APOGEE ENTERPRISES, INC. (APOG) FY 2024 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist the reader in understanding our financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources, and is provided as a supplement to and should be read in conjunction with the consolidated financial statements and related notes in Item 8. Financial Statements and Supplementary Data in this Form 10-K. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended February 25, 2023, for discussion of the results of operations for the year ended February 25, 2023, compared to the year ended February 26, 2022, which is incorporated by reference herein.

We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information and include these measures in other communications to investors. For each of these non-GAAP financial measures, we provide a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, (see "Reconciliation of Non-GAAP Financial Measures" in this Item 7 below), and an explanation of why we believe the non-GAAP measure provides useful information to management and investors. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure. Adjusted net earnings and adjusted earnings per diluted share (adjusted diluted EPS) are supplemental non-GAAP financial measures provided by the Company to assess performance on a more comparable basis from period-to-period by excluding amounts that management does not consider part of core operating results. Management uses these non-GAAP measures to evaluate the Company’s historical and prospective financial performance, measure operational profitability on a consistent basis, as a factor in determining executive compensation, and to provide enhanced transparency to the investment community.

Overview

We are a leading provider of architectural products and services for enclosing buildings, and high-performance glass and acrylic products used for preservation, energy conservation, and enhanced viewing. Our four reporting segments are: Architectural Framing Systems, Architectural Glass, Architectural Services and Large-Scale Optical (LSO).

In fiscal 2024, we made further progress toward our strategic goals and financial targets we established in fiscal 2021. We continued the deployment of the Apogee Management System across our business, supporting sustainable cost and productivity improvements. We invested in organic growth initiatives, including capacity expansion in the Large-Scale Optical Segment and geographic growth in Architectural Services. We increased our focus on differentiated products and services, and continued to diversify the mix of architectural projects that we serve while leaning more heavily into higher, value-added products. We also advanced several initiatives to strengthen our core capabilities, driving the standardization of key business processes and systems, and strengthening talent management and leadership development programs.

On January 30, 2024, the Company announced strategic actions to further streamline its business operations, enable a more efficient cost model, and better position the Company for profitable growth (referred to as “Project Fortify”). During the fourth quarter, the Company incurred $12.4 million of pre-tax charges related to Project Fortify, of which $5.5 million is included in cost of sales and $6.9 million is included in selling, general, and administrative (SG&A) expenses. The Company expects a total of $16 million to $18 million of pre-tax charges in connection with Project Fortify, leading to annualized cost savings of $12 million to $14 million. We expect that approximately 60% of these savings will be realized in fiscal 2025, with the remainder in fiscal 2026. We expect that approximately 70% of the savings will be realized in the Architectural Framing Systems segment, 20% in the Architectural Services Segment, and 10% in Corporate and other, with the plan to be substantially complete in the third quarter of fiscal 2025.

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Results of Operations

The following tables provide various components of our operations for fiscal years 2024, 2023 and 2022, in U.S. dollar amounts and percentages reflecting annual changes in such amounts and as a percentage of net sales in each fiscal year.

Our fiscal year ends on the Saturday closest to the last day of February, or as otherwise determined by the Board of Directors. Fiscal 2024 consisted of 53 weeks, while fiscal 2023 and fiscal 2022 each consisted of 52 weeks.

Comparison of Fiscal 2024 to Fiscal 2023

•Consolidated net sales were $1.42 billion compared to $1.44 billion, a decrease of 1.6%, primarily reflecting lower volumes, partially offset by improved product mix and higher pricing.

•Gross profit margin improved to 25.9% of net sales, compared to 23.3%. The gross margin improvement was primarily driven by higher pricing, improved mix and the impact of lower costs from saving initiatives. These items were partially offset by the impact of lower volume, a less favorable mix of projects in the Architectural Services Segment, $5.5 million of restructuring costs related to Project Fortify, and the inflationary impact of higher costs.

•SG&A expense increased $23.8 million to 16.5% of net sales, compared to 14.5%. The increase in expense was primarily due to increased salaries and benefits costs as well as $6.9 million in restructuring costs related to Project Fortify.

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•Operating income grew 6.4% to $133.8 million, and operating margin increased 70 basis points to 9.4%, driven by higher pricing, improved product mix, and the impact of lower costs from saving initiatives. These items were partially offset by a less favorable mix of projects in the Architectural Services Segment, increased salaries and benefits costs, $12.4 million of restructuring costs related to Project Fortify, and the inflationary impact of higher costs. Adjusted operating margin increased by 160 basis points, to 10.3%.

•Other income was $2.1 million, reflecting the impact of a $4.7 million pre-tax gain related to a New Markets Tax Credit, partially offset by an investment valuation adjustment.

•Net interest expense was $6.7 million, compared to $7.7 million driven by a lower average debt level, partially offset by a higher average interest rate.

•The effective tax rate was 22.9%, compared to 10.7%. During fiscal 2023, we claimed certain tax deductions, including a worthless stock loss deduction and other discrete tax benefits, related to our investment in Sotawall Limited, a Canadian subsidiary. These deductions generated a net tax benefit of $14.8 million, and reduced our effective tax rate for fiscal 2023 by approximately 13.1 percentage points.

•Diluted EPS was $4.51 compared to $4.64 driven by higher operating income, which was more than offset by a higher effective tax rate. Adjusted diluted EPS grew 19.8% to $4.77.

Segment Analysis

Segment net sales is defined as net sales for a certain segment and includes revenue related to intersegment transactions. We report net sales intersegment eliminations separately to exclude these sales from our consolidated total. Segment operating income is equal to net sales, less cost of goods sold, SG&A, and any asset impairment charges associated with the segment. Segment operating income includes operating income related to intersegment sales transactions and excludes certain corporate costs that are not allocated at a segment level. We report these unallocated corporate costs separately in Corporate and other. Operating income does not include other income or expense, interest expense or a provision for income taxes.

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Architectural Framing Systems

Comparison of Fiscal 2024 to Fiscal 2023

•Net sales were $601.7 million, compared to $649.8 million, primarily reflecting lower volume, partially offset by more favorable sales mix and improved pricing.

•Operating income was $64.8 million and operating margin decreased 180 basis points to 10.8% of net sales, primarily driven by the impact of lower volume, a less favorable mix of projects and $6.0 million of restructuring costs related to Project Fortify. These items were partially offset by improved sales mix and pricing, as well as the impact of lower costs from saving initiatives. Adjusted operating income was $70.8 million and adjusted operating margin decreased 80 basis points to 11.8% of net sales.

Architectural Glass

Comparison of Fiscal 2024 to Fiscal 2023

•Net sales were $378.4 million, compared to $316.6 million, primarily driven by improved pricing and a more favorable sales mix.

•Operating income was $68.0 million and operating margin increased 900 basis points to 18.0% of net sales, primarily driven by improved pricing and mix, partially offset by cost inflation.

Architectural Services

Comparison of Fiscal 2024 to Fiscal 2023

•Net sales were $378.4 million, compared to $410.6 million, primarily reflecting lower project volume and a less favorable mix of projects.

•Operating income was $11.8 million and operating margin decreased 130 basis points to 3.1% of net sales primarily driven by lower project volume, a less favorable mix of projects, and $2.5 million of restructuring costs related to Project Fortify, partially offset by lower short-term incentive compensation expense. Adjusted operating income was $14.4 million and adjusted operating margin decreased 60 basis points to 3.8% of net sales.

Large-Scale Optical (LSO)

Comparison of Fiscal 2024 to Fiscal 2023

•Net sales were $99.2 million, compared to $104.2 million, primarily reflecting lower volume due to slower customer demand in the retail markets, partially offset by favorable mix and pricing.

•Operating income was $24.2 million and operating margin increased 10 basis points to 24.4% of net sales, compared to $25.3 million, or 24.3% of net sales, primarily driven by favorable mix and pricing, partially offset by the impact of lower volume.

Corporate and other

Comparison of Fiscal 2024 to Fiscal 2023

•Corporate and other expense was $35.1 million, compared to $28.2 million, primarily driven by $3.9 million of restructuring costs related to Project Fortify, increased compensation expense and higher consulting costs, partially offset by lower insurance-related costs.

Backlog

Backlog is an operating measure used by management to assess future potential sales revenue. Backlog is defined as the dollar amount of signed contracts or firm orders, generally as a result of a competitive bidding process, which is expected to be recognized as revenue. Backlog is not a term defined under U.S. GAAP and is not a measure of contract profitability. Backlog should not be used as the sole indicator of future revenue because we have a substantial number of projects with short lead times that book-and-bill within the same reporting period that are not included in backlog.

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Architectural Framing Systems

As of fiscal 2024 year-end, segment backlog was $200.7 million, compared to $243.3 million at the end of the prior year, reflecting a decrease in order volume. As part of the actions of Project Fortify, we expect to phase out this segment's longer-cycle project business over time as the segment eliminates certain lower-margin product and service offerings. As a result, the majority of projects in this segment will generally be completed in six months or less and backlog as an operating measure will be less effective in assessing future potential sales revenue. Effective in the first quarter of fiscal 2025, backlog will no longer be reported for this segment.

Architectural Services

As of fiscal 2024 year-end, backlog in the Architectural Services Segment was $807.8 million, compared to $726.7 million at the end of the prior year, primarily driven by several large project awards in the current year.

Reconciliations of Non-GAAP Financial Measures

Adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share (adjusted diluted EPS), adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted EBITDA margin, and adjusted return on invested capital (ROIC) are supplemental non-GAAP financial measures provided by the Company to assess performance on a more comparable basis from period-to-period by excluding amounts that management does not consider part of core operating results. Management uses these non-GAAP measures as noted below:

•We use adjusted operating income, adjusted operating margin, adjusted net earnings, and adjusted diluted EPS to provide meaningful supplemental information about our operating performance by excluding amounts that are not considered part of core operating results to enhance comparability of results from period to period.

•Adjusted EBITDA represents adjusted net earnings before interest, taxes, depreciation, and amortization. We believe adjusted EBITDA and adjusted EBITDA margin metrics provide useful information to investors and analysts about our core operating performance.

•Adjusted return on invested capital (ROIC) is defined as adjusted operating income net of tax, divided by average invested capital. We believe this measure is useful in understanding operational performance and capital allocation over time, and it is used as a factor in determining executive compensation.

These non-GAAP measures should be viewed in addition to, and not as an alternative to, the reported financial results of the Company prepared in accordance with GAAP. Other companies may calculate these measures differently, thereby limiting the usefulness of the measures for comparison with other companies.

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Liquidity and Capital Resources

We rely on cash provided by operations for our material cash requirements, including working capital needs, capital expenditures, satisfaction of contractual commitments (including principal and interest payments on our outstanding indebtedness) and shareholder return through dividend payments and share repurchases.

Operating Activities. Net cash provided by operating activities was $204.2 million, compared to $102.7 million, primarily driven by favorable changes in working capital.

Investing Activities. Net cash used by investing activities was $43.7 million, compared to $27.7 million. Capital expenditures were the primary use of cash in fiscal 2024, largely driven by strategic investments to fund a capacity expansion in our Large-Scale Optical Segment and to enhance productivity through automation.

Financing Activities. Net cash used by financing activities was $144.6 million, compared to $91.0 million, primarily driven by higher net debt repayments in the current year period, partially offset by lower share repurchases.

Additional Liquidity Considerations. We periodically evaluate our liquidity requirements, cash needs and availability of debt resources relative to acquisition plans, significant capital plans, and other working capital needs.

As of the end of fiscal 2024, we had a committed revolving credit facility in the U.S. with maximum borrowings of up to $385 million, with a maturity date of August 5, 2027, and two Canadian committed, revolving credit facilities totaling $25 million (USD). At March 2, 2024, we had outstanding borrowings under our revolving credit facility of $50.0 million, while there were no outstanding borrowings under the Canadian committed, revolving credit facilities. We are required to make periodic interest payments on our outstanding indebtedness, and future interest payments will be determined based on the amount of outstanding borrowings and prevailing interest rates during that time.

Our revolving credit facilities contain two maintenance financial covenants that require us to stay below a maximum debt-to-EBITDA ratio of 3.25 and maintain a minimum ratio of EBITDA-to-interest expense of 3.00. Both ratios are computed quarterly, with EBITDA calculated on a rolling four-quarter basis. At March 2, 2024, we were in compliance with both financial covenants (which are identical in all three of our revolving credit facilities).

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The revolving credit facilities also contain an acquisition holiday. In the event we make an acquisition for which the purchase price is greater than $75 million, we can elect to increase the maximum debt-to-EBITDA ratio to 3.75 for a period of four consecutive fiscal quarters, commencing with the fiscal quarter in which a qualifying acquisition occurs. No more than two acquisition "holidays" can occur during the term of the facilities, and at least two fiscal quarters must separate qualifying acquisitions.

Borrowings under the credit facilities bear floating interest at either the Base Rate or Term Secured Overnight Financing Rate (SOFR), or, in the case of the Canadian facilities, Canadian Overnight Repo Rate Average (CORRA) plus, in each, a margin based on the Leverage Ratio (as defined in the Credit Agreements). For Base Rate borrowings, the margin ranges from 0.125% to 0.75%. For Term SOFR and CORRA borrowings, the margin ranges from 1.125% to 1.75%, with an incremental Term SOFR and CORRA adjustment of 0.10% and 0.29547%, respectively.

The U.S. facility also contains an "accordion" provision. Under this provision, we can request that the facility be increased by as much $200.0 million. Any Lender may elect or decline to participate in the requested increase at the Lender’s sole discretion.

Additionally, at March 2, 2024, we had a total of $15.0 million of ongoing letters of credit related to industrial revenue bonds, construction contracts and insurance collateral that expire in fiscal year 2025 and reduce borrowing capacity under the U.S. revolving credit facility. As of March 2, 2024, the amount available for revolving borrowings under the U.S credit facility was $320.0 million.

We acquire the use of certain assets through operating leases, such as property, manufacturing equipment, vehicles and other equipment. Future payments for such leases, excluding leases with initial terms of one year or less, were $44.8 million at March 2, 2024, with $12.5 million payable within the next 12 months. See Note 8 - Leases of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further detail surrounding our lease obligations and the timing of expected future payments.

As of March 2, 2024, we had $41.2 million of open purchase obligations, of which payments totaling $33.7 million are expected to become due within the next 12 months. These purchase obligations primarily relate to raw material commitments.

We expect to make contributions of approximately $0.4 million to our defined-benefit pension plans in fiscal 2025, which will equal or exceed our minimum funding requirements.

As of March 2, 2024, we had reserves of $5.1 million and $0.4 million for long-term unrecognized tax benefits and environmental liabilities, respectively. 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. At March 2, 2024, $463.3 million of our backlog was bonded by performance bonds with a face value of $1.3 billion. These bonds have expiration dates that align with completion of the purchase order or contract. We have not been required to make any payments under these 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 facilities, we believe that our sources of liquidity will be adequate to meet our short-term and long-term liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs, including additional sources of debt to finance potential material acquisitions for the foreseeable future. We also believe we will be able to operate our business so as to continue to be in compliance with our existing debt covenants over the next fiscal year.

We continually review our portfolio of businesses and their assets and how they support our business strategy and performance objectives. As part of this review, we may acquire other businesses, pursue geographic expansion, take actions to manage capacity and further invest in, divest and/or sell parts of our current businesses.

Recently Issued Accounting Pronouncements

See Note 1 of the Notes to Consolidated Financial Statements within Item 8 of this Form 10-K for information pertaining to recently issued accounting pronouncements, incorporated herein by reference.

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Critical Accounting Policies and Estimates

Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other assumptions or circumstances.

We consider the following items in our consolidated financial statements to require significant estimation or judgment.

Revenue recognition

We generate revenue from the design, engineering and fabrication of architectural glass, curtainwall, window, storefront and entrance systems, and from installing those products on non-residential buildings. We also manufacture value-added glass and acrylic products. Due to the diverse nature of our operations and various types of contracts with customers, we have businesses that recognize revenue over time and businesses that recognize revenue at a point in time. We believe the most significant areas of estimation and judgment are related to our businesses that recognize revenue using the over-time input method.

Approximately 34% of our total revenue in fiscal 2024 was from longer-term, fixed-price contracts. The contracts for these businesses have a single, bundled performance obligation, as these businesses generally provide interrelated products and services and integrate these products and services into a combined output specified by the customer. The customer obtains control of this combined output, generally integrated window systems or installed window and curtainwall systems, over time. We measure progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract, and record that proportion of the total contract price as revenue in the period. Contract costs include materials, labor and other direct costs related to contract performance. We believe this method of recognizing revenue is consistent with our progress in satisfying our contract obligations.

Due to the nature of the work required under these long-term contracts, the estimation of total revenue and costs incurred and remaining to complete on a project is subject to many variables and requires significant judgment. It is common for these contracts to contain potential bonuses or penalties which are generally awarded or charged upon certain project milestones or cost or timing targets, and can be based on customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on our assessments of anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Long-term contracts are often modified to account for changes in contract specifications and requirements of work to be performed. We consider contract modifications to exist when the modification, generally through a change order, either creates new or changes existing enforceable rights and obligations, and we evaluate these types of modifications to determine whether they may be considered distinct performance obligations. In many cases, these contract modifications are for goods or services that are not distinct from the existing contract, due to the significant integration service provided in the context of the contract. Therefore, these modifications are generally accounted for as part of the existing contract. The effect of a contract modification on the transaction price and our measure of progress is recognized as an adjustment to revenue, generally on a cumulative catch-up basis.

Due to the significant judgments utilized in our revenue recognition on long-term contracts, if subsequent actual results and/or updated assumptions, estimates, or projections were to change from those utilized at March 2, 2024, it could result in a material impact to our results of operations in the future.

Impairment of goodwill and indefinite-lived intangible assets

Goodwill

We evaluate goodwill for impairment annually on the first day in our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment, or a component of an operating segment, for which discrete financial information is available and is reviewed by segment management on a regular basis.

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The reporting units for our fiscal 2024 annual impairment test align with our reporting segments, with the exception of our Architectural Framing Systems Segment. This segment contains two reporting units, Window and Wall Systems and Storefront and Finishing Solutions, which represent $53.6 million and $35.7 million, of the goodwill balance at March 2, 2024, respectively. During the fourth quarter of fiscal 2024, as a result of an announced restructuring plan, we reassessed our reporting units, which led to a combination of the Window and Wall Systems and Storefront and Finishing Solutions reporting units into one Architectural Framing Systems reporting unit. We evaluated goodwill on a qualitative basis prior to and subsequent to this change and concluded that no adjustment to the carrying value of goodwill was necessary as a result of this change. In addition, no qualitative indicators of impairment were identified during the fourth quarter of fiscal 2024. Following this change, we have four reporting units, which align with our reporting segments.

For our fiscal 2024 annual impairment test, we elected to bypass the qualitative assessment process and proceed directly to comparing the fair value of each of our reporting units to carrying value, including goodwill. If fair value exceeds the carrying value, goodwill impairment is not indicated. If the carrying amount of a reporting unit is higher than its estimated fair value, the excess is recognized as an impairment expense.

We estimate the fair value of a reporting unit using both the income approach and the market approach. The income approach uses a discounted cash flow methodology that involves significant judgment and projections of future performance. Assumptions about future revenues and future operating expenses, capital expenditures and changes in working capital are based on the annual operating plan and other business plans for each reporting unit. These plans take into consideration numerous factors, including historical experience, current and future operational plans, anticipated future economic conditions and growth expectations for the industries and end markets in which we participate. These projections are discounted using a weighted-average cost of capital, which considers the risk inherent in our projections of future cash flows. We determine the weighted-average cost of capital for this analysis by weighting the required returns on interest-bearing debt and common equity capital in proportion to their estimated percentages in an expected capital structure, using published data where possible. We used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts. The market approach uses a multiple of earnings and revenue based on publicly traded companies.

Based on these analyses, estimated fair value exceeded carrying value at all of our reporting units. The discounted cash flow projections used in these analyses are 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 our reporting units and we could incur non-cash impairment expense that would negatively impact our net earnings. For example, keeping all other assumptions constant, a 100 basis point increase in the weighted average cost of capital would cause the estimated fair values of our reporting units to decrease in the range of $17 million to $46 million. In addition, keeping all other assumptions constant, a 100 basis point reduction in the long-term growth rate would cause the estimated fair values of our reporting units to decrease in the range of $7 million to $20 million. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests.

Indefinite-lived intangible assets

We have intangible assets for certain acquired trade names and trademarks which we have determined to have indefinite useful lives. We evaluate the reasonableness of the useful lives and test indefinite-lived intangible assets for impairment annually at the same measurement date as goodwill, the first day of our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

For our fiscal 2024 annual impairment test, we bypassed a qualitative assessment and performed a quantitative impairment test to compare the fair value of each indefinite-lived intangible asset with its carrying value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment expense is recognized in an amount equal to that excess. If an impairment expense is recognized, the adjusted carrying amount becomes the asset's new accounting basis.

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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 estimation of 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 the fair value analysis, we assumed discount rates ranging from 13.5% to 14.0%, a royalty rate of 1.5%, and a long-term growth rate of 3.0%. Based on our annual analysis, the fair value of each of our trade names and trademarks exceeded the carrying amount. The discounted cash flow projections used in these analyses are dependent upon achieving forecasted levels of revenue. If revenue was to fall below forecasted levels, or if market conditions were to decline in a material or sustained manner, impairment could be indicated for our indefinite-lived intangible assets and we could incur non-cash impairment expense that would negatively impact our net earnings. For example, keeping all other assumptions constant, a 100 basis point increase in the weighted average cost of capital would cause the estimated fair values of our indefinite-lived intangibles to fall below carrying value, and would indicate impairment of around $0.4 million.

We continue to conclude that the useful lives of our remaining 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, impairment could be indicated on these indefinite-lived intangible assets.

Reserves for disputes and claims regarding product liability, warranties and other project-related contingencies

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 products, some of which may be covered under our warranty policies. We have in the past and are currently subject to product liability and warranty claims, including certain legal claims related to a commercial sealant product formerly incorporated into our products. We also are subject to project management and installation-related contingencies as a result of our fixed-price material supply and installation service contracts, primarily in our Architectural Services Segment and certain of our Architectural Framing Systems businesses. The time period from when a claim is asserted to when it is resolved, either by negotiation, settlement or litigation, can be several years. While we maintain various types of 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 also actively manage the risk of these exposures through contract negotiations and proactive project management.

We reserve estimated exposures on known claims, as well as on a portion of anticipated claims for product warranty and rework costs, based on similar historical product liability claims, as a ratio of sales. We also reserve for estimated exposures on other claims as they are known and reasonably estimable.

Income taxes

We are required to make judgments regarding the potential tax effects of various financial transactions and ongoing operations to estimate our obligation to taxing authorities. These tax obligations include income, real estate, franchise and sales/use taxes. Judgments related to income taxes require the recognition in our financial statements that a tax position is more-likely-than-not to be sustained on audit.

Judgment and estimation is required in developing the provision for income taxes and the reporting of tax-related assets and liabilities and, if necessary, any valuation allowances. The interpretation of tax laws can involve uncertainty, since tax authorities may interpret such laws differently. Actual income tax could vary from estimated amounts and may result in favorable or unfavorable impacts to net income, cash flows and tax-related assets and liabilities. In addition, the effective tax rate may be affected by other changes, including the allocation of property, payroll and revenues between states.

We assess the deferred tax assets for recoverability taking into consideration historical and anticipated earnings levels; the reversal of other existing temporary differences; available net operating losses and tax carryforwards; and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, a valuation allowance against the deferred tax assets. As facts and circumstances change, adjustment to the valuation allowance may be required.

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