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 ended OctoberJuly 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 ☑
Common Stock, $0.01 par value, outstanding was 59,997,67958,351,339 shares, as of OctoberJuly 31, 2022.2023.
Securities registered pursuant to Section 12(b) of the Act:
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PGT INNOVATIONS, INC.
TABLE OF CONTENTS
Form 10-Q for the Three and NineSix Months Ended OctoberJuly 1, 20222023
Page | ||||||
Number | ||||||
Part I. | 3 | |||||
Item 1. | 3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. | 40 | |||||
Item 4. | 40 | |||||
Item 5. | 40 | |||||
Item 6. |
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- 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 |
|
| Nine Months Ended |
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
| October 1, |
| October 2, |
| October 1, |
| October 2, |
| July 1, |
| July 2, |
| July 1, |
| July 2, |
| ||||||||||||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
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| (unaudited) |
|
| (unaudited) |
| (unaudited) |
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| (unaudited) |
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Net sales | $ | 385,837 |
|
| $ | 300,431 |
|
| $ | 1,151,020 |
|
| $ | 857,023 |
| $ | 384,934 |
|
| $ | 406,521 |
|
| $ | 761,763 |
|
| $ | 765,183 |
|
Cost of sales |
| 236,035 |
|
|
| 196,228 |
|
|
| 701,495 |
|
|
| 561,849 |
|
| 230,983 |
|
|
| 241,391 |
|
|
| 458,581 |
|
|
| 465,460 |
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Gross profit |
| 149,802 |
|
|
| 104,203 |
|
|
| 449,525 |
|
|
| 295,174 |
|
| 153,951 |
|
|
| 165,130 |
|
|
| 303,182 |
|
|
| 299,723 |
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Selling, general and administrative expenses |
| 102,399 |
|
|
| 78,595 |
|
|
| 307,786 |
|
|
| 224,106 |
|
| 100,005 |
|
|
| 109,505 |
|
|
| 195,918 |
|
|
| 205,387 |
|
Restructuring costs and charges |
| 2,516 |
|
|
| — |
|
|
| 2,516 |
|
|
| — |
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Income from operations |
| 47,403 |
|
|
| 25,608 |
|
|
| 141,739 |
|
|
| 71,068 |
|
| 51,430 |
|
|
| 55,625 |
|
|
| 104,748 |
|
|
| 94,336 |
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Interest expense, net |
| 6,889 |
|
|
| 7,686 |
|
|
| 21,124 |
|
|
| 22,968 |
|
| 8,214 |
|
|
| 7,155 |
|
|
| 15,870 |
|
|
| 14,235 |
|
Debt extinguishment costs |
| — |
|
|
| 25,472 |
|
|
| — |
|
|
| 25,472 |
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Income (loss) before income taxes |
| 40,514 |
|
|
| (7,550 | ) |
|
| 120,615 |
|
|
| 22,628 |
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Income before income taxes |
| 43,216 |
|
|
| 48,470 |
|
|
| 88,878 |
|
|
| 80,101 |
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Income tax expense (benefit) |
| 10,100 |
|
|
| (2,410 | ) |
|
| 29,910 |
|
|
| 4,260 |
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Income tax expense |
| 11,462 |
|
|
| 12,005 |
|
|
| 22,697 |
|
|
| 19,810 |
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Net income (loss) |
| 30,414 |
|
|
| (5,140 | ) |
|
| 90,705 |
|
|
| 18,368 |
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Net income |
| 31,754 |
|
|
| 36,465 |
|
|
| 66,181 |
|
|
| 60,291 |
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Less: Net income attributable to redeemable |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) |
| (264 | ) |
|
| (304 | ) |
|
| (1,101 | ) |
|
| (961 | ) |
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Net income (loss) attributable to the Company | $ | 30,041 |
|
| $ | (5,817 | ) |
| $ | 89,371 |
|
| $ | 16,712 |
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Net income attributable to the Company | $ | 31,490 |
|
| $ | 36,161 |
|
| $ | 65,080 |
|
| $ | 59,330 |
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Calculation of net income (loss) per common share attributable |
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Net income (loss) attributable to the Company | $ | 30,041 |
|
| $ | (5,817 | ) |
| $ | 89,371 |
|
| $ | 16,712 |
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Decrease (increase) in redemption value of RNCI |
| 271 |
|
|
| (965 | ) |
|
| (1,514 | ) |
|
| (4,528 | ) | |||||||||||||||
Net income (loss) attributable to common shareholders | $ | 30,312 |
|
| $ | (6,782 | ) |
| $ | 87,857 |
|
| $ | 12,184 |
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Calculation of net income per common share attributable |
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Net income attributable to the Company | $ | 31,490 |
|
| $ | 36,161 |
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| $ | 65,080 |
|
| $ | 59,330 |
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(Increase) decrease in redemption value of RNCI |
| (460 | ) |
|
| 351 |
|
|
| (1,637 | ) |
|
| (1,785 | ) | |||||||||||||||
Net income attributable to common shareholders | $ | 31,030 |
|
| $ | 36,512 |
|
| $ | 63,443 |
|
| $ | 57,545 |
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Net income (loss) per common share attributable to common shareholders: |
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Net income per common share attributable to common shareholders: |
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Basic | $ | 0.51 |
|
| $ | (0.11 | ) |
| $ | 1.47 |
|
| $ | 0.20 |
| $ | 0.53 |
|
| $ | 0.61 |
|
| $ | 1.07 |
|
| $ | 0.96 |
|
Diluted | $ | 0.50 |
|
| $ | (0.11 | ) |
| $ | 1.46 |
|
| $ | 0.20 |
| $ | 0.53 |
|
| $ | 0.61 |
|
| $ | 1.07 |
|
| $ | 0.96 |
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Weighted average number of common shares outstanding: |
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Basic |
| 59,964 |
|
|
| 59,590 |
|
|
| 59,908 |
|
|
| 59,475 |
|
| 58,559 |
|
|
| 59,928 |
|
|
| 59,188 |
|
|
| 59,880 |
|
Diluted |
| 60,402 |
|
|
| 59,590 |
|
|
| 60,201 |
|
|
| 60,035 |
|
| 58,867 |
|
|
| 60,257 |
|
|
| 59,528 |
|
|
| 60,241 |
|
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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 |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
| (unaudited) |
|
| (unaudited) |
| ||||||||||
Net income (loss) | $ | 30,414 |
|
| $ | (5,140 | ) |
| $ | 90,705 |
|
| $ | 18,368 |
|
|
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|
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Other comprehensive income (loss) before tax: |
|
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|
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Increase (decrease) in fair value of derivatives |
| (2,633 | ) |
|
| 6,549 |
|
|
| (9,487 | ) |
|
| 23,910 |
|
Reclassification to earnings |
| 2,416 |
|
|
| (6,696 | ) |
|
| (3,344 | ) |
|
| (12,604 | ) |
|
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|
|
|
|
|
|
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| ||||
Other comprehensive income |
| (217 | ) |
|
| (147 | ) |
|
| (12,831 | ) |
|
| 11,306 |
|
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|
|
|
|
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|
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| ||||
Income tax expense (benefit) related to |
| (56 | ) |
|
| (37 | ) |
|
| (3,296 | ) |
|
| 2,806 |
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Other comprehensive income |
| (161 | ) |
|
| (110 | ) |
|
| (9,535 | ) |
|
| 8,500 |
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|
|
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| ||||
Comprehensive income (loss) |
| 30,253 |
|
|
| (5,250 | ) |
|
| 81,170 |
|
|
| 26,868 |
|
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|
|
|
|
|
|
|
|
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Less: Comprehensive income attributable to |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) |
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|
|
|
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Comprehensive income (loss) attributable to the Company | $ | 29,880 |
|
| $ | (5,927 | ) |
| $ | 79,836 |
|
| $ | 25,212 |
|
| Three Months Ended |
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| Six Months Ended |
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| July 1, |
|
| July 2, |
|
| July 1, |
|
| July 2, |
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| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
| (unaudited) |
|
| (unaudited) |
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Net income | $ | 31,754 |
|
| $ | 36,465 |
|
| $ | 66,181 |
|
| $ | 60,291 |
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Other comprehensive income before tax: |
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|
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Decrease in fair value of derivatives |
| (1,215 | ) |
|
| (12,929 | ) |
|
| (903 | ) |
|
| (6,854 | ) |
Reclassification to earnings |
| (19 | ) |
|
| (3,698 | ) |
|
| (159 | ) |
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| (5,760 | ) |
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Other comprehensive loss before tax |
| (1,234 | ) |
|
| (16,627 | ) |
|
| (1,062 | ) |
|
| (12,614 | ) |
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Income tax benefit related to |
| (318 | ) |
|
| (4,270 | ) |
|
| (273 | ) |
|
| (3,240 | ) |
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Other comprehensive loss, net of tax |
| (916 | ) |
|
| (12,357 | ) |
|
| (789 | ) |
|
| (9,374 | ) |
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Comprehensive income |
| 30,838 |
|
|
| 24,108 |
|
|
| 65,392 |
|
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| 50,917 |
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Less: Comprehensive income attributable to |
| (264 | ) |
|
| (304 | ) |
|
| (1,101 | ) |
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| (961 | ) |
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Comprehensive income attributable to the Company | $ | 30,574 |
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| $ | 23,804 |
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| $ | 64,291 |
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| $ | 49,956 |
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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)
|
| October 1, |
| January 1, |
|
| July 1, |
| December 31, |
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|
| 2022 |
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| 2022 |
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| 2023 |
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| 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 218,841 |
|
| $ | 96,146 |
|
| $ | 39,397 |
|
| $ | 66,548 |
|
Accounts receivable, net |
|
| 166,885 |
|
|
| 141,221 |
|
|
| 150,530 |
|
|
| 160,107 |
|
Inventories |
|
| 112,257 |
|
|
| 91,440 |
|
|
| 117,155 |
|
|
| 112,672 |
|
Contract assets, net |
|
| 56,313 |
|
|
| 55,239 |
|
|
| 50,910 |
|
|
| 47,919 |
|
Prepaid expenses |
|
| 12,456 |
|
|
| 8,727 |
|
|
| 16,625 |
|
|
| 11,763 |
|
Other current assets |
|
| 15,865 |
|
|
| 28,985 |
|
|
| 18,232 |
|
|
| 16,532 |
|
Total current assets |
|
| 582,617 |
|
|
| 421,758 |
|
|
| 392,849 |
|
|
| 415,541 |
|
|
|
|
|
|
|
|
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|
|
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| ||||
Property, plant and equipment, net |
|
| 185,305 |
|
|
| 185,266 |
|
|
| 213,165 |
|
|
| 208,354 |
|
Operating lease right-of-use asset, net |
|
| 93,020 |
|
|
| 91,162 |
|
|
| 102,864 |
|
|
| 104,121 |
|
Intangible assets, net |
|
| 369,000 |
|
|
| 394,525 |
|
|
| 433,754 |
|
|
| 447,052 |
|
Goodwill |
|
| 370,115 |
|
|
| 364,598 |
|
|
| 461,927 |
|
|
| 460,415 |
|
Other assets, net |
|
| 2,547 |
|
|
| 3,301 |
|
|
| 6,854 |
|
|
| 4,766 |
|
|
|
|
|
|
|
|
|
|
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| ||||||
Total assets |
| $ | 1,602,604 |
|
| $ | 1,460,610 |
|
| $ | 1,611,413 |
|
| $ | 1,640,249 |
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| ||||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST |
|
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| ||||||
Current liabilities: |
|
|
|
|
|
|
|
|
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| ||||||
Accounts payable and accrued liabilities |
| $ | 180,543 |
|
| $ | 122,681 |
|
| $ | 126,560 |
|
| $ | 168,961 |
|
Current portion of operating lease liability |
|
| 15,247 |
|
|
| 13,180 |
|
|
| 17,615 |
|
|
| 16,393 |
|
Total current liabilities |
|
| 195,790 |
|
|
| 135,861 |
|
|
| 144,175 |
|
|
| 185,354 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net |
|
| 626,576 |
|
|
| 625,655 |
|
|
| 670,436 |
|
|
| 642,134 |
|
Operating lease liability, less current portion |
|
| 84,894 |
|
|
| 83,903 |
|
|
| 94,928 |
|
|
| 95,159 |
|
Deferred income taxes |
|
| 34,193 |
|
|
| 37,489 |
|
|
| 47,134 |
|
|
| 47,407 |
|
Other liabilities |
|
| 7,980 |
|
|
| 11,742 |
|
|
| 6,933 |
|
|
| 7,459 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities |
|
| 949,433 |
|
|
| 894,650 |
|
|
| 963,606 |
|
|
| 977,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Redeemable non-controlling interest |
|
| 39,711 |
|
|
| 36,863 |
|
|
| — |
|
|
| 34,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Shareholders' equity: |
|
|
|
|
|
|
|
|
|
| ||||||
Preferred stock; par value $.01 per share; 10,000 shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Common stock; par value $.01 per share; 200,000 shares authorized; 63,912 and |
|
| 639 |
|
|
| 635 |
| ||||||||
Common stock; par value $.01 per share; 200,000 shares authorized; 64,148 and |
|
| 641 |
|
|
| 639 |
| ||||||||
Additional paid-in capital |
|
| 439,773 |
|
|
| 433,347 |
|
|
| 446,222 |
|
|
| 442,116 |
|
Accumulated other comprehensive income (loss) |
|
| (2,529 | ) |
|
| 7,006 |
| ||||||||
Accumulated other comprehensive (loss) income |
|
| (566 | ) |
|
| 223 |
| ||||||||
Retained earnings |
|
| 193,866 |
|
|
| 106,398 |
|
|
| 267,250 |
|
|
| 204,891 |
|
Treasury stock at cost |
|
| (18,289 | ) |
|
| (18,289 | ) | ||||||||
Treasury stock at cost (4,710 shares and 2,760 shares at July 1, 2023 |
|
| (65,740 | ) |
|
| (19,854 | ) | ||||||||
Total shareholders' equity |
|
| 613,460 |
|
|
| 529,097 |
|
|
| 647,807 |
|
|
| 628,015 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities, redeemable non-controlling interest and shareholders' equity |
| $ | 1,602,604 |
|
| $ | 1,460,610 |
|
| $ | 1,611,413 |
|
| $ | 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)
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| October 1, |
| October 2, |
|
| July 1, |
| July 2, |
| ||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 90,705 |
|
| $ | 18,368 |
|
| $ | 66,181 |
|
| $ | 60,291 |
|
Adjustments to reconcile net income to net cash |
|
|
|
|
|
|
|
|
|
| ||||||
provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation |
|
| 25,359 |
|
|
| 22,290 |
|
|
| 17,742 |
|
|
| 17,064 |
|
Amortization |
|
| 19,725 |
|
|
| 15,174 |
|
|
| 13,298 |
|
|
| 13,924 |
|
Provision for credit losses |
|
| 7,395 |
|
|
| 3,309 |
|
|
| 1,463 |
|
|
| 6,048 |
|
Stock-based compensation |
|
| 7,638 |
|
|
| 5,748 |
| ||||||||
Amortization of deferred financing costs, debt discount and premium |
|
| 921 |
|
|
| 674 |
| ||||||||
Stock-based compensation expense |
|
| 5,969 |
|
|
| 4,909 |
| ||||||||
Amortization of deferred financing costs |
|
| 654 |
|
|
| 611 |
| ||||||||
Asset impairment charges |
|
| 2,131 |
|
|
| — |
|
|
| — |
|
|
| 2,131 |
|
Debt extinguishment costs, including call premium classified as financing activity |
|
| — |
|
|
| 25,472 |
| ||||||||
(Gain) loss on sales of assets |
|
| (166 | ) |
|
| 105 |
| ||||||||
Change in operating assets and liabilities (net of effects of acquisitions): |
|
|
|
|
| |||||||||||
Non-cash portion of restructuring costs and charges |
|
| 2,473 |
|
|
| — |
| ||||||||
Gain on sales of assets |
|
| (193 | ) |
|
| (39 | ) | ||||||||
Change in operating assets and liabilities: |
|
|
|
|
| |||||||||||
Accounts receivable |
|
| (35,166 | ) |
|
| (45,997 | ) |
|
| 5,782 |
|
|
| (44,148 | ) |
Inventories |
|
| (21,145 | ) |
|
| (11,607 | ) |
|
| (4,847 | ) |
|
| (18,539 | ) |
Contract assets, net, prepaid expenses, other current and other assets |
|
| 6,213 |
|
|
| (22,843 | ) |
|
| 472 |
|
|
| 5,713 |
|
Accounts payable, accrued and other liabilities |
|
| 48,531 |
|
|
| 9,074 |
|
|
| (48,698 | ) |
|
| 36,958 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash provided by operating activities |
|
| 152,141 |
|
|
| 19,767 |
|
|
| 60,296 |
|
|
| 84,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Purchases of property, plant and equipment |
|
| (24,741 | ) |
|
| (25,663 | ) |
|
| (24,866 | ) |
|
| (17,328 | ) |
Investment in and acquisitions of business |
|
| (787 | ) |
|
| (106,480 | ) | ||||||||
Business combinations |
|
| (744 | ) |
|
| (787 | ) | ||||||||
Proceeds from sales of assets |
|
| 41 |
|
|
| 183 |
|
|
| 698 |
|
|
| 41 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash used in investing activities |
|
| (25,487 | ) |
|
| (131,960 | ) |
|
| (24,912 | ) |
|
| (18,074 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Payment of fair value of contingent consideration in Anlin Acquisition |
|
| (2,362 | ) |
|
| — |
|
|
| (4,348 | ) |
|
| (2,362 | ) |
Proceeds from issuance of senior notes |
|
| — |
|
|
| 638,300 |
| ||||||||
Payments of senior notes |
|
| — |
|
|
| (425,000 | ) | ||||||||
Payment of call premium on redemption of senior notes |
|
| — |
|
|
| (21,518 | ) | ||||||||
Payments of long-term debt |
|
| — |
|
|
| (54,000 | ) | ||||||||
Payments of financing costs |
|
| — |
|
|
| (10,361 | ) | ||||||||
Purchases of common stock relating to tax withholdings on employee equity awards |
|
| (1,888 | ) |
|
| (1,159 | ) | ||||||||
Proceeds from exercise of stock options |
|
| — |
|
|
| 138 |
| ||||||||
Redemption of redeemable non-controlling interest |
|
| (37,459 | ) |
|
| — |
| ||||||||
Proceeds of amounts drawn from revolving credit facility |
|
| 50,000 |
|
|
| — |
| ||||||||
Payments of borrowing under revolving credit facility |
|
| (22,352 | ) |
|
| — |
| ||||||||
Purchases of treasury stock under share repurchase program |
|
| (45,431 | ) |
|
| — |
| ||||||||
Income taxes paid from stock withheld relating to vesting of equity awards |
|
| (3,350 | ) |
|
| (1,663 | ) | ||||||||
Proceeds from issuance of common stock under employee stock purchase plan (ESPP) |
|
| 291 |
|
|
| 191 |
|
|
| 405 |
|
|
| 291 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net cash (used in) provided by financing activities |
|
| (3,959 | ) |
|
| 126,591 |
| ||||||||
Net cash used in financing activities |
|
| (62,535 | ) |
|
| (3,734 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net increase in cash and cash equivalents |
|
| 122,695 |
|
|
| 14,398 |
| ||||||||
Net (decrease) increase in cash and cash equivalents |
|
| (27,151 | ) |
|
| 63,115 |
| ||||||||
Cash and cash equivalents at beginning of period |
|
| 96,146 |
|
|
| 100,320 |
|
|
| 66,548 |
|
|
| 96,146 |
|
Cash and cash equivalents at end of period |
| $ | 218,841 |
|
| $ | 114,718 |
|
| $ | 39,397 |
|
| $ | 159,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-cash activity: |
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock in Eco Acquisition |
| $ | — |
|
| $ | 6,108 |
| ||||||||
Accrual of excise tax liability in treasury stock |
| $ | (455 | ) |
| $ | — |
| ||||||||
Additions to right-of-use asset |
| $ | 13,625 |
|
| $ | 47,838 |
|
| $ | 10,316 |
|
| $ | 12,262 |
|
Additions to operating lease liability |
| $ | (13,625 | ) |
| $ | (47,838 | ) |
| $ | (10,316 | ) |
| $ | (12,262 | ) |
Property, plant and equipment additions in accounts payable |
| $ | 79 |
|
| $ | 268 |
|
| $ | 870 |
|
| $ | 543 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 6 -
PGT INNOVATIONS, INC.
(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 OCTOBER 2, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at July 3, 2021 |
|
| 59,587,128 |
|
| $ | 632 |
|
| $ | 429,268 |
|
| $ | 11,330 |
|
| $ | 98,681 |
|
| $ | (18,289 | ) |
| $ | 521,622 |
| ||||||||||||||||||||||||||||
THREE MONTHS ENDED JULY 2, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at April 2, 2022 |
|
| 59,900,587 |
|
| $ | 639 |
|
| $ | 434,212 |
|
| $ | 9,989 |
|
| $ | 127,104 |
|
| $ | (18,289 | ) |
| $ | 553,655 |
| ||||||||||||||||||||||||||||
Vesting of restricted stock |
|
| 32,258 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 28,140 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (7,852 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (154 | ) |
|
| (154 | ) | ||||||||||||||||||||||||||||
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (125 | ) |
|
| — |
|
|
| (28 | ) |
|
| 154 |
|
|
| — |
| ||||||||||||||||||||||||||||
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 2,704 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,704 |
| ||||||||||||||||||||||||||||
Common stock issued under ESPP |
|
| 17,964 |
|
|
| — |
|
|
| 291 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 291 |
| ||||||||||||||||||||||||||||
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 36,161 |
|
|
| — |
|
|
| 36,161 |
| ||||||||||||||||||||||||||||
Decrease in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 351 |
|
|
| — |
|
|
| 351 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,357 | ) |
|
| — |
|
|
| — |
|
|
| (12,357 | ) | ||||||||||||||||||||||||||||
Balance at July 2, 2022 |
|
| 59,946,691 |
|
| $ | 639 |
|
| $ | 437,207 |
|
| $ | (2,368 | ) |
| $ | 163,616 |
|
| $ | (18,289 | ) |
| $ | 580,805 |
| ||||||||||||||||||||||||||||
SIX MONTHS ENDED JULY 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 |
|
| 317,102 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Grants of restricted stock |
|
| — |
|
|
| 6 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
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 |
|
| — |
|
|
| — |
|
|
| 2,254 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,254 |
|
|
| — |
|
|
| — |
|
|
| 4,909 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,909 |
|
Common stock issued under ESPP |
|
| 853 |
|
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 17,964 |
|
|
| — |
|
|
| 291 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 291 |
|
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,817 | ) |
|
| — |
|
|
| (5,817 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 59,330 |
|
|
| — |
|
|
| 59,330 |
|
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (965 | ) |
|
| — |
|
|
| (965 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,785 | ) |
|
| — |
|
|
| (1,785 | ) |
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (110 | ) |
|
| — |
|
|
| — |
|
|
| (110 | ) | ||||||||||||||||||||||||||||
Balance at October 2, 2021 |
|
| 59,612,387 |
|
| $ | 635 |
|
| $ | 431,407 |
|
| $ | 11,220 |
|
| $ | 91,871 |
|
| $ | (18,289 | ) |
| $ | 516,844 |
| ||||||||||||||||||||||||||||
NINE MONTHS ENDED OCTOBER 2, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at January 2, 2021 |
|
| 58,998,711 |
|
| $ | 625 |
|
| $ | 420,202 |
|
| $ | 2,720 |
|
| $ | 79,896 |
|
| $ | (18,309 | ) |
| $ | 485,134 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,374 | ) |
|
| — |
|
|
| — |
|
|
| (9,374 | ) | ||||||||||||||||||||||||||||
Balance at July 2, 2022 |
|
| 59,946,691 |
|
| $ | 639 |
|
| $ | 437,207 |
|
| $ | (2,368 | ) |
| $ | 163,616 |
|
| $ | (18,289 | ) |
| $ | 580,805 |
| ||||||||||||||||||||||||||||
THREE MONTHS ENDED JULY 1, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at April 1, 2023 |
|
| 59,009,698 |
|
| $ | 643 |
|
| $ | 442,546 |
|
| $ | 350 |
|
| $ | 236,483 |
|
| $ | (45,749 | ) |
| $ | 634,273 |
| ||||||||||||||||||||||||||||
Vesting of restricted stock |
|
| 221,724 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 113,104 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 7 |
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (50,266 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,159 | ) |
|
| (1,159 | ) |
|
| (776,641 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (19,991 | ) |
|
| (19,991 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (969 | ) |
|
| — |
|
|
| (189 | ) |
|
| 1,159 |
|
|
| — |
| ||||||||||||||||||||||||||||
Issuance of treasury stock |
|
| 4,600 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| 20 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock withheld in lieu of taxes |
|
| (29,508 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (756 | ) |
|
| (756 | ) | ||||||||||||||||||||||||||||
Retirement of stock withheld in lieu of taxes |
|
| — |
|
|
| — |
|
|
| (493 | ) |
|
| — |
|
|
| (263 | ) |
|
| 756 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 5,748 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,748 |
|
|
| — |
|
|
| — |
|
|
| 3,762 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,762 |
|
Exercise of stock options |
|
| 67,797 |
|
|
| 1 |
|
|
| 137 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 138 |
| ||||||||||||||||||||||||||||
Common stock issued under ESPP |
|
| 12,024 |
|
|
| — |
|
|
| 191 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 191 |
|
|
| 20,674 |
|
|
| — |
|
|
| 405 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 405 |
|
Issuance in acquisition of Eco |
|
| 357,797 |
|
|
| 4 |
|
|
| 6,104 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,108 |
| ||||||||||||||||||||||||||||
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,712 |
|
|
| — |
|
|
| 16,712 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,490 |
|
|
| — |
|
|
| 31,490 |
|
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,528 | ) |
|
| — |
|
|
| (4,528 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (460 | ) |
|
| — |
|
|
| (460 | ) |
Other comprehensive income, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,500 |
|
|
| — |
|
|
| — |
|
|
| 8,500 |
| ||||||||||||||||||||||||||||
Balance at October 2, 2021 |
|
| 59,612,387 |
|
| $ | 635 |
|
| $ | 431,407 |
|
| $ | 11,220 |
|
| $ | 91,871 |
|
| $ | (18,289 | ) |
| $ | 516,844 |
| ||||||||||||||||||||||||||||
THREE MONTHS ENDED OCTOBER 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at July 2, 2022 |
|
| 59,946,691 |
|
| $ | 639 |
|
| $ | 437,207 |
|
| $ | (2,368 | ) |
| $ | 163,616 |
|
| $ | (18,289 | ) |
| $ | 580,805 |
| ||||||||||||||||||||||||||||
Vesting of restricted stock |
|
| 42,258 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Purchases of treasury stock |
|
| (10,509 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (225 | ) |
|
| (225 | ) | ||||||||||||||||||||||||||||
Retirement of treasury stock |
|
| — |
|
|
| — |
|
|
| (163 | ) |
|
| — |
|
|
| (62 | ) |
|
| 225 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 2,729 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,729 |
| ||||||||||||||||||||||||||||
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30,041 |
|
|
| — |
|
|
| 30,041 |
| ||||||||||||||||||||||||||||
Decrease in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 271 |
|
|
| — |
|
|
| 271 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (161 | ) |
|
| — |
|
|
| — |
|
|
| (161 | ) | ||||||||||||||||||||||||||||
Balance at October 1, 2022 |
|
| 59,978,440 |
|
| $ | 639 |
|
| $ | 439,773 |
|
| $ | (2,529 | ) |
| $ | 193,866 |
|
| $ | (18,289 | ) |
| $ | 613,460 |
| ||||||||||||||||||||||||||||
NINE MONTHS ENDED OCTOBER 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 |
|
| 59,696,117 |
|
| $ | 635 |
|
| $ | 433,347 |
|
| $ | 7,006 |
|
| $ | 106,398 |
|
| $ | (18,289 | ) |
| $ | 529,097 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (916 | ) |
|
| — |
|
|
| — |
|
|
| (916 | ) | ||||||||||||||||||||||||||||
Balance at July 1, 2023 |
|
| 58,337,327 |
|
| $ | 641 |
|
| $ | 446,222 |
|
| $ | (566 | ) |
| $ | 267,250 |
|
| $ | (65,740 | ) |
| $ | 647,807 |
| ||||||||||||||||||||||||||||
SIX MONTHS ENDED JULY 1, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 |
|
| 59,911,556 |
|
| $ | 639 |
|
| $ | 442,116 |
|
| $ | 223 |
|
| $ | 204,891 |
|
| $ | (19,854 | ) |
| $ | 628,015 |
| ||||||||||||||||||||||||||||
Vesting of restricted stock |
|
| 359,360 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 501,336 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 6 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (95,001 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,888 | ) |
|
| (1,888 | ) |
|
| (1,950,161 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45,886 | ) |
|
| (45,886 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (1,498 | ) |
|
| — |
|
|
| (389 | ) |
|
| 1,888 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock withheld in lieu of taxes |
|
| (146,078 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,350 | ) |
|
| (3,350 | ) | ||||||||||||||||||||||||||||
Retirement of stock withheld in lieu of taxes |
|
| — |
|
|
| (1 | ) |
|
| (2,265 | ) |
|
| — |
|
|
| (1,084 | ) |
|
| 3,350 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 7,638 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,638 |
|
|
| — |
|
|
| — |
|
|
| 5,969 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,969 |
|
Common stock issued under ESPP |
|
| 17,964 |
|
|
| — |
|
|
| 291 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 291 |
|
|
| 20,674 |
|
|
| — |
|
|
| 405 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 405 |
|
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89,371 |
|
|
| — |
|
|
| 89,371 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65,080 |
|
|
| — |
|
|
| 65,080 |
|
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,514 | ) |
|
| — |
|
|
| (1,514 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,637 | ) |
|
| — |
|
|
| (1,637 | ) |
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,535 | ) |
|
| — |
|
|
| — |
|
|
| (9,535 | ) | ||||||||||||||||||||||||||||
Balance at October 1, 2022 |
|
| 59,978,440 |
|
| $ | 639 |
|
| $ | 439,773 |
|
| $ | (2,529 | ) |
| $ | 193,866 |
|
| $ | (18,289 | ) |
| $ | 613,460 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (789 | ) |
|
| — |
|
|
| — |
|
|
| (789 | ) | ||||||||||||||||||||||||||||
Balance at July 1, 2023 |
|
| 58,337,327 |
|
| $ | 641 |
|
| $ | 446,222 |
|
| $ | (566 | ) |
| $ | 267,250 |
|
| $ | (65,740 | ) |
| $ | 647,807 |
|
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.states, the Caribbean, Canada, and in South and Central America. Our acquisition of Eco Enterprises (“("Eco Acquisition”Acquisition") in February 2021 expandedexpands 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 and 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 also sellWe began selling 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 existingthe ticker symbol of “PGTI”. As of October 1, 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 two glass tempering and laminating plants one in North Venice, Florida and one 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, one insulation glass plant located in North Venice, Florida. Withmore recently, Utah, with the acquisition of Martin Door, a manufacturer of residential and commercial garage doors, effective as of October 14, 2022, we have a manufacturing operation in Salt Lake City, Utah. See Note 18, "Subsequent Events".Martin.
All references to PGTI or our Company apply to the consolidated financial statements of PGT Innovations, Inc. unless otherwise noted.
COVID-19
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 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. COVID-19 and its effects will likely continue to impact market conditions and business operations across industries worldwide. Therefore, we remain cautious about how the economy might behave for the next few years and continue to monitor potential impact on our operations. The extent to which the circumstances of the aftermath of the Pandemic, including the continued existence of the many variants of COVID-19 in society, 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 are unable to accurately predict the future impacts of COVID-19 on the U.S. and global economies. The impact to our customers’ and suppliers’ businesses and other factors are identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K/A, filed with the United States Securities and Exchange Commission on June 10, 2022.
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 periodperiods 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 three and ninesix months ended OctoberJuly 1, 2022,2023 and OctoberJuly 2, 20212022 consisted of 13 and 3926 weeks, respectively.
- 8 -
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 OctoberJuly 1, 20222023, and OctoberJuly 2, 2021,2022, 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/A.10-K. The accounting policies used in the preparation of these unaudited condensed 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/A.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 two 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.
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.
- 9 -
Disaggregation of Revenue from Contracts with Customers
As discussed in Note 1, we have two 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 and ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021:2022:
| Three Months Ended |
|
| Nine Months Ended |
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
| October 1, |
| October 2, |
| October 1, |
| October 2, |
| July 1, |
| July 2, |
| July 1, |
| July 2, |
| ||||||||||||||
Disaggregation of revenue (in millions): | 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
Reporting segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Southeast | $ | 288.2 |
|
| $ | 255.1 |
|
| $ | 867.5 |
|
| $ | 731.2 |
| $ | 288.0 |
|
| $ | 307.5 |
|
| $ | 570.0 |
|
| $ | 579.3 |
|
Western |
| 97.6 |
|
|
| 45.3 |
|
|
| 283.5 |
|
|
| 125.8 |
|
| 97.0 |
|
|
| 99.0 |
|
|
| 191.8 |
|
|
| 185.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
| $ | 385.0 |
|
| $ | 406.5 |
|
| $ | 761.8 |
|
| $ | 765.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Product category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Impact-resistant window and door products | $ | 227.7 |
|
| $ | 207.8 |
|
| $ | 688.5 |
|
| $ | 596.7 |
| $ | 236.5 |
|
| $ | 243.0 |
|
| $ | 464.8 |
|
| $ | 460.8 |
|
Non-impact window and door products |
| 158.1 |
|
|
| 92.6 |
|
|
| 462.5 |
|
|
| 260.3 |
|
| 148.5 |
|
|
| 163.5 |
|
|
| 297.0 |
|
|
| 304.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
| $ | 385.0 |
|
| $ | 406.5 |
|
| $ | 761.8 |
|
| $ | 765.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
New construction | $ | 160.9 |
|
| $ | 120.5 |
|
| $ | 484.3 |
|
| $ | 365.0 |
| $ | 146.3 |
|
| $ | 173.3 |
|
| $ | 303.9 |
|
| $ | 323.4 |
|
Repair and remodel |
| 224.9 |
|
|
| 179.9 |
|
|
| 666.7 |
|
|
| 492.0 |
|
| 238.7 |
|
|
| 233.2 |
|
|
| 457.9 |
|
|
| 441.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
| $ | 385.0 |
|
| $ | 406.5 |
|
| $ | 761.8 |
|
| $ | 765.2 |
|
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 OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, the Western segment’s net sales of its volume products were $26.632.0 million and $21.929.7 million, respectively. For the ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, the Western segment’s net sales of its volume products were $82.657.9 million and $62.556.0 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 OctoberJuly 1, 20222023 and January 1,December 31, 2022, those contract liabilities totaled $42.930.3 million and $45.239.1 million, respectively, of which $34.423.6 million and $37.033.4 million, respectively, are classified within accrued liabilities, and $8.56.7 million and $8.25.7 million, respectively, are classified as a reduction to the contract assets to which they relate. Contract assets, net, totaled $56.350.9 million at OctoberJuly 1, 20222023 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 OctoberJuly 1, 20222023 will be satisfied in the fourththird quarter of 2022,2023, and contract assets at OctoberJuly 1, 20222023 will be transferred to accounts receivable in the fourththird quarter of 2022.2023. Contract liabilities at OctoberJuly 1, 2023 represents cash received during the three-month period ended July 1, 2023, excluding amounts recognized as revenue during that period. Contract assets at July 1, 2023 represents revenue recognized during the three-month period ended July 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 October 1,December 31, 2022, excluding amounts recognized as revenue during that period. Contract assets at October 1,December 31, 2022 represents revenue recognized during the three-month period ended October 1, 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.
- 109 -
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.
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 October 1, 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 OctoberJuly 1, 20222023 and January 1,December 31, 2022, we had gross accounts receivable of $177.2164.7 million and $145.9173.8 million, respectively, and an allowance for credit losses of $10.314.2 million and $4.713.7 million, respectively. During the second quarter of 2022, a customer with whom we have had a long-term relationship experienced financial difficulties. As such, we determined to cease taking orders and provide additional reserves of approximately $3.0 million against our existing exposure to this customer. During the nine-months ended October 1, 2022, we recorded provisions for credit losses totaling $7.4 million, including the provision relating to this customer.
- 11 -
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 OctoberJuly 1, 2022,2023, we recorded warranty expense at a rate of approximately 1.82.5% of sales, which was slightly lowerhigher than the rate during the three months ended OctoberJuly 2, 20212022 of 1.91.7% of sales. OurThe increase in the warranty expense rate in the three months ended OctoberJuly 1, 2023, compared with the rate during the three months ended July 2, 2022, is a result of servicing a higher number of overall warranty claims in the second quarter of 2023, resulting in a higher level of service warranty expense, whereas the rate in the second quarter of 2022 was lower on average as there was a decrease in the use of higher-cost contract labor we had used in the first half of 2022 to respond to warranty claims due to a currently tight labor market.labor.
During the ninesix months ended OctoberJuly 1, 2022,2023, we recorded warranty expense at a rate of approximately 2.02.2% of sales, which was slightly lowerhigher than the rate during the ninesix months ended OctoberJuly 2, 20212022 of 2.1% of sales. Our warranty expense rate in the nine months ended October 1, 2022 was affected by the use of higher-cost contract labor during the first quarter of 2022 to respond to warranty claims in a currently tight labor market. The rate in the nine months ended October 2, 2021 includes the effect of wind-down of certain commercial business in the first quarter of 2021, which resulted in warranty costs higher than those we would incur in the normal course of business.
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 and ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021.2022. The reserve is determined through assessing our claims history. Of the accrued warranty reserve of $15.516.1 million at OctoberJuly 1, 2022,2023, $12.5 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at OctoberJuly 1, 2022,2023, 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 |
|
| Acquisition- |
|
| Charged |
|
|
|
|
|
|
|
| End of |
| ||||||
Accrued Warranty |
| of Period |
|
| Related |
|
| to Expense |
|
| Adjustments |
|
| Settlements |
|
| Period |
| ||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three months ended October 1, 2022 |
| $ | 16,151 |
|
| $ | (2,537 | ) |
| $ | 6,880 |
|
| $ | 750 |
|
| $ | (5,763 | ) |
| $ | 15,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three months ended October 2, 2021 |
| $ | 9,459 |
|
| $ | 347 |
|
| $ | 5,706 |
|
| $ | (531 | ) |
| $ | (5,505 | ) |
| $ | 9,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Nine months ended October 1, 2022 |
| $ | 13,504 |
|
| $ | (2,537 | ) |
| $ | 22,872 |
|
| $ | 1,263 |
|
| $ | (19,621 | ) |
| $ | 15,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Nine months ended October 2, 2021 |
| $ | 8,001 |
|
| $ | 536 |
|
| $ | 18,015 |
|
| $ | (890 | ) |
| $ | (16,186 | ) |
| $ | 9,476 |
|
|
| Beginning |
|
| Charged |
|
|
|
|
|
|
|
| End of |
| |||||
Accrued Warranty |
| of Period |
|
| to Expense |
|
| Adjustments |
|
| Settlements |
|
| Period |
| |||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three months ended July 1, 2023 |
| $ | 15,543 |
|
| $ | 9,766 |
|
| $ | 22 |
|
| $ | (9,218 | ) |
| $ | 16,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three months ended July 2, 2022 |
| $ | 16,321 |
|
| $ | 6,844 |
|
| $ | (237 | ) |
| $ | (6,777 | ) |
| $ | 16,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six months ended July 1, 2023 |
| $ | 15,388 |
|
| $ | 17,005 |
|
| $ | 944 |
|
| $ | (17,224 | ) |
| $ | 16,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six months ended July 2, 2022 |
| $ | 13,504 |
|
| $ | 15,992 |
|
| $ | 513 |
|
| $ | (13,858 | ) |
| $ | 16,151 |
|
- 10 -
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:
|
| October 1, |
| January 1, |
|
| July 1, |
| December 31, |
| ||||||
|
| 2022 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Raw materials |
| $ | 107,005 |
|
| $ | 87,164 |
|
| $ | 113,779 |
|
| $ | 109,679 |
|
Work-in-progress |
|
| 2,729 |
|
|
| 3,248 |
|
|
| 1,427 |
|
|
| 916 |
|
Finished goods |
|
| 2,523 |
|
|
| 1,028 |
|
|
| 1,949 |
|
|
| 2,077 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Inventories |
| $ | 112,257 |
|
| $ | 91,440 |
|
| $ | 117,155 |
|
| $ | 112,672 |
|
- 12 -
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 $3.8 million for the three months ended July 1, 2023 and $2.7 million for the three months ended October 1, 2022 and $2.3 million for the three months ended OctoberJuly 2, 2021.2022. We recorded compensation expense for stock-based awards of $7.66.0 million for the ninesix months ended OctoberJuly 1, 20222023 and $5.74.9 million for the ninesix months ended OctoberJuly 2, 2021.2022. As of OctoberJuly 1, 2022,2023, there was $11.915.7 million in total unrecognized compensation cost related entirely to restricted share 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 1.7 years at OctoberJuly 1, 2022.2023.
Of the $2.73.8 million and $2.32.7 million in stock-based compensation expense in the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, respectively, $2.33.2 million and $1.92.3 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. Of the $7.66.0 million and $5.74.9 million in stock-based compensation expense in the ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, respectively, $6.65.1 million and $4.94.2 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.
Issuance
2023 Long-Term Incentive Plan
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, are 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.
- 11 -
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.
- 13 -
NOTE 6. ACQUISITIONS
See Note 18, Subsequent Events,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, liabilities assumed and subsequent adjustments to that allocation as of our reporting date, are as follows:
|
| Initial |
|
| Adjustments to |
|
| Preliminary |
| |||
Accounts receivable |
| $ | 6,653 |
|
| $ | (194 | ) |
| $ | 6,459 |
|
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 |
|
|
| (493 | ) |
|
| 10,929 |
|
Operating lease right-of-use asset |
|
| 12,259 |
|
|
| — |
|
|
| 12,259 |
|
Intangible assets |
|
| 91,900 |
|
|
| — |
|
|
| 91,900 |
|
Total assets acquired |
|
| 137,109 |
|
|
| (1,051 | ) |
|
| 136,058 |
|
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 |
|
|
| (768 | ) |
|
| 96,726 |
|
Goodwill |
|
| 90,300 |
|
|
| 1,512 |
|
|
| 91,812 |
|
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 discussionmarket participant could achieve in a current sale. The substantial majority of eventsinventories 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
- 12 -
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 half 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 that occurred after Octoberof 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 July 1, 2022.2023, goodwill is estimated to be $91.8 million. Martin's goodwill is included as part of the Western reporting 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 $121.7 million, composed of $115.0 million in cash, including $113.5 million for purchase price and $1.5 million in working capital adjustments, including $0.8 million paid during the three months ended October 1, 2022, and fair value of contingent consideration of $6.7 million, discussed in greater detail below.
The cash portion of the Anlin Acquisition of $115.0 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 $55.6 million from cash on hand. Cash on hand for the Anlin Acquisition was ultimately provided by the issuance of $575.0 million of 4.375% senior notes due 2029 and related transactions, further explained in Note 9, Long-Term Debt, as well as cash generated through operations.
The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Anlin Acquisition, are as follows:
|
| Initial |
|
| Adjustments to |
|
| Final |
| |||
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 |
|
Total assets acquired |
|
| 131,139 |
|
|
| (5,558 | ) |
|
| 125,581 |
|
Accounts payable |
|
| (5,175 | ) |
|
| 593 |
|
|
| (4,582 | ) |
Accrued and other liabilities |
|
| (7,993 | ) |
|
| 2,537 |
|
|
| (5,456 | ) |
Operating lease liability |
|
| (3,450 | ) |
|
| (14 | ) |
|
| (3,464 | ) |
Total liabilities assumed |
|
| (16,618 | ) |
|
| 3,116 |
|
|
| (13,502 | ) |
Net assets acquired |
|
| 114,521 |
|
|
| (2,442 | ) |
|
| 112,079 |
|
Goodwill |
|
| 5,596 |
|
|
| 4,017 |
|
|
| 9,613 |
|
Fair value of consideration transferred |
| $ | 120,117 |
|
| $ | 1,575 |
|
| $ | 121,692 |
|
|
|
|
|
|
|
|
|
|
| |||
Consideration: |
|
|
|
|
|
|
|
|
| |||
Cash |
| $ | 114,196 |
|
| $ | 786 |
|
| $ | 114,982 |
|
Contingent consideration |
|
| 5,921 |
|
|
| 789 |
|
|
| 6,710 |
|
Fair value of consideration transferred |
| $ | 120,117 |
|
| $ | 1,575 |
|
| $ | 121,692 |
|
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 valuation firm. During the first quarter of 2022, we made several adjustments to the estimated fair value of the initial valuation of certain intangible assets. 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 of $2.2 million becoming fully amortized in the first quarter of 2022, discussed below, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine-month period ended October 1, 2022.
- 14 -
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.
The Anlin Purchase Agreement providesprovided for the potential for earn-out contingency payments to the 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. 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.
The 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 administrative expenses in the accompanying condensed consolidated statement of operations for the nine monthsour 2022 fiscal year ended October 1,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 past the March 31, 2022 due date stated in the Anlin Purchase Agreement.
DuringAs of the third 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 $9.1 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 $4.85.1 million, representing the difference between this
- 13 -
updated estimated fair value, and the fair value estimated in our purchase price allocation, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine monthsyear ended October 1,December 31, 2022. We will continue to update our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA each reporting period, as required by ASC 805, and record any adjustments within operating income until finalized by March 31, 2023.
Regarding the allocation of the fair value ofHaving paid all contingent consideration transferred in the Anlin Acquisition, as discussed in Note 5 of our Annual Report on Form 10-K/A for the year ended January 1, 2022, specific items being finalized are our calculations of contingencies assumed in the Anlin acquisition, including the earn-out contingencies and reserves for warranty obligations. During the three months ended October 1, 2022, we finalized our calculation of the reserves for warranty obligations assumed in the Anlin Acquisition. As a result, we recorded a decrease in accrued and other liabilities ofwhich combined totaled $2.5 million, resulting in an equal decrease in goodwill.
For tax purposes, contingent consideration does not become part of tax goodwill until paid. As such, the amount of goodwill deductible for tax purposes will not be finalized until the outcome of both earn-out contingency payments are known. As of October 1, 2022, the initial estimated fair value of the contingent consideration in the allocation relating to the remaining payment was $4.312.1 million and which exceeds the $6.7 million fair value on contingent consideration established in the purchase allocation, we believe that our tax basis in the goodwill accordingof the Anlin Acquisition is equal to the current allocationits book basis of consideration is $9.6 million. As such, as of October 1, 2022, the amount of goodwill estimated to be tax deductible is the difference of $5.3
million. Anlin's goodwill is included as part of the Western reporting. We believe Anlin'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. Our estimate of the amount of tax deductible goodwill may change as the amounts of the payments of contingent consideration are finalized.
As discussed above, we made changes to the initial estimated fair values of the trade name and customer relationships assets in the Anlin Acquisition, and we determined that a portion of our customer relationships intangible asset relates 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 value 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 nine-month period ended October 1, 2022.
The Anlin Purchase Agreement has a post-closing working capital calculation we were required to prepare, and delivered to sellers during the second quarter of 2022. This resulted in an additional payment of consideration to the seller of $0.8 million, made during the second quarter of 2022.
- 15 -
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. The following unaudited pro forma financial information has 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 (the "2021 Senior Notes") 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 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 |
|
| Nine Months Ended |
| ||
Pro Forma Results (unaudited) |
| October 2, 2021 |
|
| October 2, 2021 |
| ||
(in thousands, except per share amounts) |
| (unaudited) |
| |||||
Net sales |
| $ | 329,613 |
|
| $ | 939,395 |
|
|
|
|
|
|
|
| ||
Net income (loss) attributable to common shareholders |
| $ | (3,326 | ) |
| $ | 18,410 |
|
|
|
|
|
|
|
| ||
Net income (loss) per common share attributable to common shareholders: |
|
|
|
|
|
| ||
Basic |
| $ | (0.06 | ) |
| $ | 0.31 |
|
Diluted |
| $ | (0.06 | ) |
| $ | 0.31 |
|
|
|
|
|
|
|
|
Net sales of Anlin included in the condensed consolidated statement of operations for the three and nine months ended October 1, 2022, was $35.0 million and $106.2 million, respectively. The net income of Anlin in the condensed consolidated statement of operations for the three and nine months ended October 1, 2022, was $4.4 million and $14.6 million, respectively.
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 and net income from CRi included in the three and nine months ended October 1, 2022 was immaterial.
- 16 -
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 three manufacturing locations in the region, including a glass processing facility.
The fair value consideration for Eco was $102.0 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, and estimated contingent consideration of $1.5 million recorded in the second quarter of 2022, which was required by the purchase agreement. During the third quarter of 2022, the amount of the contingent consideration was finalized and determined to be $1.9 million, with the difference of $427 thousand classified as selling, general and administrative expense in the three and nine months ended October 1, 2022. 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 “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 redeemable non-controlling interest, of $130.4 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 |
|
| Adjustments to |
|
| Final |
| |||
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 |
|
Total assets acquired |
|
| 143,350 |
|
|
| (1,447 | ) |
|
| 141,903 |
|
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 |
|
| 104,462 |
|
|
| (1,118 | ) |
|
| 103,344 |
|
Redeemable non-controlling interest |
|
| (34,084 | ) |
|
| 5,620 |
|
|
| (28,464 | ) |
Net assets acquired, net of redeemable non-controlling interest |
|
| 70,378 |
|
|
| 4,502 |
|
|
| 74,880 |
|
Goodwill |
|
| 30,051 |
|
|
| (2,967 | ) |
|
| 27,084 |
|
Fair value of consideration transferred |
| $ | 100,429 |
|
| $ | 1,535 |
|
| $ | 101,964 |
|
|
|
|
|
|
|
|
|
|
| |||
Consideration: |
|
|
|
|
|
|
|
|
| |||
Cash |
| $ | 94,321 |
|
| $ | 35 |
|
| $ | 94,356 |
|
PGTI common stock |
|
| 6,108 |
|
|
| — |
|
|
| 6,108 |
|
Contingent consideration |
|
| — |
|
|
| 1,500 |
|
|
| 1,500 |
|
Fair value of consideration transferred |
| $ | 100,429 |
|
| $ | 1,535 |
|
| $ | 101,964 |
|
- 17 -
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 nine months ended October 2, 2021.
The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has currently been estimated to be $27.1 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.
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 |
|
| Final |
|
| 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 |
|
|
|
- 18 -
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.
Dilutive shares from equity plans in the three months ended October 2, 2021 was zero, as we had a net loss attributable to common shareholders during this period which, by adding such dilutive shares would have resulted in anti-dilution to net loss per common share. Dilutive shares from equity plans for the three months ended October 2, 2021 would have been 510 thousand shares.
There were no anti-dilutive Anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three- or nine-month periodsthree and six months ended OctoberJuly 1, 2023 and July 2, 2022 or October 2, 2021.were insignificant.
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 |
|
| Nine Months Ended |
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
| October 1, |
| October 2, |
| October 1, |
| October 2, |
| July 1, |
| July 2, |
| July 1, |
| July 2, |
| ||||||||||||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||
| (in thousands, except per share amounts) |
| (in thousands, except per share amounts) |
| ||||||||||||||||||||||||||
Net income (loss) | $ | 30,414 |
|
| $ | (5,140 | ) |
| $ | 90,705 |
|
| $ | 18,368 |
| |||||||||||||||
Net income | $ | 31,754 |
|
| $ | 36,465 |
|
| $ | 66,181 |
|
| $ | 60,291 |
| |||||||||||||||
Less: Net income attributable to RNCI |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) |
| (264 | ) |
|
| (304 | ) |
|
| (1,101 | ) |
|
| (961 | ) |
Net income (loss) attributable to the Company |
| 30,041 |
|
|
| (5,817 | ) |
|
| 89,371 |
|
|
| 16,712 |
| |||||||||||||||
Decrease (increase) in redemption value of RNCI |
| 271 |
|
|
| (965 | ) |
|
| (1,514 | ) |
|
| (4,528 | ) | |||||||||||||||
Net income (loss) attributable to common shareholders | $ | 30,312 |
|
| $ | (6,782 | ) |
| $ | 87,857 |
|
| $ | 12,184 |
| |||||||||||||||
Net income attributable to the Company |
| 31,490 |
|
|
| 36,161 |
|
|
| 65,080 |
|
|
| 59,330 |
| |||||||||||||||
(Increase) decrease in redemption value of RNCI |
| (460 | ) |
|
| 351 |
|
|
| (1,637 | ) |
|
| (1,785 | ) | |||||||||||||||
Net income attributable to common shareholders | $ | 31,030 |
|
| $ | 36,512 |
|
| $ | 63,443 |
|
| $ | 57,545 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Weighted-average number of common shares outstanding - Basic |
| 59,964 |
|
|
| 59,590 |
|
|
| 59,908 |
|
|
| 59,475 |
|
| 58,559 |
|
|
| 59,928 |
|
|
| 59,188 |
|
|
| 59,880 |
|
Add: Dilutive shares from equity plans |
| 438 |
|
|
| — |
|
|
| 293 |
|
|
| 560 |
|
| 308 |
|
|
| 329 |
|
|
| 340 |
|
|
| 361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Weighted-average number of common shares outstanding - Diluted |
| 60,402 |
|
|
| 59,590 |
|
|
| 60,201 |
|
|
| 60,035 |
|
| 58,867 |
|
|
| 60,257 |
|
|
| 59,528 |
|
|
| 60,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income (loss) per common share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Net income per common share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Basic | $ | 0.51 |
|
| $ | (0.11 | ) |
| $ | 1.47 |
|
| $ | 0.20 |
| $ | 0.53 |
|
| $ | 0.61 |
|
| $ | 1.07 |
|
| $ | 0.96 |
|
Diluted | $ | 0.50 |
|
| $ | (0.11 | ) |
| $ | 1.46 |
|
| $ | 0.20 |
| $ | 0.53 |
|
| $ | 0.61 |
|
| $ | 1.07 |
|
| $ | 0.96 |
|
- 1914 -
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and intangible assets are as follows:
|
|
|
|
|
|
|
| Initial | ||
|
| October 1, |
|
| January 1, |
|
| Useful Life | ||
|
| 2022 |
|
| 2022 |
|
| (in years) | ||
|
| (in thousands) |
|
|
| |||||
Goodwill |
| $ | 370,115 |
|
| $ | 364,598 |
|
| indefinite |
|
|
|
|
|
|
|
|
| ||
Other intangible assets: |
|
|
|
|
|
|
|
| ||
Trade names (indefinite-lived) |
| $ | 208,441 |
|
| $ | 212,141 |
|
| indefinite |
|
|
|
|
|
|
|
|
| ||
Customer relationships and customer-related assets |
|
| 286,947 |
|
|
| 289,047 |
|
| <1-15 |
Trade name (amortizable) |
|
| 22,200 |
|
|
| 22,200 |
|
| 15 |
Developed technology |
|
| 5,900 |
|
|
| 5,900 |
|
| 6-10 |
Non-compete agreement |
|
| 3,338 |
|
|
| 3,338 |
|
| 2-5 |
Software license |
|
| 590 |
|
|
| 590 |
|
| 2 |
Less: Accumulated amortization |
|
| (158,416 | ) |
|
| (138,691 | ) |
|
|
|
|
|
|
|
|
|
|
| ||
Subtotal |
|
| 160,559 |
|
|
| 182,384 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Other intangible assets, net |
| $ | 369,000 |
|
| $ | 394,525 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Goodwill at January 1, 2022 |
| $ | 364,598 |
|
|
|
|
|
| |
Increase in Anlin Acquisition contingent consideration |
|
| 789 |
|
|
|
|
|
| |
Decrease in Anlin Acquisition trade name |
|
| 3,700 |
|
|
|
|
|
| |
Decrease in Anlin Acquisition customer relationships |
|
| 4,300 |
|
|
|
|
|
| |
Increase in Anlin Acquisition customer-related backlog asset |
|
| (2,200 | ) |
|
|
|
|
| |
Final net working capital payment in Anlin Acquisition |
|
| 786 |
|
|
|
|
|
| |
Estimated contingent consideration in Eco Acquisition |
|
| 1,500 |
|
|
|
|
|
| |
Decrease in estimated warranty reserve in Anlin Acquisition |
|
| (2,537 | ) |
|
|
|
|
| |
Net other measurement period changes in Anlin Acquisition |
|
| (821 | ) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| ||
Goodwill at October 1, 2022 |
| $ | 370,115 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| ||
Trade names (indefinite-lived) at January 1, 2022 |
| $ | 212,141 |
|
|
|
|
|
| |
Decrease in Anlin Acquisition trade name |
|
| (3,700 | ) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| ||
Trade names (indefinite-lived) at October 1, 2022 |
| $ | 208,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Initial | ||
|
| July 1, |
|
| December 31, |
|
| Useful Life | ||
|
| 2023 |
|
| 2022 |
|
| (in years) | ||
|
| (in thousands) |
|
|
| |||||
Goodwill |
| $ | 461,927 |
|
| $ | 460,415 |
|
| indefinite |
|
|
|
|
|
|
|
|
| ||
Other intangible assets: |
|
|
|
|
|
|
|
| ||
Trade names (indefinite-lived) |
| $ | 225,018 |
|
| $ | 225,018 |
|
| indefinite |
|
|
|
|
|
|
|
|
| ||
Customer relationships and customer-related assets |
|
| 340,047 |
|
|
| 340,047 |
|
| <1-15 |
Trade name (amortizable) |
|
| 22,200 |
|
|
| 22,200 |
|
| 15 |
Developed technology |
|
| 20,500 |
|
|
| 20,500 |
|
| 3-14 |
Non-compete agreement |
|
| 3,538 |
|
|
| 3,538 |
|
| 2-5 |
Software license |
|
| 590 |
|
|
| 590 |
|
| 2 |
Less: Accumulated amortization |
|
| (178,139 | ) |
|
| (164,841 | ) |
|
|
|
|
|
|
|
|
|
|
| ||
Subtotal |
|
| 208,736 |
|
|
| 222,034 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Other intangible assets, net |
| $ | 433,754 |
|
| $ | 447,052 |
|
|
|
|
|
|
|
|
|
|
|
| ||
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 |
|
| 768 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| ||
Goodwill at July 1, 2023 |
| $ | 461,927 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Estimated amortization of our amortizable intangible assets for future years is as follows:
(in thousands) |
| Total |
|
| Total |
| ||
Remainder of 2022 |
| $ | 5,162 |
| ||||
2023 |
|
| 20,520 |
| ||||
Remainder of 2023 |
| $ | 13,009 |
| ||||
2024 |
|
| 20,474 |
|
|
| 25,971 |
|
2025 |
|
| 20,299 |
|
|
| 25,640 |
|
2026 |
|
| 16,906 |
|
|
| 21,241 |
|
2027 |
|
| 20,987 |
| ||||
Thereafter |
|
| 77,198 |
|
|
| 101,888 |
|
|
|
|
|
|
|
| ||
Total |
| $ | 160,559 |
|
| $ | 208,736 |
|
Amortization expense relating to amortizable intangible assets for the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $5.86.5 million and $5.35.9 million, respectively. Amortization expense relating to amortizable intangible assets for the ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $19.713.3 million and $15.213.9 million, respectively. See Note 6 for discussion of the amortization of the customer-related backlog asset of $2.2 million during the nine-month period ended October 1, 2022.
- 20 -
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 ninethree and six months ended OctoberJuly 1, 2022,2023, 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 OctoberJuly 1, 20222023 and January 1,December 31, 2022, the carrying value of our Southeast reporting unit goodwill is $228.3 million and $226.8228.3 million, respectively. As of OctoberJuly 1, 20222023 and January 1,December 31, 2022, the carrying value of our Western reporting unit goodwill is $141.8233.6 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
|
| October 1, |
| January 1, |
|
| July 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 |
|
| 104,000 |
|
|
| 76,352 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt |
|
| 635,000 |
|
|
| 635,000 |
|
|
| 679,000 |
|
|
| 651,352 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred financing costs |
|
| (8,424 | ) |
|
| (9,345 | ) |
|
| (8,564 | ) |
|
| (9,218 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net |
| $ | 626,576 |
|
| $ | 625,655 |
|
| $ | 670,436 |
|
| $ | 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”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, beginningwhich began 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 OctoberJuly 1, 2022,2023, the face value of debt outstanding under the 2021 Senior Notes due 2029 was $575.0 million, and accrued interest was $12.66.4 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 $54.060.0 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.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.
- 21 -
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 2024
See Note 18, Subsequent Events, for a discussion of events relating to the 2016 Credit Agreement that occurred after October 1, 2022.2027
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.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 provided 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 $56.0 million through July 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 paidpay 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 July 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 OctoberJuly 1, 2022, there2023, borrowings outstanding under the $250.0 million New Revolving Credit Facility totaled $104.0 million, and accrued interest was $385 thousand. There were $5.78.5 million in letters of credit outstanding andoutstanding. Availability under the New Revolving Credit Facility at July 1, 2023 totaled $74.3137.5 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 5.12% as of October 1, 2022, and was 2.106.90% at JanuaryJuly 1, 2023, and 6.07% at December 31, 2022.
The Martin Acquisition was financed in part with the $
- 22 -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.
Deferred Financing Costs
The activityActivity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, for the nine months ended October 1, 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 six months ended July 1, 2023, is as follows:
(in thousands) |
| Total |
|
| Total |
| ||
At beginning of year |
| $ | 9,345 |
|
| $ | 9,218 |
|
Less: Amortization expense |
|
| (921 | ) |
|
| (654 | ) |
At end of period |
| $ | 8,424 |
|
| $ | 8,564 |
|
- 17 -
Estimated amortization expense relating to deferred financing costs for the years indicated as of OctoberJuly 1, 2022,2023, is as follows:
(in thousands) |
| Total |
|
| Total |
| ||
Remainder of 2022 |
| $ | 312 |
| ||||
2023 |
|
| 1,282 |
| ||||
Remainder of 2023 |
| $ | 666 |
| ||||
2024 |
|
| 1,282 |
|
|
| 1,366 |
|
2025 |
|
| 1,083 |
|
|
| 1,442 |
|
2026 |
|
| 1,114 |
|
|
| 1,466 |
|
2027 |
|
| 1,440 |
| ||||
Thereafter |
|
| 3,351 |
|
|
| 2,184 |
|
|
|
|
|
|
|
| ||
Total |
| $ | 8,424 |
|
| $ | 8,564 |
|
We have no scheduled 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 July 1, 2023, are as follows (at face value):
(in thousands) |
|
|
|
|
|
| ||
Remainder of 2022 |
| $ | — |
| ||||
2023 |
|
| — |
| ||||
Remainder of 2023 |
| $ | — |
| ||||
2024 |
|
| 60,000 |
|
|
| — |
|
2025 |
|
| — |
|
|
| — |
|
2026 |
|
| — |
|
|
| — |
|
2027 |
|
| 104,000 |
| ||||
Thereafter |
|
| 575,000 |
|
|
| 575,000 |
|
|
|
|
|
|
|
| ||
Total |
| $ | 635,000 |
|
| $ | 679,000 |
|
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 and nine months ended October 1, 2022 and October 2, 2021, are as follows (in thousands):
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease cost | $ | 5,101 |
|
| $ | 4,213 |
|
| $ | 14,941 |
|
| $ | 10,990 |
|
Short-term lease cost |
| 2,668 |
|
|
| 2,280 |
|
|
| 7,488 |
|
|
| 6,696 |
|
Total lease cost | $ | 7,769 |
|
| $ | 6,493 |
|
| $ | 22,429 |
|
| $ | 17,686 |
|
- 23 -
Other information relating to leases for the three and nine months ended October 1, 2022 and October 2, 2021, are as follows (in thousands, except years and percentages):
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Supplemental cash flows information |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash paid for amounts included in the |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating cash flows relating to | $ | (4,913 | ) |
| $ | (3,435 | ) |
| $ | (14,230 | ) |
| $ | (9,503 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Right-of-use assets obtained in exchange |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating leases | $ | 1,363 |
|
| $ | 933 |
|
| $ | 13,625 |
|
| $ | 47,838 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average remaining lease term in years |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
| 6.39 |
|
|
| 6.39 |
|
|
| 6.39 |
|
|
| 6.39 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average discount rate |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
| 5.4 | % |
|
| 5.5 | % |
|
| 5.4 | % |
|
| 5.5 | % |
Future maturities under operating leases were as follows at October 1, 2022 and January 1, 2022 (in thousands):
|
| October 1, |
|
| January 1, |
| ||
|
| 2022 |
|
| 2022 |
| ||
Remainder of 2022 |
| $ | 5,005 |
|
| $ | 17,929 |
|
2023 |
|
| 19,735 |
|
|
| 17,577 |
|
2024 |
|
| 19,140 |
|
|
| 16,990 |
|
2025 |
|
| 17,998 |
|
|
| 15,987 |
|
2026 |
|
| 16,799 |
|
|
| 15,025 |
|
2027 |
|
| 15,847 |
|
|
| 14,358 |
|
Thereafter |
|
| 22,978 |
|
|
| 17,891 |
|
|
|
|
|
|
|
| ||
Total future minimum lease payments |
|
| 117,502 |
|
|
| 115,757 |
|
|
|
|
|
|
|
| ||
Less: Imputed interest |
|
| (17,361 | ) |
|
| (18,674 | ) |
|
|
|
|
|
|
| ||
Operating lease liability - total |
| $ | 100,141 |
|
| $ | 97,083 |
|
|
|
|
|
|
|
| ||
Reported as of October 1, 2022 and January 2, 2021: |
|
|
|
|
|
| ||
Current portion of operating lease liability |
| $ | 15,247 |
|
| $ | 13,180 |
|
Operating lease liability, less current portion |
|
| 84,894 |
|
|
| 83,903 |
|
|
|
|
|
|
|
| ||
Operating lease liability - total |
| $ | 100,141 |
|
| $ | 97,083 |
|
As of October 1, 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 $7.8 million for the three months ended October 1, 2022 and was $6.5 million for the three months ended October 2, 2021. Of the $7.8 million for the three months ended October 1, 2022, $4.0 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 $6.5 million for the three months ended October 2, 2021, $0.5 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. Lease expense was $22.4 million for the nine months ended October 1, 2022 and was $17.7 million for the nine months ended October 2, 2021. Of the $22.4 million for the nine months ended October 1, 2022, $11.4 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 $17.7 million for the nine months ended October 2, 2021, $6.9 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.
- 24 -
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 income tax expense of $10.111.5 million for the three months ended OctoberJuly 1, 2022,2023, compared with income tax benefitexpense of $2.412.0 million for the three months ended OctoberJuly 2, 2021.2022. Our effective tax rate for the three months ended OctoberJuly 1, 2022,2023, was 24.926.5%, compared with 31.924.8% for the three months ended OctoberJuly 2, 2021.2022. Our income tax expense for the threetwo months ended October 1, 2022,May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, and income tax benefit for the three months ended OctoberJuly 2, 2021,2022, includes income tax expenses of $291209 thousand and $449237 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco. We had an income tax expense of $29.922.7 million for the ninesix months ended OctoberJuly 1, 2022,2023, compared with income tax expense of $4.319.8 million for the ninesix months ended OctoberJuly 2, 2021.2022. Our effective tax rate for the ninesix months ended OctoberJuly 1, 2022,2023, was 24.825.5%, compared with 18.824.7% for the ninesix months ended OctoberJuly 2, 2021.2022. Our income tax expense for the ninefive months ended October 1,May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, and the six months ended July 2, 2022, and October 2, 2021, includes income tax expenses of $1.00.9 million and $1.20.7 million, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the three months ended OctoberJuly 1, 20222023 includes discrete items of income tax benefitexpense relating to excess tax expense from the lapses of restrictions on stock awards, which totaled $24 thousand. The income tax expense in the three months ended July 2, 2022 included discrete items of income tax expense relating to excess tax expense from the lapses of restrictions on stock awards totaling $40 thousand. Income tax expense in the six months ended July 1, 2023 includes discrete items of income tax benefits relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $60 thousand, and from research and development tax credits true-up adjustments, which totaled $472414 thousand. The income tax benefit in the three months ended October 2, 2021 included discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards totaling $14 thousand, and other true-up adjustments totaling less than $0.1 million. Income tax expense in the ninesix months ended October 1,July 2, 2022 includes discrete items of income tax benefitbenefits relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $15696 thousand, from researchthousand. Income tax expense in the three and development tax credits true-up adjustments, which totaled $472 thousand, andsix months ended July 2, 2022 also includes a refund from the state of Florida, received by the Company in the second quarter of 2022, relating to excess taxes received by the state in 2021, which was $584 thousand, benefiting tax expense by $462 thousand, net of its Federal tax effect. Income tax expense in the nine months ended October 2, 2021 include discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $714
thousand. - 18 -
Excluding discrete items of income tax, the effective tax rates for the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, would have been an income tax expense rate of 26.226.5% and an income tax benefit rate of 30.825.6%, respectively. Excluding discrete items of income tax, the effective tax rates for the ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, would have been an income tax expense ratesrate of 25.726.0% and 21.925.4%, respectively.
In September 2021, the state of Florida announced that the corporate 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 state rate of 25.7%, from our estimate in 2021 of 24.2%. During the first nine monthshalf of 2022,2023, we made payments of estimated taxes totaling $21.739.6 million, which included $20.826.6 million in Federal estimated income taxes with the remainder to various states, primarily Florida. During the first nine monthshalf of 2021,2022, we made payments of estimated taxes totaling $12.49.6 million, which included $8.38.8 million in Federal estimated income taxes with the remainder to various states, primarily Florida. As a result of Hurricane Ian, a large and destructive Category 4 Atlantic hurricane, which made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, the U.S. Internal Revenue Service and the state of Florida have both extended their deadlines for payment of the fourth quarter 2022 estimated tax payment, originally due December 15, 2022, to February 15, 2023.
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.
- 25 -
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 or ninesix months ended OctoberJuly 1, 20222023 or OctoberJuly 2, 2021,2022, we did not 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 the 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 $60.0104.0 million and $76.4 million as of OctoberJuly 1, 2022,2023, and January 1,December 31, 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 $475.8537.3 million as of OctoberJuly 1, 2022,2023, 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.
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 |
| ||||||||||||
October 1, 2022 | Total |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| |||||||||||||||||||
July 1, 2023 | Total |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| |||||||||||||||||||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Aluminum contracts | $ | (4,001 | ) |
| $ | — |
|
| $ | (4,001 | ) |
| $ | — |
| $ | (887 | ) |
| $ | — |
|
| $ | (887 | ) |
| $ | — |
|
MTP contracts |
| 598 |
|
|
| — |
|
|
| 598 |
|
|
| — |
|
| 125 |
|
|
| — |
|
|
| 125 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| $ | (3,403 | ) |
| $ | — |
|
| $ | (3,403 | ) |
| $ | — |
| $ | (762 | ) |
| $ | — |
|
| $ | (762 | ) |
| $ | — |
|
| 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.
- 26 -
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, 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.
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 OctoberJuly 1, 2022,2023, the fair value of our aluminum forward contracts was in a liability position of $4.00.9 million. We had 826 outstanding forward contracts for the purchase of 11.517.4 million pounds of aluminum through December 2022,June 2024, at an average price of $1.331.04 per pound, which excludes the Midwest premium, with maturity dates of between one and threetwelve months. At OctoberJuly 1, 2022,2023, the fair value of our MTP contracts was in an asset position of $0.60.1 million. We had 21 outstanding MTP contractscontract to hedge the Platt US MW Transaction price per pound for the delivery of 5.34.4 million pounds of aluminum through December 2022,2023, at an average price of $0.110.21 per pound, with a maturity datesdate of between one and threesix 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 OctoberJuly 1, 2022.2023.
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. We
- 20 -
expect the amount of accumulated other comprehensive loss of approximately $3.40.8 million in the accompanying condensed consolidated balance sheet as of OctoberJuly 1, 2022,2023, to be reclassified to earnings within the next twelve months.
- 27 -
The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at OctoberJuly 1, 20222023 and January 1,December 31, 2022, as follows (in thousands):
|
| Derivative Assets |
|
|
| Derivative Liabilities |
|
| Derivative Assets |
|
|
| Derivative Liabilities |
| ||||||||||||
|
| October 1, 2022 |
|
|
| October 1, 2022 |
|
| July 1, 2023 |
|
|
| July 1, 2023 |
| ||||||||||||
Derivatives designated as hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
instruments under Subtopic 815-20: |
| Balance Sheet Location |
| Fair Value |
|
|
| Balance Sheet Location |
| Fair Value |
|
| Balance Sheet Location |
| Fair Value |
|
|
| Balance Sheet Location |
| Fair Value |
| ||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Aluminum contracts |
| Other current assets |
| $ | — |
|
|
| Accrued liabilities |
| $ | (4,001 | ) |
| Other current assets |
| $ | — |
|
|
| Accrued liabilities |
| $ | (887 | ) |
MTP contracts |
| Other current assets |
|
| 598 |
|
|
| Accrued liabilities |
|
| — |
|
| Other current assets |
|
| 125 |
|
|
| Accrued liabilities |
|
| — |
|
Aluminum contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
MTP contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
Total derivative instruments |
| Total derivative assets |
| $ | 598 |
|
|
| Total derivative liabilities |
| $ | (4,001 | ) |
| Total derivative assets |
| $ | 125 |
|
|
| Total derivative liabilities |
| $ | (887 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Derivative Assets |
|
|
| Derivative Liabilities |
|
| Derivative Assets |
|
|
| Derivative Liabilities |
| ||||||||||||
|
| January 1, 2022 |
|
|
| January 1, 2022 |
|
| 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 |
|
| Balance Sheet Location |
| Fair Value |
|
|
| Balance Sheet Location |
| Fair Value |
| ||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Aluminum contracts |
| Other current assets |
| $ | 4,829 |
|
|
| Accrued liabilities |
| $ | — |
|
| Other current assets |
| $ | — |
|
|
| Accrued liabilities |
| $ | — |
|
MTP contracts |
| Other current assets |
|
| 4,599 |
|
|
| Accrued liabilities |
|
| — |
|
| Other current assets |
|
| 300 |
|
|
| Accrued liabilities |
|
| — |
|
Aluminum contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
MTP contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
Total derivative instruments |
| Total derivative assets |
| $ | 9,428 |
|
|
| Total derivative liabilities |
| $ | — |
|
| 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 loss of $2.50.6 million as of OctoberJuly 1, 2022,2023, 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.
The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three and ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022 (in thousands):
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
| Derivatives in Cash Flow Hedging Relationships |
|
| Derivatives in Cash Flow Hedging Relationships |
| ||||||||||||||||||||||||||||||
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
| ||||||||||||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||||||||
|
| October 1, |
| October 2, |
| October 1, |
| October 2, |
|
| July 1, |
| July 2, |
| July 1, |
| July 2, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Aluminum contracts |
| $ | (2,012 | ) |
| $ | 4,194 |
|
| Cost of sales |
| $ | (3,185 | ) |
| $ | 4,271 |
|
| $ | (1,161 | ) |
| $ | (13,022 | ) |
| Cost of sales |
| $ | (63 | ) |
| $ | 1,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
MTP contracts |
| $ | (621 | ) |
| $ | 2,355 |
|
| Cost of sales |
| $ | 769 |
|
| $ | 2,425 |
|
| $ | (54 | ) |
| $ | 93 |
|
| Cost of sales |
| $ | 82 |
|
| $ | 2,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Derivatives in Cash Flow Hedging Relationships |
|
| Derivatives in Cash Flow Hedging Relationships |
| ||||||||||||||||||||||||||||||
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
| ||||||||||||||||||||
|
| Nine Months Ended |
|
| Nine Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||||
|
| October 1, |
| October 2, |
| October 1, |
| October 2, |
|
| July 1, |
| July 2, |
| July 1, |
| July 2, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Aluminum contracts |
| $ | (9,427 | ) |
| $ | 13,385 |
|
| Cost of sales |
| $ | (597 | ) |
| $ | 8,423 |
|
| $ | (949 | ) |
| $ | (7,415 | ) |
| Cost of sales |
| $ | (63 | ) |
| $ | 2,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
MTP contracts |
| $ | (60 | ) |
| $ | 10,525 |
|
| Cost of sales |
| $ | 3,941 |
|
| $ | 4,181 |
|
| $ | 46 |
|
| $ | 561 |
|
| Cost of sales |
| $ | 222 |
|
| $ | 3,172 |
|
We classify cash flows related to derivative instruments as operating activities in the condensed consolidated statements of cash flows.
- 2821 -
NOTE 15.14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the components of accumulated other comprehensive income (loss) for the three and ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022 (in thousands):
Three months ended October 1, 2022 |
| Aluminum |
|
| MTP |
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Three months ended July 1, 2023 |
| Aluminum |
|
| MTP |
|
|
|
| |||||||||||||||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
|
| Contracts |
|
| Contracts |
|
| Total |
| ||||||
Balance at July 2, 2022 |
| $ | (3,846 | ) |
| $ | 1,478 |
|
| $ | (2,368 | ) | ||||||||||||
Increase (decrease) in fair value of derivatives |
|
| (2,012 | ) |
|
| (621 | ) |
|
| (2,633 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 3,185 |
|
|
| (769 | ) |
|
| 2,416 |
| ||||||||||||
Balance at April 1, 2023 |
| $ | 157 |
|
| $ | 193 |
|
| $ | 350 |
| ||||||||||||
Decrease in fair value of derivatives |
|
| (1,161 | ) |
|
| (54 | ) |
|
| (1,215 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income |
|
| 63 |
|
|
| (82 | ) |
|
| (19 | ) | ||||||||||||
Tax effect |
|
| (279 | ) |
|
| 335 |
|
|
| 56 |
|
|
| 283 |
|
|
| 35 |
|
|
| 318 |
|
Net current-period other comprehensive loss |
|
| 894 |
|
|
| (1,055 | ) |
|
| (161 | ) |
|
| (815 | ) |
|
| (101 | ) |
|
| (916 | ) |
Balance at October 1, 2022 |
| $ | (2,952 | ) |
| $ | 423 |
|
| $ | (2,529 | ) | ||||||||||||
Balance at July 1, 2023 |
| $ | (658 | ) |
| $ | 92 |
|
| $ | (566 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Nine months ended October 1, 2022 |
| Aluminum |
|
| MTP |
|
|
|
| |||||||||||||||
Six months ended July 1, 2023 |
| Aluminum |
|
| MTP |
|
|
|
| |||||||||||||||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
|
| Contracts |
|
| Contracts |
|
| Total |
| ||||||
Balance at January 1, 2022 |
| $ | 3,610 |
|
| $ | 3,396 |
|
| $ | 7,006 |
| ||||||||||||
Balance at December 31, 2022 |
| $ | — |
|
| $ | 223 |
|
| $ | 223 |
| ||||||||||||
Increase (decrease) in fair value of derivatives |
|
| (9,427 | ) |
|
| (60 | ) |
|
| (9,487 | ) |
|
| (949 | ) |
|
| 46 |
|
|
| (903 | ) |
Amounts reclassified from accumulated other comprehensive income |
|
| 597 |
|
|
| (3,941 | ) |
|
| (3,344 | ) |
|
| 63 |
|
|
| (222 | ) |
|
| (159 | ) |
Tax effect |
|
| 2,268 |
|
|
| 1,028 |
|
|
| 3,296 |
|
|
| 228 |
|
|
| 45 |
|
|
| 273 |
|
Net current-period other comprehensive loss |
|
| (6,562 | ) |
|
| (2,973 | ) |
|
| (9,535 | ) | ||||||||||||
Balance at October 1, 2022 |
| $ | (2,952 | ) |
| $ | 423 |
|
| $ | (2,529 | ) | ||||||||||||
Net current-period other comprehensive income loss |
|
| (658 | ) |
|
| (131 | ) |
|
| (789 | ) | ||||||||||||
Balance at July 1, 2023 |
| $ | (658 | ) |
| $ | 92 |
|
| $ | (566 | ) |
|
|
|
|
|
|
|
|
|
| |||
Three months ended October 2, 2021 |
| Aluminum |
|
| MTP |
|
|
|
| |||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
| |||
Balance at July 3, 2021 |
| $ | 6,191 |
|
| $ | 5,139 |
|
| $ | 11,330 |
|
Increase in fair value of derivatives |
|
| 4,194 |
|
|
| 2,355 |
|
|
| 6,549 |
|
Amounts reclassified from accumulated other comprehensive income |
|
| (4,271 | ) |
|
| (2,425 | ) |
|
| (6,696 | ) |
Tax effect |
|
| 20 |
|
|
| 17 |
|
|
| 37 |
|
Net current-period other comprehensive loss |
|
| (57 | ) |
|
| (53 | ) |
|
| (110 | ) |
Balance at October 2, 2021 |
| $ | 6,134 |
|
| $ | 5,086 |
|
| $ | 11,220 |
|
|
|
|
|
|
|
|
|
|
| |||
Nine months ended October 2, 2021 |
| Aluminum |
|
| MTP |
|
|
|
| |||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
| |||
Balance at January 2, 2021 |
| $ | 2,403 |
|
| $ | 317 |
|
| $ | 2,720 |
|
Increase in fair value of derivatives |
|
| 13,385 |
|
|
| 10,525 |
|
|
| 23,910 |
|
Amounts reclassified from accumulated other comprehensive income |
|
| (8,423 | ) |
|
| (4,181 | ) |
|
| (12,604 | ) |
Tax effect |
|
| (1,231 | ) |
|
| (1,575 | ) |
|
| (2,806 | ) |
Net current-period other comprehensive income |
|
| 3,731 |
|
|
| 4,769 |
|
|
| 8,500 |
|
Balance at October 2, 2021 |
| $ | 6,134 |
|
| $ | 5,086 |
|
| $ | 11,220 |
|
|
|
|
|
|
|
|
|
|
| |||
Three months ended July 2, 2022 |
| Aluminum |
|
| MTP |
|
|
|
| |||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
| |||
Balance at April 2, 2022 |
| $ | 6,784 |
|
| $ | 3,205 |
|
| $ | 9,989 |
|
Increase (decrease) in fair value of derivatives |
|
| (13,022 | ) |
|
| 93 |
|
|
| (12,929 | ) |
Amounts reclassified from accumulated other comprehensive income |
|
| (1,210 | ) |
|
| (2,488 | ) |
|
| (3,698 | ) |
Tax effect |
|
| 3,602 |
|
|
| 668 |
|
|
| 4,270 |
|
Net current-period other comprehensive loss |
|
| (10,630 | ) |
|
| (1,727 | ) |
|
| (12,357 | ) |
Balance at July 2, 2022 |
| $ | (3,846 | ) |
| $ | 1,478 |
|
| $ | (2,368 | ) |
|
|
|
|
|
|
|
|
|
| |||
Six months ended July 2, 2022 |
| Aluminum |
|
| MTP |
|
|
|
| |||
(in thousands) |
| Contracts |
|
| Contracts |
|
| Total |
| |||
Balance at January 1, 2022 |
| $ | 3,610 |
|
| $ | 3,396 |
|
| $ | 7,006 |
|
Increase (decrease) in fair value of derivatives |
|
| (7,415 | ) |
|
| 561 |
|
|
| (6,854 | ) |
Amounts reclassified from accumulated other comprehensive income |
|
| (2,588 | ) |
|
| (3,172 | ) |
|
| (5,760 | ) |
Tax effect |
|
| 2,547 |
|
|
| 693 |
|
|
| 3,240 |
|
Net current-period other comprehensive loss |
|
| (7,456 | ) |
|
| (1,918 | ) |
|
| (9,374 | ) |
Balance at July 2, 2022 |
| $ | (3,846 | ) |
| $ | 1,478 |
|
| $ | (2,368 | ) |
- 2922 -
NOTE 16.15. SEGMENTS
We have two 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.
The following table represents summary financial data attributable to our operating segments for the three and ninesix months ended OctoberJuly 1, 2022,2023, and OctoberJuly 2, 2021. Results of the Southeast segment for the three and nine months ended October 1, 2022 includes the results of Eco for the entire three- and nine-month periods, whereas for the three and nine months ended October 2, 2021, the three months ended October 2, 2021 includes the results of Eco for the entire three-month period, but the nine months ended October 2, 2021 includes only its post-acquisition period from February 1, 2021.2022. Results of the Western segment for the three and ninesix months ended OctoberJuly 1, 2022 includes2023 include the results of CRi, acquired May 1, 2021, and Anlin,Martin, acquired October 25, 2021. Results of the Western segment14, 2022, whereas such results are not included for the three and nine monthssix month ended OctoberJuly 2, 2021, includes CRi's results for the post acquisition period from May 1, 2021, and no results from Anlin. 2022. Corporate overhead has been allocated to each segment using an allocation method we believe is reasonable (in thousands):
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
| July 1, |
|
| July 2, |
|
| July 1, |
|
| July 2, |
| ||||
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
| ||||
Southeast segment | $ | 287,977 |
|
| $ | 307,492 |
|
| $ | 570,022 |
|
| $ | 579,259 |
|
Western segment |
| 96,957 |
|
|
| 99,029 |
|
|
| 191,741 |
|
|
| 185,924 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total net sales | $ | 384,934 |
|
| $ | 406,521 |
|
| $ | 761,763 |
|
| $ | 765,183 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from operations: |
|
|
|
|
|
|
|
|
|
|
| ||||
Southeast segment | $ | 39,954 |
|
| $ | 41,014 |
|
| $ | 80,475 |
|
| $ | 66,570 |
|
Western segment |
| 13,992 |
|
|
| 14,611 |
|
|
| 26,789 |
|
|
| 27,766 |
|
Restructuring costs and charges (1) |
| (2,516 | ) |
|
| — |
|
|
| (2,516 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total income from operations |
| 51,430 |
|
|
| 55,625 |
|
|
| 104,748 |
|
|
| 94,336 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| 8,214 |
|
|
| 7,155 |
|
|
| 15,870 |
|
|
| 14,235 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total income before income taxes | $ | 43,216 |
|
| $ | 48,470 |
|
| $ | 88,878 |
|
| $ | 80,101 |
|
(1) For the three and six months ended July 1, 2023, restructuring costs and charges totaling $2.5 million relates to the Southeast segment income from operations.
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
| ||||
Southeast segment | $ | 288,246 |
|
| $ | 255,170 |
|
| $ | 867,505 |
|
| $ | 731,257 |
|
Western segment |
| 97,591 |
|
|
| 45,261 |
|
|
| 283,515 |
|
|
| 125,766 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total net sales | $ | 385,837 |
|
| $ | 300,431 |
|
| $ | 1,151,020 |
|
| $ | 857,023 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from operations: |
|
|
|
|
|
|
|
|
|
|
| ||||
Southeast segment | $ | 30,037 |
|
| $ | 20,713 |
|
| $ | 96,607 |
|
| $ | 54,977 |
|
Western segment |
| 17,366 |
|
|
| 4,895 |
|
|
| 45,132 |
|
|
| 16,091 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total income from operations |
| 47,403 |
|
|
| 25,608 |
|
|
| 141,739 |
|
|
| 71,068 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| 6,889 |
|
|
| 7,686 |
|
|
| 21,124 |
|
|
| 22,968 |
|
Debt extinguishment costs |
| — |
|
|
| 25,472 |
|
|
| — |
|
|
| 25,472 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total income (loss) before income taxes | $ | 40,514 |
|
| $ | (7,550 | ) |
| $ | 120,615 |
|
| $ | 22,628 |
|
Depreciation expense for the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $6.76.8 million and $7.06.9 million for our Southeast segment, respectively, and $1.62.0 million and $0.91.5 million for our Western segment, respectively. Depreciation expense for the nine-monthssix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $20.613.6 million and $19.713.9 million for our Southeast segment, respectively, and $4.74.1 million and $2.63.1 million for our Western segment, respectively. Amortization expense for the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $2.72.0 million, and $2.72.8 million for our Southeast segment, respectively, and $3.14.5 million and $2.63.1 million for our Western segment, respectively. Amortization expense for the ninesix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021,2022, was $8.14.0 million, and $7.95.5 million for our Southeast segment, respectively, and $11.69.3 million and $7.38.4 million for our Western segment, respectively.
Total assets of our Southeast segment as of OctoberJuly 1, 20222023 and January 1,December 31, 2022 were $995.3902.0 million and $911.3909.6 million, respectively. Total assets of our Western segment as of OctoberJuly 1, 20222023 and January 1,December 31, 2022 were $607.3709.4 million and $549.3730.6 million, respectively.
- 3023 -
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 providesprovided the Company with a call right for seller’s equity interest in the third year following the acquisition date. If the Company doesdid not exercise its right to call by the third anniversary, the agreement providesprovided the seller with a put right which can becould have been exercised during the 15-day period following the third anniversary. Upon exerciseEffective on May 26, 2023, the Company exercised its call-right to purchase the remaining 25% ownership stake in Eco it previously did not own. The redemption price of the put or call right,remaining 25% was calculated by the purchase price is calculatedCompany pursuant to the operating agreement based on a futurethe performance metric included therein, and was determined to be $37.5 million, which was agreed performance metricwith by the seller. Subsequent to this redemption, the Company's ownership of Eco Enterprises is now 100%.. The put option makes
Prior to the non-controlling interest redeemable and, therefore,redemption effective on May 26, 2023, the redeemable non-controlling interest is classified as temporary equity outside of shareholders’ equity.Company
The calculatescalculated the estimated future redemption value of the non-controlling interest on a quarterly basis. The redeemable non-controlling interest iswas accreted to the future redemption value using the effective interest method up to the date on which the put-right becomesbecame effective. Any accretion adjustment in the current reporting period of the redeemable non-controlling interest iswas offset against retained earnings and impactsimpacted 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 $47.5 million, which we accreted to $39.7 million as of October 1, 2022.
The following table presents the changes in the Company’s redeemable non-controlling interest for the period presented:six months ended July 1, 2023, and July 2, 2022:
| Nine Months Ended |
| Six Months Ended |
| ||||||||||
| October 1, |
| October 2, |
| July 1, |
| July 2, |
| ||||||
(in thousands) | 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
| ||||
Balance at beginning of period | $ | 36,863 |
|
| $ | — |
| $ | 34,721 |
|
| $ | 36,863 |
|
RNCI in Eco at initially estimated fair value |
| — |
|
|
| 28,464 |
| |||||||
Net income attributable to redeemable non-controlling interest |
| 1,334 |
|
|
| 1,656 |
|
| 1,101 |
|
|
| 961 |
|
Change in value of redeemable non-controlling interest |
| 1,514 |
|
|
| 4,528 |
|
| 1,637 |
|
|
| 1,785 |
|
Redemption of redeemable non-controlling interest |
| (37,459 | ) |
|
| — |
| |||||||
Balance at end of period | $ | 39,711 |
|
| $ | 34,648 |
| $ | — |
|
| $ | 39,609 |
|
- 24 -
NOTE 18. SUBSEQUENT EVENTS17. SHAREHOLDERS' EQUITY
Acquisition and Refinancing2023 Share Repurchase Program
On October 14, 2022, pursuant to a Share Purchase Agreement ("SPA"), WWS Acquisition LLC (“Buyer”), a Missouri limited liability company and indirect wholly owned subsidiary ofFebruary 7, 2023, the Company completed the acquisition ("Martin Acquisition")announced that its Board of all of the issued and outstanding shares of capital of Martin Door Holdings Inc.,Directors approved a Utah corporation (“Seller” or "Martin") headquartered in Salt Lake City, and manufacturer of premium overhead garage doors and hardware serving the Western U.S. residential and commercial markets.
The total fair value of consideration transferred at closing for the Martin Acquisition, was approximately $187.8 million, subject to certain adjustments as set forth in the SPA,new, share repurchase program which included an enterprise value of $185.0 million, and a payment of approximately $2.8 million for estimated net working capital in excess of target net working capital. The purchase price is subject to a post-closing true-up mechanism as set forth in the SPA, which is expected to be determined within ninety days from the date of the closing of the Martin Acquisition. Martin's assets include those typical to the operation of the business including accounts receivable, inventories, property and equipment, as well as intangibles assets which we expect will include one or more Martin trade names, customer relationships, developed technology, and possibly other yet to be identified intangible assets. We expect to engage a third-party valuation firm to assist with the valuation of such assets.
On October 13, 2022,authorizes the Company entered into an amendment of the 2016 Credit Agreement (the “Fifth Amendment”). The Fifth Amendment provides for, among other things, a new five-year revolving credit facility in an aggregate principal amount ofto purchase up to $250.0 million (the “New Revolving Credit Facility”). The New Revolving Credit Facility refinancesof 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 replacesother restrictions. During the previously existingsix months ended July 1, 2023, we repurchased a total of 1,950,161 shares under this program at a total cost of $80.045.4 million, revolving credit facility underwhich excludes the 2016 Credit Agreement.1% excise tax imposed on corporate stock buy-backs by the Inflation Reduction Act of 2022. The Company’s obligations undertiming 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 2016 Credit Agreement continuecompany to be secured by substantially allacquire any amount of its and its direct and indirect subsidiaries’ assets.common stock.
Shareholder Rights Plan
- 31 -
Interest on borrowings underOn March 30, 2023, we announced that our Board of Directors had unanimously approved the New Revolving Credit Facility is payable either quarterly or atadoption of a limited-duration shareholder rights plan (the “Rights Plan”) which includes the expirationdeclaration of any Secured 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 floordividend distribution of 100one basis points) plusright (each, a percentage spread (ranging“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 0.75one-thousandth% to 1.75%) based on our first lien net leverage ratio or SOFR (with a floor of 0 basis points) plusof a percentage spread (ranging from share of Series A Participating Preferred Stock, par value $1.750.01% 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"). 2.75%) based on our first lien net leverage ratio. After giving effect to the Fifth Amendment, we will pay quarterly feesThe Rights expire on the unused portionearliest of (1) March 30, 2024, unless such date is extended, or (2) the redemption or exchange of the New Revolving Credit Facility equal to a percentage spread (ranging from Rights as described above.0.25% to 0.35%) based on our first lien net leverage ratio. The Fifth Amendment also modifies the financial covenant under the 2016 Credit Agreement such that it will be tested on a quarterly basis, commencing with the fiscal quarter ending December 31, 2022.
The Martin Acquisition was financed withBoard 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 250.010 million available under% or more of the New Revolving Credit Facility providedCompany's outstanding common stock in a transaction not approved by the Fifth Amendment of our 2016 Credit Agreement, under which we drew $160.0 million on October 14, 2022,Board. In the proceeds of which were used to pay $98.4 million ofevent that the $187.8 million total fair value of consideration transferred, and to pay $61.6 million to prepay our $60.0 million Term A Loan under the Fourth Amendment of our 2016 Credit Agreement, plus $1.6 million in fees, costs and accrued interest. The remainder of the total fair value of consideration transferred totaling $89.4 million was funded with cash and cash equivalents on hand previously generated through operations. We also paid buyer fees and costs relatingRights become exercisable due to the Martin Acquisition, which we are analyzing for proper accounting treatment. We accrued an estimated $1.25 million of acquisition-related expenses intriggering ownership threshold being crossed, each Right will entitle its holder (other than the three months ended October 1, 2022 for services received prior toperson, entity or group triggering the closing of the Martin Acquisition, classified as selling, generalRights Plan, whose Rights will become void and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended October 1, 2022.
Cyberattack
On November 5, 2022, the Company detected a ransomware infection that impacted portions of its network and caused disruption to daily business operations. Immediately, upon discovery, the Company engaged outside cybersecurity experts familiar with these types of incidents to conduct a forensic investigation and assess the extent and scope of the incident. As of the date of the filing of this Quarterly Report on Form 10-Q, the investigation is in its early stages and ongoing. To date, there is no evidence of personal information being accessed or acquired.
Security is a top priority for the Company, and the Company continues to work to take a series of measures to safeguard the integrity of its information technology systems. Upon detecting the security event, the Company took immediate steps designed to contain the incident and implement its business continuity plans to restore and support continued operations. The Company has notified appropriate law enforcement authorities.
The Company is also working closely with cybersecurity experts and legal counsel. The Company is in the early stages of its investigation and assessment of the security event and cannot determine, at this time, the extent of the impact from such event on its business, results of operations or financial condition or whether such impact will have a material adverse effect. The Company carries insurance, including cyber insurance, commensurate with the size and the nature of its operations. Further, while the Company is communicating with its customers regarding this disruption, it cannot guarantee that its customer relationships will not be harmed asexercisable) 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.
NOTE 18. RESTRUCTURING COSTS AND CHARGES
During the second quarter of 2023, the Company’s management approved a plan to exit the North Carolina market relating to its NewSouth brand. As a result of this event. In additiondecision, the Company determined to these risksclose its NewSouth showrooms in Raleigh-Durham and other information set forthCharlotte, North Carolina, which resulted in this report, one should carefully consider the discussion on the other risksrestructuring costs and uncertainties that cybersecurity incidents may have on us, contained in Part I, “Item 1A. Risk Factors”charges totaling $2.5 million in the Company’s Annual Report on Form 10-K/A forsecond quarter and first half of 2023. Of the year ended January 1, 2022.$2.5 million in restructuring costs and charges, $2.0 million represents the total impairments of the right-of-use assets of the leases of the Raleigh-Durham and Charlotte, North Carolina showroom facilities, and $0.4 relates to write-offs of the related leasehold improvements. The remainder represents personnel-related costs, which were paid by the end of the 2023 second quarter.
- 3225 -
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/A10-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/A10-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:
- 33 -
- 26 -
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
Hurricane Ian
Hurricane Ian, a large and destructive Category 4 Atlantic hurricane, made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, moving slowly to the northeast across the entire state causing widespread damage to property from high winds and severe flooding. Three of PGT’s manufacturing facilities and many of our team were directly in the path of Hurricane Ian. Even though the Company’s manufacturing facilities did not sustain any meaningful damage from the storm, many of our team members live in the areas that were hardest hit.
We closed our west Florida facilities on Tuesday, September 27th, and did not open them until Monday, October 3rd. Our facilities did not sustain any significant physical damage, but disruption caused by the storm resulted in us having limited ability to produce at our facilities as our team members could not safely travel to work due to road closures caused by subsequent flooding and downed trees and power lines. Hurricane Ian caused disruption to our ability to manufacture and distribute our products as our team members were unable to safely travel to our impacted facilities. Production in the first week after Ian was only a single shift with lower than usual productivity caused by using makeshift labor teams for our various production lines. Also, Hurricane Ian affected our customers’ ability to accept deliveries of our products. We estimate that storm-related disruptions caused approximately $12.0 million of third-quarter 2022 sales to be deferred. In addition to the impact to profits from lost sales, we incurred disruption and recovery costs as a result of the storm totaling $1.8 million in the three and nine months ended October 1, 2022, of which $1.1 million is classified as cost of sales, and $0.7 million is classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended October 1, 2022.
As we continued through the month of October, we were able to increase the number of shifts and gradually improve on our productivity from the first week of the month, and are just now reaching productivity levels that we were delivering before the storm. As we work through the remainder of the fourth quarter, we will be taking further actions that should allow us to get back to more reasonable productivity levels.
While we will continue to address the challenges presented by the hurricane, we may also be impacted by the current macro-economic environment, which includes rising interest rates, a slowdown in new home sales, inflationary conditions in building products, and the looming threat of a recession. These conditions have resulted in a high degree of uncertainty facing the U.S. economy. After Hurricane Irma in September 2017, we saw an increase in demand for our impact products as the effects of the storm resulted in our products being viewed with a high degree of favorable sentiment. While it is too early to forecast any increase in demand as a result of Hurricane Ian, we would expect the benefit of any increase in demand to assist with offsetting potential softening from a slowdown in the economy.
- 34 -
Sales and Operations
During the thirdsecond quarter of 2022,2023, we grew atexperienced solid net sales, despite several macro-economic headwinds which negatively impacted both our Southeast and Western segments, as the momentum of growth we experienced last year continues in 2022. Additionally, we continue to make strategic marketing investments which are paying dividends through customer awareness during the repairincluding increased interest rates and remodeling season. Ofcontinuing inflationary conditions. Despite these macro-economic headwinds, our total net sales for the thirdsecond quarter of 2023 was $384.9 million, which decreased 5.3% compared to $406.5 million in the second quarter of 2022. Our Southeast segment's net sales were $288.0 million in the second quarter of 2023, compared to $307.5 million in the second quarter of 2022, a decrease of $385.8$19.5 million, which increased 28.4% compared to $300.4 millionor 6.3%. This decrease in the third quarter of 2021, and which included organic sales growth of 16.8%. Sales growth at our Southeast segment was entirely organic, primarily due to softness in new construction, while sales growth at our Western segment was both organicthe repair and from acquisitions.remodel channel continues to be solid in the Southeast segment.
Our SoutheastWestern segment's net sales were $288.2$96.9 million in the thirdsecond quarter of 2023, compared to $99.0 million in the second quarter of 2022, a decrease of $2.1 million, or 2.1%. Sales for the second quarter of 2023 of our Western segment includes acquisition growth from Martin. Excluding Martin's second quarter 2023 sales, our existing business was negatively impacted by softness in the new construction channel in the second quarter of 2023, compared to $255.1the second quarter of 2022.
The softness in the new construction channel in both the Southeast and Western segments has resulted in a decrease in unit volume in both segments, which has been partially offset by last year's price increases.
Our gross profit was $154.0 million in the thirdsecond quarter of 2021, an increase2023, producing a gross margin of $33.140.0%, compared to $165.1 million or 13.0%. We believe somein the 2022 second quarter, and a gross margin of this organic growth is being driven by gaining market share as40.6%, a decline in gross margin of 60 basis points from the changing market dynamics in our largest market of Florida has led one of our larger competitors in our southeast region to discontinue its aluminum product line, allowing us to pick up market share. Our NewSouth brand continues to perform well, and is benefitting from organic growth in our main market of Florida, but also the expansion of our direct-to-consumer footprint in markets outside of Florida as we are in various stages of adding new retail locations to our existing list of stores.
As discussed above, although Hurricane Ian negatively impacted our thirdsecond quarter of 2022 to the second quarter of 2023. We believe the decline in both gross profit and may also negativelygross margin is a result of a decrease in sales due to the macro-economic headwinds, a change in mix of organic sales, excluding sales of Martin, towards a higher portion from our Southeast segment, whose products have a slightly lower margin, and a lower portion from our Western segment, whose products have a higher margin. Despite the negative impact our fourthon gross profit and gross margin from the decline in sales, gross profit and gross margin benefitted from several positive factors, including a reduction in the cost of aluminum and vinyl in the second quarter of 2023 compared to the second quarter of 2022, onecontinued improvement in operating efficiencies which began in 2022, and which have remained a focus in 2023, and an increase in capacity for production of our own glass, which we can produce at a cost lower than procuring glass from a third-party.
Cash from operations during the first six months of 2023 was $60.3 million, compared to $84.9 million in the first six months of 2022, a decrease in cash from operations of $24.6 million, or 29.0%. Our second quarter 2023 decrease in cash from operations are the result of a decrease in cash flow leverage from accounts payable, which decreased significantly from the end of 2022 to the end of the biggest eventssecond quarter of 2023. The decrease in accounts payable was a strategic decision we made to achieve higher material procurement discounts.
We also believe that occurred recently was the passageHurricane Ian has continued to spur homeowners to take advantage of Florida House Bill 7071, signed into law in May 2022. This bill provides a two-year tax relief to Florida residences, available through June 2024, who choose to "harden" their homes against the damaging effects of storms by investing in impact-resistant windows, doors, and other product categories. We're excited about this great benefit for Florida homeowners 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. Going forward, weWe believe our Florida operations will benefitoperation is benefitting from this home-hardening legislation. The
- 27 -
legislation, the main highlight of the billwhich includes a sales tax exemption for Floridians that harden their homes against natural disasters using impact-resistant products like those sold by the Company, which is available through June 2024.Company.
Our Western segment's net sales were $97.6 million in the third quarter of 2022, compared to $45.3 million in the third quarter of 2021, an increase of $52.3 million, or 115.6%. While sales for the third quarter of 2022 of our Western segment includes acquisition growth from Anlin, our existing business grew organically by 38.3% compared to the third quarter of last year. We believe the strength in our Western segment is due to our production builder business as this sector has performed well for several quarters, as we believe that demand for conversion to indoor/outdoor living continues to be strong. We believe we are also benefitting from our capacity expansion in the Phoenix, Arizona area and our new San Diego showroom in Southern California. We believe the organic growth we had in the third of 2022 reflects the strength of our portfolio of brands across our entire geographic footprint.
Our gross profit increased to $149.8 million in the third quarter of 2022, producing a gross margin of 38.8%, compared to $104.2 million in the 2021 third quarter, and a gross margin of 34.7%, an improvement in gross margin of 410 basis points from the third quarter of 2021 to the third quarter of 2022. Additionally, cash from operations during the first nine months of 2022 was $152.1 million, compared to $19.8 million in the first nine months of 2021, an increase in cash from operations of $132.3 million, or 669.7%. We were able to produce this operational and cash generation improvement, despite headwinds of inflationary pressure being felt on material and labor costs. We also benefitted from price increases implemented earlier in the year to offset such inflationary headwinds. During the 2022 third quarter, we continued to focus on improving our manufacturing processes in order to reduce lead-times to meet the continued growing demand. Prior to Hurricane Ian, during the third quarter of 2022, we were able to reduce our average lead times by 40% to 50% in our primary brands compared to the third quarter of last year. Recent investments in our team to help achieve higher talent levels have also helped generate improved operational efficiencies across our entire portfolio of brands. We believe the combination of improved operational performance we achieved prior to Hurricane Ian, reduced lead times and previously implemented price increases will continue to benefit our gross margin through the balance of 2022.
- 35 -
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-three and nine-month periodssix months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022 are composed of 13 weeks and 3926 weeks, respectively (in thousands, except percentages):
|
| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
|
| October 1, 2022 |
| October 2, 2021 |
| July 1, 2023 |
| July 2, 2022 | ||||||||||||||||
|
| (unaudited) |
| (unaudited) | ||||||||||||||||||||
Net sales |
| $ | 385,837 |
|
| 100.0 % |
| $ | 300,431 |
|
| 100.0 % |
| $ | 384,934 |
|
| 100.0 % |
| $ | 406,521 |
|
| 100.0 % |
Cost of sales |
|
| 236,035 |
|
| 61.2 % |
|
| 196,228 |
|
| 65.3 % |
|
| 230,983 |
|
| 60.0 % |
|
| 241,391 |
|
| 59.4 % |
Gross profit |
|
| 149,802 |
|
| 38.8 % |
|
| 104,203 |
|
| 34.7 % |
|
| 153,951 |
|
| 40.0 % |
|
| 165,130 |
|
| 40.6 % |
Selling, general and administrative expenses |
|
| 102,399 |
|
| 26.5 % |
|
| 78,595 |
|
| 26.2 % |
|
| 100,005 |
|
| 26.0 % |
|
| 109,505 |
|
| 26.9 % |
Restructuring costs and charges |
|
| 2,516 |
|
| 0.7 % |
|
| — |
|
| - | ||||||||||||
Income from operations |
|
| 47,403 |
|
| 12.3 % |
|
| 25,608 |
|
| 8.5 % |
|
| 51,430 |
|
| 13.4 % |
|
| 55,625 |
|
| 13.7 % |
Interest expense, net |
|
| 6,889 |
|
| 1.8 % |
|
| 7,686 |
|
| 2.6 % |
|
| 8,214 |
|
| 2.1 % |
|
| 7,155 |
|
| 1.8 % |
Debt extinguishment costs |
|
| — |
|
| - |
|
| 25,472 |
|
| 8.5 % | ||||||||||||
Income (loss) before income taxes |
|
| 40,514 |
|
| 10.5 % |
|
| (7,550 | ) |
| (2.5)% | ||||||||||||
Income tax expense (benefit) |
|
| 10,100 |
|
| 2.6 % |
|
| (2,410 | ) |
| (0.8)% | ||||||||||||
Net income (loss) |
|
| 30,414 |
|
| 7.9 % |
|
| (5,140 | ) |
| (1.7)% | ||||||||||||
Income before income taxes |
|
| 43,216 |
|
| 11.2 % |
|
| 48,470 |
|
| 11.9 % | ||||||||||||
Income tax expense |
|
| 11,462 |
|
| 3.0 % |
|
| 12,005 |
|
| 3.0 % | ||||||||||||
Net income |
|
| 31,754 |
|
| 8.2 % |
|
| 36,465 |
|
| 9.0 % | ||||||||||||
Less: Net income attributable to redeemable RNCI |
|
| (373 | ) |
| (0.1)% |
|
| (677 | ) |
| (0.2)% |
|
| (264 | ) |
| (0.1)% |
|
| (304 | ) |
| (0.1)% |
Net income (loss) attributable to the Company |
|
| 30,041 |
|
| 7.8 % |
|
| (5,817 | ) |
| (1.9)% | ||||||||||||
Decrease (increase) in redemption value of RNCI |
|
| 271 |
|
| 0.1 % |
|
| (965 | ) |
| (0.3)% | ||||||||||||
Net income (loss) attributable to common shareholders |
| $ | 30,312 |
|
| 7.9 % |
| $ | (6,782 | ) |
| (2.3)% | ||||||||||||
Net income attributable to the Company |
|
| 31,490 |
|
| 8.2 % |
|
| 36,161 |
|
| 8.9 % | ||||||||||||
(Increase) decrease in redemption value of RNCI |
|
| (460 | ) |
| (0.1)% |
|
| 351 |
|
| 0.1 % | ||||||||||||
Net income attributable to common shareholders |
| $ | 31,030 |
|
| 8.1 % |
| $ | 36,512 |
|
| 9.0 % |
|
| Nine Months Ended |
| Six Months Ended | ||||||||||||||||||||
|
| October 1, 2022 |
| October 2, 2021 |
| July 1, 2023 |
| July 2, 2022 | ||||||||||||||||
|
| (unaudited) |
| (unaudited) | ||||||||||||||||||||
Net sales |
| $ | 1,151,020 |
|
| 100.0 % |
| $ | 857,023 |
|
| 100.0 % |
| $ | 761,763 |
|
| 100.0 % |
| $ | 765,183 |
|
| 100.0 % |
Cost of sales |
|
| 701,495 |
|
| 60.9 % |
|
| 561,849 |
|
| 65.6 % |
|
| 458,581 |
|
| 60.2 % |
|
| 465,460 |
|
| 60.8 % |
Gross profit |
|
| 449,525 |
|
| 39.1 % |
|
| 295,174 |
|
| 34.4 % |
|
| 303,182 |
|
| 39.8 % |
|
| 299,723 |
|
| 39.2 % |
Selling, general and administrative expenses |
|
| 307,786 |
|
| 26.7 % |
|
| 224,106 |
|
| 26.1 % |
|
| 195,918 |
|
| 25.7 % |
|
| 205,387 |
|
| 26.8 % |
Restructuring costs and charges |
|
| 2,516 |
|
| 0.3 % |
|
| — |
|
| - | ||||||||||||
Income from operations |
|
| 141,739 |
|
| 12.3 % |
|
| 71,068 |
|
| 8.3 % |
|
| 104,748 |
|
| 13.8 % |
|
| 94,336 |
|
| 12.3 % |
Interest expense, net |
|
| 21,124 |
|
| 1.8 % |
|
| 22,968 |
|
| 2.7 % |
|
| 15,870 |
|
| 2.1 % |
|
| 14,235 |
|
| 1.9 % |
Debt extinguishment costs |
|
| — |
|
| - |
|
| 25,472 |
|
| 3.0 % | ||||||||||||
Income before income taxes |
|
| 120,615 |
|
| 10.5 % |
|
| 22,628 |
|
| 2.6 % |
|
| 88,878 |
|
| 11.7 % |
|
| 80,101 |
|
| 10.5 % |
Income tax expense |
|
| 29,910 |
|
| 2.6 % |
|
| 4,260 |
|
| 0.5 % |
|
| 22,697 |
|
| 3.0 % |
|
| 19,810 |
|
| 2.6 % |
Net income |
|
| 90,705 |
|
| 7.9 % |
|
| 18,368 |
|
| 2.1 % |
|
| 66,181 |
|
| 8.7 % |
|
| 60,291 |
|
| 7.9 % |
Less: Net income attributable to redeemable RNCI |
|
| (1,334 | ) |
| (0.1)% |
|
| (1,656 | ) |
| (0.2)% |
|
| (1,101 | ) |
| (0.1)% |
|
| (961 | ) |
| (0.1)% |
Net income attributable to the Company |
|
| 89,371 |
|
| 7.8 % |
|
| 16,712 |
|
| 2.0 % |
|
| 65,080 |
|
| 8.5 % |
|
| 59,330 |
|
| 7.8 % |
Decrease in redemption value of RNCI |
|
| (1,514 | ) |
| (0.1)% |
|
| (4,528 | ) |
| (0.5)% | ||||||||||||
Increase in redemption value of RNCI |
|
| (1,637 | ) |
| (0.2)% |
|
| (1,785 | ) |
| (0.2)% | ||||||||||||
Net income attributable to common shareholders |
| $ | 87,857 |
|
| 7.6 % |
| $ | 12,184 |
|
| 1.4 % |
| $ | 63,443 |
|
| 8.3 % |
| $ | 57,545 |
|
| 7.5 % |
- 3628 -
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBERJULY 1, 20222023 AND OCTOBERJULY 2, 20212022
The three-month periods ended October 1, 2022 and October 2, 2021 are each composed of 13 weeks.
Net sales
|
| Three Months Ended |
|
|
| Three Months Ended |
|
| ||||||||||||||||||||
|
| October 1, 2022 |
| October 2, 2021 |
|
|
| July 1, 2023 |
| July 2, 2022 |
|
| ||||||||||||||||
|
| Net Sales |
|
| % of sales |
| Net Sales |
|
| % of sales |
| % change |
| Net Sales |
|
| % of sales |
| Net Sales |
|
| % of sales |
| % change | ||||
By segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Southeast segment |
| $ | 288.2 |
|
| 74.7% |
| $ | 255.1 |
|
| 84.9% |
| 13.0% |
| $ | 288.0 |
|
| 74.8% |
| $ | 307.5 |
|
| 75.6% |
| (6.3%) |
Western segment |
|
| 97.6 |
|
| 25.3% |
|
| 45.3 |
|
| 15.1% |
| 115.6% |
|
| 96.9 |
|
| 25.2% |
|
| 99.0 |
|
| 24.4% |
| (2.1%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total net sales |
| $ | 385.8 |
|
| 100.0% |
| $ | 300.4 |
|
| 100.0% |
| 28.4% |
| $ | 384.9 |
|
| 100.0% |
| $ | 406.5 |
|
| 100.0% |
| (5.3%) |
Net sales for the thirdsecond quarter of 20222023 were $385.8$384.9 million, a $85.4$21.6 million, or 28.4%5.3%, increasedecrease in sales, including 16.8% of organic growth, from $300.4$406.5 million in the thirdsecond quarter of the prior year.
During the third quarter of 2022, we experienced strong growth at both our Southeast and Western segments, as the momentum of growth we experienced over last year continued in 2022. Additionally, we continue to make strategic marketing investments which are paying dividends through customer awareness during the repair and remodeling season. Of our total net sales for the third quarter of 2022 of $385.8 million, which increased 28.4% compared to $300.4 million in the third quarter of 2021, growth was both organic and from acquisitions. Our Southeast segment's net sales were $288.2$288.0 million in the thirdsecond quarter of 2023, compared to $307.5 million in the second quarter of 2022, compared to $255.1 million in the third quartera decrease of 2021, an increase of $33.1$19.5 million, or 13.0%6.3%. This growthdecrease in sales at our Southeast segment was entirely organic, but we believe was adversely impacted by Hurricane Ianprimarily due to softness in late-September 2022. As previously discussed, Hurricane Ian was a largenew construction, while the repair and destructive Category 4 Atlantic hurricane, that made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, disrupting our ability to manufacture and distribute our products. We estimate that storm-related disruptions caused approximately $12.0 million of third-quarter 2022 salesremodel channel continues to be deferred.solid in the Southeast segment.
Our Western segment's net sales were $97.6$96.9 million in the thirdsecond quarter of 2023, compared to $99.0 million in the second quarter of 2022, compared to $45.3a decrease of $2.1 million, inor 2.1%. Sales for the thirdsecond quarter of 2021, an increase of $52.3 million, or 115.6%. While sales for the third quarter of 20222023 of our Western segment includes acquisition growth from Anlin,Martin. Excluding Martin's second quarter 2023 sales, our existing Western segment's sales grew organicallybusiness was negatively impacted by 38.3%softness in the new construction channel in the second quarter of 2023, compared to the second quarter of 2022.
The softness in the new construction channel in both the Southeast and Western segments has resulted in a decrease in unit volume in both segments, which has been partially offset by last year's third quarter. We believe the strength in our Western segment is due to our production builder business as this sector has performed well for several quarters, as we believe that demand for conversion to indoor/outdoor living continues to be strong. We believe we are also benefitting from our capacity expansion in the Phoenix, Arizona area and our new San Diego showroom in Southern California.price increases.
Gross profit and gross margin
Gross profit was $149.8$154.0 million in the thirdsecond quarter of 2022, an increase2023, a decrease of $45.6$11.1 million, or 43.8%6.8%, from $104.2$165.1 million in the thirdsecond quarter of 2021.2022. Our gross margin was 38.8%40.0% in the thirdsecond quarter of 2022,2023, compared to 34.7%40.6% in the prior year thirdsecond quarter, an increasea decrease of 4.1%0.6%. Adjusting for costs relating to Hurricane Ian that impacted our gross profit totaling $1.1 million, our gross marginWe believe the decline in the third quarter of 2022 was 39.1%, compared to 34.7% in the prior year third quarter, and increase of 4.4%. The increases inboth gross profit and gross margin includeis a result of a decrease in sales due to the effectsmacro-economic headwinds, a change in mix of price increase actions we tookorganic sales, excluding sales of Martin, towards a higher portion from our Southeast segment, whose products have a slightly lower margin, and a lower portion from our Western segment, whose products have a higher margin. Despite the negative impact on gross profit and gross margin from the decline in sales, gross profit and gross margin benefitted from several positive factors, including a reduction in the cost of aluminum and vinyl in the second quarter of 2023 compared to offset the impacts of labor and material cost headwinds we have experienced for several quarters. Also, during the thirdsecond quarter of 2022, continued improvement in operating efficiencies which began in 2022, and which have remained a focus in 2023, and an increase in capacity for production of our own glass, which we maintainedcan produce at a high degreecost lower than procuring glass from a third-party. Additionally, gross profit in the second quarter of focus on our supply chain to minimize disruptions, which helped us maintain a high level2023 includes the impact of operational efficiency which lead to reduced delivery lead-times. We also 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.Martin acquisition.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses were $102.4$100.0 million in the thirdsecond quarter of 2022, an increase of $23.8 million, from $78.62023, compared to $109.5 million in the thirdsecond quarter of 2021.2022. SG&A in the thirdsecond quarter of 20222023 was 26.5%26.0% of net sales, compared to 26.2%26.9% of net sales in the thirdsecond quarter of 2021. The increase in2022. SG&A in the thirdsecond quarter of 2022,2023, decreased when compared to last year's thirdsecond quarter, as a result of several factors, including a decrease in expense for uncollectible accounts receivable, which decreased SG&A by $5.2 million, and a decrease in distribution costs from decreasing fuel costs and unit volume sales, which decreased SG&A by $2.6 million. The remaining decrease is primarily a result of a decrease in personnel costs. These decreases in SG&A were partially due tooffset by the inclusion of SG&A from our 2021 acquisition of Anlin,Martin in the fourth quarter of 2022, which added $8.5$2.9 million of SG&A in the 20222023 second quarter, and included $0.6including $1.4 million of non-cash amortization expense relating to its intangible assets. However, the year-over-year increase in SG&A was also driven by increasing distribution and variable overhead costs due to the increase in sales. Increasing fuel
Restructuring costs and charges
During the inflationary conditions we have experienced oversecond quarter of 2023, the last few quarters have also impacted SG&A year-over-year. SG&A expensesCompany’s management approved a plan to exit the North Carolina market relating to its NewSouth brand. As a result of this decision, the Company determined to close its NewSouth showrooms in Raleigh-Durham and Charlotte, North Carolina, which resulted in restructuring costs and charges totaling $2.5 million in the thirdsecond quarter of 2022 includes $0.72023. Of the $2.5 million in restructuring costs and charges, $2.0 million represents the total impairments of the right-of-use assets of the leases of the Raleigh-Durham and Charlotte, North Carolina showroom facilities, and $0.4 relates to write-offs of the related leasehold improvements. The remainder represents personnel-related costs, related to disruptions and recovery efforts causedwhich were paid by Hurricane Ian.the end of the 2023 second quarter.
- 3729 -
Income from operations
Income from operations was $47.4$51.4 million in the thirdsecond quarter of 2022, an increase2023, a decrease of $21.8$4.2 million, or 85.2%7.5%, from $25.6$55.6 million in the thirdsecond quarter of 2021.2022. Income from operations in the thirdsecond quarter of 20222023 includes $30.0nearly $40.0 million from our Southeast segment, before reduction for restructuring costs and $17.4charges of $2.5 million, which relates entirely to the Southeast segment, and $14.0 million from our Western segment, compared to $20.7$41.0 million and $4.9$14.6 million from our Southeast and Western segments, respectively, in the thirdsecond quarter of 2021,2022, all after allocation of corporate operating costs in both periods. Income from operations in the third quarter of 2022, was adversely impacted by $1.8 million due to disruptions and recovery costs caused by Hurricane Ian.
The increase in income from operations was related to the benefit from higher sales in the third quarter of 2022 compared to last year’s third quarter, as well as the benefits of the continued efficiency improvements at both our Southeast and Western segments, more than offsetting the rising costs for materials in aluminum and glass, including the increasing costs of distribution being passed onto us by our vendors, and the continuing costs of attracting, training and retaining an experienced labor force.
Interest expense, net
Interest expense was $6.9$8.2 million in the thirdsecond quarter of 2022, a decrease2023, an increase of $0.8nearly $1.1 million, or 10.4%14.8%, from $7.7$7.2 million in the thirdsecond quarter of 2021.2022. The redemption of the $425.0 million of higher rate 6.75% 2018 Senior Notes due 2026, with the $575.0 million of lower rate 4.375% 2021 Senior Notesincrease in 2021 primarily resulted in a lower level of interest expense in the thirdsecond quarter of 2023, compared to the second quarter of 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 second quarter of 2023, compared to the thirdterm loan borrowings under our then existing 2016 Credit Facility due 2024 during the second quarter of 2021.
Debt Extinguishment Costs
Debt extinguishment costs totaled $25.5 million in2022, as well as a higher interest rate under the three months ended October 2, 2021. On September 24, 2021, we completedrevolving facility during the issuancesecond quarter of $575.0 million aggregate principal amount of 4.375% 2021 Senior Notes due 2029, issued at 100% of their principal amount. Redemption in-full of the $575.0 million of 2018 Senior Notes due 2026, including accrued and unpaid interest through September 27, 2021, also included a pre-payment call premium of 105.063% of face value, which totaled $21.5 million and is classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the nine months ended October 2, 2021. The remainder of debt extinguishment costs of $4.0 million is composed of $9.4 million of unamortized third-party deferred costs and lender fees relating2023, compared to the 2021 Senior Notes due 2026, includingterm loan facility during the First and Second Add-On Notes, offset by $5.4 millionsecond quarter of unamortized premiums we received from the First and Second Add-On Notes.2022.
Income tax expense
We had income tax expense of $10.1$11.5 million for the three months ended OctoberJuly 1, 2022,2023, compared with income tax benefitexpense of $2.4$12.0 million for the three months ended OctoberJuly 2, 2021.2022. Our effective tax rate for the three months ended OctoberJuly 1, 2022,2023, was 24.9%26.5%, compared with 31.9%24.8% for the three months ended OctoberJuly 2, 2021.2022. Our income tax expense for the threetwo months ended October 1, 2022,May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, and income tax benefit for the three months ended OctoberJuly 2, 2021,2022, includes income tax expenses of $291$209 thousand and $449$237 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the three months ended OctoberJuly 1, 20222023 includes discrete items of income tax benefitexpense relating to excess tax benefitsexpense from the lapses of restrictions on stock awards, which totaled $60 thousand, and from research and development tax credits true-up adjustments, which totaled $472$24 thousand. The income tax benefitexpense in the three months ended OctoberJuly 2, 20212022 included discrete items of income tax benefitexpense relating to excess tax benefitsexpense from the lapses of restrictions on stock awards totaling $14$40 thousand. Income tax expense in the three months ended July 2, 2022 also includes a refund from the state of Florida, received by the Company in the second quarter of 2022, relating to excess taxes received by the state in 2021, which was $584 thousand, and other true-up adjustments totaling less than $0.1 million.benefiting tax expense by $462 thousand, net of its Federal tax effect. Excluding discrete items of income tax, the effective tax rates for the three months ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2022, would have been an income tax expense rate of 26.2%26.5% and an income tax benefit rate of 30.8%25.6%, respectively.
In September 2021, the state of Florida announced that the corporate 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 state rate of 25.7%, from our estimate in 2021 of 24.2%. During the third quarter of 2022, we made payments of estimated taxes totaling $12.1 million, which included $12.0 million in Federal estimated income taxes with the remainder to various states, primarily Florida. During the third quarter of 2021, we made payments of estimated taxes totaling $1.4 million, which included $0.7 million in Federal estimated income taxes with the remainder to various states, primarily Florida. As a result of Hurricane Ian, a large and destructive Category 4 Atlantic hurricane, which made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, the U.S. Internal Revenue Service and the state of Florida have both extended their deadlines for payment of the fourth quarter 2022 estimated tax payment, originally due December 15, 2022, to February 15, 2023.
- 38 -
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the threetwo months ended October 1, 2022,May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, was $0.4 million,$264 thousand, compared to $0.7 million$304 thousand for the three months ended OctoberJuly 2, 2022, and represents the share of the net income of Eco for the period, attributable to the 25% interest of Eco which was not acquiared 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 two months ended May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, was an increase of $0.5 million, compared to a decrease of $0.4 million in the three months ended July 2, 2022. See Note 16 in Part I, Item 1, for a further discussion of the change in the redemption value of the redeemable non-controlling interest.
- 30 -
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 1, 2023 AND JULY 2, 2022
Net sales
|
| Six Months Ended |
|
| ||||||||||
|
| July 1, 2023 |
| July 2, 2022 |
|
| ||||||||
|
| Net Sales |
|
| % of sales |
| Net Sales |
|
| % of sales |
| % change | ||
By segment: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Southeast segment |
| $ | 570.0 |
|
| 74.8% |
| $ | 579.3 |
|
| 75.7% |
| (1.6%) |
Western segment |
|
| 191.8 |
|
| 25.2% |
|
| 185.9 |
|
| 24.3% |
| 3.1% |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total net sales |
| $ | 761.8 |
|
| 100.0% |
| $ | 765.2 |
|
| 100.0% |
| (0.4%) |
Net sales for the first half of 2023 were $761.8 million, a $3.4 million, or 0.4%, decrease in sales, from $765.2 million in the first half of the prior year. Our Southeast segment's net sales were $570.0 million in the first half of 2023, compared to $579.3 million in the first half of 2022, a decrease of $9.3 million, or 1.6%. This decrease in sales at our Southeast segment was entirely organic, primarily due to softness in new construction, while the repair and remodel channel continues to be solid in the Southeast segment.
Our Western segment's net sales were $191.8 million in the first half of 2023, compared to $185.9 million in the first half of 2022, an increase of $5.9 million, or 3.1%. Sales for the first half of 2023 of our Western segment includes acquisition growth from Martin. Excluding Martin's first half 2023 sales, our existing business was negatively impacted by softness in the new construction channel in the first half of 2023, compared to the first half of 2022.
The softness in the new construction channel in both the Southeast and Western segments has resulted in a decrease in unit volume in both segments, which has been partially offset by last year's price increases.
Gross profit and gross margin
Gross profit was $303.2 million in the first half of 2023, an increase of $3.5 million, or 1.2%, from $299.7 million in the first half of 2022. Our gross margin was 39.8% in the first half of 2023, compared to 39.2% in the prior year first half, an increase of 0.6%. Gross profit and gross margin benefitted from several positive factors, including a reduction in the cost of aluminum and vinyl in the first half of 2023, compared to the first half of 2022, continued improvement in operating efficiencies which began in 2022, and which have remained a focus in 2023, and an increase in capacity for production of our own glass, which we can produce at a cost lower than procuring glass from a third-party. Additionally, gross profit in the first half of 2023 includes the impact of the Martin acquisition.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses were $195.9 million in the first half of 2023, compared to $205.4 million in the first half of 2022. SG&A in the first half of 2023 was 25.7% of net sales, compared to 26.8% of net sales in the first half of 2022. SG&A in the first half of 2023, decreased when compared to last year's first half, as a result of several factors, including a decrease in expense for uncollectible accounts receivable, which decreased SG&A by $4.8 million, a decrease in distribution costs from decreasing fuel costs and unit volume sales, which decreased SG&A by $4.2 million, and a gain from an insurance recovery relating to the wind-down of the commercial business of our NewSouth acquisition of $2.9 million. The remaining decrease is primarily a result of a decrease in personnel costs. SG&A in the first half of 2023 was impacted by the inclusion of SG&A from our fourth quarter 2022 acquisition of Martin, which added $6.2 million of SG&A in the 2023 first half, including $3.0 million of non-cash amortization expense relating to its intangible assets. SG&A in the first half of 2023 also includes $0.9 million of executive severance costs and $1.1 million of costs related to prior acquisitions, but which we did not incur until the first half of 2023.
Restructuring costs and charges
During the second quarter of 2023, the Company’s management approved a plan to exit the North Carolina market relating to its NewSouth brand. As a result of this decision, the Company determined to close its NewSouth showrooms in Raleigh-Durham and Charlotte, North Carolina, which resulted in restructuring costs and charges totaling $2.5 million in the second quarter of 2023. Of the $2.5 million in restructuring costs and charges, $2.0 million represents the total impairments of the right-of-use assets of the leases of the Raleigh-Durham and Charlotte, North Carolina showroom facilities, and $0.4 relates to write-offs of the related leasehold improvements. The remainder represents personnel-related costs, which were paid by the end of the 2023 second quarter.
- 31 -
Income from operations
Income from operations was $104.7 million in the first half of 2023, an increase of $10.4 million, or 11.0%, from $94.3 million in the first half of 2022. Income from operations in the first half of 2023 includes $80.5 million from our Southeast segment, before reduction for restructuring costs and charges of $2.5 million, which relates entirely to the Southeast segment, and $26.8 million from our Western segment, compared to $66.6 million and $27.7 million from our Southeast and Western segments, respectively, in the first half of 2022, all after allocation of corporate operating costs in both periods.
Interest expense, net
Interest expense was $15.9 million in the first half of 2023, an increase of $1.6 million, or 11.5%, from $14.2 million in the first half of 2022. The increase in interest expense in the first half of 2023, compared to the first half of 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 half of 2023, compared to the term loan borrowings under our then existing 2016 Credit Facility due 2024 during the first half of 2022, as well as a higher interest rate under the revolving facility during the first half of 2023, compared to the term loan facility during the first half of 2022.
Income tax expense
We had income tax expense of $22.7 million for the six months ended July 1, 2023, compared with income tax expense of $19.8 million for the six months ended July 2, 2022. Our effective tax rate for the six months ended July 1, 2023, was 25.5%, compared with 24.7% for the six months ended July 2, 2022. Our income tax expense for the five months ended May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, and the six months ended July 2, 2022, includes income tax expenses of $0.9 million and $0.7 million, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the six months ended July 2, 2022 includes discrete items of income tax benefits relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $96 thousand. Income tax expense in the six months ended July 2, 2022 also includes a refund from the state of Florida, received by the Company in the second quarter of 2022, relating to excess taxes received by the state in 2021, which was $584 thousand, benefiting tax expense by $462 thousand, net of its Federal tax effect. Excluding discrete items of income tax, the effective tax rates for the six months ended July 1, 2023 and July 2, 2022, would have been an income tax expense rate of 26.0% and 25.4%, respectively.
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the five months ended May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, was $1.1 million, compared to $1.0 million for the six months ended July 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 periodfive months ended October 1, 2022,May 26, 2023, the date we acquired the 25% share of Eco we previously did not own, was a decreasean increase of $0.3$1.6 million, compared to an increase of $1.0$1.8 million in the threesix months ended OctoberJuly 2, 2021.2022. See Note 17 in Part I, Item 1, for a further discussion of the change in the redemption value of the redeemable non-controlling interest.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 1, 2022 AND OCTOBER 2, 2021
The nine-month periods ended October 1, 2022 and October 2, 2021 are each composed of 39 weeks.
Net sales
|
| Nine Months Ended |
|
| ||||||||||
|
| October 1, 2022 |
| October 2, 2021 |
|
| ||||||||
|
| Net Sales |
|
| % of sales |
| Net Sales |
|
| % of sales |
| % change | ||
By segment: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Southeast segment |
| $ | 867.5 |
|
| 75.4% |
| $ | 731.2 |
|
| 85.3% |
| 18.6% |
Western segment |
|
| 283.5 |
|
| 24.6% |
|
| 125.8 |
|
| 14.7% |
| 125.4% |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total net sales |
| $ | 1,151.0 |
|
| 100.0% |
| $ | 857.0 |
|
| 100.0% |
| 34.3% |
Net sales for the first nine months of 2022 were $1,151.0 million, a $294.0 million, or 34.3%, increase in sales, including 20.4% of organic growth, from $857.0 million in the first nine months of the prior year.
During the first nine months of 2022, we experienced strong growth at both our Southeast and Western segments, as the momentum of growth we experienced over last year continued in 2022. Additionally, we continue to make strategic marketing investments which are paying dividends through customer awareness during the repair and remodeling season. Of our total net sales for the first nine months of 2022 of $1,151.0 million, which increased 34.3% compared to $857.0 million in the first nine months of 2021, growth was both organic and from acquisitions. Our Southeast segment's net sales were $867.5 million in the first nine months of 2022, compared to $731.2 million in the first nine months of 2021, an increase of $136.3 million, or 18.6%. This growth included 17.8% of organic growth, but we believe was adversely impacted by Hurricane Ian in late-September 2022. As previously discussed, Hurricane Ian was a large and destructive Category 4 Atlantic hurricane, that made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, disrupting our ability to manufacture and distribute our products. We estimate that Hurricane Ian-related disruptions caused approximately $12.0 million of third-quarter 2022 sales to be deferred.
Our Western segment's net sales were $283.5 million in the first nine months of 2022, compared to $125.8 million in the first nine months of 2021, an increase of $157.7 million, or 125.4%. While sales for the first nine months of 2022 of our Western segment includes acquisition growth from Anlin and CRi, our existing business grew organically by 38.4% compared to the first nine months of last year. We believe the strength in our Western segment is due to our production builder business as this sector has performed well for several quarters, as we believe that demand for conversion to indoor/outdoor living continues to be strong. We believe we are also benefitting from our capacity expansion in the Phoenix, Arizona area and our new San Diego showroom in Southern California.
Gross profit and gross margin
Gross profit was $449.5 million in the first nine months of 2022, an increase of $154.3 million, or 52.3%, from $295.2 million in the first nine months of 2021. Our gross margin was 39.1% in the first nine months of 2022, compared to 34.4% in the first nine months of last year, an increase of 4.7%. Adjusting for costs relating to Hurricane Ian that impacted our gross profit totaling $1.1 million, our gross margin in the first nine months of 2022 was 39.2%, compared to 34.4% in the prior year third quarter, and increase of 4.8%. The increases in gross profit and gross margin include the effects of price increase actions we took to offset the impacts of labor and material cost headwinds we have experienced for several quarters. Also, during the first nine months of 2022, we maintained a high degree of focus on our supply chain to minimize disruptions, which helped us maintain a high level of operational efficiency which lead to reduced delivery lead-times. We also 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.
- 39 -
Selling, general and administrative expenses
SG&A expenses were $307.8 million in the first nine months of 2022, an increase of $83.7 million, from $224.1 million in the first nine months of 2021. SG&A in the first nine months of 2022 was 26.7% of net sales, compared to 26.1% of net sales in the first nine months of 2021. The increase in SG&A in the first nine months of 2022, compared to the first nine months of last year is partially due to the inclusion of SG&A from our 2021 acquisition of Anlin, which added $25.9 million of SG&A in the 2022 first nine months, and included $4.1 million of non-cash amortization expense relating to its intangible assets. However, the year-over-year increase in SG&A was also driven by increasing distribution and variable overhead costs due to the increase in sales. Increasing fuel costs and the inflationary conditions we have experienced over the last few quarters have also impacted SG&A year-over-year. SG&A expenses in the first nine months of 2022 includes $0.7 million of costs related to disruptions and recovery efforts caused by Hurricane Ian.
Income from operations
Income from operations was $141.7 million in the first nine months of 2022, an increase of $70.6 million, or 99.4%, from $71.1 million in the first nine months of 2021. Income from operations in the first nine months of 2022 includes $96.6 million from our Southeast segment and $45.1 million from our Western segment, compared to $55.0 million and $16.1 million from our Southeast and Western segments, respectively, in the first nine months of 2021, all after allocation of corporate operating costs in both periods. Income from operations in the first nine months of 2022, was adversely impacted by $1.8 million due to disruptions and recovery costs caused by Hurricane Ian.
The increase in income from operations was related to the benefit from higher sales in the first nine months of 2022 compared to the first nine months of last year, as well as the benefits of the continued efficiency improvements at both our Southeast and Western segments, more than offsetting the rising costs for materials in aluminum and glass, including the increasing costs of distribution being passed onto us by our vendors, and the continuing costs of attracting, training and retaining an experienced labor force.
Interest expense, net
Interest expense was $21.1 million in the first nine months of 2022, a decrease of $1.8 million, or 8.0%, from $23.0 million in the first nine months of 2021. The redemption of the $425.0 million of higher rate 6.75% 2018 Senior Notes due 2026, with the $575.0 million of lower rate 4.375% 2021 Senior Notes due 2029 in 2021 primarily resulted in a lower level of interest expense in the first nine months of 2022 compared to the first nine months of 2021.
Debt Extinguishment Costs
Debt extinguishment costs totaled $25.5 million in the nine months ended October 2, 2021. On September 24, 2021, we completed the issuance of $575.0 million aggregate principal amount of 4.375% 2021 Senior Notes due 2029, issued at 100% of their principal amount. Redemption in-full of the $575.0 million of 2018 Senior Notes due 2026, including accrued and unpaid interest through September 27, 2021, also included a pre-payment call premium of 105.063% of face value, which totaled $21.5 million and is classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the nine months ended October 2, 2021. The remainder of debt extinguishment costs of $4.0 million is composed of $9.4 million of unamortized third-party deferred costs and lender fees relating to the 2021 Senior Notes due 2026, including the First and Second Add-On Notes, offset by $5.4 million of unamortized premiums we received from the First and Second Add-On Notes.
Income tax expense
We had an income tax expense of $29.9 million for the nine months ended October 1, 2022, compared with income tax expense of $4.3 million for the nine months ended October 2, 2021. Our effective tax rate for the nine months ended October 1, 2022, was 24.8%, compared with 18.8% for the nine months ended October 2, 2021. Our income tax expense for the nine months ended October 1, 2022, and October 2, 2021, includes $1.0 thousand and $1.2 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the nine months ended October 1, 2022 includes discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $156 thousand, from research and development tax credits true-up adjustments, which totaled $472 thousand, and a refund from the state of Florida, received by the Company in the second quarter of 2022, relating to excess taxes received by the state in 2021, which was $584 thousand, benefiting tax expense by $462 thousand, net of its Federal tax effect. Income tax expense in the nine months ended October 2, 2021 include discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $714 thousand. Excluding discrete items of income tax, the effective tax rates for the nine months ended October 1, 2022 and October 2, 2021, would have been income tax expense rates of 25.7% and 21.9%, respectively.
- 40 -
In September 2021, the state of Florida announced that the corporate 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 state rate of 25.7%, from our estimate in 2021 of 24.2%. During the first nine months of 2022, we made payments of estimated taxes totaling $21.7 million, which included $20.8 million in Federal estimated income taxes with the remainder to various states, primarily Florida. During the first nine months of 2021, we made payments of estimated taxes totaling $12.4 million, which included $8.3 million in Federal estimated income taxes with the remainder to various states, primarily Florida. As a result of Hurricane Ian, a large and destructive Category 4 Atlantic hurricane, which made landfall on the southwest Florida coastline at Cayo Costa on September 28, 2022, the U.S. Internal Revenue Service and the state of Florida have both extended their deadlines for payment of the fourth quarter 2022 estimated tax payment, originally due December 15, 2022, to February 15, 2023.
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the nine months ended October 1, 2022, was $1.3 million, compared to $1.7 million for the nine months ended October 2, 2021, 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 nine-month period ended October 1, 2022, was an increase of $1.5 million, compared to an increase of $4.5 million in the nine months ended October 2, 2021. 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.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Our principal source of liquidity is cash flow generated by operations, 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 nine monthshalf of 20222023 and 2021:2022:
|
| Components of Cash Flows |
|
| Components of Cash Flows |
| ||||||||||
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| October 1, |
| October 2, |
|
| July 1, |
| July 2, |
| ||||||
(in millions) |
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
Cash provided by operating activities |
| $ | 152.1 |
|
| $ | 19.8 |
|
| $ | 60.3 |
|
| $ | 84.9 |
|
Cash used in investing activities |
|
| (25.5 | ) |
|
| (132.0 | ) |
|
| (24.9 | ) |
|
| (18.1 | ) |
Cash (used in) provided by financing activities |
|
| (4.0 | ) |
|
| 126.6 |
| ||||||||
Cash used in financing activities |
|
| (62.5 | ) |
|
| (3.7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Increase in cash and cash equivalents |
| $ | 122.6 |
|
| $ | 14.4 |
| ||||||||
(Decrease) increase in cash and cash equivalents |
| $ | (27.1 | ) |
| $ | 63.1 |
|
- 4132 -
Operating activities. Cash provided by operating activities during the first nine monthshalf of 20222023 was $152.1$60.3 million, compared to cash provided inby operating activities of $19.8$84.9 million in the first nine monthshalf of 2021. The increase2022, a decrease in cash provided by operating activities for the first nine months of 2022, as compared to the first nine months of 2021, was $132.3$24.6 million, and was due to the factors set forth in the table below.
Direct cash flows from operations for the first nine monthshalf of 20222023 and 20212022 are as follows:
|
| Direct Operating |
| |||||
|
| Nine Months Ended |
| |||||
|
| October 1, |
|
| October 2, |
| ||
(in millions) |
| 2022 |
|
| 2021 |
| ||
Collections from customers |
| $ | 1,145.8 |
|
| $ | 806.8 |
|
Other collections of cash |
|
| 12.2 |
|
|
| 9.5 |
|
Disbursements to vendors |
|
| (681.1 | ) |
|
| (537.9 | ) |
Personnel related disbursements |
|
| (289.1 | ) |
|
| (213.9 | ) |
Income taxes paid, net of refunds |
|
| (20.9 | ) |
|
| (12.2 | ) |
Debt service payments |
|
| (14.7 | ) |
|
| (32.4 | ) |
Other cash activity, net |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
|
|
|
|
|
| ||
Cash provided by operations |
| $ | 152.1 |
|
| $ | 19.8 |
|
During the second quarter of 2022, a customer with whom we have had a long-term relationship experienced financial difficulties. As such, we determined to cease taking orders and provide additional reserves of approximately $3.0 million against our existing exposure to this customer. During the nine-months ended October 1, 2022, we recorded provisions for credit losses totaling $7.4 million, including the provision relating to this customer.
|
| Direct Operating |
| |||||
|
| Six Months Ended |
| |||||
|
| July 1, |
|
| July 2, |
| ||
(in millions) |
| 2023 |
|
| 2022 |
| ||
Collections from customers |
| $ | 776.4 |
|
| $ | 740.0 |
|
Other collections of cash |
|
| 11.2 |
|
|
| 9.1 |
|
Disbursements to vendors |
|
| (474.1 | ) |
|
| (456.0 | ) |
Personnel related disbursements |
|
| (198.7 | ) |
|
| (185.5 | ) |
Income taxes paid, net of refunds |
|
| (39.5 | ) |
|
| (8.8 | ) |
Debt service payments |
|
| (15.1 | ) |
|
| (14.0 | ) |
Other cash activity, net |
|
| 0.1 |
|
|
| 0.1 |
|
|
|
|
|
|
|
| ||
Cash provided by operations |
| $ | 60.3 |
|
| $ | 84.9 |
|
Inventory as of OctoberJuly 1, 2022,2023, was $112.3$117.2 million, compared to $91.4$112.7 million at January 1,December 31, 2022, an increase of $20.9$4.5 million. 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 and finished goods inventories. As such, we believe the value of our inventories will be realized through sales.
Investing activities. Cash used in investing activities was $25.5$24.9 million for the first nine monthshalf of 2022,2023, compared to cash used in investing activities of over $132.0$18.1 million for the first nine monthshalf of 2021, a decrease2022, an increase in cash used in investing activities of $106.5$6.8 million. There was cash used relating to acquire businessesbusiness combinations in the first nine monthshalf of 20222023 relating to the finalization of the Anlin acquisitionMartin Acquisition working capital adjustment, resulting in a final payment to sellers of $0.7 million, compared to $0.8 million. Cash used to acquire businessesmillion in the first nine monthshalf of 2021 totaled $106.5 million, which included $94.4 million related to our acquisition of Eco, and $12.1 million2022 relating to our acquisitionthe finalization of CRi.the Anlin Acquisition working capital adjustment. There was an decreaseincrease in cash used in capital expenditures of $1.0$7.6 million which went from $25.7$17.3 million in the first nine monthshalf of 2021,2022, to $24.7$24.9 million in the first nine monthshalf of 2022.2023. Proceeds from the sales of assets was $0.7 million in the first half of 2023, compared with less than $0.1 million in the first nine monthshalf of 2022, compared with $0.2 million in the first nine months of 2021.2022.
Financing activities. Cash used in financing activities was $4.0$62.5 million in the first nine monthshalf of 2022,2023, compared to cash providedused in financing activities of $126.6$3.7 million in the first nine monthshalf of 2021, a decrease2022, an increase in cash providedused in financing activities of $130.6$58.8 million.
In the first nine monthshalf of 2023, we made payments of contingent consideration relating to our acquisition of 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. In the first half of 2022, we made payments of contingent consideration relating to our acquisition of Anlin totaling $2.7 million, representing the first payment we were required to make under the Anlin purchase agreement based on their 2021 EBITDA, as defined in the agreement. Because these 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 first payment, which was $2.4 million, as a financing activity, with the difference classified within operating activities.
Effective on May 26, 2023, the Company exercised its call-right to purchase the remaining 25% ownership stake in Eco it previously did not own. The redemption price of the remaining 25% was calculated by the Company pursuant to the operating agreement based on the performance metric included therein, and was determined to be $37.5 million, which was agreed with by the seller. Subsequent to this redemption, the Company's ownership of Eco Enterprises is now 100%.
During the first half of 2023, we had net borrowings under the New Revolving Credit Facility of $27.6 million, which included gross borrowings of $50.0 million, partially offset by gross repayments totaling $22.4 million.
As further discussed below under Share Repurchase Program, during the first half of 2023, we made repurchases of 1,950,161 shares of our common stock at a total cash used of $45.4 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 $1.9$3.4 million in the first nine monthshalf of 2022,2023, versus $1.2$1.7 million in the first nine monthshalf of 2021,2022, an increase in cash used of $0.7$1.7 million.
- 33 -
There were proceeds from stock issued under our 2019 Employee Stock Purchase Plan of $0.4 million during the first half of 2023, compared to $0.3 million during the first nine monthshalf of 2022, compared to $0.2 million during the first nine monthsan increase in cash used of 2021. Proceeds from the exercises of stock options for the first nine months of 2021 was $0.1 million,million.
- 42 -
In the first nine months of 2021, we issued $575.0 million in 4.375% 2021 Senior Notes due 2029, as well as the $60.0 million of Second Additional Senior Notes, including a premium of $3.3 million with the Second Additional Notes, which provided proceeds from issuances of senior notes in the nine months ended October 2, 2021 totaling $638.3 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, plus a pre-payment call premium of 105.063% of face value, which totaled $21.5 million, classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the three and nine months ended October 2, 2021. We also prepaid the outstanding term loan borrowings under the 2016 Credit Agreement of $54.0 million. We paid financing costs totaling $10.4 million in the first nine months of 2021, including financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes due 2026.
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”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, beginningwhich began 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 OctoberJuly 1, 2022,2023, the face value of debt outstanding under the 2021 Senior Notes due 2029 was $575.0 million, and accrued interest was $12.6$6.4 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.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.
2016 Credit Agreement due 20242027
On February 16, 2016, we entered into the 2016 Credit Agreement due 2024, among us, the lending institutions identified inAgreement. From 2016 to 2022, we entered into various amendments to the 2016 Credit Agreement, due 2024, and Truist Financial Corporation (formerly knownincluding the amendment in October 2022, as SunTrust Bank), as Administrative Agent and Collateral Agent. 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.
- 43 -
On March 16, 2018, we entered into an amendment of our 2016 Credit Agreement due 2024 (the “Second Amendment”). The Second 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.described below.
On October 31, 2019, we13, 2022, the Company entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Thirdthe Fifth 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) a new five-year revolving credit facility in an aggregate principal amount of up to $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. Our obligations under the 2016 Credit Agreement continue to be secured by substantially all of our assets, as well as our direct and indirect subsidiaries’ assets, and is senior in position to the 2021 Senior Notes.
On October 25, 2021, we entered into an amendment of our 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 of $60.0 million (the "Incremental Term A Loan"), proceeds from which were used to fund the Anlin Acquisition. The Fourth Amendment did not change any terms relating to the Revolving Facility, under which we paid quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. As of October 1, 2022, there were $5.7 million in letters of credit outstanding and $74.3 million available under the Revolving Facility.
The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2024 was 5.12% as of October 1, 2022, and was 2.10% at January 1, 2022.
On October 14, 2022, the Company entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement (the “Credit Agreement”) dated as of February 16, 2016, by and among the Company, the other credit parties party thereto, the lending institutions party thereto and Truist Bank, as Administrative Agent, Collateral Agent, an LC Issuer and Swing Line Lender.2027. The Fifth Amendment provides for among other things,the New Revolving Credit Facility, a new five-year revolving credit facility in an aggregate principal amount of $250.0 million (the “New Revolving Credit Facility”).million. The New Revolving Credit Facility refinances and replaces the previously existing $80.0 million revolving credit facility under the 2016 Credit Agreement.Agreement due 2027. The Company’s obligations under the 2016 Credit Agreement due 2027 continue to be secured by substantially all of its and its direct and indirect subsidiaries’ assets.assets, and is senior in position to the 2021 Senior Notes due 2029.
Contemporaneously with the Fifth Amendment, the Company drew down $160.0 million of funds 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 totaling $60.0 million, plus accrued interest and fees totaling $1.6 million. As discussed below, the remaining $98.4 million of proceeds were used to fund the cash portion of the Martin Acquisition. The Company has made net repayments of the $160.0 million of initial borrowings under the New Revolving Credit Facility totaling $56.0 million through July 1, 2023.
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Interest on borrowings under the New Revolving Credit Facility is payable either quarterly or at the expiration of any Secured 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 Fifth Amendment, we will pay a quarterly feescommitment fee on the unused portion of the New 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 ittesting will be testedoccur on a quarterly basis, commencingand 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 July 1, 2023.
The 2016 Credit Agreement due 2027 includes certain covenants limiting the fiscal quarter endingability 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 July 1, 2023, borrowings outstanding under the $250.0 million New Revolving Credit Facility totaled $104.0 million, and accrued interest was $385 thousand. There were $8.5 million in letters of credit outstanding. Availability under the New Revolving Credit Facility at July 1, 2023 totaled $137.5 million. The weighted average all-in interest rate for borrowings under the existing revolving credit facility of the 2016 Credit Agreement due 2027 was 6.90% at July 1, 2023, and 6.07% at December 31, 2022. We made repayments of borrowings under the New Revolving Credit Facility totaling $15.0 million subsequent to July 1, 2023, resulting in borrowings outstanding under the New Revolving Credit Facility of $89.0 million as of the date of this report.
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 to pay $61.6 million to prepay our $60.0 million Term A Loanexisting 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 and cash equivalents on hand previously generated through operations. We also paid buyer fees and costs relating to the Martin Acquisition which we are analyzing for proper accounting treatment. We accrued an estimated $1.25totaling $4.8 million of acquisition-related expenses in the three monthsyear ended October 1,December 31, 2022, for services received prior to the closing of the Martin Acquisition, classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine monthsyear ended October 1,December 31, 2022. Since the end of the third quarter of 2022, we have made payments of borrowings under the New Revolving Credit Facility totaling $61.6 million, resulting in borrowings outstanding under the New Revolving Credit Facility as of the date of the filing of this Current Report on Form 10-Q of $98.4 million. Since the end of the third quarter of 2022, we have made payments of borrowings under the New Revolving Credit Facility totaling $61.6 million, resulting in borrowings outstanding under the New Revolving Credit Facility as of the date of the filing of this Current Report on Form 10-Q of $98.4 million.
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Deferred Financing Costs
The activityActivity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, for the nine months ended October 1, 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 six months ended July 1, 2023, is as follows:
(in thousands) |
| Total |
|
| Total |
| ||
At beginning of year |
| $ | 9,345 |
|
| $ | 9,218 |
|
Less: Amortization expense |
|
| (921 | ) |
|
| (654 | ) |
At end of period |
| $ | 8,424 |
|
| $ | 8,564 |
|
Estimated amortization expense relating to deferred financing costs for the years indicated as of OctoberJuly 1, 2022,2023, is as follows:
(in thousands) |
| Total |
|
| Total |
| ||
Remainder of 2022 |
| $ | 312 |
| ||||
2023 |
|
| 1,282 |
| ||||
Remainder of 2023 |
| $ | 666 |
| ||||
2024 |
|
| 1,282 |
|
|
| 1,366 |
|
2025 |
|
| 1,083 |
|
|
| 1,442 |
|
2026 |
|
| 1,114 |
|
|
| 1,466 |
|
2027 |
|
| 1,440 |
| ||||
Thereafter |
|
| 3,351 |
|
|
| 2,184 |
|
|
|
|
|
|
|
| ||
Total |
| $ | 8,424 |
|
| $ | 8,564 |
|
We have no scheduled 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 July 1, 2023, are as follows (at face value):
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(in thousands) |
|
|
| |
Remainder of 2022 |
| $ | — |
|
2023 |
|
| — |
|
2024 |
|
| 60,000 |
|
2025 |
|
| — |
|
2026 |
|
| — |
|
Thereafter |
|
| 575,000 |
|
|
|
|
| |
Total |
| $ | 635,000 |
|
(in thousands) |
|
|
| |
Remainder of 2023 |
| $ | — |
|
2024 |
|
| — |
|
2025 |
|
| — |
|
2026 |
|
| — |
|
2027 |
|
| 104,000 |
|
Thereafter |
|
| 575,000 |
|
|
|
|
| |
Total |
| $ | 679,000 |
|
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 six months ended July 1, 2023, we repurchased a total of 1,950,161 shares under this program at a total cost of $45.4 million, which excludes the 1% excise tax imposed on corporate stock buy-backs by the Inflation Reduction Act of 2022. Subsequent to July 1, 2023, we have not purchased any additional shares under this program. 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.
Eco Redemption. Effective on May 26, 2023, the Company exercised its call-right to purchase the remaining 25% ownership stake in Eco it previously did not own. The redemption price of the remaining 25% was calculated by the Company pursuant to the operating agreement based on the performance metric included therein, and was determined to be $37.5 million, which was agreed with by the seller. Subsequent to this redemption, the Company's ownership of Eco Enterprises is now 100%.
Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first ninehalf months of 2022,2023, capital expenditures were $24.7$24.9 million, compared to $25.7$17.3 million for the first nine monthshalf 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.
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. We 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 OctoberJuly 1, 2022,2023, the fair value of our aluminum forward contracts was in a liability position of $4.0$0.9 million. We had 826 outstanding forward contracts for the purchase of 11.517.4 million pounds of aluminum through December 2022,June 2024, at an average price of $1.33$1.04 per pound, which excludes the Midwest premium, with maturity dates of between one and threetwelve months.
At OctoberJuly 1, 2022,2023, the fair value of our
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MTP contracts was in an assetposition of $0.6$0.1 million. We had 21 outstanding MTP contractscontract to hedge the Platt US MW Transaction price per pound for the delivery of 5.34.4 million pounds of aluminum through December 2022,2023, at an average price of $0.11$0.21 per pound, with a maturity datesdate of between onesix months.We assessed the risk of non-performance of the Company and three months.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 July 1, 2023.
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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. 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 October 1, 2022. We expect the amount of accumulated other comprehensive loss of approximately $3.4$0.8 million in the accompanying condensed consolidated balance sheet as of OctoberJuly 1, 2022,2023, to be reclassified to earnings within the next twelve 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/A10-K for the year ended January 1,December 31, 2022. There have been no changes to our critical accounting policies during the first nine monthshalf of 2022.2023.
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. 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.
Subsequent Events - Acquisition and Refinancing. On October 14, 2022, pursuant to a Share Purchase Agreement ("SPA"), WWS Acquisition LLC (“Buyer”), a Missouri limited liability company and indirect wholly owned subsidiary of the Company, completed the acquisition ("Martin Acquisition") of all of the issued and outstanding shares of capital of Martin Door Holdings Inc., a Utah corporation (“Seller” or "Martin") headquartered in Salt Lake City, and manufacturer of premium overhead garage doors and hardware serving the Western U.S. residential and commercial markets.
The total fair value of consideration transferred at closing for the Martin Acquisition, was approximately $187.8 million, subject to certain adjustments as set forth in the SPA, which included an enterprise value of $185.0 million, and a payment of approximately $2.8 million for estimated net working capital in excess of target net working capital. The purchase price is subject to a post-closing true-up mechanism as set forth in the SPA, which is expected to be determined within ninety days from the date of the closing of the Martin Acquisition. Martin's assets include those typical to the operation of the business including accounts receivable, inventories, property and equipment, as well as intangibles assets which we expect will include one or more Martin trade names, customer relationships, developed technology, and possibly other yet to be identified intangible assets, and which we expect to engage a third-party valuation firm to assist with the valuation of such assets.
On October 13, 2022, the Company entered into the Fifth Amendment of the 2016 Credit Agreement. The Fifth Amendment provides for, among other things, the New Revolving Credit Facility, which is a new five-year revolving credit facility in an aggregate principal amount of $250.0 million. The New Revolving Credit Facility refinances and replaces the previously existing $80.0 million revolving credit facility under the 2016 Credit Agreement. The Company’s obligations under the 2016 Credit Agreement continue to be secured by substantially all of its and its direct and indirect subsidiaries’ assets.
Interest on borrowings under the New Revolving Credit Facility is payable either quarterly or at the expiration of any 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 Fifth Amendment, we will pay quarterly fees on the unused portion of the New 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 financial covenant under the 2016 Credit Agreement such that it will be tested on a quarterly basis, commencing with the fiscal quarter ending December 31, 2022.
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The Martin Acquisition was financed with the $250.0 million available under the New Revolving Credit Facility provided by the Fifth Amendment of our 2016 Credit Agreement, 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, and to pay $61.6 million to prepay our $60.0 million Term A Loan under the Fourth Amendment of our 2016 Credit Agreement, plus $1.6 million in fees, costs and accrued interest. The remainder of the total fair value of consideration transferred totaling $89.4 million was funded with cash and cash equivalents on hand previously generated through operations. We also paid buyer fees and costs relating to the Martin Acquisition, which we are analyzing for proper accounting treatment. We accrued an estimated $1.25 million of acquisition-related expenses in the three months ended October 1, 2022 for services received prior to the closing of the Martin Acquisition, classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended October 1, 2022. Since the end of the third quarter of 2022, we have made payments of borrowings under the New Revolving Credit Facility totaling $61.6 million, resulting in borrowings outstanding under the New Revolving Credit Facility as of the date of the filing of this Current Report on Form 10-Q of $98.4 million.
Subsequent Events - Cyberattack. On November 5, 2022, the Company detected a ransomware infection that impacted portions of its network and caused disruption to daily business operations. Immediately, upon discovery, the Company engaged outside cybersecurity experts familiar with these types of incidents to conduct a forensic investigation and assess the extent and scope of the incident. As of the date of the filing of this Quarterly Report on Form 10-Q, the investigation is in its early stages and ongoing. To date, there is no evidence of personal information being accessed or acquired.
Security is a top priority for the Company, and the Company continues to work to take a series of measures to safeguard the integrity of its information technology systems. Upon detecting the security event, the Company took immediate steps designed to contain the incident and implement its business continuity plans to restore and support continued operations. The Company has notified appropriate law enforcement authorities.
The Company is also working closely with cybersecurity experts and legal counsel. The Company is in the early stages of its investigation and assessment of the security event and cannot determine, at this time, the extent of the impact from such event on its business, results of operations or financial condition or whether such impact will have a material adverse effect. The Company carries insurance, including cyber insurance, commensurate with the size and the nature of its operations. Further, while the Company is communicating with its customers regarding this disruption, it cannot guarantee that its customer relationships will not be harmed as a result of this event. In addition to these risks and other information set forth in this report, one should carefully consider the discussion on the other risks and uncertainties that cybersecurity incidents may have on us, contained in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K/A for the year ended January 1, 2022.
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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”). As of OctoberJuly 1, 2022,2023, we are covered for approximately 80%27% of our anticipated aluminum needs for the remaindersecond half of 20222023 and first half of 2024 at an average price of $1.33$1.04 per pound. We are not hedged beyond the first half of 2024 as of the date of this report. These calculations are based only on the LME price of aluminum and excludes an estimate for the MTP, which we hedge separately. As of OctoberJuly 1, 2022,2023, we are covered for approximately 37%12% of our anticipated MTP delivery costs for the remainder of 20222023 at an average price of $0.11$0.21 per pound. AsWe have no coverage of our MTP delivery costs beyond the end of 2023 as of the date of this report, we had not added any further coverage since October 1, 2022. However, we may add more coverage for our anticipated aluminum needs during the rest of 2022 and/or 2023, as we deem necessary.report.
Regarding our aluminum hedging instruments for the purchase of aluminum, as of OctoberJuly 1, 2022,2023, a 10% decrease in the price of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $1.1$1.7 million. This calculation utilizes our actual commitment of 11.517.4 million pounds under contract (to be settled through December 2022)June 2024) and the market price of aluminum as of OctoberJuly 1, 2022.2023. 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 OctoberJuly 1, 2022,2023, a 10% decrease in the Platts MW US Transaction price per pound would decrease the fair value of our MTP contracts an estimated $0.1 million. This calculation utilizes our actual commitment of 5.34.4 million pounds under contract (to be settled through December 2022)2023) and the then current Platts MW US Transaction price per pound as of OctoberJuly 1, 2022.2023.
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 $98.4$89.0 million, a 100 basis-point increase in interest rate would result in approximately $1.0$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
- 37 -
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 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.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGSPROCEEDINGS.
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/A10-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.
We may not realize the anticipated benefits from the Martin Acquisition, and the Martin Acquisition could adversely impact our
business and our operating results.
We may not be able to achieve the full potential strategic and financial benefits that we expect to achieve from the Martin Acquisition. We may not achieve the anticipated benefits from the Martin Acquisition for a variety of reasons, including, among others, unanticipated costs, charges and expenses. In addition, we may not achieve the anticipated unrealized benefits of operational initiatives. If we fail to achieve some or all of the benefits expected to result from the Martin Acquisition, or if such benefits are delayed, our business could be harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSPROCEEDS.
Recent sales of unregistered securities; use of proceeds from registered securities. None during the quarter cover by this report.
Purchases of equity securities by the issuer 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 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. We began repurchasing shares under this program beginning on February 27, 2023. 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.
The following table represents information relating to share repurchases under this program during our second fiscal quarter ended July 1, 2023:
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|
|
|
| Purchases of Equity Securities | ||||||
Period |
| Beginning and |
| (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 |
Beginning balance |
| April 2 |
|
|
|
|
|
|
| $224.36 |
April 2023 |
| April 2 to April 29 |
| 308,522 |
| $25.2887 |
| 308,522 |
| $216.56 |
May 2023 |
| April 30 to May 27 |
| 382,104 |
| $25.6170 |
| 382,104 |
| $206.77 |
June 2023 |
| May 28 to July 1 |
| 86,015 |
| $25.6088 |
| 86,015 |
| $204.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 776,641 |
| $25.4857 |
| 776,641 |
|
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
Insider Adoption or Termination of Trading Arrangements.
During the fiscal quarter ended July 1, 2023, one of our officers terminated a “Rule 10b5-1 trading arrangement” as that terms is defined in Item 408 of Regulation S-K. The following represents the required information as regards the terminated trading arrangement:
Deborah L. LaPinska | Senior Vice President – Chief Customer Officer | |
Plan adopted | November 15, 2022 | |
Plan terminated | June 1, 2023 | |
Initial duration | Plan is terminated. Plan was adopted November 15, 2022, with initial trading no sooner than December 15, 2022, and was scheduled to expire on earlier of date when all shares under the plan are sold and December 15, 2023. | |
Aggregate shares | Sales of no more than 10,000 per month, for total of 120,000 shares. 50,000 shares were sold under the plan. |
Other than the officer described above, during the fiscal quarter ended July 1, 2023, none of our directors or other officers adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K.
ITEM 6. EXHIBITSEXHIBITS.
| |
| |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | |
32.1** | |
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32.2** | |
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*Filed herewith.
**Furnished herewith.
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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: | By: /s/ |
Name: | |
Title: |
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