. The plan historically included a discretionary annual Company contribution based on a percentage of employees’ base earnings and years of service with the Company for all eligible non-union employees and for eligible union employees according to the terms of union contracts. The discretionary annual contribution was discontinued effective January 1, 2011. As a result, the fiscal 2011 contribution was only for the 10 months ending December 31, 2010. The contribution was $3.7 million and $4.5 million in fiscal 2011 and 2010, respectively.

 

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In addition to the contribution above, employees are also allowed to contribute up to 60 percent of their eligible earnings to this plan, up to statutory limits. Effective March 1, 2011, the Company contributes a match of 100 percent of the first one percent contributed and 50 percent of the next five percent contributed on eligible compensation that non-union employees contribute and according to contract terms for union employees. Prior to that date, the Company contribution was 30 percent of the first six percent of eligible compensation that non-union employees contributed and according to contract terms for union employees. The Company match was $3.6 million for 2012 and was $1.7 million in each of fiscal 2011 and 2010.

Deferred Compensation Plan

The Company maintains a deferred compensation plan that allows participants to defer compensation and assist in saving for retirement and certain short-term needs. The deferred compensation liability was $2.5 million at March 3, 2012 and is included in other long-term liabilities in the consolidated balance sheet. The deferred compensation plan has historically been unfunded. In fiscal 2012, the Company invested in corporate-owned life insurance policies (COLI) and mutual funds with the intention of utilizing them as a long-term funding source for the deferred compensation plan. COLI assets of $1.5 million at March 3, 2012, are recorded at their net cash surrender values and are included in other non-current assets in the consolidated balance sheet. Mutual fund investments of $1.2 million at March 3, 2012, are recorded at estimated fair value, based on quoted market prices, and are included in other non-current assets in the consolidated balance sheet.

Plans under Collective Bargaining Agreements

The Company contributes to various multi-employer union retirement plans, which provide retirement benefits to the majority of its union employees; none of the plans are considered significant. The total contribution to these plans in fiscal 2012, 2011 and 2010 was $3.9 million, $4.2 million and $5.8 million, respectively.

Pension Plan

As part of the acquisition of Tubelite in fiscal 2008, the Company assumed the assets and liabilities of the Tubelite, Inc. Hourly Employees’ Pension Plan (Tubelite plan). This plan is a defined-benefit pension plan that was frozen to new entrants and additional years of service credit for participating employees as of January 1, 2004.

Officers’ Supplemental Executive Retirement Plan (SERP)

The Company sponsors an unfunded SERP for the benefit of certain executives. The plan is considered a defined-benefit pension plan which is based principally on an employee’s years of service and compensation levels near retirement.

On October 8, 2008, the Company’s Board of Directors adopted an amendment to the Apogee Enterprises, Inc. Officers’ Supplemental Executive Retirement Plan providing that no more benefits will accrue to plan participants as of December 31, 2008. Plan participants continue to earn service for the purpose of becoming vested in the benefits they had accrued as of December 31, 2008.

Obligations and Funded Status of Defined-Benefit Pensions Plans

The following tables present reconciliations of the benefit obligation of the defined-benefit pension plans and the funded status of the defined-benefit pension plans. Both the Tubelite plan and the SERP use a fiscal year-end measurement date.

 

(In thousands)

   2012     2011  

Change in benefit obligation

    

Benefit obligation beginning of period

   $ 12,778      $ 11,911   

Interest cost

     654        665   

Actuarial loss

     2,221        836   

Benefits paid

     (879     (634
  

 

 

   

 

 

 

Benefit obligation at measurement date

   $ 14,774      $ 12,778   
  

 

 

   

 

 

 

Change in plan assets

    

Fair value of plan assets beginning of period

   $ 4,549      $ 4,688   

Actual return on plan assets

     224        142   

Company contributions

     678        353   

Benefits paid

     (879     (634
  

 

 

   

 

 

 

Fair value of plan assets at measurement date

   $ 4,572      $ 4,549   
  

 

 

   

 

 

 

Funded status— net amount recognized

   $ (10,202   $ (8,229
  

 

 

   

 

 

 

 

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Amounts recognized in the consolidated balance sheets consist of:

 

(In thousands)

   2012     2011  

Current liabilities

   $ (1,001   $ (644

Other long-term liabilities

     (9,201     (7,585
  

 

 

   

 

 

 

Total

   $ (10,202   $ (8,229
  

 

 

   

 

 

 

Amounts included in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost consist of:

 

(In thousands)

   2012      2011  

Net actuarial loss

   $ 4,335       $ 2,244   
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ 4,335       $ 2,244   
  

 

 

    

 

 

 

The amount recognized in comprehensive earnings for fiscal 2012 and 2011, net of tax expense, is as follows:

 

(In thousands)

   2012      2011  

Net actuarial loss

   $ 1,331       $ 506   
  

 

 

    

 

 

 

Total

   $ 1,331       $ 506   
  

 

 

    

 

 

 

Components of the defined-benefit pension plans net periodic benefit cost are as follows:

 

(In thousands)

   2012     2011     2010  

Interest cost

   $ 654      $ 665      $ 681   

Expected return on assets

     (214     (225     (177

Amortization of unrecognized transition amount

     —          —          (5

Amortization of unrecognized net loss

     120        126        57   
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 560      $ 566      $ 556   
  

 

 

   

 

 

   

 

 

 

The estimated net actuarial loss for the defined-benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost for fiscal 2013 is $0.2 million, net of tax benefit.

Additional Information

Assumptions

Weighted-average assumptions used at the measurement date to determine the defined-benefit plans’ benefit obligation for the following fiscal years are as follows:

 

(Percentages)

   2012      2011      2009  

Discount rate

     4.00         5.25         5.75   

Weighted-average assumptions used at the measurement date to determine the defined-benefit plans’ net periodic benefit cost for the following fiscal years are as follows:

 

(Percentages)

   2012      2011      2010  

Discount rate

     5.25         5.75         6.75   

Expected return on assets

     5.50         5.50         3.75   

Discount rate. The discount rate reflects the current rate at which the defined-benefit plans’ pension liabilities could be effectively settled at the end of the year based on the measurement date. The discount rate was determined by matching the expected benefit payments to payments from the Principal Discount Yield Curve. This produced a discount rate of 4.00 percent. There are no known or anticipated changes in the discount rate assumption that will impact the pension expense in fiscal year 2013.

Expected return on assets. To develop the expected long-term rate of return on asset assumption, the Company considered historical long-term rates of return for broad asset classes, actual past rates of return achieved by the plan, the general mix of assets held by the plan and the stated investment policy for the plan. This resulted in the selection of the 5.50 percent long-term rate of return on assets assumption.

 

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Net periodic benefit cost. Total net periodic pension benefit cost was $0.6 million in each of fiscal 2012, 2011 and 2010. Total net periodic pension benefit cost is expected to be approximately $0.6 million in fiscal 2013. The net periodic pension benefit cost for fiscal 2013 has been estimated assuming a discount rate of 4.0 percent.

Contributions

Pension contributions to the plans for fiscal 2012 and 2011 totaled $0.7 million and $0.4 million, respectively. Since the SERP is unfunded, contributions to that plan represent benefit payments made. The pension contributions in fiscal 2012 and 2011 equaled or exceeded the minimum funding requirement. Fiscal 2013 pension contributions are expected to total $0.9 million.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans as follows:

 

(In thousands)

  

 

 

Fiscal 2013

   $ 1,001   

Fiscal 2014

     989   

Fiscal 2015

     975   

Fiscal 2016

     971   

Fiscal 2017

     966   

Fiscal 2018-2022

     4,677   
  

 

 

 

Plan Assets

The Company does not maintain assets intended for the future use of the SERP. In accordance with its policy, the assets of the Tubelite plan have been invested in fixed-income securities with maturities intended to match benefit payments. The fixed-income securities are carried at fair value based on prices from recent trades of similar securities, and are classified as Level 2 in the valuation hierarchy.

Employee Stock Purchase Plan

The Company also sponsors an employee stock purchase plan into which its employees may contribute up to $500 per week on an after-tax basis. The Company contributes a match of 15 percent of the employee contribution. Contributions and Company match funds are used to purchase shares of Company stock on the open market. The Company match to this plan was $0.1 million in each of fiscal 2012, 2011 and 2010.

10 Shareholders’ Equity

A class of 200,000 shares of junior preferred stock with a par value of $1.00 is authorized, but unissued.

Share Repurchases

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. The Company repurchased 275,000 shares in the open market during fiscal 2012 for $2.4 million. No share repurchases were made under the plan during fiscal 2011 or 2010. The Company has purchased a total of 2,279,123 shares, at a total cost of $29.7 million, since the inception of this program and has remaining authority to repurchase 970,877 shares under this program, which has no expiration date.

In addition to the shares repurchased according to this repurchase plan, the Company also purchased $1.3 million, $1.7 million and $1.5 million of Company stock from employees in order to satisfy stock-for-stock option exercises or withholding tax obligations related to stock-based compensation, pursuant to terms of board and shareholder approved compensation plans during fiscal 2012, 2011 and 2010, respectively.

 

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Accumulated Other Comprehensive Loss

The following table summarizes the accumulated other comprehensive loss, net of tax at March 3, 2012 and February 26, 2011.

 

(In thousands)

   2012     2011  

Net unrealized loss on marketable securities

   $ (46   $ (31

Pension liability adjustments

     (2,761     (1,430

Foreign currency translation adjustments

     (1,953     576   
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (4,760   $ (885
  

 

 

   

 

 

 

11 Share-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; 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.

In August 2011, the Company granted 450,512 stock options and 155,875 nonvested share awards to its new President and Chief Executive Officer, resulting in an increase in the number of shares issued under stock option and nonvested share awards outstanding. In August 2011, the Company also granted 59,952 vested shares to its new President and Chief Executive Officer that were fully expensed during the second quarter, and are included in stock-based compensation expense noted below. These awards were granted as an “inducement grant” under applicable NASDAQ Stock Market Listing Rules and were made outside of the Company’s existing equity plans.

Total stock-based compensation expense under all Plans and the inducement grant included in the results of operations for fiscal 2012, 2011 and 2010 was $4.4 million, $5.2 million and $6.1 million, respectively. At March 3, 2012, there was $1.1 million of total unrecognized compensation cost related to stock option awards, which is expected to be recognized over a weighted average period of approximately 30 months.

Cash proceeds from the exercise of stock options were $1.1 million, $0.3 million and $0.7 million for fiscal 2012, 2011 and 2010, respectively. There were immaterial amounts of tax benefits realized for the tax deductions from option exercises in both fiscal 2012 and 2011. The tax benefit realized for the tax deductions from option exercises totaled $0.1 million for fiscal 2010.

The weighted average fair value per option at the date of grant for options granted in fiscal 2012 was $2.89, which was for the stock option issued under the inducement grant noted above. There were no options or SARs issued in fiscal 2011 or 2010. The aggregate intrinsic value of these 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 $0.2 million in each of fiscal 2012 and 2011 and was $0.5 million in fiscal 2010.

 

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The fair value of each award grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2012.

 

     2012  

Dividend yield

     3.9

Expected stock price volatility

     56.1

Risk-free interest rate

     0.8

Expected lives

     4.6 years   
  

 

 

 

The expected stock price volatility is based on historical experience. The risk-free rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant. The expected life, the average time an option grant is outstanding, and forfeiture rates are estimated based on historical experience.

The following table summarizes the award transactions under the Plans for the year ended March 3, 2012:

 

     Options/SARs Outstanding  
     Number of
Shares
    Weighted
Average

Exercise  Price
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic Value
 

Outstanding at Feb. 26, 2011

     1,477,324      $ 17.81         

Award granted

     450,512        8.34         

Awards exercised

     (86,942     11.94         

Awards canceled

     (25,601     19.74         
  

 

 

   

 

 

       

Outstanding at Mar. 3, 2012

     1,815,293      $ 15.71       &nbs