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," "will," "continue" 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. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by the Company. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Information about factors that could materially affect our results can be found in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedFebruary 29, 2020 and in subsequent filings with theU.S. Securities and Exchange Commission , including this Quarterly Report on Form 10-Q. We also 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 and metal products and services for enclosing commercial buildings and framing and displays. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO). 20 -------------------------------------------------------------------------------- Table of Contents The ongoing COVID-19 pandemic continues to cause volatility and uncertainty in global markets impacting worldwide economic activity. We have experienced some delays in commercial construction projects and orders as a result of COVID-19. In our Architectural Glass and Architectural Framing segments, orders have been delayed or have slowed, as customers and end markets face some uncertainty and delays in timing of work. In our Architectural Services segment, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Within our LSO segment, many customers reopened and the segment's two manufacturing locations resumed normal operations during the second quarter, after being shutdown for most of the first and second quarters, in response to governmental "stay at home" directives. We have also been impacted by quarantine-related absenteeism among our workforce, resulting in labor and capacity constraints at some of our facilities. The extent to which COVID-19 will continue to impact our business will depend on future developments and public health advancements, which are highly uncertain and cannot be predicted with confidence. However, by the end of the second quarter, we have continued to see signs of improvement, including the reopening of retailers, moderating project delays and fewer workforce absences. Furthermore, in response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities, in addition to quarantine-related paid leave and other employee assistance programs. The following selected financial data should be read in conjunction with the Company's Form 10-K for the year endedFebruary 29, 2020 and the consolidated financial statements, including the notes to consolidated financial statements, included therein.
Highlights of Second Quarter of Fiscal 2021 Compared to Second Quarter of Fiscal 2020
Net sales Consolidated net sales decreased 10.5 percent, or$37.6 million , and decreased 14.6 percent, or$103.8 million , for the three- and six-month periods endedAugust 29, 2020 , respectively, compared to the same periods in the prior year, reflecting COVID-19 and market-related volume declines in three of the Company's segments.
The relationship between various components of operations, as a percentage of net sales, is presented below:
Three Months Ended Six Months Ended August 29, 2020 August 31, 2019 August 29, 2020 August 31, 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 76.2 75.9 77.6 76.5 Gross profit 23.8 24.1 22.4 23.5 Selling, general and administrative expenses 16.6 16.4 17.5 16.4 Operating income 7.3 7.7 4.9 7.1 Interest expense, net 0.4 0.7 0.5 0.7 Other income, net 0.4 0.1 - 0.1 Earnings before income taxes 7.2 7.1 4.5 6.4 Income tax expense 1.7 1.7 1.1 1.6 Net earnings 5.5 % 5.4 % 3.4 % 4.8 % Effective tax rate 23.7 % 24.0 % 24.4 % 24.2 % Gross profit Gross profit as a percent of sales was 23.8 percent and 22.4 percent for the three- and six-month periods endedAugust 29, 2020 , compared to 24.1 percent and 23.5 percent for the three- and six-month periods endedAugust 31, 2019 . The decrease in both periods of fiscal 2021 compared to fiscal 2020 was largely driven by lower volumes due to COVID-19 and market-related project delays. Selling, general and administrative (SG&A) expenses SG&A expenses as a percent of sales were 16.6 percent and 17.5 percent for the three- and six-month periods endedAugust 29, 2020 , compared to 16.4 percent in each of the prior year three- and six-month periods. SG&A increased as a percent of sales compared to the same periods in the prior year due to reduced leverage on lower sales, partially offset by the impact of temporary cost reduction actions taken by the Company in response to the current COVID-19 environment, procurement savings, and other cost reduction activities. 21 -------------------------------------------------------------------------------- Table of Contents Income tax expense The effective tax rate in the second quarter of fiscal 2021 was 23.7 percent, compared to 24.0 percent in the same period last year, and 24.4 percent for the first six months of fiscal 2021, compared to 24.2 percent in the prior year period.
Segment Analysis
Architectural Framing Systems
Three Months Ended Six Months Ended (In thousands) August 29, 2020 August 31, 2019 % Change August 29, 2020 August 31, 2019 % Change Net sales$ 152,927 $ 187,394 (18.4) %$ 303,091 $ 367,916 (17.6) % Operating income 11,697 15,523 (24.6) % 18,993 27,796 (31.7) % Operating margin 7.6 % 8.3 % 6.3 % 7.6 % Architectural Framing Systems net sales declined$34.5 million , or 18.4 percent, and$64.8 million , or 17.6 percent, for the three- and six-month periods endedAugust 29, 2020 , compared to the prior-year periods, reflecting COVID-19-related project delay and lower order volume. Operating margin decreased 70 and 130 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year, reflecting leverage on the lower revenue, partially offset by the cost reductions referenced above and improved productivity. As ofAugust 29, 2020 , segment backlog was approximately$404 million , compared to approximately$421 million as of the end of the prior quarter, reflecting the decline in order volume. Backlog represents the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which may be expected to be recognized as revenue in the future. Backlog is not a term defined underU.S. GAAP and is not a measure of contract profitability. We view backlog as one indicator of future revenues, particularly in our longer-lead time businesses. In addition to backlog, we have a substantial amount of projects with short lead times that book-and-bill within the same reporting period and are not included in backlog. We have strong visibility beyond backlog, as projects awarded, verbal commitments and bidding activities are not included in backlog. Architectural Glass Three Months Ended Six Months Ended (In thousands) August 29, 2020 August 31, 2019 % Change August 29, 2020 August 31, 2019 % Change Net sales$ 86,584 $ 99,138 (12.7) %$ 163,495 $ 199,429 (18.0) % Operating income 4,976 6,460 (23.0)% 4,482 12,859 (65.1) % Operating margin 5.7 % 6.5 % 2.7 % 6.4 % Net sales decreased$12.6 million , or 12.7 percent, and 35.9 million, or 18.0 percent, for the three- and six-month periods endedAugust 29, 2020 , compared to the same periods in the prior year. The decrease reflects lower volumes due to COVID-19-related project delays and lower order volume due to market-related softness. Operating margin decreased 80 and 370 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year. The decline in operating margin in the current quarter compared to the second quarter of last year is due to the lower volume, partially offset by strong factory productivity, COVID-19 related temporary cost reductions, and procurement savings. For the year-to-date period, operating margin declined due to leverage on the lower volume and the impact of COVID-19-related costs. Architectural Services Three Months Ended Six Months Ended (In thousands) August 29, 2020 August 31, 2019 % Change August 29, 2020 August 31, 2019 % Change Net sales$ 73,670 $ 61,597 19.6 %$ 137,221 $ 126,744 8.3 % Operating income 6,569 3,976 65.2 % 11,912 8,549 39.3 % Operating margin 8.9 % 6.5 % 8.7 % 6.7 % Architectural Services net sales increased$12.1 million , or 19.6 percent, and$10.5 million , or 8.3 percent, for the three- and six-month periods endedAugust 29, 2020 , over the same periods in the prior year, on strong project cost flow. 22 -------------------------------------------------------------------------------- Table of Contents Operating margin increased 240 and 200 basis points for the three- and six-month periods of the current year, compared to the same periods in the prior year, driven by strong project execution, procurement cost reductions and temporary cost reduction actions taken in response to COVID-19. As ofAugust 29, 2020 , segment backlog was approximately$665 million , compared to approximately$685 million as of the end of the prior quarter. Backlog is described within the Architectural Framing Systems discussion above. Large-Scale Optical (LSO) Three Months Ended Six Months Ended (In thousands) August 29, 2020 August 31, 2019 % Change August 29, 2020 August 31, 2019 % Change Net sales$ 16,860 $ 20,785 (18.9) %$ 23,171 $ 42,045 (44.9) % Operating income 2,149 4,630 (53.6) (984) 8,807 (111.2) % Operating margin 12.7 % 22.3 % (4.2) % 20.9 % LSO net sales decreased$3.9 million or 18.9 percent, and$18.9 million , or 44.9 percent, for the three- and six-month periods endedAugust 29, 2020 , over the same periods in the prior year. In the second quarter, the segment's customers had largely reopened, after having been closed for most of the first quarter due to COVID-19-related restrictions. In addition, the segment's two primary manufacturing locations resumed normal operations during the quarter, after being closed for most of the first and second quarters. In the current quarter, the segment had operating income of$2.1 million and operating margin of 12.7 percent compared to operating income of$4.6 million and operating margin of 22.3 percent in last year's second quarter, reflecting decreased leverage on the lower revenue, partially offset by temporary COVID-19-related cost reductions and effective cost management. The segment had an operating loss of$1.0 million and operating margin of (4.2) percent for the six-month period endedAugust 29, 2020 , compared to operating income of$8.8 million and operating margin of 20.9 percent for the same period of the prior year, reflecting the impact of the segment's temporary shutdown and resulting lower volume discussed above. Liquidity and Capital Resources Selected cash flow data Six Months Ended (In thousands) August 29, 2020 August 31, 2019 Operating Activities Net cash provided by operating activities $ 85,330 $ 17,802 Investing Activities Capital expenditures (14,224) (22,559) Financing Activities Borrowings on line of credit 192,581 184,500 (Repayment) borrowings on debt (5,400)
150,000
Payments on line of credit (237,500)
(307,500)
Repurchase and retirement of common stock (4,731) (20,010) Dividends paid (9,751) (9,203) Operating Activities. Cash provided by operating activities was$85.3 million for the first six months of fiscal 2021, an increase of$67.5 million compared to the prior-year period, reflecting strong working capital management. Investing Activities. Net cash used in investing activities was$15.2 million for the first six months of fiscal 2021, driven by capital expenditures of$14.2 million , while in the first six months of the prior year, net cash used by investing activities was$23.0 million , due to capital expenditures of$22.6 million . Given the uncertain economic environment in fiscal 2021, we have limited our capital spending to the most critical or high return capital projects. Financing Activities. Net cash used by financing activities was$66.1 million for the first six months of fiscal 2021, compared to net cash used by financing activities of$4.7 million for the prior-year period, primarily due to$47.5 million of net payments on the line of credit in the current year, compared to net borrowings of$27.0 million in the prior-year period. AtAugust 29, 2020 , we were in compliance with the financial covenants on our credit facility and term loan. We paid dividends totaling$9.8 million ($0.3750 per share) in the first six months of fiscal 2021, compared to$9.2 million ($0.3500 per share) in the comparable prior-year period. InMarch 2020 , we repurchased 231,492 shares under our authorized share repurchase program, for a total cost of$4.7 million . We did not repurchase any shares under this program during the 23 -------------------------------------------------------------------------------- Table of Contents second quarter. In the first six months of fiscal 2020, we repurchased 531,997 shares under our authorized share repurchase program, for a total cost of$20.0 million . Since the inception of the share repurchase program in 2004, we have purchased a total of 6,186,404 shares, at a total cost of$179.1 million . We currently have remaining authority to repurchase an additional 2,063,596 shares under this program. We will continue to evaluate making future share repurchases, considering our cash flow and debt levels, market conditions, including the continuing effects of the COVID-19 pandemic, and other potential uses of cash.
Other Financing Activities. The following summarizes our significant contractual
obligations that impact our liquidity as of
Payments Due by Fiscal Period Remainder of (In thousands) Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Thereafter Total Debt obligations $ -$ 152,000 $ 1,000 $ -$ 2,672 $ 12,000 $ 167,672 Operating leases (undiscounted) 6,443 12,081 11,081 9,122 7,307 14,748 60,782 Purchase obligations 95,815 79,623 1,498 897 770 2,310 180,913 Total cash obligations$ 102,258 $ 243,704 $ 13,579 $ 10,019 $ 10,749 $ 29,058 $ 409,367 We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Purchase obligations in the table above relate to raw material commitments and capital expenditures.
We expect to make contributions of
As ofAugust 29, 2020 , we had reserves of$4.2 million for unrecognized tax benefits. We expect approximately$0.4 million of the unrecognized tax benefits to lapse during the next 12 months. We are unable to reasonably estimate in which future periods the remaining unrecognized tax benefits will ultimately be settled. We are required, in the ordinary course of business, to provide surety or performance bonds that commit payments to our customers for any non-performance. AtAugust 29, 2020 ,$1.1 billion of these types of bonds were outstanding, of which$589.1 million is in our backlog. These bonds do not have stated expiration dates. We have never been required to make payments under surety or performance bonds with respect to our existing businesses. Due to our ability to generate strong cash from operations and our borrowing capability under our committed revolving credit facility, we believe that our sources of liquidity will continue to be adequate to fund our working capital requirements, planned capital expenditures and dividend payments for at least the next 12 months. COVID-19 Consideration. While we believe we have adequate sources of liquidity to continue to fund our business for at least the next 12 months, the extent to which the ongoing COVID-19 situation may impact our results of operations or liquidity is uncertain. To date, we have experienced some delays in commercial construction projects and orders due to COVID-19. While the construction and construction-related industries are considered an "essential business or service" in most jurisdictions in which we operate, site closures or project and order delays have occurred and increased social distancing and health-related precautions are required on many work sites, which have caused and may continue to cause additional project delays and additional costs to be incurred. Within the LSO segment, after being closed for most of the first and second quarters, we have resumed normal operations at the segment's two manufacturing locations during the quarter and many of our customer's retail locations have also reopened. We expect this global pandemic to continue to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. At this time, we do not expect that the impact from the coronavirus outbreak will have a significant effect on our liquidity. As demonstrated during the first and second quarters, we have taken steps to increase available cash on hand including, but not limited to, active working capital management and targeted reductions in discretionary operating expenses and capital expenditures. Given the continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, liquidity or financial position. To the extent that our customers and suppliers are adversely impacted by the coronavirus outbreak, this could reduce the availability, or result in delays, of materials or supplies, or delays in customer payments, which in turn could materially interrupt our business operations, thereby negatively affecting our results of operations, and/or impact our liquidity. 24 -------------------------------------------------------------------------------- Table of Contents Related Party Transactions No material changes have occurred in the disclosure with respect to our related party transactions set forth in our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 . Critical Accounting Policies No material changes have occurred in the disclosure of our critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 , other than as described in our Current Report on Form 10-Q for the fiscal quarter endedMay 30, 2020 and as noted below.Goodwill and indefinite-lived intangible asset impairmentGoodwill We evaluate goodwill for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including a significant decline in our stock price and market capitalization, along with concerns resulting from the COVID-19 pandemic at four of our nine identified reporting units. Therefore, we performed an interim goodwill impairment evaluation as ofMay 30, 2020 . If the fair value of a reporting unit exceeds the carrying value, goodwill impairment is not indicated. Our accounting policy related to goodwill has not changed from that disclosed in our Annual Report on Form 10-K. Based on the results of the interim quantitative goodwill impairment analysis, the estimated fair value of each reporting unit exceeded its carrying value and, therefore, goodwill impairment was not indicated as ofMay 30, 2020 . However, the estimated fair value did not exceed carrying value by a significant margin at two reporting units within the Architectural Framing Systems segment, EFCO and Sotawall, which had goodwill balances of$90.4 million and$26.7 million , respectively, atMay 30, 2020 . We utilized a discount rate of 11.0 percent in determining the discounted cash flows for EFCO and a discount rate of 10.4 percent in determining the discounted cash flows for Sotawall. We utilized a long-term growth rate of 3.0 percent in our fair value analysis for all reporting units. If our discount rates were to increase by 100 basis points at Sotawall and EFCO, the fair value of these reporting units would fall below carrying value, which would indicate impairment of the goodwill. Additionally, this discounted cash flow analysis is dependent upon achieving forecasted levels of revenue and profitability. If revenue or profitability were to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment could be indicated at these reporting units, and potentially at other reporting units. During the second quarter of fiscal 2021, no additional qualitative indicators of impairment were identified and therefore, no interim quantitative goodwill impairment evaluation was completed as ofAugust 29, 2020 . If the impacts that we have experienced from COVID-19 continue at the current or worsening levels, this will likely have a negative impact on our forecasted revenue and profitability and this could result in an indication of goodwill impairment in future periods. Indefinite-lived intangible assets We hold intangible assets for certain acquired trade names and trademarks which are determined to have indefinite useful lives. We evaluate the reasonableness of the useful life and test indefinite-lived intangible assets for impairment annually at our year-end, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. During the first quarter of fiscal 2021, we identified qualitative indicators of impairment, including deteriorating macroeconomic conditions resulting from the COVID-19 pandemic. Therefore, the Company performed a quantitative indefinite-lived intangible asset impairment evaluation as ofMay 30, 2020 . If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If an impairment loss is recognized, the adjusted carrying amount becomes the asset's new accounting basis. Our accounting policy for indefinite-lived intangible assets has not changed from that disclosed in our Annual Report on Form 10-K. Fair value is measured using the relief-from-royalty method. This method assumes the trade name or trademark has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from the asset. This method requires us to estimate the future revenue from the related asset, the appropriate royalty rate, and the weighted average cost of capital. The assessment of fair value involves significant judgment and projections about future performance. In determining the discounted future revenue in our fair value analysis, we used discount rates that are appropriate with the risks and uncertainties inherent in the respective businesses in the range of 10.9 percent to 11.5 percent, royalty rates of 1.5 to 2.0 percent, and a long-term growth rate of 3.0 percent. Based on our analysis, the fair value of each of our trade names exceeded its carrying amount and impairment was not indicated. During the second quarter of fiscal 2021, no additional qualitative indicators of impairment were identified and therefore, no interim quantitative indefinite-lived intangible asset impairment evaluation was completed as ofAugust 29, 2020 . We continue to conclude that the useful life of our indefinite-lived intangible assets is appropriate. If future revenue were to fall below forecasted levels or if market conditions were to decline in a material or sustained manner, due to COVID-19 or otherwise, impairment could be indicated on one or more of our indefinite-lived intangible assets. 25
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