UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period endedApril 2,1, 20222023

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 001-37971

PGT Innovations, Inc.

 

1070 Technology Drive

North Venice, FL 34275

Registrant’s telephone number: 941-480-1600

 

State of Incorporation

 

IRS Employer Identification No.

Delaware

 

020-0634715

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

PGTI

New York Stock Exchange, Inc.

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.

Yes No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No ☐

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

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No No ☑

Common Stock, $0.01 par value, outstanding was 59,918,55058,721,849 shares, as of April 30, 2022.2023.

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

PGTI

New York Stock Exchange, Inc.

 

 


PGT INNOVATIONS, INC.

TABLE OF CONTENTS

 

Form 10-Q for the Three monthsMonths Ended April 2, 20221, 2023

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

Number

Part I.

 

Financial Information

 

3

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited):

 

3

 

 

 

 

Condensed Consolidated Statements of Operations

 

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

4

 

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity

 

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

Item 2.

 

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

 

2925

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

3834

 

 

Item 4.

 

Controls and Procedures

 

3834

 

 

 

 

 

 

 

Part II.

 

Other Information

 

3935

 

 

Item 1.

 

Legal Proceedings

 

3935

 

 

Item 1A.

 

Risk Factors

 

3935

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

3935

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

 

 

Item 6.

 

Exhibits

 

4036

 

 

 

 

Signature

 

4137

 

 

 

 

 

 

 

 

 

- 2 -


PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

Three Months Ended

 

Three Months Ended

 

April 2,

 

April 3,

 

April 1,

 

April 2,

 

2022

 

 

2021

 

2023

 

 

2022

 

(unaudited)

 

(unaudited)

 

Net sales

$

358,662

 

$

271,092

 

$

376,829

 

 

$

358,662

 

Cost of sales

 

224,069

 

 

 

177,130

 

 

227,598

 

 

 

224,069

 

 

 

 

 

 

 

 

 

Gross profit

 

134,593

 

93,962

 

 

149,231

 

 

 

134,593

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

95,882

 

 

 

69,766

 

 

95,913

 

 

 

95,882

 

 

 

 

 

 

 

 

 

Income from operations

 

38,711

 

24,196

 

 

53,318

 

 

 

38,711

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7,080

 

 

 

7,457

 

 

7,656

 

 

 

7,080

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

31,631

 

16,739

 

 

45,662

 

 

 

31,631

 

 

 

 

 

 

 

 

 

Income tax expense

 

7,805

 

 

 

3,944

 

 

11,235

 

 

 

7,805

 

 

 

 

 

 

 

 

 

Net income

 

23,826

 

12,795

 

 

34,427

 

 

 

23,826

 

 

 

 

 

 

 

 

 

Less: Net income attributable to redeemable non-controlling interest

 

(657

)

 

 

(411

)

Less: Net income attributable to redeemable
non-controlling interest ("RNCI")

 

(837

)

 

 

(657

)

 

 

 

 

 

 

 

 

Net income attributable to the Company

$

23,169

 

 

$

12,384

 

$

33,590

 

 

$

23,169

 

 

 

 

 

 

 

 

 

Calculation of net income per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

Net income attributable to the Company

$

23,169

 

$

12,384

 

$

33,590

 

 

$

23,169

 

Change in redemption value of redeemable non-controlling interest

 

(2,136

)

 

 

 

Increase in redemption value of RNCI

 

(1,177

)

 

 

(2,136

)

Net income attributable to common shareholders

$

21,033

 

 

$

12,384

 

$

32,413

 

 

$

21,033

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

Basic

$

0.35

 

 

$

0.21

 

$

0.54

 

 

$

0.35

 

Diluted

$

0.35

 

 

$

0.21

 

$

0.54

 

 

$

0.35

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

59,831

 

 

 

59,286

 

 

59,818

 

 

 

59,831

 

Diluted

 

60,219

 

 

 

59,894

 

 

60,153

 

 

 

60,219

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

Three Months Ended

 

Three Months Ended

 

April 2,

 

April 3,

 

April 1,

 

April 2,

 

2022

 

 

2021

 

2023

 

 

2022

 

(unaudited)

 

(unaudited)

 

Net income

$

23,826

 

 

$

12,795

 

$

34,427

 

 

$

23,826

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

Change in fair value of derivatives

 

6,075

 

8,288

 

Other comprehensive income before tax:

 

 

 

 

 

Increase in fair value of derivatives

 

312

 

 

 

6,075

 

Reclassification to earnings

 

(2,062

)

 

 

(1,775

)

 

(140

)

 

 

(2,062

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income
before tax

 

4,013

 

6,513

 

 

172

 

 

 

4,013

 

 

 

 

 

 

 

 

 

 

 

Income tax expense related to other
comprehensive income

 

1,030

 

 

 

1,618

 

 

45

 

 

 

1,030

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income,
net of tax

 

2,983

 

 

 

4,895

 

 

127

 

 

 

2,983

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

26,809

 

17,690

 

 

34,554

 

 

 

26,809

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to
redeemable non-controlling interest

 

(657

)

 

 

(411

)

 

(837

)

 

 

(657

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to the Company

$

26,152

 

 

$

17,279

 

$

33,717

 

 

$

26,152

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 4 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

April 2,

 

January 1,

 

 

April 1,

 

December 31,

 

 

2022

 

 

2022

 

 

2023

 

 

2022

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,631

 

$

96,146

 

 

$

48,314

 

 

$

66,548

 

Accounts receivable, net

 

 

179,167

 

141,221

 

 

 

159,522

 

 

 

160,107

 

Inventories

 

 

97,399

 

91,440

 

 

 

114,881

 

 

 

112,672

 

Contract assets, net

 

 

51,193

 

55,239

 

 

 

50,314

 

 

 

47,919

 

Prepaid expenses

 

 

11,236

 

8,727

 

 

 

14,400

 

 

 

11,763

 

Other current assets

 

 

28,515

 

 

 

28,985

 

 

 

14,535

 

 

 

16,532

 

Total current assets

 

 

471,141

 

421,758

 

 

 

401,966

 

 

 

415,541

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

186,030

 

185,266

 

 

 

210,950

 

 

 

208,354

 

Operating lease right-of-use asset, net

 

 

88,812

 

91,162

 

 

 

103,452

 

 

 

104,121

 

Intangible assets, net

 

 

380,682

 

394,525

 

 

 

440,259

 

 

 

447,052

 

Goodwill

 

 

370,366

 

364,598

 

 

 

461,381

 

 

 

460,415

 

Other assets, net

 

 

2,087

 

 

 

3,301

 

 

 

6,410

 

 

 

4,766

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,499,118

 

 

$

1,460,610

 

 

$

1,624,418

 

 

$

1,640,249

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST
AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

137,414

 

$

122,681

 

 

$

142,754

 

 

$

168,961

 

Current portion of operating lease liability

 

 

13,676

 

 

 

13,180

 

 

 

16,827

 

 

 

16,393

 

Total current liabilities

 

 

151,090

 

135,861

 

 

 

159,581

 

 

 

185,354

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

625,959

 

625,655

 

 

 

645,108

 

 

 

642,134

 

Operating lease liability, less current portion

 

 

81,473

 

83,903

 

 

 

94,175

 

 

 

95,159

 

Deferred income taxes

 

 

38,519

 

37,489

 

 

 

47,452

 

 

 

47,407

 

Other liabilities

 

 

8,766

 

 

 

11,742

 

 

 

7,094

 

 

 

7,459

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

905,807

 

 

 

894,650

 

 

 

953,410

 

 

 

977,513

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

39,656

 

 

 

36,863

 

 

 

36,735

 

 

 

34,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock; par value $.01 per share; 10,000 shares
authorized;
0 shares outstanding

 

 

 

Common stock; par value $.01 per share; 200,000 shares authorized; 63,883 and
63,516 shares issued and 59,901 and 58,696 shares outstanding at
April 2, 2022 and January 1, 2022, respectively

 

639

 

635

 

Additional paid-in-capital

 

 

434,212

 

433,347

 

Preferred stock; par value $.01 per share; 10,000 shares
authorized;
no shares outstanding

 

 

 

 

 

 

Common stock; par value $.01 per share; 200,000 shares authorized; 64,339 and
63,940 shares issued and 59,010 and 59,912 shares outstanding at
April 1, 2023 and December 31, 2022, respectively

 

 

643

 

 

 

639

 

Additional paid-in capital

 

 

442,546

 

 

 

442,116

 

Accumulated other comprehensive income

 

 

9,989

 

7,006

 

 

 

350

 

 

 

223

 

Retained earnings

 

 

127,104

 

106,398

 

 

 

236,483

 

 

 

204,891

 

Treasury stock at cost

 

 

(18,289

)

 

 

(18,289

)

Treasury stock at cost (3,934 shares and 2,760 shares at April 1, 2023
and December 31, 2022, respectively)

 

 

(45,749

)

 

 

(19,854

)

Total shareholders' equity

 

 

553,655

 

 

 

529,097

 

 

 

634,273

 

 

 

628,015

 

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and shareholders' equity

 

$

1,499,118

 

 

$

1,460,610

 

 

$

1,624,418

 

 

$

1,640,249

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

April 2,

 

April 3,

 

 

April 1,

 

April 2,

 

 

2022

 

 

2021

 

 

2023

 

 

2022

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,826

 

$

12,795

 

 

$

34,427

 

 

$

23,826

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

 

 

(used in) provided by operating activities:

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation

 

 

8,470

 

6,697

 

 

 

8,890

 

 

 

8,470

 

Amortization

 

 

8,043

 

4,749

 

 

 

6,793

 

 

 

8,043

 

Provision for allowance for doubtful accounts

 

 

1,408

 

2,411

 

Stock-based compensation

 

 

2,205

 

1,750

 

Amortization of deferred financing costs, debt discount and premium

 

 

304

 

230

 

Loss on sales of assets

 

 

747

 

67

 

Change in operating assets and liabilities (net of effects of acquisition):

 

 

 

 

 

Provision for credit losses

 

 

1,724

 

 

 

1,408

 

Stock-based compensation expense

 

 

2,207

 

 

 

2,205

 

Amortization of deferred financing costs

 

 

326

 

 

 

304

 

(Gain) loss on sales of assets

 

 

(204

)

 

 

747

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

 

(39,357

)

 

(24,980

)

 

 

(3,179

)

 

 

(39,357

)

Inventories

 

 

(6,286

)

 

(4,307

)

 

 

(2,573

)

 

 

(6,286

)

Contract assets, net, prepaid expenses, other current and other assets

 

 

10,669

 

(20,898

)

 

 

2,148

 

 

 

10,669

 

Accounts payable, accrued and other liabilities

 

 

7,291

 

 

 

20,039

 

 

 

(26,641

)

 

 

7,291

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

17,320

 

 

 

(1,447

)

Net cash provided by operating activities

 

 

23,918

 

 

 

17,320

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(8,180

)

 

(6,512

)

 

 

(11,785

)

 

 

(8,180

)

Investment in and acquisition of business

 

 

 

(94,321

)

Business combinations

 

 

(744

)

 

 

 

Proceeds from sales of assets

 

 

8

 

 

 

7

 

 

 

566

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(8,172

)

 

 

(100,826

)

 

 

(11,963

)

 

 

(8,172

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of senior notes

 

 

 

63,300

 

Payments of financing costs

 

 

 

(1,363

)

Purchases of common stock relating to tax withholdings on employee equity awards

 

 

(1,663

)

 

 

(1,005

)

Payment of fair value of contingent consideration in Anlin Acquisition

 

 

(4,348

)

 

 

 

Proceeds of amounts drawn from revolving credit facility

 

 

15,000

 

 

 

 

Payments of borrowing under revolving credit facility

 

 

(12,352

)

 

 

 

Purchases of treasury stock under share repurchase program

 

 

(25,895

)

 

 

 

Income taxes paid from stock withheld relating to vesting of equity awards

 

 

(2,594

)

 

 

(1,663

)

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(1,663

)

 

 

60,932

 

Net cash used in financing activities

 

 

(30,189

)

 

 

(1,663

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

7,485

 

(41,341

)

Net (decrease) increase in cash and cash equivalents

 

 

(18,234

)

 

 

7,485

 

Cash and cash equivalents at beginning of period

 

 

96,146

 

 

 

100,320

 

 

 

66,548

 

 

 

96,146

 

Cash and cash equivalents at end of period

 

$

103,631

 

 

$

58,979

 

 

$

48,314

 

 

$

103,631

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in Eco Acquisition

 

$

 

 

$

6,108

 

Establish right-of-use asset

 

$

1,324

 

 

$

29,490

 

Establish operating lease liability

 

$

(1,324

)

 

$

(29,490

)

Additions to right-of-use asset

 

$

3,991

 

 

$

1,324

 

Additions to operating lease liability

 

$

(3,991

)

 

$

(1,324

)

Property, plant and equipment additions in accounts payable

 

$

127

 

 

$

1,022

 

 

$

62

 

 

$

127

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 6 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except shares)(unaudited)

 

 

PGT Innovations, Inc. Shareholders' Equity

 

 

 

 

 

PGT Innovations, Inc. Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common stock

 

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

 

 

 

Common stock

 

 

Paid-in

 

Comprehensive

 

Retained

 

Treasury

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Stock

 

 

Total

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Stock

 

 

Total

 

THREE MONTHS ENDED APRIL 3, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2021

 

 

58,998,711

 

$

625

 

$

420,202

 

$

2,720

 

$

79,896

 

$

(18,309

)

 

$

485,134

 

THREE MONTHS ENDED APRIL 2, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

59,696,117

 

 

$

635

 

 

$

433,347

 

 

$

7,006

 

 

$

106,398

 

 

$

(18,289

)

 

$

529,097

 

Vesting of restricted stock

 

 

288,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

 

 

5

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock withheld in lieu of taxes

 

 

(84,492

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,663

)

 

 

(1,663

)

Retirement of stock withheld in lieu of taxes

 

 

 

 

 

(1

)

 

 

(1,335

)

 

 

 

 

 

(327

)

 

 

1,663

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,205

 

 

 

 

 

 

 

 

 

 

 

 

2,205

 

Net income attributable to the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,169

 

 

 

 

 

 

23,169

 

Increase in value of RNCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,136

)

 

 

 

 

 

(2,136

)

Other comprehensive income,
net of taxes of $
1,030

 

 

 

 

 

 

 

 

 

 

 

2,983

 

 

 

 

 

 

 

 

 

2,983

 

Balance at April 2, 2022

 

 

59,900,587

 

 

$

639

 

 

$

434,212

 

 

$

9,989

 

 

$

127,104

 

 

$

(18,289

)

 

$

553,655

 

THREE MONTHS ENDED APRIL 1, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

59,911,556

 

 

$

639

 

 

$

442,116

 

 

$

223

 

 

$

204,891

 

 

$

(19,854

)

 

$

628,015

 

Vesting of restricted stock

 

147,106

 

 

 

 

 

 

 

 

 

 

388,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

3

 

(3

)

 

 

 

 

 

 

 

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

 

 

(1

)

 

1

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

(42,414

)

 

 

 

 

 

(1,005

)

 

(1,005

)

 

 

(1,173,520

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,895

)

 

 

(25,895

)

Retirement of treasury stock

 

 

 

 

 

(844

)

 

 

(161

)

 

1,005

 

 

Stock-based compensation

 

 

 

 

 

1,750

 

 

 

 

 

1,750

 

Issuance in acquisition of Eco

 

 

357,797

 

4

 

6,104

 

 

 

 

6,108

 

Net income attributable to the Company

 

 

 

 

 

12,384

 

 

12,384

 

Change in redemption value of redeemable
non-controlling interest

 

 

 

 

 

 

 

 

Other comprehensive income, net of
tax expense of $
1,618

 

 

 

 

 

 

 

 

 

 

 

4,895

 

 

 

 

 

 

 

 

4,895

 

Balance at April 3, 2021

 

 

59,461,200

 

 

 

631

 

 

 

427,210

 

 

 

7,615

 

 

92,119

 

 

 

(18,309

)

 

 

509,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED APRIL 2, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

59,696,117

 

$

635

 

$

433,347

 

$

7,006

 

$

106,398

 

$

(18,289

)

 

$

529,097

 

Vesting of restricted stock

 

 

288,962

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

5

 

(5

)

 

 

 

 

 

Purchases of treasury stock

 

 

(84,492

)

 

 

 

 

 

(1,663

)

 

(1,663

)

Retirement of treasury stock

 

 

 

(1

)

 

(1,335

)

 

 

(327

)

 

1,663

 

 

Stock withheld in lieu of taxes

 

 

(116,570

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,594

)

 

 

(2,594

)

Retirement of stock withheld in lieu of taxes

 

 

 

 

 

(1

)

 

 

(1,772

)

 

 

 

 

 

(821

)

 

 

2,594

 

 

 

 

Stock-based compensation

 

 

 

 

2,205

 

 

 

 

2,205

 

 

 

 

 

 

 

 

 

2,207

 

 

 

 

 

 

 

 

 

 

 

 

2,207

 

Net income attributable to the Company

 

 

 

 

 

 

23,169

 

 

23,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,590

 

 

 

 

 

 

33,590

 

Change in redemption value of redeemable
non-controlling interest

 

 

 

 

 

(2,136

)

 

 

(2,136

)

Other comprehensive income, net of
tax expense of $
1,030

 

 

 

 

 

 

 

 

 

 

 

2,983

 

 

 

 

 

 

 

 

2,983

 

Balance at April 2, 2022

 

 

59,900,587

 

 

$

639

 

 

$

434,212

 

 

$

9,989

 

 

$

127,104

 

 

$

(18,289

)

 

$

553,655

 

Increase in value of RNCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,177

)

 

 

 

 

 

(1,177

)

Other comprehensive income,
net of taxes of $
45

 

 

 

 

 

 

 

 

 

 

 

127

 

 

 

 

 

 

 

 

 

127

 

Balance at April 1, 2023

 

 

59,009,698

 

 

$

643

 

 

$

442,546

 

 

$

350

 

 

$

236,483

 

 

$

(45,749

)

 

$

634,273

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 7 -


PGT INNOVATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

About PGT Innovations, Inc.

PGT Innovations, Inc. (“PGTI,”PGTI”, “we,” or the “Company”), formerly named PGT, Inc., is a leading manufacturer of impact-resistant aluminum and vinyl-framed windows and doors and offers a broad range of fully customizable window and door products.products, as well as fully custom overhead garage doors. The majority of our sales are to customers in the state of Florida; however, we also sell products in many other states, .the Caribbean, Canada, and in South and Central America. Our acquisition of Eco Enterprises (“("Eco Acquisition”Acquisition") in February 2021 expands our range of product offerings in our major market of southeast Florida. We also have sales of products that are designed to unify indoor and outdoor living spaces, through our Western Windows Systems’ (“WWS”) division, and most of its sales are in the western United States. Our acquisitionacquisitions of Anlin Windows and Doors ("Anlin") in October 2021 expandsand Martin Door Holdings, Inc. ("Martin") in October 2022 expanded our presence in the west. The acquisition of Martin, which produces residential and commercial garage doors, expands the Company into building products adjacent to its portfolio of window and door brands. Products are sold primarily through an authorized dealer and distributor network. However, with our acquisition of NewSouth Window Solutions in February 2020, we alsoWe began to sellselling window and door products in the direct-to-consumer channel, through a “factory-direct” sales model.model, through our acquisition of NewSouth Windows Solutions ("NewSouth") in February 2020.

We were incorporated in the state of Delaware on December 16, 2003, as JLL Window Holdings, Inc., with primary operations in North Venice, Florida. On February 15, 2006, our Company was renamed PGT, Inc. On December 14, 2016, we announced that we changed our name to PGT Innovations, Inc. and, effective on December 28, 2016, the listing of our common stock was transferred to the New York Stock Exchange (“NYSE”) from the NASDAQ Global Market, and began trading on the NYSE under its existing ticker symbol of “PGTI”. As of April 2, 2022, we had major manufacturing operations in Florida,

We are headquartered in North Venice, Tampa, and in the greater Miami area. We alsoFlorida, where we have manufacturing operations, in Phoenix, Arizona and Clovis, California. Additionally, we haveas well as 2two glass tempering and laminating plants 1 in North Venice, Florida and 1one insulated glass plant. We also have Florida-based manufacturing operations in Medley,Ft. Myers, Tampa, and the greater Miami area. Outside of Florida, we have manufacturing operations in Arizona, California and, more recently, Utah, with the acquisition of Martin.1 insulation glass plant located in North Venice, Florida.

All references to PGTI or our Company apply to the consolidated financial statements of PGT Innovations, Inc. unless otherwise noted.

COVID-19 Pandemic

During March 2020, a global pandemic (the “Pandemic”) was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The Pandemic has resulted in a significant number of infections, hospitalizations and deaths around the world, including in the United States, and in several of our key markets.

The extent to which the continuing circumstances around the Pandemic could affect our future business, operations and financial results will depend upon numerous factors that we are not able to accurately predict. As such, we continue to be unable to accurately predict the impact the Pandemic and the challenges it has created for the U.S. and global economies. The impact to our customers’ and suppliers’ businesses and other factors identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on March 1, 2022. We will continue to evaluate the nature and extent of any changes relating to the Pandemic and any impact those changes may have to our business, consolidated results of operations, and financial condition.

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Our condensed consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods. The Company’s fiscal first three months ended April 2, 2022,1, 2023 and April 3, 20212, 2022 consisted of 13 weeks.

The condensed consolidated balance sheet as of January 1,December 31, 2022, is derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of January 1,December 31, 2022, and the unaudited condensed consolidated financial statements as of and for the periods ended April 2, 20221, 2023, and April 3, 2021,2, 2022, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended January 1,December 31, 2022, included in the Company’s most recent Annual Report on Form 10-K. The accounting policies used in the preparation of these unaudited condensed

- 8 -


consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K.

The preparation of financial statements in conformity with GAAP 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

We have 2two reportable segments: the Southeast segment and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida. The Western reporting segment, also an operating segment, is composed of sales from our facilities in Arizona, Utah and California. See Note 1615 for segment disclosures.

Recently Adopted Accounting Pronouncements

Business Combinations - Contracts Assets and Liabilities8 -

On October 28, 2021, the FASB issued ASU 2021-08, which amends ASC 805-20 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. This standard was effective beginning January 1, 2022. Early adoption was permitted and was adopted by the Company in the period beginning January 3, 2021. The adoption of this standard did not have any impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in March 2021, subsequent amendment to the initial guidance, ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We have not elected adoption of this optional guidance and do not intend to elect this guidance before the sunset date of December 31, 2022, as there is no material impact on our consolidated financial statements.


NOTE 2. REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

Revenue Recognition Accounting Policy

The Company primarily manufactures fully customized windows and doors based on design specifications, measurements, colors, finishes, framing materials, glass-types, and other options selected by the customer at the point in time an order is received. The Company has an enforceable right to payment at the time an order is received and accepted at the agreed-upon sales prices contained in our agreements with our customers for all manufacturing efforts expended on behalf of its customers. Due to the customized build-to-order nature of these products, the Company’s assessment is that the substantial portion of its finished goods and certain unused glass components have no alternative use, and that control of these products and components passes to the customer over time during the manufacturing of the products in an order, or upon our receipt of certain pre-cut glass components from our supplier attributed to specific customer orders.

Based on these factors, the Company recognizes a substantial portion of revenue over time during the manufacturing process once customization begins, and for certain unused glass components on hand, at the end of a reporting period. Revenue on work-in-process at the end of a reporting period is recognized in proportion to costs incurred to total estimated cost of the product being manufactured. Except for the Western segment’s volume products, discussed in the section titled Disaggregation of Revenue from Contracts with Customers below, revenue recognized at a point in time is immaterial.

Disaggregation of Revenue from Contracts with Customers

As discussed in Note 1, we have 2two reportable segments: our Southeast segment and our Western segment. See Note 16 for more information. The following table provides information about our net sales by reporting segment, product category and market for the three months ended April 2, 20221, 2023 and April 3, 2021:2, 2022:

 

- 9 -


 

Three Months Ended

 

 

April 2,

 

 

April 3,

 

Disaggregation of revenue (in millions):

2022

 

 

2021

 

Reporting segment:

 

 

 

 

 

Southeast

$

271.8

 

 

$

233.6

 

Western

 

86.9

 

 

 

37.5

 

 

 

 

 

 

 

Total net sales

$

358.7

 

 

$

271.1

 

 

 

 

 

 

 

Product category:

 

 

 

 

 

Impact-resistant window and door products

$

217.8

 

 

$

191.4

 

Non-impact window and door products

 

140.9

 

 

 

79.7

 

 

 

 

 

 

 

Total net sales

$

358.7

 

 

$

271.1

 

 

 

 

 

 

 

Market:

 

 

 

 

 

New construction

$

150.1

 

 

$

120.0

 

Repair and remodel

 

208.6

 

 

 

151.1

 

 

 

 

 

 

 

Total net sales

$

358.7

 

 

$

271.1

 

 

Three Months Ended

 

 

April 1,

 

 

April 2,

 

Disaggregation of revenue (in millions):

2023

 

 

2022

 

Reporting segment:

 

 

 

 

 

Southeast

$

282.0

 

 

$

271.8

 

Western

 

94.8

 

 

 

86.9

 

 

 

 

 

 

 

Total net sales

$

376.8

 

 

$

358.7

 

 

 

 

 

 

 

Product category:

 

 

 

 

 

Impact-resistant window and door products

$

228.3

 

 

$

217.8

 

Non-impact window and door products

 

148.5

 

 

 

140.9

 

 

 

 

 

 

 

Total net sales

$

376.8

 

 

$

358.7

 

 

 

 

 

 

 

Market:

 

 

 

 

 

New construction

$

157.6

 

 

$

150.1

 

Repair and remodel

 

219.2

 

 

 

208.6

 

 

 

 

 

 

 

Total net sales

$

376.8

 

 

$

358.7

 

 

The Company’s Western segment includes both custom and volume products. This segment’s volume products are not made-to-order and are of standardized sizes and design specifications. Therefore, the Company’s assessment is that the Western segment’s volume products have alternative uses, and that control of these products passes to the customer at a point in time, which is typically when the product has been delivered to the customer. For the three months ended April 2, 20221, 2023 and April 3, 2021,2, 2022, the Western segment’s net sales of its volume products were $26.325.9 million and $19.626.3 million, respectively.

 

Contract Balances

Contract assets represent sales recognized in excess of billings related to finished goods not yet shipped and certain unused glass components not yet placed into the production process for which revenue is recognized over time as noted above.time. Contract liabilities relate to customer deposits at the end of reporting periods. At April 2, 20221, 2023 and January 1,December 31, 2022, those contract liabilities totaled $43.831.1 million and $45.239.1 million, respectively, of which $34.324.4 million and $37.033.4 million, respectively, are classified within accrued liabilities, and $9.56.8 million and $8.25.7 million, respectively, are classified as a reduction to the contract assets to which they relate. Contract assets, net, totaled $51.250.3 million at April 2, 20221, 2023 and $55.247.9 million at January 1,December 31, 2022, in the accompanying condensed consolidated balance sheets.

Because of the short-term nature of our performance obligations, as discussed below, substantially all of our performance obligations are satisfied within the quarter following the end of a reporting period. As such, we expect substantially all of the contract liabilities at January 1,December 31, 2022 were satisfied in the first quarter of 2022,2023, and contract assets at January 1,December 31, 2022 were transferred to accounts receivable in the first quarter of 2022. We expect2023. Also, substantially all of the contract liabilities at April 2, 20221, 2023 will be satisfied in the second quarter of 2022,2023, and contract assets at April 2, 20221, 2023 will be transferred to accounts receivable in the second quarter of 2022.2023. Contract liabilities at April 2,1, 2023 represents cash received during the three-month period ended April 1, 2023, excluding amounts recognized as revenue during that period. Contract assets at April 1, 2023 represents revenue recognized during the three-month period ended April 1, 2023, excluding amounts transferred to accounts receivable during that period. Contract liabilities at December 31, 2022 represents cash received during the three-month period ended April 2,December 31, 2022, excluding amounts recognized as revenue during that period. Contract assets at April 2,December 31, 2022 represents revenue recognized during the three-month period ended April 2, 2022, excluding amounts transferred to accounts receivable during that period. Contract liabilities at January 1, 2022 represents cash received during the three-month period ended January 1, 2022, excluding amounts recognized as revenue during that period. Contract assets at January 1, 2022 represents revenue recognized during the three-month period ended January 1,December 31, 2022, excluding amounts transferred to accounts receivable during that period.

 

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue as the performance obligation is satisfied. Our contracts with our customers generally represent an approved purchase order together with our standard terms and conditions. Our custom product contracts include distinct goods that are substantially the same and have the same pattern of transfer to the customer over time, and therefore represent a series of distinct goods accounted for as a single performance obligation. For volume products, we allocate the contract’s transaction price to each distinct performance obligation based on the estimated relative standalone selling price of each distinct good. Observable standalone sales are used to determine the standalone selling price. Certain customers are eligible for rebates based on their volume or purchases during an annual period. Rebates are recorded as a reduction to sales and were immaterial in all periods presented.

- 109 -


Performance obligations are satisfied over time, generally for our custom products, and as of a point in time for our volume products. Performance obligations are supported by contracts with customers, and we have elected not to disclose our unsatisfied performance obligations as of April 2, 2022 under the short-term contract exemption as we expect such performance obligations will be satisfied within the quarter following the end of a reporting period.

Policies Regarding Shipping and Handling Costs and Commissions on Contract Assets

The Company has made a policy election to continue to recognize shipping and handling costs as a fulfillment activity. Treating shipping and handling as a fulfillment activity requires estimated shipping and handling costs for undelivered products and certain glass components on which we have recognized revenue and created a contract asset, to be accrued to match this cost with the recognized revenue. Sales taxes collected from customers are recorded on a net basis.

The Company utilizes the practical expedient which permits the current expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to employees. We expense sales commissions paid to employees as sales are recognized, including sales from the creation of contract assets, as the expected amortization period is less than one year.

Allowance for Credit Losses

The Company adoptedAccounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”) on December 29, 2019 (the first day of our 2020 fiscal year). Topic 326 requires us toWe measure all expected credit losses for financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. In the ordinary course of business, we extend credit to qualified dealers and distributors, generally on a non-collateralized basis. The Company maintains an allowance for credit losses which is based on management’s assessments of the amount which may become uncollectible in the future and is determined through consideration of our write-off history, specific identification of uncollectible accounts based in part on the customer’s past due balance (based on contractual terms), and consideration of prevailing economic and industry conditions, and may include anticipated unfavorable impacts of the COVID-19 pandemiccurrent macro-economic conditions on the businesses of our customers, such as dealers and distributors.

As of April 2, 20221, 2023 and January 1,December 31, 2022, we had gross accounts receivable of $184.4175.4 million and $145.9173.8 million, respectively, and an allowance for credit losses of $5.215.9 million and $4.713.7 million, respectively.

NOTE 3. WARRANTY

Most of our manufactured products are sold with warranties. Warranty periods, which vary by product components, generally range from 1 to 10 years; however, the warranty period for a limited number of specifically identified components in certain applications is a lifetime. The majority of the products sold have warranties on components which range from 1 to 3 years. The amount charged to expense for warranties is based on management’s assessment of the cost per service call and the number of service calls expected to be incurred to satisfy warranty obligations on the current net sales.

During the three months ended April 2, 2022,1, 2023, we recorded warranty expense at a rate of approximately 2.61.9% of sales, which was level withslightly lower than the rate during the three months ended April 3, 20212, 2022 of 2.6% of sales. OurThe decrease in the warranty expense rate in the three months ended April 2, 20221, 2023 is a result of an increase in the useservicing a higher number of warranty claims with internal team members, as opposed to higher-cost contract labor to respond to warranty claimsin the first half of 2022 due to a currentlythen tight labor market, whereas in the three months ended April 3, 2021, the wind-down of the commercial business of NewSouth in the first quarter of 2021 resulted in warranty costs higher than those we would incur in the normal course of business.market.

The following table summarizes current period charges, adjustments to previous estimates, as well as settlements, which represent actual costs incurred during the period for the three months ended April 2, 20221, 2023 and April 3, 2021.2, 2022. The reserve is determined through specific identification and assessing our claims history. Of the accrued warranty reserve of $16.315.5 million at April 2, 2022,1, 2023, $13.812.2 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at April 2, 2022,1, 2023, with the remainder classified within other liabilities as non-current liabilities. Of the accrued warranty reserve of $13.515.4 million at January 1,December 31, 2022, $11.812.4 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at January 1,December 31, 2022, with the remainder classified within other liabilities as non-current liabilities.

 

 

Beginning

 

 

Charged

 

 

 

 

 

 

 

 

End of

 

 

Beginning

 

 

Charged

 

 

 

 

 

 

 

 

End of

 

Accrued Warranty

 

of Period

 

 

to Expense

 

 

Adjustments

 

 

Settlements

 

 

Period

 

 

of Period

 

 

to Expense

 

 

Adjustments

 

 

Settlements

 

 

Period

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 1, 2023

 

$

15,388

 

 

$

7,239

 

 

$

922

 

 

$

(8,006

)

 

$

15,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 2, 2022

 

$

13,504

 

 

$

9,148

 

 

$

750

 

 

$

(7,081

)

 

$

16,321

 

 

$

13,504

 

 

$

9,148

 

 

$

750

 

 

$

(7,081

)

 

$

16,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 3, 2021

 

$

8,001

 

 

$

6,966

 

 

$

389

 

 

$

(5,713

)

 

$

9,643

 

 

 

- 11 -


NOTE 4. INVENTORIES

Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited finished goods inventory since the substantial majority of our products are custom, made-to-order and the revenue on these products, as well as the related cost, has been fully recognized upon completion of the manufacturing process. Finished goods inventory and work-in-progress costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Inventories consisted of the following:

 

 

April 2,

 

January 1,

 

 

April 1,

 

December 31,

 

 

2022

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

 

(in thousands)

 

Raw materials

 

$

93,221

 

$

87,164

 

 

$

111,215

 

 

$

109,679

 

Work-in-progress

 

3,312

 

3,248

 

 

 

1,356

 

 

 

916

 

Finished goods

 

 

866

 

 

 

1,028

 

 

 

2,310

 

 

 

2,077

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

$

97,399

 

 

$

91,440

 

 

$

114,881

 

 

$

112,672

 

 

 

- 10 -


NOTE 5. STOCK BASED-COMPENSATION

Stock-Based Compensation Expense

We record stock compensation expense over an equity award’s vesting period based on the award’s fair value at the date of grant. We recorded compensation expense for stock-based awards of $2.2 million for the three months ended April 2, 2022,1, 2023 and $1.82.2 million for the three months ended April 3, 2021.2, 2022. As of April 2, 2022,1, 2023, there was $13.018.0 million in total unrecognized compensation cost related entirely to restricted share awards.awards, including time-vesting and those with performance conditions. These costs are expected to be recognized in earnings on an accelerated basis over the weighted average remaining vesting period of 1.9 years at April 2, 2022.1, 2023.

 

Of the $2.2 million and $1.82.2 million in stock-based compensation expense in the three months ended April 2, 20221, 2023 and April 3, 2021,2, 2022, respectively, $1.9 million and $1.51.9 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales.

 

New Issuance

 

On February 14, 2022,15, 2023, we issued 468,518524,114 shares of restricted stock to certain executive and non-executive employees of the Company, under the Company’s 20222023 long-term incentive plan (“20222023 LTIP”). Half of the shares awarded under the 20222023 LTIP, or 234,259262,057 shares, isare subject to adjustment based on the performance of the Company for the 20222023 fiscal year. A portion of the 234,259262,057 performance shares issued under the 20222023 LTIP are also subject to a total shareholder return ("TSR") component, which will not be finalized until the third anniversary of the February 14, 202215, 2023 grant date. Specifically, 37.5% of the one-half of the restricted stock awarded in the 20222023 LTIP are performance restricted shares which will not be earned unless certain financial performance metrics are met by the Company for the 20222023 fiscal year. The performance criteria, as defined in the share awards, provide for a graded awarding of shares based on the percentage by which the Company meets earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined in our 20222023 business plan. The percentages, ranging from less than 80% to greater than 120% of the target amount of that EBITDA metric, provide for the awarding of shares ranging from 0% to 200% of the target amount of shares with respect to 37.5% of half of the 234,259262,057 performance shares, or 87,84998,273 shares. The remaining 62.5% of the one-half of the restricted stock awarded in the 2022 LTIP,262,057 performance shares, or 146,410163,784 shares, are subject to the same EBITDA metric, but are also subject to a TSR component which stratifies the performance of the Company's common stock price compared to a defined peer group of companies over the three-year period subsequent to February 14, 2022,15, 2023, such that if the Company's TSR falls at the 75th percentile or higher compared to the peer group, grantees will receive an additional 25% of performance shares. If the Company's TSR falls at the 25th percentile or lower compared to the peer group, grantees will forfeit 25% of performance shares. If the Company's TSR falls within the 75th and 25th percentiles, there will be no additional adjustment and grantees will receive their performance shares as per the EBITDA metric previously discussed. The final award is also affected by forfeitures upon the termination of a grantee’s employment with the Company. The remaining 234,259262,057 shares from the 20222023 LTIP are not subject to adjustment based on any performance or other criteria, but rather, vest in three equal installments on each of the first, second and third anniversaries of the grant date, assuming the grantee is employed by the Company on those vesting dates.

The grant date fair value of the 20222023 LTIP was $18.2722.64 per share for those shares not subject to adjustment based on any performance or other criteria except the passage of time, and the 37.5% of shares subject only to the EBITDA criteria of Company performance. For the 62.5% of performance shares subject to both the EBITDA criteria of Company performance and the TSR component, the grant date fair value was $20.7926.08 per share as determined by a third-party valuation specialist engaged by the Company, which used Monte Carlo simulation techniques to determine the fair value of such shares, which we consider to be a Level 3 input. As such, the weighted-average fair value of the 234,259262,057 shares subject to the performance of the Company for the 20222023 fiscal year, including those shares subject to the TSR, is $19.8424.79 per share.

- 1211 -


NOTE 6. ACQUISITIONS

MARTIN DOORS

On October 14, 2022, we completed the acquisition of the Martin Doors brand. The acquisition was done by WWS Acquisition, LLC, a Missouri limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired all of the shares of stock of Martin Door Holdings, Inc., a Utah corporation, headquartered in Salt Lake City, Utah, a custom manufacturer of overhead garage doors and hardware serving the Western U.S. (the "Martin Acquisition"), pursuant to that certain Share Purchase Agreement dated as of October 14, 2022 (the “Martin Purchase Agreement”). The fair value of consideration transferred in the Martin Acquisition was $188.5 million, composed entirely of cash, including $185.0 million for purchase price and $3.5 million in working capital adjustments, of which $2.8 million was estimated and paid at closing, and approximately $0.7 million was paid in the first quarter of 2023 upon finalization of the net working capital calculation.

The cash portion of the Martin Acquisition was financed with borrowings under the revolving credit facility ("New Revolving Credit Facility") established under fifth amendment ("Fifth Amendment") to the 2016 Credit Agreement ("2016 Credit Agreement due 2027") of $98.4 million, with the remaining $90.1 million, which includes the approximately $0.7 million final net working capital adjustment paid in the first quarter of 2023, funded with cash on hand. Generally, cash on hand for the Martin Acquisition was provided by cash generated through operations.

Purchase Price Allocation

The preliminary estimated fair value of assets acquired, and liabilities assumed as of the closing date, are as follows:

 

 

Initial
Allocation

 

 

Adjustments to
Allocation

 

 

Preliminary
Allocation

 

Accounts receivable

 

$

6,653

 

 

$

(141

)

 

$

6,512

 

Inventories

 

 

9,543

 

 

 

(364

)

 

 

9,179

 

Contract assets, net

 

 

5,242

 

 

 

 

 

 

5,242

 

Prepaid expenses and other assets

 

 

90

 

 

 

 

 

 

90

 

Property and equipment

 

 

11,422

 

 

 

 

 

 

11,422

 

Operating lease right-of-use asset

 

 

12,259

 

 

 

 

 

 

12,259

 

Intangible assets

 

 

91,900

 

 

 

 

 

 

91,900

 

Total assets acquired

 

 

137,109

 

 

 

(505

)

 

 

136,604

 

Accounts payable

 

 

(2,482

)

 

 

 

 

 

(2,482

)

Accrued and other liabilities

 

 

(1,270

)

 

 

283

 

 

 

(987

)

Deferred tax liabilities

 

 

(23,604

)

 

 

 

 

 

(23,604

)

Operating lease liability

 

 

(12,259

)

 

 

 

 

 

(12,259

)

Total liabilities assumed

 

 

(39,615

)

 

 

283

 

 

 

(39,332

)

Net assets acquired

 

 

97,494

 

 

 

(222

)

 

 

97,272

 

Goodwill

 

 

90,300

 

 

 

966

 

 

 

91,266

 

Fair value of consideration transferred

 

$

187,794

 

 

$

744

 

 

$

188,538

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

Cash

 

$

187,794

 

 

$

744

 

 

$

188,538

 

Fair value of consideration transferred

 

$

187,794

 

 

$

744

 

 

$

188,538

 

The fair value of certain working capital related items, including Martin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued and other liabilities, approximated their book values at the date of the Martin Acquisition. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. The substantial majority of inventories at the acquisition date was comprised of raw materials. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. During the first quarter of 2023, we made immaterial adjustments to our purchase allocation relating to accounts receivable, inventories and accrual and other liabilities.

We incurred acquisition costs totaling $4.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and other services in the Martin Acquisition in the year ended December 31, 2022.

Because the Martin Acquisition was an acquisition of stock, Martin's assets and liabilities retain their tax bases at the time of the acquisition. Therefore, none of the identifiable intangible assets or goodwill acquired in the Martin Acquisition are deductible for tax purposes. As of April 1, 2023, goodwill is estimated to be $91.3 million. Martin's goodwill is included as part of the Western reporting

- 12 -


unit. We believe Martin's goodwill relates to the expansion of our footprint in a key, strategic market we have identified as a geographic area of growth for our Company, as well as being a key component of our strategy to expand into adjacent building material products, other than windows and doors.

Pro forma results of operations, as well as net sales and income attributable to the Martin Acquisition are not presented as it did not have a material impact on our results of operations.

Valuation of Identified Intangible Assets

The valuation of the identifiable intangible assets acquired in the Martin Acquisition and our estimate of their respective useful lives are as follows:

 

 

 

 

 

Initial

 

 

Preliminary

 

 

Useful Life

 

 

Valuation

 

 

(in years)

(in thousands)

 

 

 

 

 

Trade name

 

$

24,000

 

 

indefinite

Customer relationships

 

 

52,700

 

 

15

Customer-related backlog (amortized in 2022)

 

 

400

 

 

<1

Developed technology

 

 

14,600

 

 

3 - 14

Non-compete-related intangible

 

 

200

 

 

5

 

 

 

 

 

 

Intangible assets

 

$

91,900

 

 

 

ANLIN WINDOWS & DOORS

On October 25, 2021, we completed the acquisition of Anlin Windows & Doors. The acquisition was done by Western Window Holding LLC, a Delaware limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired substantially all of the assets, properties and rights owned, used or held for use in the business, as operated by Anlin Industries, a California corporation, of manufacturing vinyl windows and doors for the replacement market and the new construction market, and all activities conducted in connection therewith (the "Anlin Acquisition"), pursuant to that certain Asset Purchase Agreement dated as of September 1, 2021 (the “Anlin Purchase Agreement”), by and among the Company, and Anlin Industries. The fair value of consideration transferred in the Anlin Acquisition was $120.9121.7 million, composed of $114.2115.0 million in cash, including $113.5 million for purchase price and $0.71.5 million in estimated working capital adjustment,adjustments, including $0.8 million paid during the three months ended October 1, 2022, and estimated fair value of contingent consideration of $6.7 million, discussed in greater detail below.

The cash portion of the Anlin Acquisition of $114.2 million was financed with borrowings under the fourth amendment of our 2016 Credit Agreement due 2024 of $60.0 million, which resulted in net proceeds after fees of $59.4 million, with the remaining $54.8 million from cash on hand. Cash on hand for the Anlin Acquisition was ultimately provided by the issuance of senior notes due 2029 of $575.0 million of 4.375% and related transactions, further explained in Note 9, Long-Term Debt.

The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Anlin Acquisition, are as follows:

 

 

Initial
Allocation

 

 

Adjustments to
Allocation

 

 

Preliminary
Allocation

 

Accounts receivable

 

$

10,803

 

 

$

 

 

$

10,803

 

Inventories

 

 

7,633

 

 

 

(327

)

 

 

7,306

 

Contract assets, net

 

 

7,027

 

 

 

 

 

 

7,027

 

Prepaid expenses and other assets

 

 

1,626

 

 

 

(954

)

 

 

672

 

Property and equipment

 

 

22,800

 

 

 

1,509

 

 

 

24,309

 

Operating lease right-of-use asset

 

 

3,450

 

 

 

14

 

 

 

3,464

 

Intangible assets

 

 

77,800

 

 

 

(5,800

)

 

 

72,000

 

Goodwill

 

 

5,596

 

 

 

5,768

 

 

 

11,364

 

Total assets acquired

 

 

136,735

 

 

 

210

 

 

 

136,945

 

Accounts payable

 

 

(5,175

)

 

 

593

 

 

 

(4,582

)

Accrued and other liabilities

 

 

(7,993

)

 

 

 

 

 

(7,993

)

Operating lease liability

 

 

(3,450

)

 

 

(14

)

 

 

(3,464

)

Total liabilities assumed

 

 

(16,618

)

 

 

579

 

 

 

(16,039

)

Fair value of consideration transferred

 

$

120,117

 

 

$

789

 

 

$

120,906

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

Cash

 

$

114,196

 

 

$

 

 

$

114,196

 

Contingent consideration

 

 

5,921

 

 

 

789

 

 

 

6,710

 

Fair value of consideration transferred

 

$

120,117

 

 

$

789

 

 

$

120,906

 

The fair value of certain working capital related items, including Anlin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities, approximated their book values at the date of the Anlin Acquisition. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Inventories at the acquisition date was primarily composed of raw materials. Further review during the first quarter of 2022 resulted in an adjustment to decrease the estimated net realizable value of inventory. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. During the first quarter of 2022, additional value was assigned to acquired property and equipment, primarily due to an increase in the estimate of the fair value of acquired land. Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs, with the assistance of a third-party valuations firm. During the first quarter of 2022, we made several adjustments to the estimated fair value of the initial valuation of certain intangible assets, given the preliminary nature of several of the valuation inputs. Additionally, we determined that a portion of the customer relationship asset we acquired related to Anlin's backlog, which had an estimated useful life of less than three months, resulting in its estimated fair value becoming fully amortized in the first quarter of 2022, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three-month period ended April 2, 2022.

We incurred acquisition costs totaling $1.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Anlin Acquisition, incurred during the year ended January 1, 2022, primarily during the third and fourth quarters.

- 13 -


The Anlin Purchase Agreement providesprovided for the potential for an earn-out contingency paymentpayments to sellers should Anlin achieve a certain level of earnings before interest, taxes, depreciation and amortization, ("Anlin EBITDA"), as defined in the Anlin Purchase Agreement, for its fiscal years of 2021 and 2022, of up to $3.2 million to be paid out by March 31, 2022, and of up to $9.5 million to be paid out by March 31, 2023, respectively. We had recorded a preliminary earn-out contingent liability of $5.9 million as of our 2021 fiscal year ended January 1, 2022, which represented its then estimated fair value based on probability adjusted levels of estimated Anlin EBITDA. Estimated Anlin EBITDA is a significant input that is not observable in the market, which ASC 820 considers to be a Level 3 input. In the first quarter of 2022, we finalized the fair value of the earn-out contingency, which we adjusted by an additional $0.8 million, to a total of $6.7 million of estimated fair value of contingent consideration as of the effective date of the Anlin Acquisition, classified within accrued current liabilities in the accompanying condensed consolidated balance sheet as of April 2, 2022.Acquisition. This amount included $2.4 million for the contingent consideration relating to 2021 Anlin EBITDA and $4.3 million for the contingent consideration relating to the 2022 Anlin EBITDA.

By mutual agreement between sellerThe first contingent consideration payment was agreed to be $2.7 million, which exceeded its estimated fair value by $0.3 million. This excess is classified as selling, general and buyer,administrative expenses in our 2022 fiscal year ended December 31, 2022. The payment was made during the second quarter of 2022 after both parties agreed to extend the deadline for the first payment of contingent consideration, which waspast the March 31, 2022 asdue date stated in the Anlin Purchase Agreement while both parties continued to negotiate the amountAgreement.

As of the first contingent consideration payment, which was agreed to be $2.5 million, which we paid in April 2022. During the first quarterend of 2022, we updated our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA to $9.5 million, which was estimated to be $5.1 million.the maximum potential payout for fiscal year 2022 under the Anlin Purchase Agreement, which we paid-out in the first quarter of 2023. As such, we recognized an expense of approximately $1.05.1 million, representing the difference between the actual andthis updated estimated fair value, of the contingent consideration relating to 2021 Anlin EBITDA, and the difference between the initial and updated estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA,estimated in our purchase price allocation, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three monthsyear ended April 2,December 31, 2022. We will continue to update our estimate of the fair value of the

Having paid all contingent consideration relating to 2022in the Anlin EBITDA each reporting period, as required by ASC 805,Acquisition, which combined totaled $12.1 million and record any adjustments within operating income until finalized by March 31, 2022.

For tax purposes, contingent consideration does not become part of tax goodwill until paid. As such,which exceeds the amount of goodwill deductible for tax purposes will not be finalized until the outcome of both earn-out contingency payments are known. As discussed, as of April 2, 2022, the estimated fair value of the earn-out contingency was $6.7 million and goodwill according to the current allocation of consideration is $11.4 million, and is included as part of the Western reporting unit goodwill. As such, as of April 2, 2022, the amount of goodwill estimated to be tax deductible was the difference of $4.7 million. We believe goodwill relates to the expansion of our footprint in a key, strategic market we have identified as a geographic area of growth for our Company. Our estimate of the amount of tax deductible goodwill may change as we the amounts of the payments offair value on contingent consideration are finalized.

As discussed above,established in the purchase allocation, we made changes tobelieve that our tax basis in the initial estimated fair valuesgoodwill of the trade name and customer relationships assets in the Anlin Acquisition and we determined that a portion of our customer relationships intangible asset relatesis equal to the backlog acquired in the acquisition, which we estimated to be $2.2 million. Due to the short useful life of the customer-related backlog, its estimated fair valuebook basis of $2.2 million was fully amortized by the end of the first quarter of 2022, which is classified within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three-month period ended April 2, 2022. Our purchase price allocation is preliminary, and other items are subject to change.

The Anlin Purchase Agreement has a post-closing working capital calculation whereby we are required to prepare, and deliver to sellers, a final statement of purchase price. We expect to finalize this process during the second quarter of 2022.

Valuation of Identified Intangible Assets

The valuation of the identifiable intangible assets acquired in the Anlin Acquisition and our estimate of their respective useful lives are as follows:

 

 

 

 

 

 

 

 

 

 

 

Initial

 

 

Initial

 

 

Adjustment to

 

 

Preliminary

 

 

Useful Life

 

 

Valuation

 

 

Valuation

 

 

Valuation

 

 

(in years)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

$

35,400

 

 

$

(3,700

)

 

$

31,700

 

 

indefinite

Customer relationships

 

 

42,100

 

 

 

(4,300

)

 

 

37,800

 

 

15

Customer-related backlog

 

 

 

 

 

2,200

 

 

 

2,200

 

 

<1

Developed technology

 

 

300

 

 

 

 

 

 

300

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

$

77,800

 

 

$

(5,800

)

 

$

72,000

 

 

 

Pro Forma Financial Information

The following unaudited pro forma financial information assumes the acquisition had occurred at the beginning of the earliest period presented that does not include Anlin's actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of Anlin adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the refinancing of the 2018 Senior Notes due 2026 and the third amendment of the 2016 Credit Agreement due 2024 into the 2021 Senior Notes due 2029 and the fourth amendment of the 2016 Credit Agreement due 2024. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the

- 14 -


acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.

 

Three Months Ended

 

 

April 3,

 

Pro Forma Results (unaudited)

2021

 

(in thousands, except per share amounts)

(unaudited)

 

Net sales

$

295,512

 

 

 

 

Net income attributable to common shareholders

$

12,745

 

 

 

 

Net income per common share attributable to common shareholders:

 

 

Basic

$

0.21

 

Diluted

$

0.21

 

 

 

 

Net sales of Anlin included in the condensed consolidated statement of operations for the three months ended April 2, 2022, was $32.49.6 million. The net income of Anlin in the condensed consolidated statement of operations for the three months ended April 2, 2022, was $

2.9 million.

CRI SOCAL, INC.

On May 2, 2021, pursuant to an asset purchase agreement dated April 9, 2021, we acquired substantially all of the assets and assumed certain liabilities of CRi SoCal, Inc. (“CRi”), a California corporation doing business in California as Combined Resources (the “CRi Acquisition”). CRi is engaged in the sales, distribution and installation of window and door products, and related design services, to homebuilders in the residential new construction market from its leased facility in Rancho Santa Margarita, California. Until its acquisition by the Company, CRi was a customer of the Company’s western business unit.

The fair value of consideration transferred in the acquisition of CRi totaled $12.5 million, and included $12.1 million in cash, funded from cash on hand, and $0.4 million in accounts receivable owed by CRi to the Company’s western business unit relating to sales prior to the acquisition, which are considered settled as a result of the acquisition. The preliminary estimated fair value of assets acquired and liabilities assumed totaled $17.6 million and $5.1 million, respectively, which included offsetting operating lease right of use assets and operating lease liabilities totaling $2.6 million. The estimated fair value of assets acquired also included current assets totaling $4.1 million, primarily accounts receivable, identifiable intangible assets totaling $7.0 million, goodwill of $3.7 million, all of which we believe is tax deductible, and a small amount of property and equipment. Liabilities assumed included the aforementioned operating lease liability, as well as a total of $2.5 million in trade accounts payable and customer deposits. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. We believe goodwill in the acquisition relates to the expansion of our footprint in an existing market, in a way that we believe will enhance our long-term profitability in that market of our Western business.

Sales from CRi included in the three-month period ended April 2, 2022 totaled $2.4 million. CRi’s effect on consolidated net income was immaterial in the three-month period ended April 2, 2022.

ECO WINDOW SYSTEMS

On February 1, 2021, we completed the acquisition of a 75% ownership stake in Eco Enterprises and its related companies, Eco Windows Systems, LLC, Eco Glass Production, LLC, and Unity Windows, LLC (together “Eco”). Eco is a manufacturer and installer of aluminum, impact-resistant windows and doors, serving the South Florida region since 2009. Eco is headquartered in Medley, Florida, near Miami, Florida, and has 3 manufacturing locations in the region, including a glass processing facility.

The fair value consideration for Eco was $100.5 million, including $94.4 million in cash, after favorable adjustments totaling $5.6 million relating to working capital and customer deposits which were agreed to and settled in the second quarter of 2021. The fair value of consideration also included PGT Innovations, Inc. common stock with a then estimated fair value of $6.1 million. The cash portion of the purchase price was financed by a second add-on issuance of $60.0 million aggregate principal amount of 6.75% senior notes to the 2018 Senior Notes due 2026 on January 25, 2021 (the “Second Additional Senior Notes”), issued at 105.5% of their principal amount, resulting in a premium to us of $3.3 million, together with cash on hand of $31.1 million.

The common stock portion of the purchase price was represented by the issuance of 357,797 shares of PGT Innovations, Inc. common stock on February 1, 2021, with a closing price value of $21.34 per share on that date, or approximately $7.6 million based on that price. However, the seller of Eco, who is also the holder of the 25% redeemable non-controlling interest in Eco Enterprises, is restricted from selling these shares for a three-year period from the date of the acquisition. As such, we estimated that there was an approximately 20% discount for the lack of marketability of the shares. The fair value of the redeemable non-controlling interest in the acquisition has been estimated to be $28.5 million, resulting in total fair value of the Eco business in the acquisition, including the

- 15 -


redeemable non-controlling interest, of $128.9 million. The fair value of the redeemable non-controlling interest has been calculated as 25% of the initial estimated fair value of the entity at the acquisition date, less a discount for seller’s lack of control in the new entity, estimated to be 5%, and a discount for the seller’s lack of marketability of the minority stake, estimated to be 10%. See Note 17 for more information regarding the redeemable non-controlling interest.

The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Eco Acquisition, are as follows:

 

 

 

Initial
Allocation

 

 

Adjustments to
Allocation

 

 

Final
Allocation

 

Accounts receivable

 

$

5,031

 

 

$

(241

)

 

$

4,790

 

Inventories

 

 

7,728

 

 

 

(684

)

 

 

7,044

 

Contract assets, net

 

 

4,312

 

 

 

(123

)

 

 

4,189

 

Prepaid expenses and other assets

 

 

1,706

 

 

 

(759

)

 

 

947

 

Property and equipment

 

 

24,009

 

 

 

(191

)

 

 

23,818

 

Operating lease right-of-use asset

 

 

27,864

 

 

 

(1,049

)

 

 

26,815

 

Intangible assets

 

 

72,700

 

 

 

1,600

 

 

 

74,300

 

Goodwill

 

 

30,051

 

 

 

(4,467

)

 

 

25,584

 

Total assets acquired

 

 

173,401

 

 

 

(5,914

)

 

 

167,487

 

Accounts payable

 

 

(6,809

)

 

 

(116

)

 

 

(6,925

)

Accrued and other liabilities, including customer deposits

 

 

(4,215

)

 

 

(604

)

 

 

(4,819

)

Operating lease liability

 

 

(27,864

)

 

 

1,049

 

 

 

(26,815

)

Total liabilities assumed

 

 

(38,888

)

 

 

329

 

 

 

(38,559

)

Net assets acquired

 

 

134,513

 

 

 

(5,585

)

 

 

128,928

 

Redeemable non-controlling interest

 

 

(34,084

)

 

 

5,620

 

 

 

(28,464

)

Fair value of consideration transferred

 

$

100,429

 

 

$

35

 

 

$

100,464

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

Cash

 

$

94,321

 

 

$

35

 

 

$

94,356

 

PGTI common stock

 

 

6,108

 

 

 

 

 

 

6,108

 

Fair value of consideration transferred

 

$

100,429

 

 

$

35

 

 

$

100,464

 

The fair value of certain working capital related items, including Eco’s accounts receivable, prepaid and other expenses, and accounts payable and accrued liabilities, approximated their book values at the date of the Eco Acquisition. Subsequent to our initial allocation, we adjusted the fair value of certain acquired commercial receivable accounts based on a further post-acquisition assessment of their collectability. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Substantially all of inventories at the acquisition date was composed of raw materials. The fair value of property and equipment was estimated with the assistance of a third-party valuation firm, using the indirect cost approach, which we consider to be Level 3 in the fair value hierarchy. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm.

We incurred acquisition costs totaling $1.7 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Eco Acquisition, which includes $1.0 million in the fourth quarter of 2020, and $0.7 million in first three months of 2021, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three months ended April 3, 2021.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has currently been estimated to be $25.6 million, classified as part of the Southeast reporting unit goodwill, which we expect the portion of goodwill relating to our 75% investment to be deductible for tax purposes.

We believe goodwill represents the strengthening of our supply chain for glass through faster glass production, as well as diversification and expansion of product offerings in the high-growth commercial market, and an expansion of our dealer network with minimal overlap with our existing deal network.

 

- 1613 -


Valuation of Identified Intangible Assets in the Eco Acquisition

The valuation of the identifiable intangible assets acquired in the Eco Acquisition and our estimate of their respective useful lives are as follows:

 

 

 

 

 

 

 

 

 

 

 

Initial

 

 

Initial

 

 

Adjustment to

 

 

Preliminary

 

 

Useful Life

 

 

Valuation

 

 

Valuation

 

 

Valuation

 

 

(in years)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

$

36,000

 

 

$

(1,100

)

 

$

34,900

 

 

indefinite

Customer relationships

 

 

36,700

 

 

 

2,700

 

 

 

39,400

 

 

5 - 15

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

$

72,700

 

 

$

1,600

 

 

$

74,300

 

 

 

Pro Forma Financial Information

The following unaudited pro forma financial information assumes the Eco Acquisition had occurred at the beginning of the earliest period presented that does not include Eco’s actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of Eco adjusted for the following: amortization expense related to the estimated intangible assets arising from the acquisition; interest expense to reflect the Second Additional Senior Notes; net income attributable to redeemable non-controlling interest; and, change in redemption value of redeemable non-controlling interest. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.

 

Three Months Ended

 

 

 

April 3,

 

 

 

2021

 

 

(unaudited)

 

Net sales

 

$

279,044

 

 

 

 

 

Net income attributable to PGTI stockholders:

 

$

12,542

 

 

 

 

 

Net income per common share attributable to PGTI stockholders:

 

 

 

Basic

 

$

0.21

 

Diluted

 

$

0.21

 

Net sales of Eco included in the condensed consolidated statements of operations for the three months ended April 2, 2022, and April 3, 2021, was $21.5 million and $15.4 million, respectively, after eliminations of intercompany sales. The net income of Eco in the condensed consolidated statements of operations for the three months ended April 2, 2022, and April 3, 2021, was $2.6 million and $1.6 million, respectively, including the portions attributable to the redeemable non-controlling interest of $0.7 million and $0.4 million, respectively.

NOTE 7. NET INCOME PER COMMON SHARE

Basic earnings per share (“EPS”) available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Diluted EPS available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period.

There were 0 anti-dilutive Anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three-month periodsthree months ended April 1, 2023 and April 2, 2022 or April 3, 2021.were insignificant.

- 17 -


The table below presents the calculation of EPS and a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS:

 

Three Months Ended

 

Three Months Ended

 

April 2,

 

April 3,

 

April 1,

 

April 2,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands, except per share amounts)

 

(in thousands, except per share amounts)

 

Net income

$

23,826

 

$

12,795

 

$

34,427

 

 

$

23,826

 

Less: Net income attributable to redeemable non-controlling interest

 

(657

)

 

 

(411

)

Less: Net income attributable to RNCI

 

(837

)

 

 

(657

)

Net income attributable to the Company

 

23,169

 

12,384

 

 

33,590

 

 

 

23,169

 

Change in redemption value of redeemable non-controlling interest

 

(2,136

)

 

 

 

Increase in redemption value of RNCI

 

(1,177

)

 

 

(2,136

)

Net income attributable to common shareholders

$

21,033

 

 

$

12,384

 

$

32,413

 

 

$

21,033

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Basic

 

59,831

 

59,286

 

Weighted-average number of common shares outstanding - Basic

 

59,818

 

 

 

59,831

 

Add: Dilutive shares from equity plans

 

388

 

 

 

608

 

 

335

 

 

 

388

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Diluted

 

60,219

 

 

 

59,894

 

Weighted-average number of common shares outstanding - Diluted

 

60,153

 

 

 

60,219

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

Basic

$

0.35

 

 

$

0.21

 

$

0.54

 

 

$

0.35

 

Diluted

$

0.35

 

 

$

0.21

 

$

0.54

 

 

$

0.35

 

 

- 14 -


NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets are as follows:

 

 

 

 

 

Initial

 

 

 

 

 

Initial

 

April 2,

 

January 2,

 

Useful Life

 

April 1,

 

December 31,

 

Useful Life

 

2022

 

 

2021

 

 

(in years)

 

2023

 

 

2022

 

 

(in years)

 

(in thousands)

 

 

 

(in thousands)

 

 

Goodwill

 

$

370,366

 

 

$

364,598

 

 

indefinite

 

$

461,381

 

 

$

460,415

 

 

indefinite

 

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

Trade names (indefinite-lived)

 

$

208,441

 

 

$

212,141

 

 

indefinite

 

$

225,018

 

 

$

225,018

 

 

indefinite

 

 

 

 

 

 

 

 

 

 

Customer relationships and customer-related assets

 

 

286,947

 

289,047

 

<1-15

 

 

340,047

 

 

 

340,047

 

 

<1-15

Trade name (amortizable)

 

 

22,200

 

22,200

 

15

 

 

22,200

 

 

 

22,200

 

 

15

Developed technology

 

 

5,900

 

5,900

 

6-10

 

 

20,500

 

 

 

20,500

 

 

3-14

Non-compete agreement

 

 

3,338

 

3,338

 

2-5

 

 

3,538

 

 

 

3,538

 

 

2-5

Software license

 

 

590

 

590

 

2

 

 

590

 

 

 

590

 

 

2

Less: Accumulated amortization

 

 

(146,734

)

 

 

(138,691

)

 

 

 

(171,634

)

 

 

(164,841

)

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

172,241

 

 

 

182,384

 

 

 

 

215,241

 

 

 

222,034

 

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets, net

 

$

380,682

 

 

$

394,525

 

 

 

$

440,259

 

 

$

447,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill at January 1, 2022

 

$

364,598

 

 

 

 

Increase in contingent consideration in our Anlin Acquisition

 

789

 

 

 

Decrease in trade name in our Anlin Acquisition

 

3,700

 

 

 

 

Net decrease in customer-related assets in our Anlin Acquisition

 

2,100

 

 

 

 

Net decrease in other allocation changes in our Anlin Acquisition

 

 

(821

)

 

 

 

Goodwill at December 31, 2022

 

$

460,415

 

 

 

 

Increase relating to Martin Acquisition net working capital payment

 

 

744

 

 

 

 

Net other measurement period changes in Martin Acquisition

 

 

222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill at April 2, 2022

 

$

370,366

 

 

 

 

Goodwill at April 1, 2023

 

$

461,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names (indefinite-lived) at January 1, 2022

 

$

212,141

 

 

 

 

Decrease in value of trade name in our Anlin Acquisition

 

 

(3,700

)

 

 

 

 

 

 

 

 

 

Trade names (indefinite-lived) at April 2, 2022

 

$

208,441

 

 

 

 

 

- 18 -


Estimated amortization of our amortizable intangible assets for future years is as follows:

 

(in thousands)

 

Total

 

 

Total

 

Remainder of 2022

 

$

16,844

 

2023

 

 

20,520

 

Remainder of 2023

 

$

19,514

 

2024

 

 

20,474

 

 

 

25,971

 

2025

 

 

20,299

 

 

 

25,640

 

2026

 

 

16,906

 

 

 

21,241

 

2027

 

 

20,987

 

Thereafter

 

 

77,198

 

 

 

101,888

 

 

 

 

 

 

 

Total

 

$

172,241

 

 

$

215,241

 

 

Amortization expense relating to amortizable intangible assets for the three months ended April 1, 2023 and April 2, 2022, was $6.8 million and April 3, 2021, was $8.0 million, and $4.7 million, respectively. See Note 6 for discussion of the amortization of the customer-related backlog asset of $2.2 million during the three-month period ended April 2, 2022.

 

We perform our annual goodwill and indefinite-lived intangible asset impairment testing on the first day of our fiscal fourth quarter of each year, and at interim periods if needed based on occurrence of triggering events. During the three months ended April 2, 2022,1, 2023, we did not identify any events which we believe would trigger the need for tests for impairments of our indefinite-lived intangibles assets. As of April 2, 20221, 2023 and January 1,December 31, 2022, the carrying value of our Southeast reporting unit goodwill is $226.8228.3 million and $226.8228.3 million, respectively. As of April 2, 20221, 2023 and January 1,December 31, 2022, the carrying value of our Western reporting unit goodwill is $143.6233.1 million and $137.8232.1 million, respectively. Goodwill of our Southeast reporting unit includes the goodwill relating to Eco. Goodwill of our Western reporting unit includes the goodwill relating to both Anlin and CRi.

 

- 15 -


NOTE 9. LONG-TERM DEBT

 

 

April 2,

 

January 1,

 

 

April 1,

 

December 31,

 

 

2022

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

2021 Senior Notes due 2029, maturing in October 2029

 

$

575,000

 

$

575,000

 

 

$

575,000

 

 

$

575,000

 

 

 

 

 

 

 

 

 

 

 

2016 Credit Agreement due 2024, maturing in October 2024

 

 

60,000

 

 

 

60,000

 

2016 Credit Agreement due 2027, maturing in October 2027

 

 

79,000

 

 

 

76,352

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

635,000

 

 

 

635,000

 

 

 

654,000

 

 

 

651,352

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

(9,041

)

 

 

(9,345

)

 

 

(8,892

)

 

 

(9,218

)

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

$

625,959

 

 

$

625,655

 

 

$

645,108

 

 

$

642,134

 

 

2021 Senior Notes due 2029

On September 24, 2021, we completed the issuance of $575.0 million aggregate principal amount of 4.375% senior notes (“2021 Senior Notes due 2029”), issued at 100% of their principal amount. The 2021 Senior Notes due 2029 are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future restricted subsidiaries, other than any restricted subsidiary of the Company that does not guarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2021 Senior Notes due 2029 are senior unsecured obligations of the Company and the guarantors, respectively, and rank pari passu in right of payment with all existing and future senior debt and senior to all existing and future subordinated debt of the Company and the guarantors. The 2021 Senior Notes due 2029 were offered under Rule 144A of the Securities Act, and in transactions outside the United States under Regulation S of the Securities Act, and have not been, and will not be, registered under the Securities Act.

The 2021 Senior Notes due 2029 mature on October 1, 2029. Interest on the 2021 Senior Notes due 2029 is payable semi-annually, in arrears, beginning on April 1, 2022, with interest accruing at a rate of 4.375% per annum from September 24, 2021. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes due 2029 totaling $8.7 million, which included a 1.25% lender spread on the total principal value of the 2021 Senior Notes due 2029, or $7.2 million, and $1.5 million of other costs, all of which are being amortized under the effective interest method. See “Deferred Financing Costs” below.

As of April 2, 2022,1, 2023, the face value of debt outstanding under the 2021 Senior Notes due 2029 was $575.0 million, and accrued interest began accruing on September 24, 2021.was $12.6 million. Proceeds from the 2021 Senior Notes due 2029 were used, in part, to redeem in full the $425.0

- 19 -


million of 2018 Senior Notes due 2026, including the related fees, costs, and the prepayment call premium of $21.5 million, representing 5.063% of the $425.0 million face value then outstanding, prepay the outstanding term loan borrowings under the then existing 2016 Credit Agreement of $54.060.0 million and the related fees and costs, and finance the Anlin Acquisition in the fourth quarter of 2021. See Note 6, Acquisitions, for a discussion of the Anlin Acquisition.

The indenture for the 2021 Senior Notes due 2029 gives us the option to redeem some or all of the 2021 Senior Notes due 2029 at the redemption prices and on the terms specified in the indenture governing the 2021 Senior Notes due 2029. The indenture governing the 2021 Senior Notes due 2029 does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a change of control, as defined in the indenture, the Company is required to offer to repurchase the notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. We also may make optional redemptions at various premiums including a make-whole call at the then current treasury rate plus 50 basis points prior to October 1, 2024, then 102.188% on or after August 1, 2024, 101.094% on or after August 2025, then at 100.000% on or after August 1, 2026.

The indenture for the 2021 Senior Notes due 2029 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) enter into agreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with affiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; and (viii) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

- 16 -


2016 Credit Agreement due 20242027

On February 16, 2016, we entered into the 2016 Credit Agreement. From 2016 to 2022, we entered into various amendments to the 2016 Credit Agreement, due 2024, among us,including the lending institutions identifiedamendment in October 2022, as described below.

On October 13, 2022, the Company entered into the Fifth Amendment of the 2016 Credit Agreement due 2024, and Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent.2027. The 2016 Credit Agreement due 2024 establishes senior secured credit facilities in an aggregate amount of $310.0 million, consisting of a $270.0 million Term B term loan facility originally maturing in February 2022 that amortizes on a basis of 1% annually during its six-year term, and a $40.0 million revolving credit facility originally maturing in February 2021 that included a swing line facility and a letter of credit facility. Our obligations under the 2016 Credit Agreement due 2024 are, subject to exceptions, guaranteed by substantially all of our wholly-owned direct and indirect subsidiaries that are restricted subsidiaries and secured by substantially all of our assets as well as our direct and indirect restricted subsidiaries’ assets.

On March 16, 2018, we entered into an amendment of our 2016 Credit Agreement due 2024 (the “Second Amendment”). The SecondFifth Amendment among other things, decreased the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2024) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2024), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2024). On February 17, 2017, we entered into the first amendment to our 2016 Credit Agreement due 2024, which also resulted in decreases in the applicable margins, but which, unlike the Second Amendment, did not include any changes in lender positions.

On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Third Amendment providedprovides for, among other things, (i) a three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022,New Revolving Credit Facility, which refinanced in full our existing Term B term loan facility under the 2016 Credit Agreement, and had no regularly scheduled amortization, and (ii)is a new five-year revolving credit facility in an aggregate principal amount of up to$250.0 million. The New Revolving Credit Facility refinances and replaces the previously existing $80.0 million (the “Revolving Facility”), maturing in October 2024, which replaced our then existing $40.0 million revolving credit facility under the 2016 Credit Agreement and includes a swing-line facility and letter of credit facility. Ourdue 2027. The Company’s obligations under the 2016 Credit Agreement due 2027 continue to be secured by substantially all of our assets, as well as ourits and its direct and indirect subsidiaries’ assets, and is senior in position to the 2021 Senior Notes due 2029.

On October 25, 2021, we entered into an amendmentContemporaneously with the Fifth Amendment, the Company drew down $160.0 million of ourfunds available under the New Revolving Credit Facility. Proceeds totaling $61.6 million from the $160.0 million drawdown were used to repay then existing term loan borrowings under the 2016 Credit Agreement ("Fourth Amendment"). The Fourth Amendment provides for, among other things, a three-year Term A loan in the aggregate maximum available amount oftotaling $60.0 million, (the "Incremental Term A Loan"),plus accrued interest and fees totaling $1.6 million. As discussed below, the remaining $98.4 million of proceeds from which were used to fund the Anlincash portion of the Martin Acquisition. The Fourth Amendment does not changeCompany has made net repayments of the $160.0 million of initial borrowings under the New Revolving Credit Facility totaling $81.0 million through April 1, 2023.

Interest on borrowings under the New Revolving Credit Facility is payable either quarterly or at the expiration of any terms relatingSecured Overnight Financing Rate ("SOFR") interest period applicable thereto. Borrowings under the New Revolving Credit Facility accrue interest at a rate equal to, at our option, a base rate (with a floor of 100 basis points) plus a percentage spread (ranging from 0.75% to 1.75%) based on our first lien net leverage ratio or SOFR (with a floor of 0 basis points) plus a percentage spread (ranging from 1.75% to 2.75%) based on our first lien net leverage ratio. After giving effect to the Revolving Facility, under whichFifth Amendment, we pay a quarterly feescommitment fee on the unused portion of the revolving credit facilityNew Revolving Credit Facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Fifth Amendment also modifies the application of the financial covenant under the 2016 Credit Agreement such that testing will occur on a quarterly basis, and requires we maintain a first lien net leverage ratio of not more than 4.00 to 1.00. We were in compliance with this covenant as of April 1, 2023.

The 2016 Credit Agreement due 2027 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) sell or otherwise dispose of assets; (iv) enter into transactions with affiliates; (v) create or incur liens; (vi) merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; (viii) make investments and (ix) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

As of April 2, 2022, there1, 2023, borrowings outstanding under the $250.0 million New Revolving Credit Facility totaled $79.0 million, and accrued interest was $244 thousand. There were $5.78.5 million in letters of credit outstanding andoutstanding. Availability under the New Revolving Credit Facility at April 1, 2023 totaled $74.3162.5 million available under the Revolving Facility.

million. The weighted average all-in interest rate for borrowings under the term-loan portionexisting revolving credit facility of the 2016 Credit Agreement due 20242027 was 2.46% as of April 2, 2022, and was 2.106.47% at JanuaryApril 1, 2023, and 6.07% at December 31, 2022.

- 20 -The Martin Acquisition was financed in part with the $250.0 million available under the New Revolving Credit Facility provided by the Fifth Amendment of our 2016 Credit Agreement due 2027, under which we drew $160.0 million on October 14, 2022, the proceeds of which were used to pay $98.4 million of the $187.8 million total fair value of consideration transferred at closing, and $61.6 million to prepay our $60.0 million existing term loans under the Fourth Amendment of our 2016 Credit Agreement due 2027, plus $1.6 million in fees, costs and accrued interest. The remainder of the total fair value of consideration transferred at closing, totaling $89.4 million was funded with cash on hand previously generated through operations. We also paid buyer fees and costs relating to the Martin Acquisition totaling $4.8 million in the year ended December 31, 2022, classified as selling, general and administrative expenses for the year ended December 31, 2022.


Deferred Financing Costs

The activityActivity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, for the three months ended April 2, 2022, are as follows. All deferred financing costs arewhich is classified as a reduction of the carrying value of long-term debt:debt, for the three months ended April 1, 2023, is as follows:

 

(in thousands)

 

Total

 

 

Total

 

At beginning of year

 

$

9,345

 

 

$

9,218

 

Less: Amortization expense

 

 

(304

)

 

 

(326

)

At end of period

 

$

9,041

 

 

$

8,892

 

 

- 17 -


Estimated amortization expense relating to deferred financing costs for the years indicated as of April 2, 2022,1, 2023, is as follows:

 

(in thousands)

 

Total

 

 

Total

 

Remainder of 2022

 

$

929

 

2023

 

 

1,282

 

Remainder of 2023

 

$

994

 

2024

 

 

1,282

 

 

 

1,366

 

2025

 

 

1,083

 

 

 

1,442

 

2026

 

 

1,114

 

 

 

1,466

 

2027

 

 

1,440

 

Thereafter

 

 

3,351

 

 

 

2,184

 

 

 

 

 

 

 

Total

 

$

9,041

 

 

$

8,892

 

 

We have no schedule payments of outstanding debt until the contractual maturity of the 2016 Credit Agreement in October 2024. OurThe contractual future maturities of long-term debt outstanding, as of April 1, 2023, are as follows (at face value):

 

(in thousands)

 

 

 

 

 

 

Remainder of 2022

 

$

0

 

2023

 

 

0

 

Remainder of 2023

 

$

 

2024

 

 

60,000

 

 

 

 

2025

 

 

0

 

 

 

 

2026

 

 

0

 

 

 

 

2027

 

 

79,000

 

Thereafter

 

 

575,000

 

 

 

575,000

 

 

 

 

 

 

 

Total

 

$

635,000

 

 

$

654,000

 

 

NOTE 10. LEASES

We lease certain of our manufacturing facilities under operating leases. We also lease production equipment, vehicles, computer equipment, storage units and office equipment under operating leases. Our leases have remaining lease terms of 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year. All of our leases are operating leases. We did not recognize right-of-use assets or lease liabilities for certain short-term leases that are month-to-month leases. The lease expense relating to these leases is not significant.

The components of lease expense for the three months ended April 2, 2022 and April 3, 2021, are as follows (in thousands):

 

Three Months Ended

 

 

April 2,

 

 

April 3,

 

 

2022

 

 

2021

 

 

 

 

 

 

 

Operating lease cost

$

4,839

 

 

$

2,879

 

Short-term lease cost

 

2,305

 

 

 

2,200

 

Total lease cost

$

7,144

 

 

$

5,079

 

- 21 -


Other information relating to leases for the three months ended April 2, 2022 and April 3, 2021, are as follows (in thousands, except years and percentages):

 

Three Months Ended

 

 

April 2,

 

 

April 3,

 

 

2022

 

 

2021

 

Supplemental cash flows information

 

 

 

 

 

Cash paid for amounts included in the
  measurement of lease liabilities:

 

 

 

 

 

Operating cash flows relating to
  operating leases

$

(4,529

)

 

$

(2,764

)

 

 

 

 

 

 

Right-of-use assets obtained in exchange
  for lease obligations:

 

 

 

 

 

Operating leases

$

1,324

 

 

$

29,490

 

 

 

 

 

 

 

Weighted average remaining lease term in years

 

 

 

 

 

Operating leases

 

6.57

 

 

 

7.23

 

 

 

 

 

 

 

Weighted average discount rate

 

 

 

 

 

Operating leases

 

5.5

%

 

 

5.6

%

Future maturities under operating leases were as follows at April 2, 2022 and January 1, 2022 (in thousands):

 

 

April 2,

 

 

January 1,

 

 

 

2022

 

 

2022

 

Remainder of 2022

 

$

-

 

 

$

17,929

 

2023

 

 

13,714

 

 

 

17,577

 

2024

 

 

17,947

 

 

 

16,990

 

2025

 

 

17,365

 

 

 

15,987

 

2026

 

 

16,240

 

 

 

15,025

 

2027

 

 

15,146

 

 

 

14,358

 

Thereafter

 

 

32,257

 

 

 

17,891

 

 

 

 

 

 

 

 

Total future minimum lease payments

 

 

112,669

 

 

 

115,757

 

 

 

 

 

 

 

 

Less: Imputed interest

 

 

(17,520

)

 

 

(18,674

)

 

 

 

 

 

 

 

Operating lease liability - total

 

$

95,149

 

 

$

97,083

 

 

 

 

 

 

 

 

Reported as of April 2, 2022 and January 1, 2022:

 

 

 

 

 

 

Current portion of operating lease liability

 

$

13,676

 

 

$

13,180

 

Operating lease liability, less current portion

 

 

81,473

 

 

 

83,903

 

 

 

 

 

 

 

 

Operating lease liability - total

 

$

95,149

 

 

$

97,083

 

As of April 2, 2022, we had no additional operating or finance leases that have not yet commenced. Our operating leases expire at various times through 2032. Lease expense was $7.1 million for the three months ended April 2, 2022 and was $5.1 million for the three months ended April 3, 2021. Of the $7.1 million for the three months ended April 2, 2022, $3.6 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses. Of the $5.1 million for the three months ended April 3, 2021, $2.2 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses.

- 22 -


NOTE 11.10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Our Company is a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of those proceedings cannot be predicted with certainty, management believes the outcome of any claim that is pending or threatened, either individually or in the aggregate, will not have a material adverse effect on our operations, financial position or cash flows.

NOTE 12.11. INCOME TAXES

The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We estimate the annual effective tax rate quarterly based on the forecasted annual pre-tax results of our operations. The tax effects of items that are unrelated to current year ordinary income are recognized entirely as discrete items in the period identified, including share-based compensation, changes in tax laws and adjustments to the actual liability determined upon filing tax returns.

We had anincome tax expense of $11.2 million for the three months ended April 1, 2023, compared with income tax expense of $7.8 million for the three months ended April 2, 2022, compared with income tax expense of $3.9 million for the three months ended April 3, 2021.2022. Our effective tax rate for the three months ended April 2, 2022,1, 2023, was an expense rate of 24.724.6%, and was an expense rate ofcompared with 23.624.7% for the three months ended April 3, 2021.2, 2022. Our income tax expense for the three-month periodsthree months ended April 1, 2023, and April 2, 2022, and April 3, 2021, includes income tax expenses of $505654 thousand and $305505 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco.

Income tax expense in the three months ended April 2, 2022 and April 3, 2021 include1, 2023 includes discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $136438 thousandthousand. The income tax benefit in the three months ended April 2, 2022 andincluded discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards totaling $95136 thousand inthousand. Excluding discrete items of income tax, the effective tax rates for the three months ended April 3, 2021. The effect of these discrete items on our effective tax rates for these periods was not significant.

In September 2021, the state of Florida announced that the corporate1, 2023 and April 2, 2022, would have been an income tax rate for the 2021 tax year was being lowered from its then current level of 4.458% to 3.535%. However, for 2022, Florida's corporate income tax rate returned to its statutory level before the passage of the Tax Cuts and Jobs Act, which is 5.5%. As such, we adjusted our annual effective tax rate for 2022 to include this increase in rate in Florida, where a substantial portion of our business is apportioned, to an estimated combined statutory federal and stateexpense rate of 25.725.6% from our estimate in 2021 ofand 24.225.1%. , respectively.

During the first three months of 2022 or 2021,2023, we made payments of estimated taxes totaling $16.4 million, which included $8.8 million in Federal estimated income taxes with the remainder to various states, primarily Florida. We were 0not required to make any payments of estimated federal or state income taxes.taxes during the first three months of 2022. We had accrued federal and state income taxes payable of $11.2 million and $16.4 million at April 1, 2023, and December 31, 2022, respectively.

- 18 -


NOTE 13.12. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The accounting guidance concerning fair value allows us to elect to measure financial instruments at fair value and report the changes in fair value through earnings. This election can only be made at certain specified dates and is irrevocable once made. We do not have a policy regarding specific assets or liabilities to elect to measure at fair value, but rather we make the election on an instrument-by-instrument basis as they are acquired or incurred.

During the three months ended April 2, 20221, 2023 or April 3, 2021,2, 2022, we did 0not make any transfers between Level 2 and Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, and accounts payable and accrued liabilities, whose carrying amounts approximate their fair values due to their short-term nature. Our financial instruments also include borrowings under ourthe 2016 Credit Agreement due 2027, as well as the 2021 Senior Notes due 2029, all classified as long-term debt. The fair value of borrowings under the 2016 Credit Agreement due 20242027 approximated its carrying value due to its variable-rate nature, and waswere approximately $60.079.0 million and $76.4 million as of April 2,1, 2023, and December 31, 2022, and January 1, 2022, compared to a principal outstanding value of $60.0 million at those dates, respectively. The fair value of the 2021 Senior Notes due 2029 is based on debt with similar terms and characteristics and was approximately $531.2518.2 million as of April 2, 2022,1, 2023, compared to a principal outstanding value of $575.0 million, and the fair value was approximately $578.2480.8 million as of January 1,December 31, 2022, compared to a principal outstanding value of $575.0 million.

- 23 -


Items Measured at Fair Value

The following are measured in the condensed consolidated financial statements at fair value on a recurring basis and are categorized in the table below based upon the lowest level of significant input to the valuation (in thousands):

 

Fair Value Measurements

 

Fair Value Measurements

 

Assets (Liabilities)

 

Assets (Liabilities)

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

Markets

 

Inputs

 

Inputs

 

 

 

 

Markets

 

Inputs

 

Inputs

 

April 2, 2022

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

April 1, 2023

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

$

9,058

 

$

 

$

9,058

 

$

 

$

212

 

 

$

 

 

$

212

 

 

$

 

MTP contracts

 

4,383

 

 

 

 

 

 

4,383

 

 

 

 

 

260

 

 

 

 

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,441

 

 

$

 

 

$

13,441

 

 

$

 

$

472

 

 

$

 

 

$

472

 

 

$

 

 

 

Fair Value Measurements

 

 

Assets (Liabilities)

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

 

Markets

 

 

Inputs

 

 

Inputs

 

January 1, 2022

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

$

4,829

 

 

$

 

 

$

4,829

 

 

$

 

MTP contracts

 

4,599

 

 

 

 

 

 

4,599

 

 

 

 

 

$

9,428

 

 

$

 

 

$

9,428

 

 

$

 

- 19 -


 

Fair Value Measurements

 

 

Assets (Liabilities)

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

 

Markets

 

 

Inputs

 

 

Inputs

 

December 31, 2022

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

$

 

 

$

 

 

$

 

 

$

 

MTP contracts

 

300

 

 

 

 

 

 

300

 

 

 

 

 

$

300

 

 

$

 

 

$

300

 

 

$

 

 

See Note 1413 for a description of the methods and assumptions used in the determination of the fair values of our aluminum forward and Midwest Transaction Premium (“MTP”) contracts, as well as the basis for classifying these assets and liabilities as Level 2.

NOTE 14.13. DERIVATIVES

Aluminum Contracts and Midwest Transaction Premium

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. In early 2020, we began entering into forward contractsproduction, and to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium, or MTP. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum and the related MTP.

We record our aluminum hedge contracts at fair value, based on trading values for aluminum forward contracts. Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”). The LME provides a transparent forum and is the world’s largest center for the trading of futures contracts for non-ferrous metals. The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle. Based on this high degree of volume and liquidity in the LME, we believe the valuation price at any measurement date for contracts with identical terms as to prompt date, trade date and trade price as those we hold at any time represents a contract’s exit price to be used for purposes of determining fair value.

 

We record our MTP hedge contracts at fair value, based on the Platts MW US Transaction price per pound assessment, which has been a benchmark for decades in the North American aluminum industry. Platts surveys the North American market daily to capture trades, bids and offers on a delivered Midwest basis. Data is normalized to reflect the typical price per pound between the largest number of market participants, for delivery within 7 to 30 days from date of publication, net-30-day payment terms, for typical order quantities, chemistries and freight allowances. The survey is extensive and encompasses both domestic and offshore producers, traders and brokers that are varied in scope. Based on the extensive nature of this pricing mechanism, we believe the Platts MW US Transaction price at any time represents a contract’s exit price to be used for purposes of determining fair value.

- 24 -


Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities. We do not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement.

At April 2, 2022,1, 2023, the fair value of our aluminum forward contracts was in an asset position of $9.10.2 million. We had 2313 outstanding forward contracts for the purchase of 36.35.6 million pounds of aluminum through December 2022,2023, at an average price of $1.321.07 per pound, which excludes the Midwest premium, with maturity dates of between two monthsand tennine months. At April 2, 2022,1, 2023, the fair value of our MTP contracts was in an asset position of $4.40.3 million. We had 71 outstanding MTP contractscontract to hedge the Platt US MW Transaction price per pound for the delivery of 17.06.3 million pounds of aluminum through December 2022,2023, at an average price of $0.120.21 per pound, with a maturity datesdate of between two months and tennine months. We assessed the risk of non-performance of the Company and our counterparty to these contracts, as applicable, and determined it was immaterial and, therefore, did not record any adjustment to their fair values as of April 2, 2022.1, 2023.

We assess the effectiveness of our aluminum forward and MTP contracts by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. TheWe

- 20 -


expect the amount of income, net, recognized in the “accumulatedaccumulated other comprehensive income (loss)” line itemof approximately $0.5 million in the accompanying condensed consolidated balance sheet as of April 2, 2022, that we expect will1, 2023, to be reclassified to earnings within the next twelve months, is approximately $13.4 million.months.

The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at April 2, 20221, 2023 and January 1,December 31, 2022, as follows (in thousands):

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

April 2, 2022

 

 

 

April 2, 2022

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

10,184

 

 

 

Accrued liabilities

 

$

(1,126

)

MTP contracts

 

Other current assets

 

 

4,383

 

 

 

Accrued liabilities

 

 

 

Aluminum contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

MTP contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

Total derivative instruments

 

  Total derivative assets

 

$

14,567

 

 

 

  Total derivative liabilities

 

$

(1,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

January 1, 2022

 

 

 

January 1, 2022

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

4,829

 

 

 

Accrued liabilities

 

$

 

MTP contracts

 

Other current assets

 

 

4,599

 

 

 

Accrued liabilities

 

 

 

Aluminum contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

MTP contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

Total derivative instruments

 

Total derivative assets

 

$

9,428

 

 

 

Total derivative liabilities

 

$

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

April 1, 2023

 

 

 

April 1, 2023

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

212

 

 

 

Accrued liabilities

 

$

 

MTP contracts

 

Other current assets

 

 

260

 

 

 

Accrued liabilities

 

 

 

Aluminum contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

MTP contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

Total derivative instruments

 

  Total derivative assets

 

$

472

 

 

 

  Total derivative liabilities

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

December 31, 2022

 

 

 

December 31, 2022

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

 

 

 

Accrued liabilities

 

$

 

MTP contracts

 

Other current assets

 

 

300

 

 

 

Accrued liabilities

 

 

 

Aluminum contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

MTP contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

 

Total derivative instruments

 

Total derivative assets

 

$

300

 

 

 

Total derivative liabilities

 

$

 

 

The ending accumulated balance for the aluminum forward and MTP contracts included in accumulated other comprehensive income, (losses), net of tax, was an accumulated other comprehensive income of $10.00.4 million as of April 2, 2022,1, 2023, and was an accumulated other comprehensive income of $7.00.2 million at January 1,December 31, 2022. The income tax effects of accumulated comprehensive income (losses) are released as amounts are reclassified out of accumulated comprehensive income (losses) at the income tax rate used at the time those income tax effects were provided, which generally represents our blended statutory income tax rate.

- 25 -


The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three months ended April 2, 20221, 2023 and April 3, 20212, 2022 (in thousands):

 

 

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

Amount of Gain or (Loss)
Recognized in OCI(L) on
Derivatives

 

 

Location of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

 

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

 

 

 

Three Months Ended

 

 

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

$

5,607

 

 

$

4,083

 

 

Cost of sales

 

$

1,378

 

 

$

1,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTP contracts

 

$

468

 

 

$

4,205

 

 

Cost of sales

 

$

684

 

 

$

387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

Amount of Gain or (Loss)
Recognized in OCI(L) on
Derivatives

 

 

Location of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

 

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

 

 

 

Three Months Ended

 

 

 

 

Three Months Ended

 

 

 

April 1,

 

 

April 2,

 

 

 

 

April 1,

 

 

April 2,

 

 

 

2023

 

 

2022

 

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

$

212

 

 

$

5,607

 

 

Cost of sales

 

$

 

 

$

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTP contracts

 

$

100

 

 

$

468

 

 

Cost of sales

 

$

140

 

 

$

684

 

 

We classify cash flows related to derivative instruments as operating activities in the condensed consolidated statements of cash flows.

- 21 -


NOTE 15.14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the components of accumulated other comprehensive income for the three months ended April 2, 20221, 2023 and April 3, 20212, 2022 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 2, 2022

 

Aluminum

 

 

MTP

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at January 1, 2022

 

$

3,610

 

 

$

3,396

 

 

$

7,006

 

Change in fair value of derivatives

 

 

5,607

 

 

 

468

 

 

 

6,075

 

Amounts reclassified from other comprehensive income

 

 

(1,378

)

 

 

(684

)

 

 

(2,062

)

Tax effect

 

 

(1,055

)

 

 

25

 

 

 

(1,030

)

Net current-period other comprehensive income

 

 

3,174

 

 

 

(191

)

 

 

2,983

 

Balance at April 2, 2022

 

$

6,784

 

 

$

3,205

 

 

$

9,989

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 1, 2023

 

Aluminum

 

 

MTP

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at December 31, 2022

 

$

 

 

$

223

 

 

$

223

 

Increase in fair value of derivatives

 

 

212

 

 

 

100

 

 

 

312

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

(140

)

 

 

(140

)

Tax effect

 

 

(55

)

 

 

10

 

 

 

(45

)

Net current-period other comprehensive income (loss)

 

 

157

 

 

 

(30

)

 

 

127

 

Balance at April 1, 2023

 

$

157

 

 

$

193

 

 

$

350

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 3, 2021

 

Aluminum

 

 

MTP

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at January 2, 2021

 

$

2,403

 

 

$

317

 

 

$

2,720

 

Change in fair value of derivatives

 

 

4,083

 

 

 

4,205

 

 

 

8,288

 

Amounts reclassified from other comprehensive income

 

 

(1,388

)

 

 

(387

)

 

 

(1,775

)

Tax effect

 

 

(670

)

 

 

(948

)

 

 

(1,618

)

Net current-period other comprehensive income

 

 

2,025

 

 

 

2,870

 

 

 

4,895

 

Balance at April 3, 2021

 

$

4,428

 

 

$

3,187

 

 

$

7,615

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 2, 2022

 

Aluminum

 

 

MTP

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at January 1, 2022

 

$

3,610

 

 

$

3,396

 

 

$

7,006

 

Increase in fair value of derivatives

 

 

5,607

 

 

 

468

 

 

 

6,075

 

Amounts reclassified from other comprehensive income

 

 

(1,378

)

 

 

(684

)

 

 

(2,062

)

Tax effect

 

 

(1,055

)

 

 

25

 

 

 

(1,030

)

Net current-period other comprehensive income (loss)

 

 

3,174

 

 

 

(191

)

 

 

2,983

 

Balance at April 2, 2022

 

$

6,784

 

 

$

3,205

 

 

$

9,989

 

 

 

- 2622 -


NOTE 16.15. SEGMENTS

We have 2two reportable segments: the Southeast segment and the Western segment.

The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida. The Western reporting segment, also an operating segment, is composed of sales from our facilities in Arizona, Utah and California.

Centralized financial and operational oversight, including resource allocation and assessment of performance on an income from operations basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”), with oversight by the Board of Directors. Total asset information by segment is not included herein as asset information by segment is not presented to or reviewed by the CODM.

The following table represents summary financial data attributable to our operating segments for the three-month periodsthree months ended April 2, 2022,1, 2023, and April 3, 2021. Results of the Southeast segment for the three-month period ended April 2, 2022 includes the results of Eco for the entire three-month period, whereas for the three-month period ended April 3, 2021 for only its post-acquisition period from February 1, 2021.2022. Results of the Western segment for the three-month periodthree months ended April 1, 2023 include the results of Martin, acquired October 14, 2022, whereas such results are not included for the three month ended April 2, 2022 includes the results of CRi, acquired May 1, 2021, and Anlin, acquired October 25, 2021, whereas there were no results from either CRi or Anlin in the three-month period ended April 3, 2021.

2022. Corporate overhead has been allocated to each segment using an allocation method we believe is reasonable (in thousands):

 

Three Months Ended

 

Three Months Ended

 

April 2,

 

April 3,

 

April 1,

 

April 2,

 

2022

 

 

2021

 

2023

 

 

2022

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Southeast segment

$

271,767

 

 

$

233,638

 

$

282,045

 

 

$

271,767

 

Western segment

 

86,895

 

 

 

37,454

 

 

94,784

 

 

 

86,895

 

 

 

 

 

 

 

 

 

 

 

Total net sales

$

358,662

 

 

$

271,092

 

$

376,829

 

 

$

358,662

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

Southeast segment

$

25,556

 

 

$

18,743

 

$

40,521

 

 

$

25,556

 

Western segment

 

13,155

 

 

 

5,453

 

 

12,797

 

 

 

13,155

 

 

 

 

 

 

 

 

 

 

 

Total income from operations

 

38,711

 

24,196

 

 

53,318

 

 

 

38,711

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7,080

 

 

 

7,457

 

 

7,656

 

 

 

7,080

 

 

 

 

 

 

 

 

 

Total income before income taxes

$

31,631

 

 

$

16,739

 

$

45,662

 

 

$

31,631

 

 

Depreciation expense for the three-month periodsthree months ended April 1, 2023 and April 2, 2022, and April 3, 2021, was $6.96.8 million and $5.86.9 million for our Southeast segment, respectively, and $1.62.1 million and $0.91.6 million for our Western segment, respectively. Amortization expense for the three-month periodsthree months ended April 1, 2023 and April 2, 2022, and April 3, 2021,was $2.72.0 million, and $2.42.7 million for our Southeast segment, respectively, and $5.34.8 million and $2.35.3 million for our Western segment, respectively.

Total assets of our Southeast segment as of April 2, 20221, 2023 and January 1,December 31, 2022 were $936.5907.4 million and $911.3909.6 million, respectively. Total assets of our Western segment as of April 2, 20221, 2023 and January 1,December 31, 2022 were $562.6717.0 million and $549.3730.6 million, respectively.

 

- 2723 -


NOTE 17.16. REEDEMABLE NON-CONTROLLING INTEREST

On February 1, 2021, we completed an acquisition of a 75% ownership stake in Eco. The seller of Eco obtained the remaining equity interest in the newly formed company, Eco Enterprises. The seller’s redeemable non-controlling interest ("RNCI") was initially established at fair value.

The agreement between PGT Innovations, Inc. and the seller provides the Company with a call right for seller’s equity interest in the
third year following the acquisition date. If the Company does not exercise its right to call by the third anniversary, the agreement provides the seller with a put right which can be exercised during the 15-day period following the third anniversary. Upon exercise of the put or call right, the purchase price is calculated based on a future agreed performance metric. The put option makes the non-controlling interest redeemable and, therefore, the redeemable non-controlling interest is classified as temporary equity outside of shareholders’ equity.

The Company calculates the estimated future redemption value of the non-controlling interest on a quarterly basis. The redeemable non-controlling interest is accreted to the future redemption value using the effective interest method up to the date on which the put-right becomes effective. Any accretion adjustment in the current reporting period of the redeemable non-controlling interest is offset against retained earnings and impacts earnings used in the calculation of earnings per share attributable to common shareholders in the reporting period. Based on the formula in the operating agreement governing this transaction, the future redemption value of the redeemable non-controlling interest was estimated to be
$58.339.1 million, which we accreted to $39.736.7 million as of April 2, 2022.1, 2023.

The following table presents the changes in the Company’s redeemable non-controlling interest for the period presented:three months ended April 1, 2023, and April 2, 2022:

 

Three Months Ended

 

 

April 1,

 

 

April 2,

 

(in thousands)

2023

 

 

2022

 

Balance at beginning of period

$

34,721

 

 

$

36,863

 

Net income attributable to redeemable non-controlling interest

 

837

 

 

 

657

 

Change in value of redeemable non-controlling interest

 

1,177

 

 

 

2,136

 

Balance at end of period

$

36,735

 

 

$

39,656

 

NOTE 17. SHAREHOLDERS' EQUITY

Shareholder Rights Plan

 

Three Months Ended

 

 

April 2,

 

 

April 3,

 

(in thousands)

2022

 

 

2021

 

Balance at beginning of period

$

36,863

 

 

$

 

Redeemable non-controlling interest in Eco at initially estimated fair value

 

 

 

 

34,084

 

Net income attributable to redeemable non-controlling interest

 

657

 

 

 

411

 

Change in value of redeemable non-controlling interest

 

2,136

 

 

 

 

Balance at end of period

$

39,656

 

 

$

34,495

 

On March 30, 2023, we announced that our Board of Directors had unanimously approved the adoption of a limited-duration shareholder rights plan (the “Rights Plan”) which includes the declaration of a dividend distribution of one right (each, a “Right”) for each outstanding share of the Company’s common stock to stockholders of record as of the close of business on April 10, 2023. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.01 per share, of the Company at an exercise price of $90.00, subject to adjustment. The complete terms of the Rights are set forth in a Rights Agreement, dated as of March 30, 2023, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the "Rights Agreement"). The Rights expire on the earliest of (1) March 30, 2024, unless such date is extended, or (2) the redemption or exchange of the Rights as described above.

The Board adopted the Rights Plan in response to a likely accumulation of the Company's shares by a strategic investor. The intent of the Rights Plan is to reduce the likelihood that any entity, person or group gains control of the Company through open market accumulation of the Company's shares without paying all other shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that it believes are in the best interests of its other shareholders. Under the Rights Plan, the rights will become exercisable if an entity, person or group acquires beneficial ownership of 10% or more of the Company's outstanding common stock in a transaction not approved by the Board. In the event that the Rights become exercisable due to the triggering ownership threshold being crossed, each Right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose Rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the Right.

 

- 2824 -


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022, as filed with the Securities and Exchange Commission. Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements that reflect our plans, estimates, and beliefs, all of which are based on our current expectations and could be affected by certain uncertainties, risks, and other factors described under Cautionary Note Regarding Forward-Looking Statements and elsewhere throughout this Quarterly Report, as well as the factors described in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022, and subsequent periodic reports filed with the Securities and Exchange Commission, particularly under "Risk Factors." Our actual results could differ materially from those discussed in the forward-looking statements.

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “assume,” “believe,” “could,” “estimate,” “guidance,” “may,” “outlook,” “forecast,” “intend,” “could,” “project,” “estimate,” “anticipate,” “should,” “plan,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our acquisitions of Anlin Windows & Doors ("Anlin"), and Martin Door Holdings, Inc. ("Martin"); pricing actions benefiting margins; effects of Hurricane Ian and other economic headwinds such as increasing interest rates and rising inflation; improvement of our operations and business integration; and our net sales guidance.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

the impact of the COVID-19 pandemic (the "COVID-19 pandemic" or "Pandemic") and related measures taken by governmental or regulatory authorities to combat the Pandemic, including the impact of the Pandemic and these measures on the economies and demand for our products in the states where we sell them, and on our customers, suppliers, labor force, business, operations and financial performance;
unpredictable weather and macroeconomic factors that may negatively impact the repair and remodel and new construction markets and the construction industry generally, especially in the state of Florida and the western United States, where the substantial portion of our sales are currently generated, and in the U.S. generally;
changes in raw material prices, especially for aluminum, glass, vinyl, and vinyl,steel, including, price increases due to the implementation of tariffs and other trade-related restrictions, Pandemic-related supply chain interruptions, or supply-chain interruptions from the conflict in Ukraine;
our dependence on a limited number of suppliers for certain of our key materials;
our dependence on our impact-resistant product lines, which increased with the acquisition of Eco Acquisition,Enterprises, LLC ("Eco"), and contemporary indoor/outdoor window and door systems, and on consumer preferences for those types and styles of products;
the effects of increased expenses or unanticipated liabilities incurred as a result of, or due to activities related to, our recent acquisitions, including Anlin,our acquisitions of Martin and our Eco Acquisition;Anlin;
our level of indebtedness, which increased in connection with our recent acquisition,acquisitions, including our Eco Acquisition,acquisitions of Martin and the acquisition of Anlin;
increases in credit losses from obligations owed to us by our customers in the event of a downturn in the home repair and remodel or new home construction channels in our core markets and our inability to collect such obligations from such customers;
the risks that the anticipated cost savings, synergies, revenue enhancement strategies and other benefits expected from our acquisitionacquisitions of Anlin,Martin and from our Eco AcquisitionAnlin may not be fully realized or may take longer to realize than expected or that our actual integration costs may exceed our estimates;
increases in transportation costs, including increases in fuel prices;
our dependence on our limited number of geographically concentrated manufacturing facilities, which increased further due to our Eco Acquisition;acquisition of Eco;
sales fluctuations to and changes in our relationships with key customers;
federal, state and local laws and regulations, including unfavorable changes in local building codes and environmental and energy code regulations;

- 25 -


risks associated with our information technology systems, including cybersecurity-related risks, such as unauthorized intrusions into our systems by “hackers”"hackers" and theft of data and information from our systems, and the risks that our

- 29 -


information technology systems do not function as intended or experience temporary or long-term failures to perform as intended;
product liability and warranty claims brought against us;
in addition to our acquisitionacquisitions of Anlin,Martin and our Eco Acquisition,Anlin, our ability to successfully integrate businesses we may acquire in the future, or that any business we acquire may not perform as we expected at the timewhen we acquireacquired it; and
the other risks and uncertainties discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 1,December 31, 2022 and our other filings with the Securities and Exchange Commission.

 

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

EXECUTIVE OVERVIEW

Sales and Operations

During the first quarter of 2022,2023, we experienced growthgrew at both our Southeast and Western segments, as the momentum of growth we experienced over last year continued into 2022. Ofcontinues in 2023. Despite macro-economic headwinds including higher interest rates and inflation, our total net sales for the first quarter of 2022 of $358.72023 was $376.8 million, which increased 32.3%5.1% compared to $358.7 million in the first quarter of 2021, from $271.1 million2022. Sales growth at our Southeast segment was entirely organic, while sales growth at our Western segment was impacted by our Martin acquisition in the 2021 first quarter, included growth both organically, and from acquisitions in 2021.October 2022. Our Southeast segment's net sales were $282.0 million in the first quarter of 2023, compared to $271.8 million in the first quarter of 2022, compared to $233.6 million in the first quarter of 2021, an increase of $38.2$10.2 million, or 16.3%3.8%. This growth was largely organic, but for the sales of Eco being included for the entireOur Southeast segment benefitted from a solid repair and remodel channel. Additionally, we believe first quarter sales growth benefitted from heightened hurricane awareness as a result of 2022, versus only the post-acquisition periodHurricane Ian, which made landfall in the first quarter of 2021 from February 1, 2021. Excluding Eco, our Southeast segment grew organically by 13.8%. Our Western segment's net sales were $86.9 millionSouthwest Florida in the first quarter of 2022, compared to $37.5 million in the first quarter of 2021, an increase of $49.4 million. Sales for the first quarter of 2022 of our Western segment includes acquisition growth from Anlin and CRi, but still grew organically by 39.1% compared to last year's first quarter. We believe the organic growth we had in the first quarter of 2022 reflects the strength of our portfolio of brands across our entire geographic footprint.September 2022.

Our gross profit increasedWe also believe that Hurricane Ian has spurred homeowners to $134.6 million in the first quarter of 2022, producing a gross margin of 37.5%, compared to $94.0 million in the 2021 first quarter, and a gross margin of 34.7%, an improvement in gross margin of 280 basis points from the first quarter of 2021 to the first quarter of 2022. We were able to produce this operational improvement despite headwinds of inflationary pressure being felt on material and labor costs, as well as supply-chain challenges we have experienced in obtaining the required volumes of aluminum needed to meet demand. Our hedging programs have helped reduce the pricing impact of an extremely volatile commodity market, which we continue to monitor closely, and will take action needed to offset sharp increases in raw material spot prices, should any occur. Our Eco acquisition has provided additional glass manufacturing capacity, which has helped minimize the impacts of shortages of glass in our industry. During the 2022 first quarter, we have been focused on improving our manufacturing processes in order to reduce lead-times to meet the continued growing demand. Recent investments in our team to help them achieve higher talent levels have also helped generate improved operational efficiencies across our entire portfolio of brands, which we believe will continue to benefit our gross margin through the balance of 2022.

One of the biggest events that occurred recently was the passageadvantage of Florida House Bill 7071, signed into law in early May 2022. This bill provides two-year tax relief to Florida residences, available through June 2024, who chosechoose to "harden" their homes against the damaging effects of storms throughby investing in impact-resistant windows, doors, and other product categories. We're excited about this great benefit for Florida home ownershomeowners which we believe will provide them with the incentive needed to improve the safety and value of their homes, and that their materials of choice will include impact-resistant windows and doors from our Company's portfolio of Florida impact-resistant brands. We believe our Florida operations is benefitting from this home-hardening legislation, the main highlight of which includes a sales tax exemption for Floridians that harden their homes against natural disasters using impact-resistant products like those sold by the Company.

Our Western segment's net sales were $94.8 million in the first quarter of 2023, compared to $86.9 million in the first quarter of 2022, an increase of $7.9 million, or 9.1%. While sales for the first quarter of 2023 of our Western segment includes acquisition growth from Martin, our existing business produced solid results when compared to the first quarter of last year, despite softness in the new construction channel in the first quarter of 2023, compared to the first quarter of 2022.

Our gross profit increased to $149.2 million in the first quarter of 2023, producing a gross margin of 39.6%, compared to $134.6 million in the 2022 first quarter, and a gross margin of 37.5%, an improvement in gross margin of 210 basis points from the first quarter of 2022 to the first quarter of 2023. Cash from operations during the first three months of 2023 was $23.9 million, compared to $17.3 million in the first three months of 2022, an increase in cash from operations of $6.6 million, or 38.1%. Our first quarter 2023 improvements in operating results and cash from operations were driven by continued solid performance from our operating teams, prior year's pricing impacts offsetting material and wage inflation, and cost containment measures amid the continuing macro-environment uncertainty. Additionally, during the first quarter of 2023, we maintained our focus on delivery, quality and lead time performance, which contributed to higher margins.

- 3026 -


Performance Summary

The following table presents financial data derived from our unaudited condensed consolidated statements of operations as a percentage of total net sales for the periods indicated. The three-month periodsthree months ended April 2, 20221, 2023 and April 3, 20212, 2022 are composed of 13 weeks (in thousands, except percentages):

 

 

Three Months Ended

 

April 2,

 

April 3,

 

Three Months Ended

 

2022

 

2021

 

April 1, 2023

 

April 2, 2022

 

(unaudited)

 

(unaudited)

Net sales

 

$

358,662

 

 

100.0 %

 

$

271,092

 

 

100.0 %

 

$

376,829

 

 

100.0 %

 

$

358,662

 

 

100.0 %

Cost of sales

 

 

224,069

 

 

62.5 %

 

 

177,130

 

 

65.3 %

 

 

227,598

 

 

60.4 %

 

 

224,069

 

 

62.5 %

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

134,593

 

 

37.5 %

 

93,962

 

 

34.7 %

 

 

149,231

 

 

39.6 %

 

 

134,593

 

 

37.5 %

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

95,882

 

 

26.7 %

 

 

69,766

 

 

25.7 %

 

 

95,913

 

 

25.5 %

 

 

95,882

 

 

26.7 %

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

38,711

 

 

10.8 %

 

24,196

 

 

8.9 %

 

 

53,318

 

 

14.1 %

 

 

38,711

 

 

10.8 %

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

7,080

 

 

2.0 %

 

 

7,457

 

 

2.8 %

 

 

7,656

 

 

2.0 %

 

 

7,080

 

 

2.0 %

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

31,631

 

 

8.8 %

 

16,739

 

 

6.2 %

 

 

45,662

 

 

12.1 %

 

 

31,631

 

 

8.8 %

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

7,805

 

 

2.2 %

 

 

3,944

 

 

1.5 %

 

 

11,235

 

 

3.0 %

 

 

7,805

 

 

2.2 %

 

 

 

 

 

 

 

 

 

 

Net income

 

 

23,826

 

 

6.6 %

 

12,795

 

 

4.7 %

 

 

34,427

 

 

9.1 %

 

 

23,826

 

 

6.6 %

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to redeemable non-controlling interest

 

 

(657

)

 

(0.2)%

 

 

(411

)

 

(0.2)%

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to redeemable RNCI

 

 

(837

)

 

(0.2)%

 

 

(657

)

 

(0.2)%

Net income attributable to the Company

 

 

23,169

 

 

6.5 %

 

12,384

 

 

4.6 %

 

 

33,590

 

 

8.9 %

 

 

23,169

 

 

6.5 %

 

 

 

 

 

 

 

 

 

 

Change in redemption value of redeemable non-controlling interest

 

 

(2,136

)

 

(0.6)%

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Increase in redemption value of RNCI

 

 

(1,177

)

 

(0.3)%

 

 

(2,136

)

 

(0.6)%

Net income attributable to common shareholders

 

$

21,033

 

 

5.9 %

 

$

12,384

 

 

4.6 %

 

$

32,413

 

 

8.6 %

 

$

21,033

 

 

5.9 %

 

- 31 -


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 20221, 2023 AND APRIL 3, 20212, 2022

 

The three-month periods ended April 1, 2023 and April 2, 2022 and April 3, 2021 are each composed of 13 weeks each.weeks.

 

Net sales

 

 

Three Months Ended

 

 

 

 

April 2, 2022

 

April 3, 2021

 

 

 

 

Net Sales

 

 

% of sales

 

Net Sales

 

 

% of sales

 

% change

By segment:

 

 

 

 

 

 

 

 

 

 

 

 

Southeast segment

 

$

271.8

 

 

75.8%

 

$

233.6

 

 

86.2%

 

16.3%

Western segment

 

 

86.9

 

 

24.2%

 

 

37.5

 

 

13.8%

 

132.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

358.7

 

 

100.0%

 

$

271.1

 

 

100.0%

 

32.3%

 

 

Three Months Ended

 

 

 

 

April 1, 2023

 

April 2, 2022

 

 

 

 

Net Sales

 

 

% of sales

 

Net Sales

 

 

% of sales

 

% change

By segment:

 

 

 

 

 

 

 

 

 

 

 

 

Southeast segment

 

$

282.0

 

 

74.8%

 

$

271.8

 

 

75.8%

 

3.8%

Western segment

 

 

94.8

 

 

25.2%

 

 

86.9

 

 

24.2%

 

9.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

376.8

 

 

100.0%

 

$

358.7

 

 

100.0%

 

5.1%

Net sales for the first quarter of 20222023 were $358.7$376.8 million, an $87.6$18.1 million, or 32.3%5.1%, increase in sales, from $271.1$358.7 million in the first quarter of the prior year.

During the first quarter of 2022,2023, we experienced solid growth at both our Southeast and Western segments, as the momentum of growth we experienced over last year continued into 2022. Of our total net sales forin 2023. Additionally, we continue to make strategic marketing investments which are paying dividends through customer awareness during the first quarter of 2022 of $358.7 million, which increased 32.3% compared to the first quarter of 2021, from $271.1 million in the 2021 first quarter, included growth both organically,repair and from acquisitions in 2021.remodeling season. Our Southeast segment's net sales were $282.0 million in the first quarter of 2023, compared to $271.8 million in the first quarter of 2022, compared to $233.6an increase of $10.2 million, or 3.8%. Our Southeast segment benefitted from a solid repair and remodel channel. Additionally, we believe we have benefitted from heightened hurricane awareness following Hurricane Ian, a category 5 storm that made landfall in Southwest Florida in September 2022.

Our Western segment's net sales were $94.8 million in the first quarter of 2021, an increase of $38.2 million, or 16.3%. This growth was largely organic, but for the sales of Eco being included for the entire first quarter of 2022, versus only the post-acquisition period in the first quarter of 2021 from February 1, 2021. Excluding Eco, our Southeast segment grew organically by 13.8%. Our Western segment's net sales were2023, compared to $86.9 million in the first quarter of 2022, compared to $37.5 million in the first quarter of 2021, an increase of $49.4 million. Sales$7.9 million, or 9.1%. While sales for the first quarter of 20222023 of our Western segment includes acquisition growth from Anlin and CRi, but still grew organically by 39.1%Martin, our existing business produced solid results when compared to the first quarter of last year's first quarter. We believeyear, despite softness in the organic growth we hadnew construction channel in the first quarter of 2022 reflects2023 compare the strengthfirst quarter of our portfolio of brands across our entire geographic footprint.2022.

Gross profit and gross margin

Gross profit was $149.2 million in the first quarter of 2023, an increase of $14.6 million, or 10.9%, from $134.6 million in the first quarter of 2022, an increase of $40.6 million, or 43.2%, from $94.0 million2022. Our gross margin was 39.6% in the first quarter of 2021. Our gross margin was 37.5% in the first quarter of 2022,2023, compared to 34.7%37.5% in the prior year first quarter. The increasesquarter, an increase of 2.1%. Our first quarter 2023 improvements in gross profit and gross margin includewe believe were driven by continued solid performance from our operating teams, prior year's pricing impacts offsetting material and wage inflation, and cost containment measures amid the effects of price increase actions we took actions to offset the impacts of labor and material cost headwinds we have experienced for several quarters. During the first quarter of 2022, we continued to invest in our labor talent which helped generate operational efficiencies across all our businesses in response to increasing demand and believe these actions will continue to benefit our gross margin as we try to offset the impacts of rising costs for materials and labor, and will continue to grow our company with high-quality talent.continuing macro-environment uncertainty.

- 27 -


Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $95.9 million in the first quarter of 2022, an increase of $26.1 million, from $69.82023, compared to $95.9 million in the first quarter of 2021.2022. SG&A in the first quarter of 20222023 was 26.7%25.5% of net sales, compared to 25.7%26.7% of net sales in the first quarter of 2021. The increase in2022. SG&A in the first quarter of 2022,2023, although flat when compared to last year's first quarter, is partially due towas impacted by the inclusion of SG&A from our 2021 acquisition of Anlin,Martin in the fourth quarter of 2022, which added $9.2$3.3 million of SG&A in the 20222023 first quarter and included $2.8$1.7 million of non-cash amortization expense relating to its intangible assets. However,SG&A in the year-over-year increasefirst quarter of 2023 also includes $0.9 million of executive severance costs and $0.7 million of acquisition costs relating to the Anlin Acquisition which we incurred in the first quarter of 2023. These incremental costs were partially offset by a gain from an insurance recovery relating to the wind-down of the commercial business of our NewSouth acquisition of $2.9 million. Excluding these net incremental costs from the first quarter of 2023, SG&A was also driven by increasing distributionexpenses decreased slightly when compared to the first quarter of 2022 and variable overhead costsimproved as a percentage of sales due to the increaseleverage of higher sales in sales. Increasing fuel costs and the inflationary conditions we have experienced overfirst quarter of 2023 when compared to the last few quarters have also impacted SG&A year-over-year.first quarter of 2022.

Income from operations

Income from operations was $53.3 million in the first quarter of 2023, an increase of $14.6 million, or 37.7%, from $38.7 million in the first quarter of 2022, an increase of $14.5 million, from $24.2 million in the first quarter of 2021.2022. Income from operations in the first quarter of 20222023 includes $25.6$40.5 million from our Southeast segment and nearly $13.2$12.8 million from our Western segment, compared to $18.7$25.6 million and $5.5$13.2 million from our Southeast and Western segments, respectively, in the first quarter of 2021,2022, all after allocation of corporate operating costs in both periods. Income from operations in the first quarter of 2023, was impacted by $0.9 million of executive severance costs and $0.7 million of acquisition costs relating to the Anlin Acquisition which we incurred in the first quarter of 2023. These incremental costs were partially offset by a gain from an insurance recovery relating to the wind-down of the commercial business of our NewSouth acquisition of $2.9 million.

The increase in income from operations was related to the benefit from the leverage from higher sales in the first quarter of 20222023 compared to last year’s first quarter, as well as the benefits of the continued efficiency improvements at bothsolid performance from our Southeastoperating teams, prior year's pricing impacts offsetting material and Western segments, more than offsetting the rising costs for materials in aluminumwage inflation, and glass, including the increasing costs of distribution being passed onto us by our vendors, andcost containment measures amid the continuing costsmacro-environment uncertainty. Additionally, during the first quarter of attracting, training2023, we maintained our focus on delivery, quality and retaining an experienced labor force.lead time performance, which contributed to higher margins.

- 32 -


Interest expense, net

Interest expense was $7.7 million in the first quarter of 2023, an increase of $0.6 million, or 8.1%, from $7.1 million in the first quarter of 2022, a decrease of $0.4 million, or 5.1%, from $7.5 million2022. The increase in the first quarter of 2021. The redemption of the lower amount of $425.0 million of higher rate 6.75% 2018 Senior Notes due 2026, with the higher amount of $575.0 million of lower rate 4.375% 2021 Senior Notes due 2029 in 2021 primarily resulted in a slightly lower level of interest expense in the first quarter of 20222023, compared to the first quarter of 2021.2022 is primarily the result of a higher level of borrowings under the revolving facility of our current 2016 Credit Facility due 2027 during the first quarter of 2023, compared to the term loan borrowings under our then existing 2016 Credit Facility due 2024 during the first quarter of 2022, as well as a higher interest rate under the revolving facility during the first quarter of 2023, compared to the term loan facility during the first quarter of 2022.

Income tax expense

We had anincome tax expense of $11.2 million for the three months ended April 1, 2023, compared with income tax expense of $7.8 million for the three months ended April 2, 2022, compared with income tax expense of $3.9 million for the three months ended April 3, 2021.2022. Our effective tax rate for the three months ended April 2, 2022,1, 2023, was an expense rate of24.6%, compared with 24.7%, and was an expense rate of 23.6% for the three months ended April 3, 2021.2, 2022. Our income tax expense for the three-month periodsthree months ended April 1, 2023, and April 2, 2022, and April 3, 2021, includes $505income tax expenses of $654 thousand and $305$505 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco.

Income tax expense in the three months ended April 2, 2022 and April 3, 2021 include1, 2023 includes discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $136 thousand$438 thousand. The income tax benefit in the three months ended April 2, 2022 and $95 thousand inincluded discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards totaling $136 thousand. Excluding discrete items of income tax, the effective tax rates for the three months ended April 3, 2021. The effect of these discrete items on our effective tax rates for these periods was not significant.

In September 2021, the state of Florida announced that the corporate1, 2023 and April 2, 2022, would have been an income tax rate for the 2021 tax year was being lowered from its then current level of 4.458% to 3.535%. However, for 2022, Florida's corporate income tax rate returned to its statutory level before the passage of the Tax Cuts and Jobs Act, which is 5.5%. As such, we adjusted our annual effective tax rate for 2022 to include this increase in rate in Florida, where a substantial portion of our business is apportioned, to an estimated combined statutory federal and stateexpense rate of 25.7% from our estimate in 2021 of 24.2%. During the first three months of 2022 or 2021, we were not required to make any payments of estimated federal or state income taxes.25.6% and 25.1%, respectively.

Net income attributable to redeemable non-controlling interest

Net income attributable to redeemable non-controlling interest for the three months ended April 2, 2022,1, 2023, was $0.7$0.8 million, compared to $0.4$0.7 million for the three months ended April 3, 2021,2, 2022, and represents the share of the net income of Eco for the period, attributable to the 25% interest of Eco not acquired by the Company.

Change in redemption value of redeemable non-controlling interest

The change in the redemption value of the redeemable non-controlling interest for the three-month period ended April 2, 2022,1, 2023, was $2.1an increase of $1.2 million, compared to no adjustmentan increase of $2.1 million in the three months ended April 3, 2021.2, 2022. See Note 1716 in Part I, Item 1, for a further discussion of the change in the redemption value of the redeemable non-controlling interest.

- 33 -


LIQUIDITY AND CAPITAL RESOURCES

- 28 -


Consolidated Cash Flows

Our principal source of liquidity is cash flow generated by operations, and supplemented by borrowings under our credit facilities. We expect that this cash generating capability will provide us with financial flexibility in meeting operating and investing needs, but there can be no assurance that will be the case in future periods. Our primary capital requirements are to fund working capital needs, meet required debt service payments on our credit facilities and fund capital expenditures.

The following table summarizes our cash flow results for the first three months of 20222023 and 2021:2022:

 

 

 

Components of Cash Flows

 

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

(in millions)

 

2022

 

 

2021

 

Cash provided by (used in) operating activities

 

$

17.3

 

 

$

(1.4

)

Cash used in investing activities

 

 

(8.2

)

 

 

(100.8

)

Cash (used in) provided by financing activities

 

 

(1.7

)

 

 

60.9

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

$

7.4

 

 

$

(41.3

)

 

 

Components of Cash Flows

 

 

 

Three Months Ended

 

 

 

April 1,

 

 

April 2,

 

(in millions)

 

2023

 

 

2022

 

Cash provided by operating activities

 

$

23.9

 

 

$

17.3

 

Cash used in investing activities

 

 

(12.0

)

 

 

(8.2

)

Cash used in financing activities

 

 

(30.2

)

 

 

(1.7

)

 

 

 

 

 

 

 

(Decrease) Increase in cash and cash equivalents

 

$

(18.3

)

 

$

7.4

 

Operating activities. Cash provided by operating activities during the first three months of 20222023 was $17.3$23.9 million, compared to cash usedprovided in operating activities of $1.4$17.3 million in the first three months of 2021.2022. The increase in cash provided by operating activities for the first three months of 2022,2023, as compared to the first three months of 2021, of $18.72022, was $6.6 million, and was due to the factors set forth in the table below.

Direct cash flows from operations for the first three months of 20222023 and 20212022 are as follows:follows. Certain prior year amounts have been reclassified to conform with the current year presentation:

 

 

 

Direct Operating
Cash Flows

 

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

(in millions)

 

2022

 

 

2021

 

Collections from customers

 

$

332.9

 

 

$

245.0

 

Other collections of cash

 

 

4.5

 

 

 

3.9

 

Disbursements to vendors

 

 

(165.0

)

 

 

(163.2

)

Personnel related disbursements

 

 

(141.7

)

 

 

(74.4

)

Debt service payments

 

 

(13.5

)

 

 

(12.8

)

Other cash activity, net

 

 

0.1

 

 

 

0.1

 

 

 

 

 

 

 

 

Cash provided by (used in) operations

 

$

17.3

 

 

$

(1.4

)

 

 

Direct Operating
Cash Flows

 

 

 

Three Months Ended

 

 

 

April 1,

 

 

April 2,

 

(in millions)

 

2023

 

 

2022

 

Collections from customers

 

$

372.2

 

 

$

332.9

 

Other collections of cash

 

 

8.7

 

 

 

4.5

 

Disbursements to vendors

 

 

(218.6

)

 

 

(218.0

)

Personnel related disbursements

 

 

(120.6

)

 

 

(88.7

)

Income taxes paid, net of refunds

 

 

(16.4

)

 

 

-

 

Debt service payments

 

 

(1.3

)

 

 

(13.5

)

Other cash activity, net

 

 

(0.1

)

 

 

0.1

 

 

 

 

 

 

 

 

Cash provided by operations

 

$

23.9

 

 

$

17.3

 

Inventory as of April 2, 2022,1, 2023, was $97.4$114.9 million, compared to $91.4$112.7 million at January 1,December 31, 2022, an increase of $6.0$2.2 million. Inventory at April 2, 2022 includes $8.7 million relating to our investment in Anlin.

We monitor and evaluate raw material inventory levels based on the need for each discrete item to fulfill short-term requirements calculated from current order patterns and to provide appropriate safety stock. Because a significant portion of our products are made-to-order, which requires us to relieve inventory and recognize revenue over time, we have a low amount of work-in-process inventory.and finished goods inventories. As a result of these factors, our inventories are not excessive, andsuch, we believe the value of suchour inventories will be realized through sales.

Investing activities. Cash used in investing activities was $12.0 million for the first three months of 2023, compared to cash used in investing activities of $8.2 million for the first three months of 2022, compared to cash used in investing activities of $100.8 million for the first three months of 2021, a decreasean increase in cash used in investing activities of $92.6$3.8 million. There was no cash used relating to acquire businessesacquisitions in the first three months of 2022. Cash2023 relating to the finalization of the Martin Acquisition working capital adjustment, resulting in a final payment to sellers of $0.7 million, compared to no cash used relating to acquire businessesacquisitions in the first three months of 2021 totaled $94.3 million, related to our acquisition of Eco.2022. There was an increase in cash used in capital expenditures of $1.7$3.6 million which went from $6.5 million in the first three months of 2021, to $8.2 million in the first three months of 2022.2022, to $11.8 million in the first three months of 2023. Proceeds from the sales of assets was $0.6 million in the first three months of 2023, compared with less than $0.1 million in both the first three months of 2022 and 2021.2022.

Financing activities. Cash used in financing activities was $30.2 million in the first three months of 2023, compared to cash used in financing activities of $1.7 million in the first three months of 2022, compared toan increase in cash providedused in financing activities of $60.9 million in$28.5 million.

- 29 -


As further discussed below under Share Repurchase Program, during the first three months of 2021,2023, we made repurchases of 1,173,520 shares of our common stock at a change in cash providedtotal cost of $25.9 million, which includes $25.6 million relating to cash used in financing activities totaling $62.6 million. transactions costs, including broker commissions, and $256 thousand relating to the 1% excise tax imposed on corporate stock buy-backs by the Inflation Reduction Act of 2022.

In the first three months of 2021,2023, we issued the $60.0 millionmade payments of Second Additional Senior Notes, with a

- 34 -


premium of $3.3 million, which provided proceeds totaling $63.3 million. The proceeds of $63.3 million from the issuance of the Second Additional Senior Notes were usedcontingent consideration relating to partially fund our acquisition of Eco.Anlin totaling $9.5 million, representing the second payment we were required to make under the Anlin purchase agreement based on their 2022 EBITDA, as defined in the agreement. Because these contingent payments were not required to be made within a reasonably short period of time after the effective date of the acquisition, we classified the portion of these payments representing the fair value of the second payment, which was $4.3 million, as a financing activity, with the difference classified within operating activities.

We paid financing costs totaling $1.4 million inDuring the first three months of 2021, including financing costs relating to bank fees and professional services costs relating to2023, we had net borrowings under the offering and issuanceNew Revolving Credit Facility of the Second Additional Senior Notes. $2.6 million, which included gross borrowings of $15.0 million, partially offset by gross repayments totaling $12.4 million.

Taxes paid relating to common stock withheld from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards were $2.6 million in the first three months of 2023, versus $1.7 million in the first three months of 2022, versus $1.0 million in the first three months of 2021, an increase in cash used of $0.7$0.9 million.

Capital Resources and Debt Covenant

2021 Senior Notes due 2029

On September 24, 2021, we completed the issuance of $575.0 million aggregate principal amount of 4.375% senior notes (“2021 Senior Notes due 2029”), issued at 100% of their principal amount. The 2021 Senior Notes due 2029 are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future restricted subsidiaries, other than any restricted subsidiary of the Company that does not guarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2021 Senior Notes due 2029 are senior unsecured obligations of the Company and the guarantors, respectively, and rank pari passu in right of payment with all existing and future senior debt and senior to all existing and future subordinated debt of the Company and the guarantors. The 2021 Senior Notes due 2029 were offered under Rule 144A of the Securities Act, and in transactions outside the United States under Regulation S of the Securities Act, and have not been, and will not be, registered under the Securities Act.

The 2021 Senior Notes due 2029 mature on October 1, 2029. Interest on the 2021 Senior Notes due 2029 is payable semi-annually, in arrears, beginning on April 1, 2022, with interest accruing at a rate of 4.375% per annum from September 24, 2021. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes due 2029 totaling $8.7 million, which included a 1.25% lender spread on the total principal value of the 2021 Senior Notes due 2029, or $7.2 million, and $1.5 million of other costs, all of which are being amortized under the effective interest method.

As of April 2, 2022,1, 2023, the face value of debt outstanding under the 2021 Senior Notes due 2029 was $575.0 million, and accrued interest began accruing on September 24, 2021.was $12.6 million. Proceeds from the 2021 Senior Notes due 2029 were used, in part, to redeem in full the $425.0 million of 2018 Senior Notes due 2026, including the related fees, costs, and the prepayment call premium of $21.5 million, representing 5.063% of the $425.0 million face value then outstanding, prepay the outstanding term loan borrowings under the then existing 2016 Credit Agreement of $54.0$60.0 million and the related fees and costs, and finance the Anlin Acquisition in the fourth quarter of 2021. See Note 6, Acquisitions, for a discussion of the Anlin Acquisition.

The indenture for the 2021 Senior Notes due 2029 gives us the option to redeem some or all of the 2021 Senior Notes due 2029 at the redemption prices and on the terms specified in the indenture governing the 2021 Senior Notes due 2029. The indenture governing the 2021 Senior Notes due 2029 does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a change of control, as defined in the indenture, the Company is required to offer to repurchase the notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. We also may make optional redemptions at various premiums including a make-whole call at the then current treasury rate plus 50 basis points prior to October 1, 2024, then 102.188% on or after August 1, 2024, 101.094% on or after August 2025, then at 100.000% on or after August 1, 2026.

The indenture for the 2021 Senior Notes due 2029 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) enter into agreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with affiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; and (viii) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

- 30 -


2016 Credit Agreement due 20242027

On February 16, 2016, we entered into the 2016 Credit Agreement. From 2016 to 2022, we entered into various amendments to the 2016 Credit Agreement, due 2024, among us,including the lending institutions identifiedamendment in October 2022, as described below.

On October 13, 2022, the Company entered into the Fifth Amendment of the 2016 Credit Agreement due 2024, and Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent.2027. The 2016 Credit Agreement due 2024 establishes senior secured credit facilities in an aggregate amount of $310.0 million, consisting of a $270.0 million Term B term loan facility originally maturing in February 2022 that amortizes on a basis of 1% annually during its six-year term, and a $40.0 million revolving credit facility originally maturing in February 2021 that included a swing line facility and a letter of credit facility. Our obligations under the 2016 Credit Agreement due 2024 are, subject to exceptions, guaranteed by substantially all of our wholly-owned direct and indirect subsidiaries that are restricted subsidiaries and secured by substantially all of our assets as well as our direct and indirect restricted subsidiaries’ assets.

- 35 -


On March 16, 2018, we entered into an amendment of our 2016 Credit Agreement due 2024 (the “Second Amendment”). The SecondFifth Amendment among other things, decreased the applicable interest rate marginsprovides for the Initial Term Loans (as defined in the 2016New Revolving Credit Agreement due 2024) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2024), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2024). On February 17, 2017, we entered into the first amendment to our 2016 Credit Agreement due 2024, which also resulted in decreases in the applicable margins, but which, unlike the Second Amendment, did not include any changes in lender positions.

On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Third Amendment provided for, among other things, (i) a three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022, which refinanced in full our existing Term B term loan facility under the 2016 Credit Agreement, and had no regularly scheduled amortization, and (ii)Facility, a new five-year revolving credit facility in an aggregate principal amount of up to$250.0 million. The New Revolving Credit Facility refinances and replaces the previously existing $80.0 million (the “Revolving Facility”), maturing in October 2024, which replaced our then existing $40.0 million revolving credit facility under the 2016 Credit Agreement and includes a swing-line facility and letter of credit facility. Ourdue 2027. The Company’s obligations under the 2016 Credit Agreement due 2027 continue to be secured by substantially all of our assets, as well as ourits and its direct and indirect subsidiaries’ assets, and is senior in position to the 2021 Senior Notes due 2029.

On October 25, 2021, we entered into an amendmentContemporaneously with the Fifth Amendment, the Company drew down $160.0 million of ourfunds available under the New Revolving Credit Facility. Proceeds totaling $61.6 million from the $160.0 million drawdown were used to repay then existing term loan borrowings under the 2016 Credit Agreement ("Fourth Amendment"). The Fourth Amendment provides for, among other things, a three-year Term A loan in the aggregate maximum available amount oftotaling $60.0 million, (the "Incremental Term A Loan"),plus accrued interest and fees totaling $1.6 million. As discussed below, the remaining $98.4 million of proceeds from which were used to fund the Anlincash portion of the Martin Acquisition. The Fourth Amendment does not changeCompany has made net repayments of the $160.0 million of initial borrowings under the New Revolving Credit Facility totaling $81.0 million through April 1, 2023.

Interest on borrowings under the New Revolving Credit Facility is payable either quarterly or at the expiration of any terms relatingSecured Overnight Financing Rate ("SOFR") interest period applicable thereto. Borrowings under the New Revolving Credit Facility accrue interest at a rate equal to, at our option, a base rate (with a floor of 100 basis points) plus a percentage spread (ranging from 0.75% to 1.75%) based on our first lien net leverage ratio or SOFR (with a floor of 0 basis points) plus a percentage spread (ranging from 1.75% to 2.75%) based on our first lien net leverage ratio. After giving effect to the Revolving Facility, under whichFifth Amendment, we pay a quarterly feescommitment fee on the unused portion of the revolving credit facilityNew Revolving Credit Facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Fifth Amendment also modifies the application of the financial covenant under the 2016 Credit Agreement such that testing will occur on a quarterly basis, and requires we maintain a first lien net leverage ratio of not more than 4.00 to 1.00. We were in compliance with this covenant as of April 1, 2023.

The 2016 Credit Agreement due 2027 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) sell or otherwise dispose of assets; (iv) enter into transactions with affiliates; (v) create or incur liens; (vi) merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; (viii) make investments and (ix) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

As of April 2, 2022, there1, 2023, borrowings outstanding under the $250.0 million New Revolving Credit Facility totaled $79.0 million, and accrued interest was $244 thousand. There were $5.7$8.5 million in letters of credit outstanding and $74.3 million availableoutstanding. Availability under the New Revolving Facility.

Credit Facility at April 1, 2023 totaled $162.5 million. The weighted average all-in interest rate for borrowings under the term-loan portionexisting revolving credit facility of the 2016 Credit Agreement due 20242027 was 2.46%6.47% at April 1, 2023, and 6.07% at December 31, 2022.

The Martin Acquisition was financed in part with the $250.0 million available under the New Revolving Credit Facility provided by the Fifth Amendment of our 2016 Credit Agreement due 2027, under which we drew $160.0 million on October 14, 2022, the proceeds of which were used to pay $98.4 million of the $187.8 million total fair value of consideration transferred at closing, and $61.6 million to prepay our $60.0 million existing term loans under the Fourth Amendment of our 2016 Credit Agreement due 2027, plus $1.6 million in fees, costs and accrued interest. The remainder of the total fair value of consideration transferred at closing, totaling $89.4 million was funded with cash on hand previously generated through operations. We also paid buyer fees and costs relating to the Martin Acquisition totaling $4.8 million in the year ended December 31, 2022, classified as of April 2, 2022,selling, general and was 2.10% at January 1,administrative expenses for the year ended December 31, 2022.

Deferred Financing Costs

The activityActivity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, for the three months ended April 2, 2022, are as follows. All deferred financing costs arewhich is classified as a reduction of the carrying value of long-term debt:debt, for the three months ended April 1, 2023, is as follows:

 

(in thousands)

 

Total

 

 

Total

 

At beginning of year

 

$

9,345

 

 

$

9,218

 

Less: Amortization expense

 

 

(304

)

 

 

(326

)

At end of period

 

$

9,041

 

 

$

8,892

 

 

- 31 -


Estimated amortization expense relating to deferred financing costs for the years indicated as of April 2, 2022,1, 2023, is as follows:

 

(in thousands)

 

Total

 

 

Total

 

Remainder of 2022

 

$

929

 

2023

 

 

1,282

 

Remainder of 2023

 

$

994

 

2024

 

 

1,282

 

 

 

1,366

 

2025

 

 

1,083

 

 

 

1,442

 

2026

 

 

1,114

 

 

 

1,466

 

2027

 

 

1,440

 

Thereafter

 

 

3,351

 

 

 

2,184

 

 

 

 

 

 

 

Total

 

$

9,041

 

 

$

8,892

 

 

We have no schedule payments of outstanding debt until the contractual maturity of the 2016 Credit Agreement in October 2024. OurThe contractual future maturities of long-term debt outstanding, as of April 1, 2023, are as follows (at face value):

 

(in thousands)

 

 

 

 

 

 

Remainder of 2022

 

$

 

2023

 

 

 

Remainder of 2023

 

$

 

2024

 

 

60,000

 

 

 

 

2025

 

 

 

 

 

 

2026

 

 

 

 

 

 

2027

 

 

79,000

 

Thereafter

 

 

575,000

 

 

 

575,000

 

 

 

 

 

 

 

Total

 

$

635,000

 

 

$

654,000

 

2023 Share Repurchase Program. On February 7, 2023, the Company announced that its Board of Directors approved a new, share repurchase program which authorizes the Company to purchase up to $250.0 million of its common stock. This program permits the Company to purchase shares of its common stock from time to time through open-market purchases, in privately negotiated transactions, or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. During the three months ended April 1, 2023, we repurchased a total of 1,173,520 shares under this program at a total cost of $25.9 million, which includes $25.6 million relating to transactions costs, including broker commissions, and $256 thousand relating to the 1% excise tax imposed on corporate stock buy-backs by the Inflation Reduction Act of 2022. Subsequent to April 1, 2023, we have purchased an additional 462,222 shares under this program at a total cost of $11.9 million, including the 1% excise tax imposed on corporate stock buy-backs by the Inflation Reduction Act of 2022. The timing and total amount of stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The share repurchase program had an initial term of 3 years, through February 3, 2026, and may be suspended or discontinued at any time, and does not obligate the company to acquire any amount of common stock.

Shareholder Rights Plan. On March 30, 2023, we announced that our Board of Directors had unanimously approved the adoption of a limited-duration shareholder rights plan (the “Rights Plan”) which includes the declaration of a dividend distribution of one right (each, a “Right”) for each outstanding share of the Company’s common stock to stockholders of record as of the close of business on April 10, 2023). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.01 per share, of the Company at an exercise price of $90.00, subject to adjustment. The complete terms of the Rights are set forth in a Rights Agreement, dated as of March 30, 2023, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the "Rights Agreement"). The Rights expire on the earliest of (1) March 30, 2024, unless such date is extended, or (2) the redemption or exchange of the Rights as described above.

The Board adopted the Rights Plan in response to a likely accumulation of the Company's shares by a strategic investor. The intent of the Rights Plan is to reduce the likelihood that any entity, person or group gains control of the Company through open market accumulation of the Company's shares without paying all other shareholders an appropriate control premium or without providing the Board sufficient time to make informed judgments and take actions that it believes are in the best interests of its other shareholders. Under the Rights Plan, the rights will become exercisable if an entity, person or group acquires beneficial ownership of 10% or more of the Company's outstanding common stock in a transaction not approved by the Board. In the event that the Rights become exercisable due to the triggering ownership threshold being crossed, each Right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose Rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the Right.

 

- 3632 -


Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first three months of 2022,2023, capital expenditures were $8.2$11.8 million, compared to $6.5$8.2 million for the first three months of 2021.2022. Our capital expenditure program is directed towards making investments in capital assets that we believe will increase both gross sales and margins, but also includes capital expenditures for maintenance capital.maintenance.

Aluminum Forward and Midwest Transaction Premium Contracts. We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusions we use in production. Beginning late in the first half of 2021, we began enteringWe also enter into forward contracts to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium (MTP).

At April 2, 2022,1, 2023, the fair value of our aluminum forward contracts was in an assetposition of $9.1$0.2 million. We had 2313 outstanding forward contracts for the purchase of 36.35.6 million pounds of aluminum through December 2022,2023, at an average price of $1.32$1.07 per pound, which excludes the Midwest premium, with maturity dates of between two months and tennine months.We assessed the risk of non-performance of the Company to these contracts and determined it was immaterial and, therefore, did not record any adjustment to fair value as of April 2, 2022.

At April 2, 2022,1, 2023, the fair value of our MTP contracts was in an assetposition of $4.4$0.3 million. We had 71 outstanding MTP contractscontract to hedge the Platt US MW Transaction price per pound for the delivery of 17.06.3 million pounds of aluminum through December 2022,2023, at an average price of $0.12$0.21 per pound, with a maturity datesdate of between two months and tennine months. We assessed the risk of non-performance of the Company and our counterparty to these contracts, as applicable, and determined it was immaterial and, therefore, did not record any adjustment to their fair valuevalues as of April 2, 2022.1, 2023.

We assess the effectiveness of our aluminum forward and MTP contracts by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. TheWe expect the amount of income (loss), net, recognized in the “accumulatedaccumulated other comprehensive income (loss)” line itemof approximately $0.5 million in the accompanying condensed consolidated balance sheet as of April 2, 2022, that we expect will1, 2023, to be reclassified to earnings within the next twelve months, will be approximately $13.4 million.months.

Significant Accounting Policies and Critical Accounting Estimates. Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Significant accounting policies are those that are both important to the accurate portrayal of a Company’s financial condition and results, and those that require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the condensed consolidated financial statements and the possibility that future events may be significantly different from our expectations. We identified our significant accounting policies in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022. There have been no changes to our critical accounting policies during the first three months of 2022.

Recently Issued Accounting Pronouncements. Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in March 2021, a subsequent amendment to the initial guidance, ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We have not elected adoption of this optional guidance and do not intend to elect this guidance before the sunset date of December 31, 2022, as there is no material impact on our consolidated financial statements.2023.

 

- 3733 -


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize derivative financial instruments to hedge price movements in aluminum materials used in our manufacturing process and to hedge the delivery component of our aluminum needs, known as the Midwest Transaction Premium (“MTP”). AsHowever, as of April 2, 2022,1, 2023, we are covered for approximately 77% of our anticipatedhad minimal aluminum needsor MTP coverage for the remainder of 2022 at an average price2023, and no coverage for either beyond the end of $1.32 per pound. These calculations are based only on the LME price of aluminum and excludes an estimate for the MTP, which we hedge separately. As of April 2, 2022, we are covered for approximately 36% of our anticipated MTP costs for the remainder of 2022 at an average price of $0.12 per pound. As2023. Accordingly, as of the date of this report, we hadare substantially not added any further coverage since April 2, 2022.hedged for the substantial portions of our aluminum or delivery needs, and our price for aluminum and MTP costs will follow the changes in aluminum prices as set by the LME, as well as the MTP delivery component as set by the Platts MW US Transaction price per pound assessment. However, we may add more coverage for our anticipated aluminum needs in 2022 and/orduring the rest of 2023 and beyond, as we deem necessary.

Regarding our aluminum hedging instruments for the purchase of aluminum, as of April 2, 2022, a 10% decrease in the price of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $5.7 million. This calculation utilizes our actual commitment of 36.3 million pounds under contract (to be settled through December 2022) and the market price of aluminum as of April 2, 2022. This calculation is based only on the LME price of aluminum and excludes an estimate for the MTP. Regarding our MTP contracts for hedging of the delivery component of our aluminum needs, as of April 2, 2022, a 10% decrease in the Platts MW US Transaction price per pound would decrease the fair value of our MTP contracts an estimated $0.6 million. This calculation utilizes our actual commitment of 17.0 million pounds under contract (to be settled through December 2022) and the then current Platts MW US Transaction price per pound as of April 2, 2022.

We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding with a variable rate as of the date of filing of this Quarterly Report on Form 10-Q of $60.0$89.0 million, a 100 basis-point increase in interest rate would result in approximately $0.6$0.9 million of additional interest costs annually.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

A control system, however, no matter how well conceived and operated, can at best provide reasonable, not absolute, assurance that the objectives of the control system are met. Additionally, a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our Company have been detected, and due to these inherent limitations, misstatements due to error or fraud may occur and not be detected.

Our chief executive officer and interim chief financial officer, with the assistance of management, evaluated the design, operation and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (“Evaluation Date”). Based on that evaluation, our chief executive officer and interim chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective for the purposes of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.

During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, during the year ended January 1,December 31, 2022 we acquired Eco and Anlin.Martin. We are currently integrating Eco and AnlinMartin into our operations, compliance programs and internal control processes. As such Eco and Anlin wereMartin was not included in our assessment of internal control over financial reporting as of January 1,December 31, 2022. We will include Eco and AnlinMartin into our assessment of internal controls as of December 31, 2022,30, 2023, the end of our 20222023 fiscal year. Eco Enterprises and Anlin Industries wereMartin Doors was included in the 20212022 consolidated financial statements of the Company and constituted 22.0%14.0% of total assets as of January 1,December 31, 2022 and 9.2%0.6% of revenues for the fiscal year then ended.

- 3834 -


PART II — OTHER INFORMATION

We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities with respect to claims and lawsuits. We do not believe that the ultimate resolution of the matters pending or threatened against us at this time will have a material adverse impact on our financial position or results of operations.

Although our business and facilities are subject to federal, state, and local environmental regulation, environmental regulation does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and regulations. As owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances, or the discovery of previously unknown environmental conditions.

ITEM 1A. RISK FACTORSFACTORS.

Our operations are subject to a number of risks. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, including the risk factors set forth in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended January 1,December 31, 2022. If any of the events described in the risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSPROCEEDS.

Recent sales of unregistered securities; use of proceeds from registered securities. None during

Purchases of equity securities by the quarter coverissuer and affiliated purchasers.

On February 7, 2023, the Company announced that its Board of Directors approved a new, share repurchase program which authorizes the Company to purchase up to $250.0 million of its common stock. This program permits the Company to purchase shares of its common stock from time to time through open-market purchases, in privately negotiated transactions, or by this report.other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The timing and total amount of stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The share repurchase program had an initial term of 3 years, through February 3, 2026, and may be suspended or discontinued at any time, and does not obligate the company to acquire any amount of common stock.

 

 

 

 

Purchases of Equity Securities

Period

 

Beginning and
Ending Dates

 

(a) Total Number of Shares Purchased

 

(b) Average Price Paid per Share (in $)

 

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

(d) Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs at End of Period
(in $M)

 

 

 

 

 

 

 

 

 

 

 

January 2023

 

January 1 to January 28

 

 

 

 

$250.00

 

 

 

 

 

 

 

 

 

 

 

February 2023

 

January 29 to February 25

 

 

 

 

$250.00

 

 

 

 

 

 

 

 

 

 

 

March 2023

 

February 26 to April 1

 

1,173,520

 

$21.8471

 

1,173,520

 

$224.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,173,520

 

$21.8471

 

1,173,520

 

 

- 3935 -


ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITSEXHIBITS.

 

3.1

Certificate of Designation of Preferred Stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2023)

4.1

Rights Agreement, dated as of March 30, 2023, between PGT Innovations, Inc., a Delaware corporation, and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2023)

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2*

Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1**

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2**

Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS

Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

Inline XBRL Taxonomy Definition Linkbase

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*Filed herewith.

**Furnished herewith.

- 4036 -


SIGNATURE

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

 

 

PGT INNOVATIONS, INC.

 

(Registrant)

 

 

 

 

Date: May 12, 202211, 2023

By: /s/ John KunzCraig Henderson

 

Name: John KunzCraig Henderson

 

Title: SeniorInterim Chief Financial Officer and Vice President and Chief Financial Officerof Corporate Finance

 

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