UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017 October 1, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period fromto
Commission file number001-37971
PGT Innovations, Inc.
1070 Technology Drive
North Venice, FL34275
Registrant’s telephone number:941-480-1600941-480-1600
State of Incorporation | IRS Employer Identification No. | |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ ☑No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ ☑No ☐*☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Section13(a)Section 13(a) of the Exchange Act.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes ☐ No ☒☑
Common Stock, $0.01 par value, outstanding was 49,660,69959,997,679 shares, as of November 2, 2017.October 31, 2022.
PGT INNOVATIONS, INC.
Form10-Q forSecurities registered pursuant to Section 12(b) of the Three and Nine Months Ended September 30, 2017
Act:
Title of each class | Trading Symbol(s) | |||
Name of each exchange on which registered | ||||
| PGTI | New York Stock Exchange, Inc. |
PGT INNOVATIONS, INC.
TABLE OF CONTENTS
Form 10-Q for the Three and Nine Months Ended October 1, 2022
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 | 33 | ||||||
Item 3. | 48 | |||||||
Item 4. | 48 | |||||||
Part II. | 49 | |||||||
Item | 49 | |||||||
Item 1A. | 49 | |||||||
Item 2. | 49 | |||||||
Item | 50 | |||||||
51 | ||||||||
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PGT INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | Three Months Ended |
|
| Nine Months Ended |
| |||||||||||||||||||||||||
September 30, | October 1, | September 30, | October 1, | October 1, |
| October 2, |
| October 1, |
| October 2, |
| ||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
(unaudited) | (unaudited) | (unaudited) |
|
| (unaudited) |
| |||||||||||||||||||||||||
Net sales | $ | 126,876 | $ | 129,807 | $ | 376,981 | $ | 349,046 | $ | 385,837 |
|
| $ | 300,431 |
|
| $ | 1,151,020 |
|
| $ | 857,023 |
| ||||||||
Cost of sales | 87,128 | 88,721 | 260,941 | 240,507 |
| 236,035 |
|
|
| 196,228 |
|
|
| 701,495 |
|
|
| 561,849 |
| ||||||||||||
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| ||||||||||||||||||||
Gross profit | 39,748 | 41,086 | 116,040 | 108,539 |
| 149,802 |
|
|
| 104,203 |
|
|
| 449,525 |
|
|
| 295,174 |
| ||||||||||||
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|
|
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|
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| |||||||||||||||||||||||
Selling, general and administrative expenses | 24,950 | 22,533 | 72,385 | 63,209 |
| 102,399 |
|
|
| 78,595 |
|
|
| 307,786 |
|
|
| 224,106 |
| ||||||||||||
Fair value adjustment to contingent consideration | — | (3,000 | ) | — | (3,000 | ) | |||||||||||||||||||||||||
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| ||||||||||||||||||||
Income from operations | 14,798 | 21,553 | 43,655 | 48,330 |
| 47,403 |
|
|
| 25,608 |
|
|
| 141,739 |
|
|
| 71,068 |
| ||||||||||||
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|
|
|
|
|
|
|
| |||||||||||||||||||||||
Interest expense, net | 5,514 | 5,495 | 14,992 | 14,935 |
| 6,889 |
|
|
| 7,686 |
|
|
| 21,124 |
|
|
| 22,968 |
| ||||||||||||
Debt extinguishment costs | — | — | — | 3,431 |
| — |
|
|
| 25,472 |
|
|
| — |
|
|
| 25,472 |
| ||||||||||||
|
|
|
|
|
|
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| ||||||||||||||||||||
Income before income taxes | 9,284 | 16,058 | 28,663 | 29,964 | |||||||||||||||||||||||||||
Income tax expense | 2,992 | 5,262 | 9,117 | 10,339 | |||||||||||||||||||||||||||
Income (loss) before income taxes |
| 40,514 |
|
|
| (7,550 | ) |
|
| 120,615 |
|
|
| 22,628 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net income | $ | 6,292 | $ | 10,796 | $ | 19,546 | $ | 19,625 | |||||||||||||||||||||||
Income tax expense (benefit) |
| 10,100 |
|
|
| (2,410 | ) |
|
| 29,910 |
|
|
| 4,260 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net income per common share: | |||||||||||||||||||||||||||||||
Net income (loss) |
| 30,414 |
|
|
| (5,140 | ) |
|
| 90,705 |
|
|
| 18,368 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Less: Net income attributable to redeemable |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net income (loss) attributable to the Company | $ | 30,041 |
|
| $ | (5,817 | ) |
| $ | 89,371 |
|
| $ | 16,712 |
| ||||||||||||||||
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Calculation of net income (loss) per common share attributable |
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|
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| |||||||||||||||||||||||
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 |
| ||||||||||||||||
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|
|
|
|
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| ||||||||||||||||||||
Net income (loss) per common share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic | $ | 0.13 | $ | 0.22 | $ | 0.40 | $ | 0.40 | $ | 0.51 |
|
| $ | (0.11 | ) |
| $ | 1.47 |
|
| $ | 0.20 |
| ||||||||
|
|
|
| ||||||||||||||||||||||||||||
Diluted | $ | 0.12 | $ | 0.21 | $ | 0.38 | $ | 0.39 | $ | 0.50 |
|
| $ | (0.11 | ) |
| $ | 1.46 |
|
| $ | 0.20 |
| ||||||||
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| ||||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Basic | 49,629 | 48,941 | 49,455 | 48,782 |
| 59,964 |
|
|
| 59,590 |
|
|
| 59,908 |
|
|
| 59,475 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Diluted | 51,809 | 50,672 | 51,670 | 50,528 |
| 60,402 |
|
|
| 59,590 |
|
|
| 60,201 |
|
|
| 60,035 |
| ||||||||||||
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|
|
|
|
|
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|
|
|
| ||||||||||||||||||||
Comprehensive income | $ | 6,292 | $ | 10,796 | $ | 19,546 | $ | 19,625 | |||||||||||||||||||||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
PGT INNOVATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)thousands)
(unaudited)
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss) before tax: |
|
|
|
|
|
|
|
|
|
|
| ||||
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 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income |
| (217 | ) |
|
| (147 | ) |
|
| (12,831 | ) |
|
| 11,306 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense (benefit) related to |
| (56 | ) |
|
| (37 | ) |
|
| (3,296 | ) |
|
| 2,806 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income |
| (161 | ) |
|
| (110 | ) |
|
| (9,535 | ) |
|
| 8,500 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| 30,253 |
|
|
| (5,250 | ) |
|
| 81,170 |
|
|
| 26,868 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less: Comprehensive income attributable to |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) attributable to the Company | $ | 29,880 |
|
| $ | (5,927 | ) |
| $ | 79,836 |
|
| $ | 25,212 |
|
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 44,727 | $ | 39,210 | ||||
Accounts receivable, net | 55,949 | 41,646 | ||||||
Inventories | 39,131 | 30,511 | ||||||
Prepaid expenses | 2,959 | 2,645 | ||||||
Other current assets | 6,329 | 8,365 | ||||||
|
|
|
| |||||
Total current assets | 149,095 | 122,377 | ||||||
Property, plant and equipment, net | 84,469 | 84,209 | ||||||
Trade name and other intangible assets, net | 116,702 | 120,930 | ||||||
Goodwill | 108,060 | 108,060 | ||||||
Other assets, net | 1,272 | 1,072 | ||||||
|
|
|
| |||||
Total assets | $ | 459,598 | $ | 436,648 | ||||
|
|
|
| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 40,338 | $ | 22,803 | ||||
Current portion of long-term debt | 290 | — | ||||||
|
|
|
| |||||
Total current liabilities | 40,628 | 22,803 | ||||||
Long-term debt, less current portion | 231,177 | 247,873 | ||||||
Deferred income taxes | 31,838 | 31,838 | ||||||
Other liabilities | 1,466 | 1,282 | ||||||
|
|
|
| |||||
Total liabilities | 305,109 | 303,796 | ||||||
|
|
|
| |||||
Shareholders’ equity: | ||||||||
Preferred stock; par value $.01 per share; 10,000 shares authorized; none outstanding | — | — | ||||||
Common stock; par value $.01 per share; 200,000 shares authorized; 52,376 and 51,887 shares issued and 49,660 and 49,176 shares outstanding at September 30, 2017 and December 31, 2016, respectively | 524 | 519 | ||||||
Additionalpaid-in-capital | 251,733 | 249,647 | ||||||
Accumulated deficit | (85,009 | ) | (104,555 | ) | ||||
|
|
|
| |||||
Shareholders’ equity | 167,248 | 145,611 | ||||||
Less: Treasury stock at cost | (12,759 | ) | (12,759 | ) | ||||
|
|
|
| |||||
Total shareholders’ equity | 154,489 | 132,852 | ||||||
|
|
|
| |||||
Total liabilities and shareholders’ equity | $ | 459,598 | $ | 436,648 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
PGT INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
(in thousands)thousands, except per share amounts)
(unaudited)
Nine Months Ended | ||||||||
September 30, | October 1, | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 19,546 | $ | 19,625 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 9,502 | 6,983 | ||||||
Amortization | 4,818 | 4,501 | ||||||
Provision for (recovery on) allowance for doubtful accounts | 249 | (76 | ) | |||||
Stock-based compensation | 1,568 | 1,552 | ||||||
Amortization andwrite-off of deferred financing costs and debt discount | 3,065 | 6,108 | ||||||
Deferred income taxes | — | 633 | ||||||
Excess tax benefits on stock-based compensation | — | (1,630 | ) | |||||
Fair value adjustment to contingent consideration | — | (3,000 | ) | |||||
Gain on disposal of assets | (59 | ) | (6 | ) | ||||
Change in operating assets and liabilities (net of the effect of the acquisition): | ||||||||
Accounts receivable | (15,644 | ) | (16,115 | ) | ||||
Inventories | (8,620 | ) | (464 | ) | ||||
Prepaid expenses, other current and other assets | (261 | ) | 2,626 | |||||
Accounts payable, accrued and other liabilities | 20,506 | 12,456 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 34,670 | 33,193 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (9,650 | ) | (13,287 | ) | ||||
Business acquisition | — | (101,338 | ) | |||||
Proceeds from sale of equipment | 59 | 6 | ||||||
|
|
|
| |||||
Net cash used in investing activities | (9,591 | ) | (114,619 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Payments of long-term debt | (20,062 | ) | (203,525 | ) | ||||
Proceeds from issuance of long-term debt | — | 261,030 | ||||||
Payments of financing costs | — | (7,178 | ) | |||||
Purchases of treasury stock | — | (2,722 | ) | |||||
Taxes paid relating to shares withheld on employee equity awards | (181 | ) | (54 | ) | ||||
Proceeds from exercise of stock options | 681 | 652 | ||||||
Proceeds from issuance of common stock under employee stock purchase plan | 23 | 27 | ||||||
Excess tax benefits on stock-based compensation | — | 1,630 | ||||||
Other | (23 | ) | (23 | ) | ||||
|
|
|
| |||||
Net cash (used in) provided by financing activities | (19,562 | ) | 49,837 | |||||
|
|
|
| |||||
Net increase (decrease) in cash and cash equivalents | 5,517 | (31,589 | ) | |||||
Cash and cash equivalents at beginning of period | 39,210 | 61,493 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 44,727 | $ | 29,904 | ||||
|
|
|
| |||||
Non-cash activity: | ||||||||
Financed purchase of software license | $ | 590 | $ | — | ||||
|
|
|
| |||||
Property, plant and equipment additions in accounts payable | $ | 343 | $ | 1,181 | ||||
|
|
|
| |||||
Contingent consideration reversed out of accrued liabilities | $ | — | $ | 3,000 | ||||
|
|
|
| |||||
Portion of USI purchase price held back in escrow | $ | — | $ | 100 | ||||
|
|
|
|
|
| October 1, |
|
| January 1, |
| ||
|
| 2022 |
|
| 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 218,841 |
|
| $ | 96,146 |
|
Accounts receivable, net |
|
| 166,885 |
|
|
| 141,221 |
|
Inventories |
|
| 112,257 |
|
|
| 91,440 |
|
Contract assets, net |
|
| 56,313 |
|
|
| 55,239 |
|
Prepaid expenses |
|
| 12,456 |
|
|
| 8,727 |
|
Other current assets |
|
| 15,865 |
|
|
| 28,985 |
|
Total current assets |
|
| 582,617 |
|
|
| 421,758 |
|
|
|
|
|
|
|
| ||
Property, plant and equipment, net |
|
| 185,305 |
|
|
| 185,266 |
|
Operating lease right-of-use asset, net |
|
| 93,020 |
|
|
| 91,162 |
|
Intangible assets, net |
|
| 369,000 |
|
|
| 394,525 |
|
Goodwill |
|
| 370,115 |
|
|
| 364,598 |
|
Other assets, net |
|
| 2,547 |
|
|
| 3,301 |
|
|
|
|
|
|
|
| ||
Total assets |
| $ | 1,602,604 |
|
| $ | 1,460,610 |
|
|
|
|
|
|
|
| ||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
| $ | 180,543 |
|
| $ | 122,681 |
|
Current portion of operating lease liability |
|
| 15,247 |
|
|
| 13,180 |
|
Total current liabilities |
|
| 195,790 |
|
|
| 135,861 |
|
|
|
|
|
|
|
| ||
Long-term debt, net |
|
| 626,576 |
|
|
| 625,655 |
|
Operating lease liability, less current portion |
|
| 84,894 |
|
|
| 83,903 |
|
Deferred income taxes |
|
| 34,193 |
|
|
| 37,489 |
|
Other liabilities |
|
| 7,980 |
|
|
| 11,742 |
|
|
|
|
|
|
|
| ||
Total liabilities |
|
| 949,433 |
|
|
| 894,650 |
|
|
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Redeemable non-controlling interest |
|
| 39,711 |
|
|
| 36,863 |
|
|
|
|
|
|
|
| ||
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 |
|
Additional paid-in capital |
|
| 439,773 |
|
|
| 433,347 |
|
Accumulated other comprehensive income (loss) |
|
| (2,529 | ) |
|
| 7,006 |
|
Retained earnings |
|
| 193,866 |
|
|
| 106,398 |
|
Treasury stock at cost |
|
| (18,289 | ) |
|
| (18,289 | ) |
Total shareholders' equity |
|
| 613,460 |
|
|
| 529,097 |
|
|
|
|
|
|
|
| ||
Total liabilities, redeemable non-controlling interest and shareholders' equity |
| $ | 1,602,604 |
|
| $ | 1,460,610 |
|
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 |
| |||||
|
| October 1, |
|
| October 2, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (unaudited) |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income |
| $ | 90,705 |
|
| $ | 18,368 |
|
Adjustments to reconcile net income to net cash |
|
|
|
|
|
| ||
provided by operating activities: |
|
|
|
|
|
| ||
Depreciation |
|
| 25,359 |
|
|
| 22,290 |
|
Amortization |
|
| 19,725 |
|
|
| 15,174 |
|
Provision for credit losses |
|
| 7,395 |
|
|
| 3,309 |
|
Stock-based compensation |
|
| 7,638 |
|
|
| 5,748 |
|
Amortization of deferred financing costs, debt discount and premium |
|
| 921 |
|
|
| 674 |
|
Asset impairment charges |
|
| 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): |
|
|
|
|
|
| ||
Accounts receivable |
|
| (35,166 | ) |
|
| (45,997 | ) |
Inventories |
|
| (21,145 | ) |
|
| (11,607 | ) |
Contract assets, net, prepaid expenses, other current and other assets |
|
| 6,213 |
|
|
| (22,843 | ) |
Accounts payable, accrued and other liabilities |
|
| 48,531 |
|
|
| 9,074 |
|
|
|
|
|
|
|
| ||
Net cash provided by operating activities |
|
| 152,141 |
|
|
| 19,767 |
|
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
|
| ||
Purchases of property, plant and equipment |
|
| (24,741 | ) |
|
| (25,663 | ) |
Investment in and acquisitions of business |
|
| (787 | ) |
|
| (106,480 | ) |
Proceeds from sales of assets |
|
| 41 |
|
|
| 183 |
|
|
|
|
|
|
|
| ||
Net cash used in investing activities |
|
| (25,487 | ) |
|
| (131,960 | ) |
|
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
|
| ||
Payment of fair value of contingent consideration in Anlin Acquisition |
|
| (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 |
|
Proceeds from issuance of common stock under employee stock purchase plan (ESPP) |
|
| 291 |
|
|
| 191 |
|
|
|
|
|
|
|
| ||
Net cash (used in) provided by financing activities |
|
| (3,959 | ) |
|
| 126,591 |
|
|
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
| 122,695 |
|
|
| 14,398 |
|
Cash and cash equivalents at beginning of period |
|
| 96,146 |
|
|
| 100,320 |
|
Cash and cash equivalents at end of period |
| $ | 218,841 |
|
| $ | 114,718 |
|
|
|
|
|
|
|
| ||
Non-cash activity: |
|
|
|
|
|
| ||
Issuance of common stock in Eco Acquisition |
| $ | — |
|
| $ | 6,108 |
|
Additions to right-of-use asset |
| $ | 13,625 |
|
| $ | 47,838 |
|
Additions to operating lease liability |
| $ | (13,625 | ) |
| $ | (47,838 | ) |
Property, plant and equipment additions in accounts payable |
| $ | 79 |
|
| $ | 268 |
|
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 |
|
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
|
| |||||||
|
| Common stock |
|
| Paid-in |
|
| Comprehensive |
|
| Retained |
|
| Treasury |
|
|
|
| ||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| 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 |
|
Vesting of restricted stock |
|
| 32,258 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (7,852 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (154 | ) |
|
| (154 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (125 | ) |
|
| — |
|
|
| (28 | ) |
|
| 154 |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 2,254 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,254 |
|
Common stock issued under ESPP |
|
| 853 |
|
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14 |
|
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,817 | ) |
|
| — |
|
|
| (5,817 | ) |
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (965 | ) |
|
| — |
|
|
| (965 | ) |
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 |
|
Vesting of restricted stock |
|
| 221,724 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 7 |
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (50,266 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,159 | ) |
|
| (1,159 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (969 | ) |
|
| — |
|
|
| (189 | ) |
|
| 1,159 |
|
|
| — |
|
Issuance of treasury stock |
|
| 4,600 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| 20 |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 5,748 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,748 |
|
Exercise of stock options |
|
| 67,797 |
|
|
| 1 |
|
|
| 137 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 138 |
|
Common stock issued under ESPP |
|
| 12,024 |
|
|
| — |
|
|
| 191 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 191 |
|
Issuance in acquisition of Eco |
|
| 357,797 |
|
|
| 4 |
|
|
| 6,104 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,108 |
|
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,712 |
|
|
| — |
|
|
| 16,712 |
|
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,528 | ) |
|
| — |
|
|
| (4,528 | ) |
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 |
|
Vesting of restricted stock |
|
| 359,360 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Grants of restricted stock |
|
| — |
|
|
| 6 |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeitures of restricted stock |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| (95,001 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,888 | ) |
|
| (1,888 | ) |
Retirement of treasury stock |
|
| — |
|
|
| (1 | ) |
|
| (1,498 | ) |
|
| — |
|
|
| (389 | ) |
|
| 1,888 |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 7,638 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,638 |
|
Common stock issued under ESPP |
|
| 17,964 |
|
|
| — |
|
|
| 291 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 291 |
|
Net income attributable to the Company |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89,371 |
|
|
| — |
|
|
| 89,371 |
|
Increase in value of RNCI |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,514 | ) |
|
| — |
|
|
| (1,514 | ) |
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 |
|
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,” “we,” or the “Company”) 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. The accompanying unaudited condensedmajority of our sales are to customers in the state of Florida; however, we also sell products in many other states. Our acquisition of Eco Enterprises (“Eco Acquisition”) in February 2021 expanded 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 acquisition of Anlin Windows and Doors in October 2021 expanded our presence in the west. Products are sold primarily through an authorized dealer and distributor network. However, with our acquisition of NewSouth Window Solutions in February 2020, we also sell window products in the direct-to-consumer channel through a “factory-direct” sales model.
We were incorporated in the state of Delaware on December 16, 2003, as JLL Window Holdings, Inc., with primary operations in North Venice, Florida. On February 15, 2006, our Company was renamed PGT, Inc. On December 14, 2016, we announced that we changed our name to PGT Innovations, Inc. and, effective on December 28, 2016, the listing of our common stock was transferred to the New York Stock Exchange (“NYSE”) from the NASDAQ Global Market, and began trading on the NYSE under its existing ticker symbol of “PGTI”. As of October 1, 2022, we had major manufacturing operations in Florida, in North Venice, Tampa, and in the greater Miami area. We also have manufacturing operations in Phoenix, Arizona and Clovis, California. Additionally, we have two glass tempering and laminating plants, one in North Venice, Florida and one in Medley, Florida, and one insulation glass plant located in North Venice, Florida. 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".
All references to PGTI or our Company apply to the consolidated financial statements include the accounts 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 wholly-owned subsidiary, PGT Industries, Inc.,effects will likely continue to impact market conditions and its wholly-owned subsidiaries CGI Windowbusiness operations across industries worldwide. Therefore, we remain cautious about how the economy might behave for the next few years and Holdings, Inc. (“CGI”),continue to monitor potential impact on our operations. The extent to which includes its wholly-owned subsidiary, CGI Commercial, Inc. (“CGIC”),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 WinDoor, Incorporated (collectivelyfinancial results will depend upon numerous factors that we are not able to accurately predict. As such, we are unable to accurately predict the “Company”), after eliminationfuture impacts of intercompany accountsCOVID-19 on the U.S. and transactions.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 Form10-Q and do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. InOur condensed consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period isare not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods. Each of ourThe Company’s fiscal quartersthree and nine months ended September 30, 2017,October 1, 2022, and October 1, 2016,2, 2021 consisted of 13 weeks.and 39 weeks, respectively.
- 8 -
The condensed consolidated balance sheet as of December 31, 2016,January 1, 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 December 31, 2016,January 1, 2022, and the unaudited condensed consolidated financial statements as of and for the periods ended September 30, 2017,October 1, 2022 and October 2, 2021, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2016,January 1, 2022, included in the Company’s most recent Annual Report on Form10-K. Except for the adoption of the guidance relating to the accounting for stock-based compensation expense discussed below, the 10-K/A. 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 onForm 10-K.10-K/A.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2016-09, “Compensation - Stock Compensation, Improvements to Employee Share-Based payment Accounting (Topic 718)”. This update is intended to provide simplificationThe preparation of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classificationfinancial statements in the statement of cash flows. We adopted this update effective for our fiscal year beginning January 1, 2017. Impacts of the adoption of ASU2016-09 are as follows:
The effects on the Company’s consolidated balance sheet as of December 31, 2016, relating to the adoption of ASU2016-09 is as follows (in thousands):
Previously Reported | After Adoption | |||||||
Deferred income taxes | $ | 32,171 | $ | 31,838 | ||||
|
|
|
| |||||
Total liabilities | $ | 304,129 | $ | 303,796 | ||||
|
|
|
| |||||
Additionalpaid-in-capital | $ | 249,469 | $ | 249,647 | ||||
|
|
|
| |||||
Accumulated deficit | $ | (104,710 | ) | $ | (104,555 | ) | ||
|
|
|
| |||||
Shareholders’ equity | $ | 145,278 | $ | 145,611 | ||||
|
|
|
| |||||
Total shareholders’ equity | $ | 132,519 | $ | 132,852 | ||||
|
|
|
|
In July 2015, the FASB issued ASUNo. 2015-11, “Inventory (Topic 330) – Simplifying the Measurement of Inventory”. This guidance changed the subsequent measurement of inventory, excluding inventory accounted for under LIFO or the retail inventory method, to be at lower of cost and net realizable value. Topic 330, Inventory, previously required an entity to measure inventoryliabilities at the lower of cost or market. Market could have been replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Under this ASU, an entity measures inventory within its scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU2015-11 was effective for us as of January 1, 2017. We prospectively adopted ASU2015-11 effective on January 1, 2017. The adoption of ASU2015-11 had no impact on our financial statements.
Recently Issued Accounting Pronouncements
In addition to the pronouncements issued during 2017, ASU2016-02, “Leases (Topic 842), and ASU2014-09, “Revenue from Contracts with Customers”, presented below, see Note 3 to the consolidated financial statements included in our recently filed Annual Report on Form10-K for the year ended December 31, 2016.
In August 2017, the FASB issued ASU2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments under ASU2017-12 refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the facedate 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 and California. See Note 16 for segment disclosures.
Recently Adopted Accounting Pronouncements
Business Combinations - Contracts Assets and Liabilities
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 footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU2017-12 becomes effective for us in the first quarter of 2019. We do not expect theperiod beginning January 3, 2021. The adoption of this guidance tostandard did not have a significant effectany impact on the Company’sour consolidated financial statements.
NOTE 2. REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS
Revenue Recognition Accounting Policy
In February 2017, the FASB issued ASU2017-05, “Other Income—Gain and Losses from the Derecognition of Nonfinancial Assets.” ASU2017-05 clarifies the scope of Subtopic610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Subtopic610-20, which was issued in May 2014 as a part of ASU2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts withnon-customers. This update is effective at the same time as the amendments in ASU2014-09, therefore, for our fiscal year beginning after December 15, 2017, and may be applied either under a full- or modified-retrospective basis. We do not expect the adoption of this guidance to have a significant effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU2017-04 simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. The amendment also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This update is effective for our fiscal year beginning after December 15, 2019, and shall be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this guidance to have a significant effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” ASU2017-01 affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business. It also provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This update is effective for our fiscal year beginning after December 15, 2017, including interim periods therein. We will apply the provisions of this guidance once it becomes effective.
In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842)”. This guidance supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for all entities. ASU2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is continuing to evaluate the impact of this new standard on its consolidated financial statements.
Approaching Adoption of ASU2014-09, “Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers”. ASU2014-09 replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. The FASB also issued ASU2015-14, “Deferral of Effective Date”. ASU2015-14 deferred the effective date for the new guidance until the annual reporting period beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, but not before the original effective date (periods beginning after December 15, 2016). The standard permits the use of either the full-retrospective (restating all years presented in the Company’s financial statements), or modified-retrospective (recording the impact of adoption as an adjustment to retained earnings at the beginning of the year of adoption) transition methods. Since its issuance, the FASB has also amended several aspects of the new guidance, including; ASU2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; which clarifies the Topic 606 guidance on principal versus agent considerations, ASU2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing”, which clarifies identification of a performance obligation and addresses revenue recognition associated with the licensing of intellectual property, ASU2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow Scope Improvements and Practical Expedients”, which clarifies assessment of collectability criterion,non-cash consideration and other technical corrections, and ASU2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which is the result of the FASB Board decision to issue a separate Update for technical corrections and improvements. The Company currently plans to adopt the provisions of this new accounting standard at the beginning of fiscal year 2018, using the modified-retrospective method.
The Company completed its preliminary assessment of the impact of its upcoming adoption of ASU2014-09 on its consolidated financial statements. The Company recognizes revenue currently under existing generally accepted accounting principles, which is a model based on the transfer of the risks and rewards of ownership. Predominantly, for the Company, this has been at the point in time that possession of goods has transferred to the customer upon delivery. The model for recognizing revenue will change under ASU2014-09, to one based on the transfer of control of the product to the customer. Under ASU2014-09, revenue is recognized when an entity satisfies its obligation by transferring control of the goods or services to the customer, and transfer of possession of the product is not required in order for transfer of control of the product to the customer to have occurred.
ASU2014-09 states that if any one of three defined criteria is met, it is likely that an entity will be required to recognize revenue over time, where previously the entity has recognized revenue at the point in time which possession of the goods or services pass to the customer. Pursuant to our preliminary assessment, we believe that, of these three criteria, the Company meets the criteria which states that revenue is recognized over time if an entity’s performance (i.e. creation of a good or service for the customer) does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completedto-date. ASU2014-09 further states that, when evaluating whether or not the goods or services have an alternative use, an entity should consider the level of customization of the goods or services. A high level of customization is a strong indicator that the goods or services do not have an alternative use and, therefore, revenue would be recognized over time as an entity performs.
The Company is a manufacturer of fully-customizedprimarily manufactures fully customized windows and doors and manufactures products 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 from the customer.received. The Company’s initial assessment is that its goods have no alternative use, as that term is defined in ASU2014-09, and that control of the product passes to the customer no later than completion of the manufacturing of each or all of the products in an order, but before delivery of the products to the customer. Additionally, 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 by the Company on behalf of its customers.
Based on this initial assessment, the Company believes that it will be required to change its method of recognizing revenue, to one of potentially recognizing revenue as products are manufactured, but no later than completion of the manufacturing process, from its current method of recognizing revenue upon delivery of the product Due to the customer. The Companycustomized build-to-order nature of these products, the Company’s assessment is continuing to evaluatethat the substantial portion of its manufacturing processes in order to assess at what point the productsfinished goods and certain unused glass components have no alternative use, and that control of these products and components passes to the recognitioncustomer 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 should begin. However, becauseover 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 willrecognized 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 nine months ended October 1, 2022 and October 2, 2021:
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
Disaggregation of revenue (in millions): | 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Reporting segment: |
|
|
|
|
|
|
|
|
|
|
| ||||
Southeast | $ | 288.2 |
|
| $ | 255.1 |
|
| $ | 867.5 |
|
| $ | 731.2 |
|
Western |
| 97.6 |
|
|
| 45.3 |
|
|
| 283.5 |
|
|
| 125.8 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product category: |
|
|
|
|
|
|
|
|
|
|
| ||||
Impact-resistant window and door products | $ | 227.7 |
|
| $ | 207.8 |
|
| $ | 688.5 |
|
| $ | 596.7 |
|
Non-impact window and door products |
| 158.1 |
|
|
| 92.6 |
|
|
| 462.5 |
|
|
| 260.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Market: |
|
|
|
|
|
|
|
|
|
|
| ||||
New construction | $ | 160.9 |
|
| $ | 120.5 |
|
| $ | 484.3 |
|
| $ | 365.0 |
|
Repair and remodel |
| 224.9 |
|
|
| 179.9 |
|
|
| 666.7 |
|
|
| 492.0 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total net sales | $ | 385.8 |
|
| $ | 300.4 |
|
| $ | 1,151.0 |
|
| $ | 857.0 |
|
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 October 1, 2022 and October 2, 2021, the Western segment’s net sales of its volume products were $26.6 million and $21.9 million, respectively. For the nine months ended October 1, 2022 and October 2, 2021, the Western segment’s net sales of its volume products were $82.6 million and $62.5 million, respectively.
Contract Balances
Contract assets represent sales recognized on at least all productsin excess of billings related to finished goods not yet shipped and certain unused glass components not yet placed into the production process for which manufacturing has been completed,revenue is recognized over time as noted above. Contract liabilities relate to customer deposits at the Company believes that upon adoptionend of ASU2014-09, inventories on itsreporting periods. At October 1, 2022 and January 1, 2022, those contract liabilities totaled $42.9 million and $45.2 million, respectively, of which $34.4 million and $37.0 million, respectively, are classified within accrued liabilities, and $8.5 million and $8.2 million, respectively, are classified as a reduction to the contract assets to which they relate. Contract assets, net, totaled $56.3 million at October 1, 2022 and $55.2 million at January 1, 2022, in the accompanying condensed consolidated balance sheetssheets.
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, 2022 were satisfied in the first quarter of 2022, and contract assets at January 1, 2022 were transferred to accounts receivable in the first quarter of 2022. We expect substantially all of the contract liabilities at October 1, 2022 will no longerbe satisfied in the fourth quarter of 2022, and contract assets at October 1, 2022 will be transferred to accounts receivable in the fourth quarter of 2022. Contract liabilities at October 1, 2022 represents cash received during the three-month period ended October 1, 2022, excluding amounts recognized as revenue during that period. Contract assets at October 1, 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, 2022, excluding amounts transferred to accounts receivable during that period.
- 10 -
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 finished goods. 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 also believes that it willhas made a policy election to continue to recognize revenue at an earlier point than prior to the adoption of ASU2014-09, but that such effect may not materially affect its consolidated statements of operations post-adoption due to the fact that such effects will exist at both the beginning and end of fiscal periods after the initial transition.
ASU2014-09 also requires entities, primarily in the manufacturing segment, to make policy elections relating to shipping and handling charges. Entities may elect to treat shipping and handlingcosts as a separate performance activity, and recognize revenue from shipping and handling as performance occurs. Conversely, entities may also elect to treatfulfillment activity. Treating shipping and handling as a fulfillment activity which will requirerequires 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 in order to match this cost with the revenue previously recognized over time. revenue. Sales taxes collected from customers are recorded on a net basis.
The Company currently recognizes shippingutilizes 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 to 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 handling costsreasonable 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 pandemic on the businesses of our customers, such as dealers and distributors.
As of October 1, 2022 and January 1, 2022, we had gross accounts receivable of $177.2 million and $145.9 million, respectively, and an allowance for credit losses of $10.3 million and $4.7 million, respectively. During the second quarter of 2022, a fulfillment activity, and has preliminarilycustomer with whom we have had a long-term relationship experienced financial difficulties. As such, we determined to continuecease taking orders and provide additional reserves of approximately $3.0 million against our existing exposure to treat such costs as a fulfillment activity.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.
The Company expects to continue to evaluate the impact of the adoption of ASU2014-09 on its consolidated financial statements, and will provide updates and additional information as the effective date of adoption approaches.- 11 -
NOTE 3. WARRANTY
NOTE 2. WARRANTY
Most of our manufactured products are sold with warranties. Warranty periods, which vary by product components, generally range from 1 to 10 years;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.years. The reserveamount 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 September 30, 2017,October 1, 2022, we recorded warranty expense at a rate of approximately 2.04%1.8% of sales, which decreased fromwas slightly lower than the rate induring the second quarterthree months ended October 2, 2021 of 20171.9% of 2.22%. Duringsales. Our warranty expense rate in the three months ended October 1, 2016,2022 is a result of 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.
During the nine months ended October 1, 2022, we recorded warranty expense at a rate of approximately 2.21%2.0% of sales, which was slightly lower than the rate during the nine months ended October 2, 2021 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:summarizes current period charges, adjustments to previous estimates, if necessary, as well as settlements, which represent actual costs incurred during the period for the three and nine months ended September 30, 2017,October 1, 2022 and October 1, 2016.2, 2021. The reserve is determined through specific identification and assessing Companyour claims history. Expected future obligations are discounted to aOf the accrued warranty reserve of $15.5 million at October 1, 2022, $12.5 million is classified within accrued expenses as current value using a risk-free rate for obligationsliabilities on the condensed consolidated balance sheet at October 1, 2022, with similar maturities.the remainder classified within other liabilities as non-current liabilities. Of the accrued warranty reserve of $13.5 million at January 1, 2022, $11.8 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at January 1, 2022, with the remainder classified within other liabilities as non-current liabilities.
Beginning | Charged | End of | ||||||||||||||||||||||
Accrued Warranty | of Period | Acquired | to Expense | Adjustments | Settlements | Period | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Three months ended September 30, 2017 | $ | 5,679 | $ | — | $ | 2,593 | $ | 46 | $ | (2,412 | ) | $ | 5,906 | |||||||||||
Three months ended October 1, 2016 | $ | 5,103 | $ | 10 | $ | 2,875 | $ | (19 | ) | $ | (2,493 | ) | $ | 5,476 | ||||||||||
Nine months ended September 30, 2017 | $ | 5,569 | $ | — | $ | 8,681 | $ | (18 | ) | $ | (8,326 | ) | $ | 5,906 | ||||||||||
Nine months ended October 1, 2016 | $ | 4,237 | $ | 274 | $ | 8,111 | $ | 751 | $ | (7,897 | ) | $ | 5,476 |
|
| 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 |
|
NOTE 3.4. INVENTORIES
Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited finished goods inventory since allthe substantial majority of our products are custom,made-to-order and usually shipthe revenue on these products, as well as the related cost, has been fully recognized upon completion.completion of the manufacturing process. Finished goods inventory andwork-in-progress costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost(first-in, (first-in, first-out method) or net realizable value. Inventories consisted of the following:
|
| October 1, |
|
| January 1, |
| ||
|
| 2022 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Raw materials |
| $ | 107,005 |
|
| $ | 87,164 |
|
Work-in-progress |
|
| 2,729 |
|
|
| 3,248 |
|
Finished goods |
|
| 2,523 |
|
|
| 1,028 |
|
|
|
|
|
|
|
| ||
Inventories |
| $ | 112,257 |
|
| $ | 91,440 |
|
September 30, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 29,591 | $ | 24,946 | ||||
Work-in-progress | 3,543 | 2,521 | ||||||
Finished goods | 5,997 | 3,044 | ||||||
|
|
|
| |||||
$ | 39,131 | $ | 30,511 | |||||
|
|
|
|
- 12 -
NOTE 4.5. STOCK BASED-COMPENSATION
Exercises
For the three months ended September 30, 2017, there were 90,159 options exercised at a weighted average exercise price of $1.99 per share. For the nine months ended September 30, 2017, there were 341,069 options exercised at a weighted average exercise price of $2.00 per share.
Issuance
On March 4, 2017, we granted 251,474 restricted stock awards to certain executives andnon-executive employees of the Company. The restrictions on these stock awards lapse over time based solely on continued service. However, the quantity of restricted shares granted on half of these shares, or 125,737 shares, is fixed, whereas the quantity granted on the remaining half, or 125,737 shares, is subject to Company-specific performance criteria. The restricted stock awards have a fair value on date of grant of $10.20 per share based on the closing New York Stock Exchange market price of the common stock on the day prior to the day the awards were granted. Those restricted shares whose quantity is fixed vest in equal amounts over a three-year period on the first, second and third anniversary dates of the grant. Those restricted shares whose quantity is subject to Company performance criteria vest in equal amounts on the second and third anniversary dates of the grant.
The performance criteria, as defined in the share awards, provides for a graded awarding of shares based on the percentage by which the Company meets earnings before interest and taxes, as defined, in our 2017 business plan. The performance percentages, ranging from less than 80% to greater than 120%, provide for the awarding of shares ranging from no shares to 150% of the original amount of shares.
On May 19, 2017, we granted 34,699 restricted stock awards to the sevennon-management members of the board of directors of the Company relating to their annual compensation for service on the board. The restricted stock awards have a fair value on date of grant of $11.60 per share based on the closing New York Stock Exchange market price of the common stock on the day prior to the day the awards were granted. The restrictions on these stock awards lapse based solely on continued service on the first anniversary date of the grant.
StockStock-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. Effective on January 1, 2017, we adopted the provisions of ASU2016-09, pursuant to which we elected to change our method of accounting for forfeitures, from one of estimating forfeitures, to recognizing forfeitures on an actual basis in the period they occur. For more information, see Note 1 under “Recently Adopted Accounting Pronouncements”. We recorded compensation expense for stock basedstock-based awards of $0.5 million for the three months ended September 30, 2017, and $0.4$2.7 million for the three months ended October 1, 2016.2022 and $2.3 million for the three months ended October 2, 2021. We recorded compensation expense for stock basedstock-based awards of $1.6 million for the nine months ended September 30, 2017, and $1.6$7.6 million for the nine months ended October 1, 2016.2022 and $5.7 million for the nine months ended October 2, 2021. As of September 30, 2017, and October 1, 2016,2022, there was $2.4$11.9 million and $1.9 million, respectively, ofin total unrecognized compensation cost related primarilyentirely to restricted share awards.awards, including time-vesting and those with performance conditions. These costs are expected to be recognized in earnings on an accelerated basis over the weighted average remaining vesting period of 1.5 1.7 years at October 1, 2022.
Of the $2.7 million and $2.3 million in stock-based compensation expense in the three months ended October 1, 2022 and October 2, 2021, respectively, $2.3 million and $1.9 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales. Of the $7.6 million and $5.7 million in stock-based compensation expense in the nine months ended October 1, 2022 and October 2, 2021, respectively, $6.6 million and $4.9 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales.
Issuance
On February 14, 2022, we issued 468,518 shares of restricted stock to certain executive and non-executive employees of the Company, under the Company’s 2022 long-term incentive plan (“2022 LTIP”). Half of the shares awarded under the 2022 LTIP, or 234,259 shares, are subject to adjustment based on the performance of the Company for the 2022 fiscal year. A portion of the 234,259 performance shares issued under the 2022 LTIP are also subject to a total shareholder return ("TSR") component, which will not be finalized until the third anniversary of the February 14, 2022 grant date. Specifically, 37.5% of the one-half of the restricted stock awarded in the 2022 LTIP are performance restricted shares which will not be earned unless certain financial performance metrics are met by the Company for the 2022 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 2022 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 234,259 shares, or 87,849 shares. The remaining 62.5% of the one-half of the restricted stock awarded in the 2022 LTIP, or 146,410 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, 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 234,259 shares from the 2022 LTIP are not subject to adjustment based on any performance or other criteria, but rather, vest in three equal installments on each of the first, second and third anniversaries of the grant date, assuming the grantee is employed by the Company on those vesting dates.
The grant date fair value of the 2022 LTIP was $18.27 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 $20.79 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 234,259 shares subject to the performance of the Company for the 2022 fiscal year, including those shares subject to the TSR, is $19.84 per share.
- 13 -
NOTE 6. ACQUISITIONS
See Note 18, Subsequent Events, for a discussion of events relating to an acquisition that occurred after October 1, 2022.
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 30, 2017.1, 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 provides for the potential for earn-out contingency payments to sellers should Anlin achieve a certain level of earnings before interest, taxes, depreciation and amortization, ("Anlin EBITDA"), as defined in the Anlin Purchase Agreement, for its fiscal years of 2021 and 2022, of up to $3.2 million to be paid out by March 31, 2022, and of up to $9.5 million to be paid out by March 31, 2023, respectively. We had recorded a preliminary earn-out contingent liability of $5.9 million as of our 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 months ended October 1, 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.
During the third quarter of 2022, we updated our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA, which was estimated to be $9.1 million. As such, we recognized an expense of approximately $4.8 million, representing the difference between this 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 months ended October 1, 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 of 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 of $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 $4.3 million, and goodwill according to the current allocation 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 5.7. 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 availableattributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the weighted-averageaverage number of common shares outstanding during the period. Diluted EPS reflectsavailable 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 potential 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 securities such as stock options.
Weightedexcluded from the calculation of weighted average shares outstanding for the nine months ended September 30, 2017, and for the three and nine monthsthree- or nine-month periods ended October 1, 2016, excludes underlying options of 20 thousand because their effects were anti-dilutive. There were no anti-dilutive securities outstanding for the three months ended September 30, 2017.2022, or October 2, 2021.
The table below presents the calculation of EPS and a reconciliation of weighted average common shares used in the calculation of basic and diluted EPSEPS:
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
| October 1, |
|
| October 2, |
|
| October 1, |
|
| October 2, |
| ||||
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
| (in thousands, except per share amounts) |
| |||||||||||||
Net income (loss) | $ | 30,414 |
|
| $ | (5,140 | ) |
| $ | 90,705 |
|
| $ | 18,368 |
|
Less: Net income attributable to RNCI |
| (373 | ) |
|
| (677 | ) |
|
| (1,334 | ) |
|
| (1,656 | ) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average number of common shares outstanding - Basic |
| 59,964 |
|
|
| 59,590 |
|
|
| 59,908 |
|
|
| 59,475 |
|
Add: Dilutive shares from equity plans |
| 438 |
|
|
| — |
|
|
| 293 |
|
|
| 560 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average number of common shares outstanding - Diluted |
| 60,402 |
|
|
| 59,590 |
|
|
| 60,201 |
|
|
| 60,035 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per common share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic | $ | 0.51 |
|
| $ | (0.11 | ) |
| $ | 1.47 |
|
| $ | 0.20 |
|
Diluted | $ | 0.50 |
|
| $ | (0.11 | ) |
| $ | 1.46 |
|
| $ | 0.20 |
|
- 19 -
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 |
|
|
|
|
|
|
Estimated amortization of our amortizable intangible assets for our Company:future years is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net income | $ | 6,292 | $ | 10,796 | $ | 19,546 | $ | 19,625 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average common shares—Basic | 49,629 | 48,941 | 49,455 | 48,782 | ||||||||||||
Add: Dilutive effect of stock compensation plans | 2,180 | 1,731 | 2,215 | 1,746 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average common shares—Diluted | 51,809 | 50,672 | 51,670 | 50,528 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.13 | $ | 0.22 | $ | 0.40 | $ | 0.40 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | $ | 0.12 | $ | 0.21 | $ | 0.38 | $ | 0.39 | ||||||||
|
|
|
|
|
|
|
|
(in thousands) |
| Total |
| |
Remainder of 2022 |
| $ | 5,162 |
|
2023 |
|
| 20,520 |
|
2024 |
|
| 20,474 |
|
2025 |
|
| 20,299 |
|
2026 |
|
| 16,906 |
|
Thereafter |
|
| 77,198 |
|
|
|
|
| |
Total |
| $ | 160,559 |
|
Effective on January 1, 2017, we adopted ASU2016-09. ASU2016-09 changes the accounting for excess tax benefits by requiring that they be treated as discrete items of income tax
Amortization expense in the period they occur. For the three and nine months ended September 30, 2017, income tax expense has been reduced by $347 thousand and $1.1 million, respectively, relating to excess tax benefits onamortizable intangible assets for the exercise of stock options and the lapse of restrictions on stock awards. ASU2016-09 also changed the treasury stock method of calculating diluted shares outstanding to exclude the presumption that common stock equivalents can be reduced by repurchasing shares using excess tax benefits. For the three and nine months ended September 30, 2017, diluted shares outstanding includes 724 thousand and 724 thousand shares, respectively, that prior to the adoption of ASU2016-09 would have been presumed to be bought-back, and therefore not outstanding, using the proceeds of excess tax benefits. For the three and nine months ended October 1, 2016, diluted shares outstanding would have increased by 826 thousand2022 and 827 thousand shares, respectively, if we had adopted ASU2016-09 at the beginning of our 2016 fiscal year.
NOTE 6. SALE OF ASSETS AND ACQUISITIONS
Sale of Door Glass Processing Assets
On September 22, 2017, we entered into an Asset Purchase Agreement (APA) with Cardinal LG Company (Cardinal) for the sale to Cardinal of certain manufacturing equipment we used in processing glass components forPGT-branded doors for a cash purchase price of $28 million. Contemporaneously with entering into the APA, we entered into a seven-year supply agreement (SA) with Cardinal for Cardinal to supply us with glass components forPGT-branded doors. The Company determined to sell these assets, whose net book value at September 30, 2017October 2, 2021, was $5.6$5.8 million and enter into the SA in order to allow us to heighten our focus in our core areas of window and door manufacturing and, at the same time, strengthen our supply chain for high-quality door glass from a supplier with whom we have been doing business for many years.
The APA provides for the transfer of the assets from the Company to Cardinal in two phases, with the first date being on or about November 1, 2017, and the second date being on or about March 1, 2018. Under the APA, the cash purchase price of $28$5.3 million, is to be paid by Cardinal to the Company in three separate payments of $3 million at the time of the first transfer of the assets to Cardinal, $10 million on January 15, 2018, and $15 million at the time of the second transfer of assets to Cardinal.
The SA provides that the Company will purchase, and Cardinal will supply, all of the Company’s requirements for certain glass components used in PGT-branded doors through the end of 2024. The terms of the manufacture by Cardinal and purchase by the Company of such glass components as to purchase orders, forecasts of purchases, pricing, invoicing, delivery and payment terms and other terms, are all as described in the SA.
The Company has determined that, although the APA and SA are separate agreements, they were negotiated contemporaneously. Therefore, the Company has concluded that the $28 million of proceeds under the APA should be bifurcated between the sale of the door glass manufacturing assets, and payment for the Company’s commitment to buy glass components forPGT-branded doors from Cardinal under the SA, and that such bifurcation is predicated on the fair value of the door glass manufacturing assets being sold on or about the date of sale. The Company has engaged an independent machinery and equipment valuation specialist to provide a fair market value appraisal of the assets sold to Cardinal, which is currently in process. Accordingly, as the fair market value appraisal is not yet finalized, and there had been no exchanges of assets or cash under the APA as of September 30, 2017, and no purchases or sales of glass components forPGT-branded doors under the SA as of September 30, 2017, no amountsrespectively. Amortization expense relating to either the APA or SA have been recognized in the accompanying condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017.
WinDoor Acquisition
On February 16, 2016 (“closing date”), we completed the acquisition of WinDoor, which became a wholly-owned subsidiary of PGT Industries, Inc. The fair value of consideration transferred in the acquisition was $102.6 million, including the then estimated fair value of contingent consideration of $3.0 million, which has been allocated to the net assets acquired and liabilities assumed as of the acquisition date, in accordance with ASC 805, “Business Combinations”. The cash portion of the acquisition was financed with borrowings under the 2016 Credit Agreement, and with $43.5 million of cash on hand.
The estimated fair value of assets acquired and liabilities assumed as of the closing date, were as follows (in thousands):
Final Allocation | ||||
Accounts and notes receivable | $ | 3,882 | ||
Inventories | 6,778 | |||
Prepaid expenses | 246 | |||
Property and equipment | 5,029 | |||
Intangible assets | 47,100 | |||
Goodwill | 41,856 | |||
Accounts payable and accrued liabilities | (2,320 | ) | ||
|
| |||
Purchase price | $ | 102,571 | ||
|
| |||
Consideration: | ||||
Cash | $ | 99,571 | ||
Earn-out contingency | 3,000 | |||
|
| |||
Total fair value of consideration | $ | 102,571 | ||
|
|
The fair value of working capital related items, such as accounts receivable, inventories, prepaids, and accounts payable and accrued liabilities, approximated their book values at the date of acquisition. Valuations of theamortizable intangible assets (See Note 7) were valued using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs.
Acquisition costs totaling $0.9 million are included in selling, general, and administrative expenses on the condensed consolidated statement of comprehensive income for the nine months ended October 1, 2016,2022 and relate to legal expenses, representationsOctober 2, 2021, was $19.7 million and warranties insurance, diligence,$15.2 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 accounting services.
The remaining consideration, after identifiedindefinite-lived intangible assetsasset 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 net assetsnine months ended October 1, 2022, 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 October 1, 2022 and liabilities recorded at fair value, was determined to be $41.9 million, of which $38.9 million is expected to be deductible for tax purposes. Goodwill representsJanuary 1, 2022, the increasedcarrying value of our Southeast reporting unit goodwill is $228.3 million and $226.8 million, respectively. As of October 1, 2022 and January 1, 2022, the combined entity through additional sales channel opportunities as well as operational efficiencies.carrying value of our Western reporting unit goodwill is $141.8 million and $137.8 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.
NOTE 9. LONG-TERM DEBT
The stock purchase agreement for
|
| October 1, |
|
| January 1, |
| ||
|
| 2022 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
2021 Senior Notes due 2029, maturing in October 2029 |
| $ | 575,000 |
|
| $ | 575,000 |
|
|
|
|
|
|
|
| ||
2016 Credit Agreement due 2024, maturing in October 2024 |
|
| 60,000 |
|
|
| 60,000 |
|
|
|
|
|
|
|
| ||
Long-term debt |
|
| 635,000 |
|
|
| 635,000 |
|
|
|
|
|
|
|
| ||
Deferred financing costs |
|
| (8,424 | ) |
|
| (9,345 | ) |
|
|
|
|
|
|
| ||
Long-term debt, net |
| $ | 626,576 |
|
| $ | 625,655 |
|
2021 Senior Notes due 2029
On September 24, 2021, we completed the acquisitionissuance of WinDoor (“SPA”) provided for the potential for anearn-out contingency payment to sellers had WinDoor achieved a certain level of sales in the calendar year ended December 31, 2016. The potential undiscounted$575.0 million aggregate principal amount of all future payments that could be required to be paid under the contingentearn-out consideration arrangement was between $04.375% senior notes (“2021 Senior Notes”), issued at 100% of their principal amount. The 2021 Senior Notes are jointly and $3.0 million. We had recorded anearn-out contingency liability of $3.0 millionseverally and fully and unconditionally guaranteed on the closing date, which represented its then estimated fair value using undiscounted cash flows, based on probability adjusted level of revenues with a range whose minimum was $51.0 million. Based on revised estimates using actual sales through the endsenior unsecured basis by each of the 2016 third quarter, we concludedCompany’s existing and future restricted subsidiaries, other than any restricted subsidiary of the probability was remoteCompany that WinDoor’s actual sales for 2016 would reach the $46.0 million minimum level required for the minimum payment of $2.7 million possible under theearn-out contingency arrangement and, therefore, determined that the entire initial estimated fair value of $3.0 million should be reversed. For tax purposes, contingent consideration does not become partguarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2021 Senior Notes are senior unsecured obligations of tax goodwill until paid. As such, the amount of goodwill deductible for tax purposes is $3.0 million less than the amount recorded for book purposes.
The SPA had a post-closing working capital calculation whereby we were required to prepare, and deliver to the sellers, a final statement of purchase price, including our calculation of the amount we find net working capital actually to have been as of the closing date. During the third quarter of 2016, the Company and the sellers reached agreementguarantors, 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 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 mature on October 1, 2029. Interest on the calculation2021 Senior Notes is payable semi-annually, in arrears, beginning on April 1, 2022, with interest accruing at a rate of net working capital, which resulted in a payment of $0.7 million4.375% per annum from September 24, 2021. We incurred financing costs relating to bank fees and professional services costs relating to the Company from sellers, resulting in a decrease in the purchase price which we recorded as a reduction in goodwill.
The following unaudited pro forma financial information assumes the acquisition had occurred at the beginningoffering and issuance of the earliest period presented that does not include WinDoor’s actual results for2021 Senior Notes totaling $8.7 million, which included a 1.25% lender spread on the entire period. Pro forma results have been prepared by adjusting our historical results to includetotal principal value of the results2021 Senior Notes, or $7.2 million, and $1.5 million of WinDoor adjusted forother costs, all of which are being amortized under the following: amortization expense related toeffective interest method. See “Deferred Financing Costs” below.
As of October 1, 2022, the intangible assets arisingface value of debt outstanding under the 2021 Senior Notes was $575.0 million, and accrued interest was $12.6 million. Proceeds from the acquisition2021 Senior Notes were used, in part, to redeem in full the $425.0 million of 2018 Senior Notes due 2026, including the related fees, costs, and interest expense to reflectthe 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 2016 Credit Agreement entered intoof $54.0 million and the related fees and costs, and finance the Anlin Acquisition in connection with the acquisition. fourth quarter of 2021. See Note 6, Acquisitions, for a discussion of the Anlin Acquisition.
The unaudited pro forma results below do not necessarily reflectindenture for the results2021 Senior Notes gives us the option to redeem some or all of operations that would have resulted had the acquisition been completed2021 Senior Notes at the beginningredemption prices and on the terms specified in the indenture governing the 2021 Senior Notes. The indenture governing the 2021 Senior Notes 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 earliest periods presented, nor does it indicateaggregate principal amount thereof, plus accrued and unpaid interest, if any, to the resultsdate of operations in future periods. 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 unaudited pro forma results do not includeindenture for the impact2021 Senior Notes includes certain covenants limiting the ability of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.
Pro Forma Results Net sales Net income Net income per common share: Basic Diluted Nine Months Ended October 1, 2016 (in thousands, except per share amounts) $ 351,507 $ 18,280 $ 0.37 $ 0.36
US Impact Systems, Inc. Acquisition
On August 31, 2016, CGIC, a wholly-owned subsidiary of CGI, which is wholly-owned by PGT Industries, Inc., which, in turn, is wholly-owned by the Company enteredand 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 an asset purchase agreementagreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with US Impact Systems, Inc. (USI) and its stockholders whereby CGIC purchased the operations and certain assets of, and assumed certain liabilities of USI. USI was an established fabricator of storefront window and door products. The fair valueaffiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the consideration transferred inCompany’s assets; (vii) place restrictions on the acquisition was $1.9 million, which was allocatedability of subsidiaries to currentpay dividends or make other payments to the Company; and other assets totaling $1.8 million(viii) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and amortizable intangible assets totaling $0.6 million, and goodwillqualifications.
2016 Credit Agreement due 2024
See Note 18, Subsequent Events, for a discussion of $0.6 million, less the assumption of accounts payable and accrued liabilities with estimated fair values totaling $1.2 million, in accordance with ASC 805, “Business Combinations”. This transaction did not have a significant impact on our financial position or operating results for 2016.
NOTE 7. GOODWILL, TRADE NAMES, AND OTHER INTANGIBLE ASSETS
Goodwill, trade names, and other intangible assets, net, are as follows:
Initial | ||||||||||||
September 30, | December 31, | Useful Life | ||||||||||
2017 | 2016 | (in years) | ||||||||||
(in thousands) | ||||||||||||
Goodwill | $ | 108,060 | $ | 108,060 | indefinite | |||||||
|
|
|
| |||||||||
Trade names and other intangible assets: | ||||||||||||
Trade names | $ | 75,841 | $ | 75,841 | indefinite | |||||||
|
|
|
| |||||||||
Customer relationships | 106,647 | 106,647 | 3-10 | |||||||||
Developed technology | 3,000 | 3,000 | 9-10 | |||||||||
Non-compete agreement | 1,668 | 1,668 | 2-5 | |||||||||
Software license | 590 | — | 2 | |||||||||
Less: Accumulated amortization | (71,044 | ) | (66,226 | ) | ||||||||
|
|
|
| |||||||||
Subtotal | 40,861 | 45,089 | ||||||||||
|
|
|
| |||||||||
Other intangible assets, net | $ | 116,702 | $ | 120,930 | ||||||||
|
|
|
|
Software License
In July 2017, we purchased an enterprise-wide software licenseevents relating to office productivity software. We estimated the then fair value of this software license to be $590 thousand, our purchase price. The software license is being amortized on a straight-line basis over its estimated useful life, which we have determined to be two years.
NOTE 8. LONG-TERM DEBT
September 30, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Term loan payable under the 2016 Credit Agreement | $ | 243,975 | $ | 263,975 | ||||
Other debt | 529 | — | ||||||
Fees, costs and original issue discount | (13,037 | ) | (16,102 | ) | ||||
|
|
|
| |||||
Long-term debt | 231,467 | 247,873 | ||||||
Less current portion of long-term debt | (290 | ) | — | |||||
|
|
|
| |||||
Long-term debt, less current portion | $ | 231,177 | $ | 247,873 | ||||
|
|
|
|
2016 Credit Agreement that occurred after October 1, 2022.
On February 16, 2016, we entered into athe 2016 Credit Agreement (“2016 Credit Agreement”),due 2024, among us, the lending institutions identified in the 2016 Credit Agreement due 2024, and Deutsche Bank AG New York Branch,Truist Financial Corporation (formerly known 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$310.0 million, consisting of a $270.0$270.0 million Term B term loan facility originally maturing in six yearsFebruary 2022 that will amortizeamortizes on a basis of 1%1% annually during theits six-year term, and a $40.0$40.0 million revolving credit facility originally maturing in five yearsFebruary 2021 that includesincluded 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 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.
On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Third Amendment provided for, among other things, (i) a three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022, which refinanced in full our existing Term B term loan facility under the 2016 Credit Agreement, and had no regularly scheduled amortization, and (ii) 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. Asassets, and is senior in position to the 2021 Senior Notes.
On October 25, 2021, we entered into an amendment of September 30, 2017, there were $0.2 million of letters of credit outstanding and $39.8 million available on the revolver.
Interest on all loans under theour 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement on February 17, 2017, as described below, borrowings under the term loans and the revolving credit facility accrued interest at("Fourth Amendment"). The Fourth Amendment provided for, among other things, a rate equal to, at our option, LIBOR (with a floor of 100 basis points in respect of the term loan), or a base rate (with a floor of 200 basis points in respect of the term loan) plus an applicable margin. The applicable margin was 575 basis pointsthree-year Term A loan in the caseaggregate maximum available amount of LIBOR and 475 basis points in$60.0 million (the "Incremental Term A Loan"), proceeds from which were used to fund the case ofAnlin Acquisition. The Fourth Amendment does not change any terms relating to the base rate. We will payRevolving Facility, under which we paid quarterly fees on the unused portion of the revolving credit facility equal to 50 basis points per annum as well as a quarterly letterpercentage 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 fee at 575 basis points per annum plus a 12.5 basis point facing fee per annum onoutstanding and $74.3 million available under the face amount of any outstanding letters of credit. Revolving Facility.
The weighted averageall-in interest rate for borrowings under the term-loan portion of the 2016 Credit agreementAgreement due 2024 was 6.02%5.12% as of September 30, 2017,October 1, 2022, and was 5.75%2.10% at December 31, 2016.January 1, 2022.
On February 17, 2017, we entered into an amendment of our 2016 Credit Agreement (“First Amendment”). The First Amendment, among other things, (a) decreases the applicable interest rate margins for the Initial Term Loans (as defined in the Credit Agreement) from (i) 4.75% to 3.75%, in the case of the Base Rate Loans (as defined in the Credit Agreement), and (ii) 5.75% to 4.75%, in the case of the Eurodollar Loans (as defined in the Credit Agreement), and (b) adds a soft call premium equal to 1.0% of the principal repaid or repriced if the Initial Term Loans are voluntarily refinanced or repriced pursuant to certain refinancing transactions within twelve months of the effective date of the First Amendment.
The 2016 Credit Agreement contains a springing financial covenant, if we draw in excess of twenty percent (20%) of the revolving facility, which requires us to maintain a maximum total net leverage ratio (based on the ratio of total debt for borrowed money to trailing EBITDA, each as defined in the 2016 Credit Agreement), and will be tested quarterly based on the last four fiscal quarters and is set at levels as described in the 2016 Credit Agreement. As of September 30, 2017, no such test is required as we have not exceeded 20% of our revolving capacity. We believe that our total net leverage ratio during the third quarter of 2017 was in compliance with the 2016 Credit Agreement, and that we are in compliance with all covenants.
The 2016 Credit Agreement also contains a number of affirmative and restrictive covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of our capital stock, prepayments of certain debt and transactions with affiliates. The 2016 Credit Agreement also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement may be accelerated and may become immediately due and payable. As of September 30, 2017, we were in compliance with all affirmative and restrictive covenants.
In connection with entering into the 2016 Credit Agreement, on February 16, 2016, we terminated our prior credit agreement, dated as of September- 22 2014, among PGT Industries, Inc., as the borrower, the Company, as guarantor, the lenders from time to time party thereto and Deutsche Bank, as administrative agent and collateral agent (“2014 Credit Agreement”). Along with cash on hand, proceeds from the term loan facility under the 2016 Credit Agreement were used to repay amounts outstanding under the 2014 Credit Agreement, acquire WinDoor, and pay certain fees and expenses.-
As of September 30, 2017, the face value of debt outstanding under the 2016 Credit Agreement was $244.0 million, and accrued interest was $0.4 million. During the third quarter of 2017, we made voluntary prepayments of outstanding borrowings under the term-loan portion of the 2016 Credit Agreement totaling $20.0 million, composed of a payment of $8.0 million made on September 29, 2017, and of $12.0 million made on July 7, 2017.Deferred Financing Costs
Other Debt
In July 2017, we entered into atwo-year financing arrangement for the purchase of an enterprise-wide software license relating to office productivity software. This financing arrangement requires 24 monthly payments of $26 thousand each. We estimated the value of this financing arrangement to be $590 thousand, using an imputed annual interest rate of 6.00%, which approximates our borrowing rate under the 2016 Credit Agreement, a Level 3 input. At September 30, 2017, there was $529 thousand outstanding under this financing arrangement.
The activity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, and discount for the threenine months ended September 30, 2017,October 1, 2022, are as follows. As a result of the voluntary prepayments of debt discussed above, we accelerated the amortization of lenders fees and discount relating to the term-loan portion of the 2016 Credit Agreement of $1.0 million, which is included in interest expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017. All debt-related fees,deferred financing costs and original issue discount are classified as a reduction of the carrying value of long-term debt:
(in thousands) | Total | |||
At beginning of year | $ | 16,102 | ||
Amortization expense through February 17, 2017 | (359 | ) | ||
|
| |||
At time of repricing | 15,743 | |||
Less: Amortization expense after repricing | (1,726 | ) | ||
Less: Accelerated amortization relating to debt prepayments | (980 | ) | ||
|
| |||
At end of period | $ | 13,037 | ||
|
|
(in thousands) |
| Total |
| |
At beginning of year |
| $ | 9,345 |
|
Less: Amortization expense |
|
| (921 | ) |
At end of period |
| $ | 8,424 |
|
Estimated amortization expense relating to third-party fees anddeferred financing costs lender fees and discount for the years indicated as of September 30, 2017,October 1, 2022, is as follows:
(in thousands) | Total | |||
Remainder of 2017 | $ | 670 | ||
2018 | 2,785 | |||
2019 | 2,966 | |||
2020 | 3,224 | |||
2021 | 3,011 | |||
2022 | 381 | |||
|
| |||
Total | $ | 13,037 | ||
|
|
(in thousands) |
| Total |
| |
Remainder of 2022 |
| $ | 312 |
|
2023 |
|
| 1,282 |
|
2024 |
|
| 1,282 |
|
2025 |
|
| 1,083 |
|
2026 |
|
| 1,114 |
|
Thereafter |
|
| 3,351 |
|
|
|
|
| |
Total |
| $ | 8,424 |
|
As a result of the voluntary prepayments totaling $20.0 million we made during the third quarter of 2017, weWe have no future scheduled repayments underpayments of outstanding debt until the contractual maturity of the 2016 Credit Agreement until the maturity of the facility on February 21, 2022. Thein October 2024. Our contractual future maturities of long-term debt outstanding, including the financing arrangement described as other debt, as of September 30, 2017, are as follows (at face value):
(in thousands) |
|
|
| |
Remainder of 2022 |
| $ | — |
|
2023 |
|
| — |
|
2024 |
|
| 60,000 |
|
2025 |
|
| — |
|
2026 |
|
| — |
|
Thereafter |
|
| 575,000 |
|
|
|
|
| |
Total |
| $ | 635,000 |
|
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.
(in thousands) | ||||
Remainder of 2017 | $ | 71 | ||
2018 | 295 | |||
2019 | 163 | |||
2020 | — | |||
2021 | — | |||
2022 | 243,975 | |||
|
| |||
Total | $ | 244,504 | ||
|
|
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 9.11. COMMITMENTS AND CONTINGENCIES
LitigationLegal 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 materiallymaterial adverse effect on our operations, financial position or cash flows.
NOTE 10.12. INCOME TAXES
IncomeWe had income tax expense was $3.0 million for the three months ended September 30, 2017, compared with $5.3of $10.1 million for the three months ended October 1, 2016.2022, compared with income tax benefit of $2.4 million for the three months ended October 2, 2021. Our effective tax rate for the three months ended September 30, 2017,October 1, 2022, was 32.2%24.9%, and was 32.8%compared with 31.9% for the three months ended October 2, 2021. Our income tax expense for the three months ended October 1, 2016. Income2022, and income tax benefit for the three months ended October 2, 2021, includes income tax expenses of $291 thousand and $449 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco. We had an income tax expense was $9.1 million for the nine months ended September 30, 2017, compared with $10.3of $29.9 million for the nine months ended October 1, 2016.2022, 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 September 30, 2017,October 1, 2022, was 31.8%24.8%, and was 34.5%compared with 18.8% for the nine months ended October 2, 2021. Our income tax expense for the nine months ended October 1, 2016.2022, and October 2, 2021, includes $1.0 million and $1.2 million, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the three and nine months ended September 30, 2017,October 1, 2022 includes discrete items of income tax benefit relating to excess tax benefits relating to exercises of stock options andfrom the lapses of restrictions on stock awards, treated as awhich totaled $60 thousand, and from research and development tax credits true-up adjustments, which totaled $472 thousand. The income tax benefit in the three months ended October 2, 2021 included discrete itemitems of income tax upon our adoptionbenefit relating to excess tax benefits from the lapses of ASU2016-09 effectiverestrictions on January 1, 2017,stock awards totaling $347$14 thousand, and $1.1 million, respectively. Excluding thisother true-up adjustments totaling less than $0.1 million. Income tax expense in the nine months ended October 1, 2022 includes discrete itemitems 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 three months ended October 1, 2022 and October 2, 2021, would have been an income tax expense rate of 26.2% and an income tax benefit rate of 30.8%, respectively. Excluding discrete items of income tax, the effective tax rates for the nine months ended September 30, 2017,October 1, 2022 and October 2, 2021, would have been 36.0%income tax expense rates of 25.7% and 35.8%21.9%, respectively.
TheIn 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 ratesrate for 2022 to include this increase in all periods, excluding the effectrate in Florida, where a substantial portion of the discrete item discussed above in the 2017 periods, were lower than our business is apportioned, to an estimated combined statutory federal and state tax rate of 38.8%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 asFlorida. 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 estimated impact ofsouthwest Florida coastline at Cayo Costa on September 28, 2022, the section 199 domestic manufacturing deduction, partially offset by the 50% deductibility-disallowance of meals and entertainment expenses.
At September 30, 2017, an accrued federal income tax payable of $6.6 million was classified within accrued liabilities in the accompanying condensed consolidated balance sheet. At December 31, 2016, a federal income tax receivable of $2.6 million was classified within other current assets in the accompanying condensed consolidated balance sheet. During the three or nine months ended September 30, 2017, we did not make a payment of estimated federal income taxes, nor did we receive any refunds of federal income taxes. Pursuant to tax relief from theU.S. Internal Revenue Service relating to taxpayers in certain designated areasand the state of Florida impacted by Hurricane Irma, which includes all counties in Florida in which we operate,have both extended their deadlines for payment of the deadline for remitting our required 2017 thirdfourth quarter 2022 estimated tax payment, for corporate income taxes, as well as the deadline for filing our 2016 fiscal year corporate income tax return, has been extendedoriginally due December 15, 2022, to January 31, 2018.February 15, 2023.
NOTE 11.13. 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 aninstrument-by-instrument basis as they are acquired or incurred.
During the three or nine months ended September 30, 2017,October 1, 2022 or October 1, 2016,2, 2021, we did notnot 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, as well as the 2021 Senior Notes, all classified as long-term debt. The fair value of our long-term debtborrowings under the 2016 Credit Agreement due 2024 approximated its carrying value due to its variable-rate nature, and was approximately $60.0 million as of October 1, 2022, and January 1, 2022, compared to a principal outstanding value of $60.0 million at those dates, respectively. The fair value of the 2021 Senior Notes is based on debt with similar terms and characteristics and was approximately $248.5$475.8 million as of September 30, 2017,October 1, 2022, compared to a principal outstanding value of $244.0$575.0 million, and $264.6the fair value was approximately $578.2 million as of December 31, 2016,January 1, 2022, compared to a principal outstanding value of $264.0$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 |
| |||||||||||||
| Assets (Liabilities) |
| |||||||||||||
|
|
|
| Quoted |
|
| Significant |
|
|
|
| ||||
|
|
|
| Prices in |
|
| Other |
|
| Significant |
| ||||
|
|
|
| Active |
|
| Observable |
|
| Unobservable |
| ||||
|
|
|
| Markets |
|
| Inputs |
|
| Inputs |
| ||||
October 1, 2022 | Total |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
Description |
|
|
|
|
|
|
|
|
|
|
| ||||
Aluminum contracts | $ | (4,001 | ) |
| $ | — |
|
| $ | (4,001 | ) |
| $ | — |
|
MTP contracts |
| 598 |
|
|
| — |
|
|
| 598 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| $ | (3,403 | ) |
| $ | — |
|
| $ | (3,403 | ) |
| $ | — |
|
| 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 |
|
| $ | — |
|
See Note 14 for a description of the methods and assumptions used in the determination of the fair values were determinedof 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. 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 observed 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 debtfinancial 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 October 1, 2022, the fair value of our aluminum forward contracts was in a liability position of $4.0 million. We had 8 outstanding forward contracts for the purchase of 11.5 million pounds of aluminum through December 2022, at an average price of $1.33 per pound, which excludes the Midwest premium, with maturity dates of between domesticone and three months. At October 1, 2022, the fair value of our MTP contracts was in an assetposition of $0.6 million. We had 2 outstanding MTP contracts to hedge the Platt US MW Transaction price per pound for the delivery of 5.3 million pounds of aluminum through December 2022, at an average price of $0.11 per pound, with maturity dates of between one and three 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 October 1, 2022.
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 expect the amount of accumulated other comprehensive loss of approximately $3.4 million in the accompanying condensed consolidated balance sheet as of October 1, 2022, 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 October 1, 2022 and January 1, 2022, as follows (in thousands):
|
| Derivative Assets |
|
|
| Derivative Liabilities |
| ||||||
|
| October 1, 2022 |
|
|
| October 1, 2022 |
| ||||||
Derivatives designated as hedging |
|
|
|
|
|
|
|
|
|
|
| ||
instruments under Subtopic 815-20: |
| Balance Sheet Location |
| Fair Value |
|
|
| Balance Sheet Location |
| Fair Value |
| ||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| ||
Aluminum contracts |
| Other current assets |
| $ | — |
|
|
| Accrued liabilities |
| $ | (4,001 | ) |
MTP contracts |
| Other current assets |
|
| 598 |
|
|
| Accrued liabilities |
|
| — |
|
Aluminum contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
MTP contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
Total derivative instruments |
| Total derivative assets |
| $ | 598 |
|
|
| Total derivative liabilities |
| $ | (4,001 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Derivative Assets |
|
|
| Derivative Liabilities |
| ||||||
|
| January 1, 2022 |
|
|
| January 1, 2022 |
| ||||||
Derivatives designated as hedging |
|
|
|
|
|
|
|
|
|
|
| ||
instruments under Subtopic 815-20: |
| Balance Sheet Location |
| Fair Value |
|
|
| Balance Sheet Location |
| Fair Value |
| ||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| ||
Aluminum contracts |
| Other current assets |
| $ | 4,829 |
|
|
| Accrued liabilities |
| $ | — |
|
MTP contracts |
| Other current assets |
|
| 4,599 |
|
|
| Accrued liabilities |
|
| — |
|
Aluminum contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
MTP contracts |
| Other assets |
|
| — |
|
|
| Other liabilities |
|
| — |
|
Total derivative instruments |
| Total derivative assets |
| $ | 9,428 |
|
|
| Total derivative liabilities |
| $ | — |
|
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 $2.5 million as of October 1, 2022, and was an accumulated other comprehensive income of $7.0 million at January 1, 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 institutions.
|
| Derivatives in Cash Flow Hedging Relationships |
| |||||||||||||||
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
| ||||||||||
|
| Three Months Ended |
|
|
|
| Three Months Ended |
| ||||||||||
|
| October 1, |
|
| October 2, |
|
|
|
| October 1, |
|
| October 2, |
| ||||
|
| 2022 |
|
| 2021 |
|
|
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Aluminum contracts |
| $ | (2,012 | ) |
| $ | 4,194 |
|
| Cost of sales |
| $ | (3,185 | ) |
| $ | 4,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
MTP contracts |
| $ | (621 | ) |
| $ | 2,355 |
|
| Cost of sales |
| $ | 769 |
|
| $ | 2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Derivatives in Cash Flow Hedging Relationships |
| |||||||||||||||
|
| Amount of Gain or (Loss) |
|
| Location of Gain or (Loss) |
| Amount of Gain or (Loss) |
| ||||||||||
|
| Nine Months Ended |
|
|
|
| Nine Months Ended |
| ||||||||||
|
| October 1, |
|
| October 2, |
|
|
|
| October 1, |
|
| October 2, |
| ||||
|
| 2022 |
|
| 2021 |
|
|
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Aluminum contracts |
| $ | (9,427 | ) |
| $ | 13,385 |
|
| Cost of sales |
| $ | (597 | ) |
| $ | 8,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
MTP contracts |
| $ | (60 | ) |
| $ | 10,525 |
|
| Cost of sales |
| $ | 3,941 |
|
| $ | 4,181 |
|
We classify cash flows related to derivative instruments as operating activities in the condensed consolidated statements of cash flows.
- 28 -
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the components of accumulated other comprehensive income (loss) for the three and nine months ended October 1, 2022 and October 2, 2021 (in thousands):
Three months ended October 1, 2022 |
| Aluminum |
|
| MTP |
|
|
|
| |||
(in thousands) |
| 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 |
|
Tax effect |
|
| (279 | ) |
|
| 335 |
|
|
| 56 |
|
Net current-period other comprehensive loss |
|
| 894 |
|
|
| (1,055 | ) |
|
| (161 | ) |
Balance at October 1, 2022 |
| $ | (2,952 | ) |
| $ | 423 |
|
| $ | (2,529 | ) |
|
|
|
|
|
|
|
|
|
| |||
Nine months ended October 1, 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 |
|
| (9,427 | ) |
|
| (60 | ) |
|
| (9,487 | ) |
Amounts reclassified from accumulated other comprehensive income |
|
| 597 |
|
|
| (3,941 | ) |
|
| (3,344 | ) |
Tax effect |
|
| 2,268 |
|
|
| 1,028 |
|
|
| 3,296 |
|
Net current-period other comprehensive loss |
|
| (6,562 | ) |
|
| (2,973 | ) |
|
| (9,535 | ) |
Balance at October 1, 2022 |
| $ | (2,952 | ) |
| $ | 423 |
|
| $ | (2,529 | ) |
|
|
|
|
|
|
|
|
|
| |||
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 |
|
- 29 -
NOTE 16. 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 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 nine months ended October 1, 2022, and October 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. Results of the Western segment for the three and nine months ended October 1, 2022 includes the results of CRi, acquired May 1, 2021, and Anlin, acquired October 25, 2021. Results of the Western segment for the three and nine months ended October 2, 2021, includes CRi's results for the post acquisition period from May 1, 2021, and no results from Anlin. Corporate overhead has been allocated to each segment using an allocation method we believe is reasonable (in thousands):
| 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 October 1, 2022 and October 2, 2021, was $6.7 million and $7.0 million for our Southeast segment, respectively, and $1.6 million and $0.9 million for our Western segment, respectively. Depreciation expense for the nine-months ended October 1, 2022 and October 2, 2021, was $20.6 million and $19.7 million for our Southeast segment, respectively, and $4.7 million and $2.6 million for our Western segment, respectively. Amortization expense for the three months ended October 1, 2022 and October 2, 2021, was $2.7 million, and $2.7 million for our Southeast segment, respectively, and $3.1 million and $2.6 million for our Western segment, respectively. Amortization expense for the nine months ended October 1, 2022 and October 2, 2021, was $8.1 million, and $7.9 million for our Southeast segment, respectively, and $11.6 million and $7.3 million for our Western segment, respectively.
Total assets of our Southeast segment as of October 1, 2022 and January 1, 2022 were $995.3 million and $911.3 million, respectively. Total assets of our Western segment as of October 1, 2022 and January 1, 2022 were $607.3 million and $549.3 million, respectively.
- 30 -
NOTE 17. REEDEMABLE NON-CONTROLLING INTEREST
On February 1, 2021, we completed an acquisition of a 75% ownership stake in Eco. The seller of Eco obtained the remaining equity interest in the newly formed company, Eco Enterprises. The seller’s redeemable non-controlling interest ("RNCI") was initially established at fair value.
The agreement between PGT Innovations, Inc. and the seller provides the Company with a call right for seller’s equity interest in the third year following the acquisition date. If the Company does not exercise its right to call by the third anniversary, the agreement provides the seller with a put right which can be exercised during the 15-day period following the third anniversary. Upon exercise of the put or call right, the purchase price is calculated based on a future agreed performance metric. The put option makes the non-controlling interest redeemable and, therefore, the redeemable non-controlling interest is classified as temporary equity outside of shareholders’ equity.
The Company calculates the estimated future redemption value of the non-controlling interest on a quarterly basis. The redeemable non-controlling interest is accreted to the future redemption value using the effective interest method up to the date on which the put-right becomes effective. Any accretion adjustment in the current reporting period of the redeemable non-controlling interest is offset against retained earnings and impacts earnings used in the calculation of earnings per share attributable to common shareholders in the reporting period. Based on the formula in the operating agreement governing this transaction, the future redemption value of the redeemable non-controlling interest was estimated to be $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:
| Nine Months Ended |
| |||||
| October 1, |
|
| October 2, |
| ||
(in thousands) | 2022 |
|
| 2021 |
| ||
Balance at beginning of period | $ | 36,863 |
|
| $ | — |
|
RNCI in Eco at initially estimated fair value |
| — |
|
|
| 28,464 |
|
Net income attributable to redeemable non-controlling interest |
| 1,334 |
|
|
| 1,656 |
|
Change in value of redeemable non-controlling interest |
| 1,514 |
|
|
| 4,528 |
|
Balance at end of period | $ | 39,711 |
|
| $ | 34,648 |
|
NOTE 18. 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. 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 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 of $250.0 million (the “New Revolving Credit Facility”). 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.
- 31 -
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 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.
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.
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.
- 32 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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/A for the Management’syear ended January 1, 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 consolidated financial statements and notes theretofactors described in our Annual Report on Form 10-K/A for the year ended December 31, 2016, includedJanuary 1, 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 our most recent Annual Report on Form10-K as well as our reports on Forms10-Q and8-K and other publicly available information. All amounts herein are unaudited.the forward-looking statements.
Special Note Regarding Forward-Looking Statements
Except for historical information contained herein, the matters set forth in this
This Quarterly Report on Form10-Q are forward-looking statements. These 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 are based on management’s current expectations and plans, which involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminologywords such asas: “assume,” “believe,” “could,” “estimate,” “guidance,” “may,” “will,”“believe,” “expect,“outlook,” “forecast,” “guidance,” “intend,” “could,” “project,” “estimate,” “anticipate,” “should,” “plan,” “will” and similar terminology. Youreferences 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 cautionedneither 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 to place undue reliancerely on any of these forward-looking statements, which speak only as of the filing date of this Quarterly Report and which involve risks and uncertaintiesstatements. Important factors that maycould cause our actual results and financial condition to differ materially from those set forthindicated in the forward looking statements. Those risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements include, but are not limited to:among others, the following:
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Any forward-looking statementsstatement made by us orin this Quarterly Report on our behalf speakForm 10-Q is based only on information currently available to us and speaks only as of the date they are made and, except as may be required by law, we do noton which it is made. We undertake anyno obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to reflecttime, 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 subsequent events or circumstances.
EXECUTIVE OVERVIEWAs 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.
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Sales and Operations
During the third quarter of 2022, we grew at 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 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, and which included organic sales growth of 16.8%. Sales growth at our Southeast segment was entirely organic, while sales growth at our Western segment was both organic and from acquisitions.
Our Southeast segment's net sales were $288.2 million in the third quarter of 2022, compared to $255.1 million in the third quarter of 2021, an increase of $33.1 million, or 13.0%. We recordedbelieve some of this organic growth is being driven by gaining market share as 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 third quarter of 2022, and may also negatively impact our fourth quarter of 2022, one of the biggest events that occurred recently was the passage of Florida House Bill 7071, signed into law in May 2022. This bill provides two-year tax relief to Florida residences 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, we believe our Florida operations will benefit from this home-hardening legislation. The main highlight of the bill 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.
Our Western segment's net sales were $97.6 million in the third quarter of $126.92022, compared to $45.3 million down 2.3 percentin 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 2016. Saleslast 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 $377.0 million forable 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 nine-month period ended September 30, 2017, up 8.0 percentyear 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 same period last year.
Our third quarter of 2017 started strong as sales in July and August were up over 5 percent compared to last year, which benefitted operational performance. During this period, we were regularly recording order weeks of between $10 and $11 million, and daily order volumes remained steady during the early part of September.
On September 10th, Hurricane Irma (Irma), a Category 4 storm with sustained130-mph winds, made landfall in the Florida Keys, one of our primary markets. Impacts from this400-mile-wide storm were felt over the entire state of Florida, which represents 90 percent of our consolidated sales.
As Irma advanced towards Florida, our daily order levels began to decrease, dropping by as much as 50 percent at times during the month as many customersyear. Recent investments in our key Florida markets suspended operations. Someteam to help achieve higher talent levels have also helped generate improved operational efficiencies across our entire portfolio of brands. We believe the most severely impacted areas were incombination of improved operational performance we achieved prior to Hurricane Ian, reduced lead times and previously implemented price increases will continue to benefit our most important markets in southeast and southwest Florida, which represents approximately 70 percent of our sales. When Irma arrived, we were forced to cease operations for a period of up to six days in certain locations, a period during which we did not ship or produce any products.
We estimate that Irma caused a negative sales impact of approximately $13 million to our 2017 third quarter. Irma also caused an added $1.1 million in operating costs, which included $345 thousand classified within cost of sales, and $746 thousand classified within selling, general and administrative expenses. We expect some portion of those sales to be recovered in the 2017 fourth quarter, with the remainder falling into 2018, as some of our customers are still workinggross margin through their post-Irma recovery efforts. For the month of October 2017, sales finished up 5 percent compared to October 2016, which has driven solid operational performance.
Looking to the balance of 2017, we are making meaningful advertising investments to capture opportunities for growth we expect to see in 2018 and beyond from the heighten awareness of our impact-resistant products following this active hurricane season. We are also looking forward to the opportunity we have to sharpen our focus on window and door manufacturing, having partnered with Cardinal for them to supply us with high-quality door glass. Our recently announced agreement for the sale of glass manufacturing assets to Cardinal, and the related7-yearPGT- branded door glass supply agreement for Cardinal to provide us withPGT-branded door glass will benefit both parties. The $28 million in cash proceeds we expect to receive from the sales of these assets provides us with an added ability to continue to pay down debt, and further strengthen our already strong balance sheet.2022.
For the full year 2017, the Company expects to finish within the previous guidance range for consolidated sales of $490 to $500 million.
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Performance Summary
The following table presents financial data derived from our unaudited condensed consolidated statements of comprehensive incomeoperations as a percentage of total net sales for the periods indicatedindicated. The three- and nine-month periods ended October 1, 2022 and October 2, 2021 are composed of 13 weeks and 39 weeks, respectively (in thousands, except percentages):
Three Months Ended | ||||||||||||||||||||||||||||
September 30, | October 1, |
| Three Months Ended | |||||||||||||||||||||||||
2017 | 2016 |
| October 1, 2022 |
| October 2, 2021 | |||||||||||||||||||||||
(unaudited) |
| (unaudited) | ||||||||||||||||||||||||||
Net sales | $ | 126,876 | 100.0 | % | $ | 129,807 | 100.0 | % |
| $ | 385,837 |
|
| 100.0 % |
| $ | 300,431 |
|
| 100.0 % | ||||||||
Cost of sales | 87,128 | 68.7 | % | 88,721 | 68.3 | % |
|
| 236,035 |
|
| 61.2 % |
|
| 196,228 |
|
| 65.3 % | ||||||||||
|
| |||||||||||||||||||||||||||
Gross profit | 39,748 | 31.3 | % | 41,086 | 31.7 | % |
|
| 149,802 |
|
| 38.8 % |
|
| 104,203 |
|
| 34.7 % | ||||||||||
Selling, general and administrative expenses | 24,950 | 19.7 | % | 22,533 | 17.4 | % |
|
| 102,399 |
|
| 26.5 % |
|
| 78,595 |
|
| 26.2 % | ||||||||||
Fair value adjustment to contingent consideration | — | — | (3,000 | ) | (2.3 | )% | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Income from operations | 14,798 | 11.7 | % | 21,553 | 16.6 | % |
|
| 47,403 |
|
| 12.3 % |
|
| 25,608 |
|
| 8.5 % | ||||||||||
Interest expense, net | 5,514 | 4.3 | % | 5,495 | 4.2 | % |
|
| 6,889 |
|
| 1.8 % |
|
| 7,686 |
|
| 2.6 % | ||||||||||
|
| |||||||||||||||||||||||||||
Income before income taxes | 9,284 | 7.3 | % | 16,058 | 12.4 | % | ||||||||||||||||||||||
Income tax expense | 2,992 | 2.4 | % | 5,262 | 4.1 | % | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net income | $ | 6,292 | 5.0 | % | $ | 10,796 | 8.3 | % | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
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)% | ||||||||||||||||
Less: Net income attributable to redeemable RNCI |
|
| (373 | ) |
| (0.1)% |
|
| (677 | ) |
| (0.2)% | ||||||||||||||||
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)% |
Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | October 1, |
| Nine Months Ended | |||||||||||||||||||||||||
2017 | 2016 |
| October 1, 2022 |
| October 2, 2021 | |||||||||||||||||||||||
(unaudited) |
| (unaudited) | ||||||||||||||||||||||||||
Net sales | $ | 376,981 | 100.0 | % | $ | 349,046 | 100.0 | % |
| $ | 1,151,020 |
|
| 100.0 % |
| $ | 857,023 |
|
| 100.0 % | ||||||||
Cost of sales | 260,941 | 69.2 | % | 240,507 | 68.9 | % |
|
| 701,495 |
|
| 60.9 % |
|
| 561,849 |
|
| 65.6 % | ||||||||||
|
| |||||||||||||||||||||||||||
Gross profit | 116,040 | 30.8 | % | 108,539 | 31.1 | % |
|
| 449,525 |
|
| 39.1 % |
|
| 295,174 |
|
| 34.4 % | ||||||||||
Selling, general and administrative expenses | 72,385 | 19.2 | % | 63,209 | 18.1 | % |
|
| 307,786 |
|
| 26.7 % |
|
| 224,106 |
|
| 26.1 % | ||||||||||
Fair value adjustment to contingent consideration | — | — | (3,000 | ) | (0.9 | )% | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Income from operations | 43,655 | 11.6 | % | 48,330 | 13.8 | % |
|
| 141,739 |
|
| 12.3 % |
|
| 71,068 |
|
| 8.3 % | ||||||||||
Interest expense, net | 14,992 | 4.0 | % | 14,935 | 4.3 | % |
|
| 21,124 |
|
| 1.8 % |
|
| 22,968 |
|
| 2.7 % | ||||||||||
Debt extinguishment costs | — | — | 3,431 | 1.0 | % |
|
| — |
|
| - |
|
| 25,472 |
|
| 3.0 % | |||||||||||
|
| |||||||||||||||||||||||||||
Income before income taxes | 28,663 | 7.6 | % | 29,964 | 8.6 | % |
|
| 120,615 |
|
| 10.5 % |
|
| 22,628 |
|
| 2.6 % | ||||||||||
Income tax expense | 9,117 | 2.4 | % | 10,339 | 3.0 | % |
|
| 29,910 |
|
| 2.6 % |
|
| 4,260 |
|
| 0.5 % | ||||||||||
|
| |||||||||||||||||||||||||||
Net income | $ | 19,546 | 5.2 | % | $ | 19,625 | 5.6 | % |
|
| 90,705 |
|
| 7.9 % |
|
| 18,368 |
|
| 2.1 % | ||||||||
|
| |||||||||||||||||||||||||||
Less: Net income attributable to redeemable RNCI |
|
| (1,334 | ) |
| (0.1)% |
|
| (1,656 | ) |
| (0.2)% | ||||||||||||||||
Net income attributable to the Company |
|
| 89,371 |
|
| 7.8 % |
|
| 16,712 |
|
| 2.0 % | ||||||||||||||||
Decrease in redemption value of RNCI |
|
| (1,514 | ) |
| (0.1)% |
|
| (4,528 | ) |
| (0.5)% | ||||||||||||||||
Net income attributable to common shareholders |
| $ | 87,857 |
|
| 7.6 % |
| $ | 12,184 |
|
| 1.4 % |
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017OCTOBER 1, 2022 AND OCTOBER 2, 2021
The three-month periods ended October 1, 2016
The following table represents total sales by product category for the three months ended September 30, 2017,2022 and October 1, 2016 (in millions):2, 2021 are each composed of 13 weeks.
Three Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||||||
Sales | % of sales | Sales | % of sales | % change | ||||||||||||||||
Product category: | ||||||||||||||||||||
Impact-resistant windows and door products | $ | 108.8 | 85.7 | % | $ | 110.2 | 84.9 | % | (1.3 | )% | ||||||||||
Non-Impact window and door products | 18.1 | 14.3 | % | 19.6 | 15.1 | % | (7.7 | )% | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total net sales | $ | 126.9 | 100.0 | % | $ | 129.8 | 100.0 | % | (2.3 | )% | ||||||||||
|
|
|
|
|
|
|
|
Total netNet sales
|
| Three Months Ended |
|
| ||||||||||
|
| October 1, 2022 |
| October 2, 2021 |
|
| ||||||||
|
| Net Sales |
|
| % of sales |
| Net Sales |
|
| % of sales |
| % change | ||
By segment: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Southeast segment |
| $ | 288.2 |
|
| 74.7% |
| $ | 255.1 |
|
| 84.9% |
| 13.0% |
Western segment |
|
| 97.6 |
|
| 25.3% |
|
| 45.3 |
|
| 15.1% |
| 115.6% |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total net sales |
| $ | 385.8 |
|
| 100.0% |
| $ | 300.4 |
|
| 100.0% |
| 28.4% |
Net sales duringfor the third quarter of 20172022 were $126.9$385.8 million, a decrease of $2.9$85.4 million, or 2.3%28.4%, increase in sales, including 16.8% of organic growth, from $129.8$300.4 million in the third 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 2016.2022 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 primary market isSoutheast segment's net sales were $288.2 million in the Statethird quarter of Florida, from which2022, compared to $255.1 million in the third quarter of 2021, an increase of $33.1 million, or 13.0%. This growth was entirely organic, but we derive approximately 90% of our sales. On September 10, 2017,believe was adversely impacted by Hurricane IrmaIan in late-September 2022. As previously discussed, Hurricane Ian was a large and destructive Category 4 Atlantic hurricane, that made landfall inon the southwest Florida Keys and moved north over the entire state, affecting all areas of Florida. Irma caused disruption tocoastline at Cayo Costa on September 28, 2022, disrupting our ability to manufacture and distribute our products, and required us to shut-down and cease operations for a period of up to six days at certain of our locations. Irma also affected our customers’ ability to accept deliveries of our products. We estimate that loststorm-related disruptions caused approximately $12.0 million of third-quarter 2022 sales directly attributable to the disruption caused by Irma for the three months ended September 30, 2017, totaled approximately $13 million.be deferred.
NetOur Western segment's net sales of impact-resistant window and door products were $108.8$97.6 million forin the third quarter of 2017, a decrease2022, compared to $45.3 million in the third quarter of $1.42021, an increase of $52.3 million, or 1.3%, from $110.2 million in net115.6%. While sales for the third quarter of 2016. Included in sales2022 of our impact-resistant windowWestern segment includes acquisition growth from Anlin, our existing Western segment's sales grew organically by 38.3% compared to 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 door products were $77.2 million of aluminum impact sales, a decrease of $4.3 million, or 5.3%, and $31.6 million of vinyl impact sales, an increase of $2.9 million, or 10.2%.our new San Diego showroom in Southern California.
Net sales ofnon-impact window and door products were $18.1 million for the third quarter of 2017, a decrease of $1.5 million, or 7.7%, from $19.6 million in net sales for the third quarter of 2016.
Gross profit and gross margin
Gross profit was $39.7$149.8 million in the third quarter of 2017, a decrease2022, an increase of $1.3$45.6 million, or 3.3%43.8%, from $41.1$104.2 million in the third quarter of 2016. The2021. Our gross margin percentage was 31.3%38.8% in the third quarter of 2017,2022, compared to 31.7%34.7% in the prior year third quarter, a decreasean increase of 0.4%4.1%. Adjusting for costs relating to Hurricane Irma, and transition costs associated with WinDoor leadership and the glass supply-chain, which combined totaled $1.0Ian that impacted our gross profit totaling $1.1 million, in the 2017 three-month period, and product line termination costs totaling $0.8 million in the 2016 three-month period, theour gross margin percentage was 32.1% in the third quarter of 2017,2022 was 39.1%, compared to 32.3%34.7% in the prior year third quarter, a decreaseand increase of 0.2%4.4%. ImprovementsThe increases in scrap ratesgross profit and efficiencies, which benefitted gross margin by 0.5%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 third quarter of 2017,2022, 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 a price increase, which benefittedbelieve these actions will continue to benefit our gross margin by 0.7%,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.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses were more than offset by decreases$102.4 million in the third quarter of 0.6%2022, an increase of $23.8 million, from $78.6 million in the third quarter of 2021. SG&A in the third quarter of 2022 was 26.5% of net sales, compared to 26.2% of net sales in the third quarter of 2021. The increase in SG&A in the third quarter of 2022, compared to last year's third quarter is partially due to the impactinclusion of higher depreciation on higher capital spendingSG&A from our 2021 acquisition of Anlin, which added $8.5 million of SG&A in recent years, 0.7%the 2022 second quarter, and included $0.6 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 third quarter of 2022 includes $0.7 million of costs related to disruptions and recovery efforts caused by Hurricane Ian.
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Income from operations
Income from operations was $47.4 million in the third quarter of 2022, an increase of $21.8 million, or 85.2%, from $25.6 million in the third quarter of 2021. Income from operations in the third quarter of 2022 includes $30.0 million from our Southeast segment and $17.4 million from our Western segment, compared to $20.7 million and $4.9 million from our Southeast and Western segments, respectively, in the third quarter of 2021, 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 aluminum pricessales 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 0.1% due toWestern segments, more than offsetting the combined effectsrising costs for materials in aluminum and glass, including the increasing costs of lower sales volumedistribution being passed onto us by our vendors, and mixthe continuing costs of sales.attracting, training and retaining an experienced labor force.
Selling, general and administrative expensesInterest expense, net
Selling, general and administrative expenses were $25.0Interest expense was $6.9 million in the third quarter of 2017, an increase2022, a decrease of approximately $2.4$0.8 million, or 10.7%10.4%, from $22.5$7.7 million in the third quarter of 2016. As2021. 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 in 2021 primarily resulted in a percentagelower level of sales, these costs increased to 19.7%, an increase of 2.3%, from 17.4% from the third quarter of 2016. Selling, general and administrative expenses increasedinterest expense in the third quarter of 2017,2022 compared to the third quarter of last year, due to higher distribution2021.
Debt Extinguishment Costs
Debt extinguishment costs due to disruptions caused by Irma. Selling, general and administrative expenses duringtotaled $25.5 million in the three months ended October 2, 2021. On September 30, 2017,24, 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 increased due to our community outreach activitiesincluded a pre-payment call premium of 105.063% of face value, which we undertook to assist those affected by Irma locally.
We record warrantytotaled $21.5 million and is classified as debt extinguishment costs as a selling expense within selling, general and administrative expenses. Duringin the threeaccompanying condensed consolidated statement of operations for the nine months ended September 30, 2017, we recorded warranty expense at a rateOctober 2, 2021. The remainder of 2.04%debt extinguishment costs of sales, which decreased when compared$4.0 million is composed of $9.4 million of unamortized third-party deferred costs and lender fees relating to the rate in2021 Senior Notes due 2026, including the second quarterFirst and Second Add-On Notes, offset by $5.4 million of 2017unamortized premiums we received from the First and Second Add-On Notes.
Income tax expense
We had income tax expense of 2.22%. During$10.1 million for the three months ended October 1, 2016, we recorded warranty expense at a rate2022, compared with income tax benefit of 2.21% of sales. We believe the decrease in warranty expense as a percentage of sales was the result of our workforce becoming more seasoned through experience and training. We expect that, as our team members continue to gain in experience, and are exposed to improved training initiatives we have implemented, combined with the use of our new thermal plastic spacer system, an innovative technology for the production of insulated glass, warranty expense, as a percentage of sales, will further decline.
Fair Value Adjustment of Contingent Consideration
The stock purchase agreement for the acquisition of WinDoor provided for the potential for an earn-out contingency payment to sellers had WinDoor achieved a certain level of sales in the calendar year ended December 31, 2016. The potential undiscounted amount of all future payments that could be required to be paid under the contingent earn-out consideration arrangement was between $0 and $3.0 million. We had recorded an earn-out contingency liability of $3.0$2.4 million on the closing date, which represented its then estimated fair value using undiscounted cash flows, based on probability adjusted level of revenues with a range whose minimum was $51.0 million. Based on revised estimates using actual sales through the end of the 2016 third quarter, we concluded the probability was remote that WinDoor’s actual sales for 2016 would reach the $46.0 million minimum level required for the minimum payment of $2.7 million possible under the earn-out contingency arrangement and, therefore, determined that the entire initial estimated fair value of $3.0 million should be reversed.
Interest expense, net
Interest expense was $5.5 million in the third quarter of 2017, representing no change from $5.5 million in the third quarter of 2016. Interest expense decreased due to a decrease in the average level of outstanding debt during the third quarter of 2017, compared to the third quarter of 2016, as the result of a total of $20 million in voluntary prepayments made during the third quarter of 2017, offset by an increase in interest expense due to accelerated amortization of lenders fees and discount of $1.0 million, which is included in interest expense in the accompanying condensed consolidated comprehensive income for the three months ended September 30, 2017.
As a result of recent increases in LIBOR, the weighted averageall-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement was 6.02% as of September 30, 2017.
Income tax expense
Our income tax expense was $3.0 million for the third quarter of 2017, compared with $5.3 million for the third quarter of 2016.October 2, 2021. Our effective tax rate for the third quarter of 2017three months ended October 1, 2022, was 32.2%24.9%, and was 32.8%compared with 31.9% for the third quarterthree months ended October 2, 2021. Our income tax expense for the three months ended October 1, 2022, and income tax benefit for the three months ended October 2, 2021, includes income tax expenses of 2016. $291 thousand and $449 thousand, respectively, relating to our 75% share of the pre-tax earnings of Eco.
Income tax expense in the third quarterthree months ended October 1, 2022 includes discrete items of 2017 is net ofincome tax benefit relating to excess tax benefits relating to exercises of stock options andfrom the lapses of restrictions on stock awards, treated aswhich totaled $60 thousand, and from research and development tax credits true-up adjustments, which totaled $472 thousand. The income tax benefit in the three months ended October 2, 2021 included discrete items of income tax upon our adoptionbenefit relating to excess tax benefits from the lapses of ASU2016-09 effectiverestrictions on January 1, 2017,stock awards totaling $347 thousand.$14 thousand, and other true-up adjustments totaling less than $0.1 million. Excluding this discrete itemitems of income tax, the effective tax rates for the three months ended October 1, 2022 and October 2, 2022, would have been an income tax expense rate of 26.2% and an income tax benefit rate of 30.8%, 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 the third quarter2022 to include this increase in rate in Florida, where a substantial portion of 2017 would have been 36.0%.
The effective tax rates in all periods, excluding the effect of the discrete item relatingour business is apportioned, to the treatment of excess tax benefits as discussed above, were lower than ouran estimated combined statutory federal and state tax rate of 38.8%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 asFlorida. 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 estimated impactsouthwest 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 section 199 domestic manufacturing deduction, partially offsetfourth quarter 2022 estimated tax payment, originally due December 15, 2022, to February 15, 2023.
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Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the three months ended October 1, 2022, was $0.4 million, compared to $0.7 million for the three 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 50% deductibility-disallowanceCompany.
Change in redemption value of meals and entertainment expenses.
The change in the redemption value of the redeemable non-controlling interest for the three-month period ended October 1, 2022, was a decrease of $0.3 million, compared to an increase of $1.0 million in the three months ended October 2, 2021. 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 SEPTEMBER 30, 2017OCTOBER 1, 2022 AND OCTOBER 2, 2021
The nine-month periods ended October 1, 2016
The following table represents total sales by product category for the nine months ended September 30, 2017,2022 and October 1, 2016 (in millions):2, 2021 are each composed of 39 weeks.
Nine Months Ended | ||||||||||||||||||||
September 30, 2017 | October 1, 2016 | |||||||||||||||||||
Sales | % of sales | Sales | % of sales | % change | ||||||||||||||||
Product category: | ||||||||||||||||||||
Impact-resistant window and door products | $ | 320.2 | 84.9 | % | $ | 291.1 | 83.4 | % | 10.0 | % | ||||||||||
Non-impact window and door products | 56.8 | 15.1 | % | 57.9 | 16.6 | % | (2.0 | )% | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total net sales | $ | 377.0 | 100.0 | % | $ | 349.0 | 100.0 | % | 8.0 | % | ||||||||||
|
|
|
|
|
|
|
|
Total netNet 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 duringfor the first nine months of 20172022 were $377.0$1,151.0 million, an increase of over $27.9a $294.0 million, or 8.0%34.3%, increase in sales, including 20.4% of organic growth, from $349.0$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 2016.2022 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 primary market isSoutheast segment's net sales were $867.5 million in the Statefirst nine months of Florida, from which2022, 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 derive approximately 90% of our sales. On September 10, 2017,believe was adversely impacted by Hurricane IrmaIan in late-September 2022. As previously discussed, Hurricane Ian was a large and destructive Category 4 Atlantic hurricane, that made landfall inon the southwest Florida Keys and moved north over the entire state, affecting all areas of Florida. Irma caused disruption tocoastline at Cayo Costa on September 28, 2022, disrupting our ability to manufacture and distribute our products, and required us to shut-down and cease operations for a period of up to six days at certain of our locations. Irma also affected our customers’ ability to accept deliveries of our products. We estimate that lost sales directly attributable to theHurricane Ian-related disruptions caused by Irma for the three months ended, and therefore the nine months ended, September 30, 2017, totaled approximately $13 million.$12.0 million of third-quarter 2022 sales to be deferred.
NetOur Western segment's net sales of impact-resistant window and door products were $320.2$283.5 million forin the first nine months of 2017,2022, compared to $125.8 million in the first nine months of 2021, an increase of $29.1$157.7 million, or 10.0%, from $291.1 million in net125.4%. While sales for the first nine months of 2016. Included in sales2022 of our impact-resistant windowWestern segment includes acquisition growth from Anlin and door products were $227.3 million of aluminum impact sales, an increase of $13.6 million, or 6.4%, and $93.0 million of vinyl impact sales, an increase of $15.5 million, or 20.0%.
Net sales ofnon-impact window and door products were $56.8 million forCRi, our existing business grew organically by 38.4% compared to the first nine months of 2017, an decrease of $1.1 million, or 2.0%,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 $57.9 millionour capacity expansion in net sales for the first nine months of 2016.Phoenix, Arizona area and our new San Diego showroom in Southern California.
Gross profit and gross margin
Gross profit was $116.0$449.5 million in the first nine months of 2017,2022, an increase of $7.5$154.3 million, or 6.9%52.3%, from $108.5$295.2 million in the first nine months of 2016. The2021. Our gross margin percentage was 30.8%39.1% in the first nine months of 2017,2022, compared to 31.1%34.4% in the prior year first nine months a decrease of 0.3%last year, an increase of 4.7%. Adjusting for costs relating to Hurricane Irma, transition costs associated with WinDoor leadership and the glass supply-chain, and costs relating to thestart-up ofIan that impacted our Thermal Plastic Spacer system linegross profit totaling $1.5$1.1 million, in the 2017 nine-month period, and product line termination costs totaling $0.8 million in the 2016 nine-month period, theour gross margin percentage was 31.2% in the first nine-months of 2017, compared to 31.3% in the prior year first nine-months, a decrease of 0.1%. Gross margin in the first nine months of 20172022 was negatively impacted by higher material costs, primarily related39.2%, compared to aluminum costs, which lowered34.4% in the prior year third quarter, and increase of 4.8%. The increases in gross profit and gross margin by 0.7%,include the effects of price increase actions we took to offset the impacts of labor and by higher depreciationmaterial cost headwinds we have experienced for several quarters. Also, during the first nine months of 2022, we maintained a high degree of focus on higher capital spendingour 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 recent years,our labor talent which loweredhelped generate operational efficiencies across all our businesses in response to increasing demand and believe these actions will continue to benefit our gross margin by 0.6%. These decreases were partiallyas we try to offset by a benefitthe impacts of 0.4% from improvements in scrap ratesrising costs for materials and efficiencies, a benefit of 0.5% from an improved mix of sales,labor, and will continue to higher margin products ingrow our repair and modeling markets, and a benefit of 0.3% due to a price increase.company with high-quality talent.
- 39 -
Selling, general and administrative expenses
Selling, general and administrativeSG&A expenses were $72.4$307.8 million in the first nine months of 2017,2022, an increase of $9.2$83.7 million, or 14.5%, from $63.2$224.1 million in the first nine months of 2016. As a percentage of sales, these costs increased to 19.2%, an increase of 1.1%, from 18.1% from2021. SG&A in the first nine months of 2016.2022 was 26.7% of net sales, compared to 26.1% of net sales in the first nine months of 2021. The increase in selling, generalSG&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 administrativeincluded $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 was primarily related to $3.1 million in higher accrued incentive costs as a resultthe first nine months of the improved performance,2022 includes $0.7 million of costs related to management reorganization actions, $0.9 million of costs from our attendance atdisruptions and participation in the National Association of Home Builders’ International Builders Show in Orlando, Florida in January 2017, higher distribution costs on the higher level of sales, and added delivery costs due to disruptionsrecovery efforts caused by Irma, and $0.7 million in higher costs directly related to Irma. Selling, general and administrative expenses during the nine months ended September 30, 2017, also increased due to our community outreach activities which we undertook to assist those affected by Irma locally.
Income from operations
We record warranty costs as a selling expense within selling, general and administrative expenses. During the three months ended September 30, 2017, we recorded warranty expense at a rate of 2.04% of sales, resulting in a rate of 2.30% of sales for the nine months ended September 30, 2017. During the nine months ended October 1, 2016, we recorded warranty expense at a rate of 2.32% of sales. We believe the decrease in warranty expense as a percentage of salesIncome from operations was the result of our workforce becoming more seasoned through experience and training. We expect that, as our team members continue to gain in experience, and are exposed to improved training initiatives we have implemented, combined with the use of our new thermal plastic spacer system, an innovative technology for the production of insulated glass, warranty expense, as a percentage of sales, will further decline.
Fair Value Adjustment of Contingent Consideration
The stock purchase agreement for the acquisition of WinDoor provided for the potential for an earn-out contingency payment to sellers had WinDoor achieved a certain level of sales in the calendar year ended December 31, 2016. The potential undiscounted amount of all future payments that could be required to be paid under the contingent earn-out consideration arrangement was between $0 and $3.0 million. We had recorded an earn-out contingency liability of $3.0 million on the closing date, which represented its then estimated fair value using undiscounted cash flows, based on probability adjusted level of revenues with a range whose minimum was $51.0 million. Based on revised estimates using actual sales through the end of the 2016 third quarter, we concluded the probability was remote that WinDoor’s actual sales for 2016 would reach the $46.0 million minimum level required for the minimum payment of $2.7 million possible under the earn-out contingency arrangement and, therefore, determined that the entire initial estimated fair value of $3.0 million should be reversed.
Interest expense, net
Interest expense was $15.0$141.7 million in the first nine months of 2017,2022, an increase of $0.1$70.6 million, or 99.4%, from $14.9$71.1 million in the first nine months of 2016. During 2016, concurrent with the acquisition of WinDoor2021. Income from operations in the middle of the first quarter of 2016, we refinanced our then existing credit agreement into the 2016 Credit Agreement, a $270 million senior secured credit facility, which increased our outstanding debt balance to $270 million, up from $197.5 million at the time of the refinancing. The increase in interest expense was due primarily to the increase in outstanding debt under the new credit facility and resulting increase in average outstanding debt balance during the first nine months of 2017,2022 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 2016, butlast 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 partially offset by$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 averagefirst 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 outstanding debt as the result of a total of $20 million in voluntary prepayments made during the third quarter of 2017. Interestinterest expense in the first nine months of 2017 also benefitted from2022 compared to the February 17, 2017 repricingfirst 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 2016 Credit Agreement,$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 resulted in aone-percentage point reduction in the interest rate under the term loan portion of the facility. This benefit was offset by the accelerated amortization of lenders feestotaled $21.5 million and discount of $1.0 million relating to the third quarter 2017 voluntary prepayments of term loan borrowings, which is included in interest expenseclassified as debt extinguishment costs in the accompanying condensed consolidated statementsstatement of operations for the nine months ended September 30, 2017.
As a resultOctober 2, 2021. The remainder of recent increases in LIBOR, the weighted averageall-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement was 6.02% as of September 30, 2017.
Debtdebt extinguishment costs
Debt extinguishment of $4.0 million is composed of $9.4 million of unamortized third-party deferred costs were $3.4 million in the first nine months of 2016. These costs relatedand lender fees relating to thewrite-off 2021 Senior Notes due 2026, including the First and Second Add-On Notes, offset by $5.4 million of deferred financing costsunamortized premiums we received from the First and debt discount in connection with entering into the 2016 Credit Agreement effective on February 16, 2016, which resulted in certain then existing lenders exiting the facility, and certain continuing lenders being considered debt extinguishments in the refinancing. This resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders.Second Add-On Notes.
Income tax expense
OurWe had an income tax expense was $9.1of $29.9 million for the first nine months of 2017,ended October 1, 2022, compared with $10.3income tax expense of $4.3 million for the first nine months of 2016.ended October 2, 2021. Our effective tax rate for the first nine months of 2017ended October 1, 2022, was 31.8%24.8%, and was 34.5%compared with 18.8% for the first 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 2016. the pre-tax earnings of Eco.
Income tax expense in the first nine months ended October 1, 2022 includes discrete items of 2017 is net ofincome tax benefit relating to excess tax benefits relating to exercises of stock options andfrom the lapses of restrictions on stock awards, treated aswhich 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 upon our adoptionbenefit relating to excess tax benefits from the lapses of ASU2016-09 effectiverestrictions on January 1, 2017, totaling $1.1 million.stock awards, which totaled $714 thousand. Excluding this discrete itemitems 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 2017 would2022, 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 been 35.8%.
The effective tax rates in all periods, excluding the effectboth extended their deadlines for payment of the discrete item relatingfourth 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 treatment25% interest of excess tax benefits as discussed above, were lower than our combined statutory federal and state tax rateEco not acquired by the Company.
Change in redemption value of 38.8% primarily asredeemable non-controlling interest
The change in the resultredemption value of the estimated impactredeemable 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 17 in Part I, Item 1, for a further discussion of the section 199 domestic manufacturing deduction, partially offset bychange in the 50% deductibility-disallowanceredemption value of meals and entertainment expenses.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Our principal source of liquidity is cash flow generated by operations, and supplemented by borrowings under our credit facilities. We expect that this cash generating capability will provide us with financial flexibility in meeting operating and investing needs.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.
Consolidated Cash FlowsThe following table summarizes our cash flow results for the first nine months of 2022 and 2021:
|
| Components of Cash Flows |
| |||||
|
| Nine Months Ended |
| |||||
|
| October 1, |
|
| October 2, |
| ||
(in millions) |
| 2022 |
|
| 2021 |
| ||
Cash provided by operating activities |
| $ | 152.1 |
|
| $ | 19.8 |
|
Cash used in investing activities |
|
| (25.5 | ) |
|
| (132.0 | ) |
Cash (used in) provided by financing activities |
|
| (4.0 | ) |
|
| 126.6 |
|
|
|
|
|
|
|
| ||
Increase in cash and cash equivalents |
| $ | 122.6 |
|
| $ | 14.4 |
|
- 41 -
Operating activities. Cash provided by operating activities during the first nine months of 20172022 was $34.7$152.1 million, compared to $33.2cash provided in operating activities of $19.8 million in the first nine months of 2016.2021. The reductionincrease in cash provided by operating activities for the first nine months of 2017,2022, as compared to the first nine months of 2016,2021, was $132.3 million, and was due to the factors set forth in the table below.
Direct cash flows from operations for the first nine months of 20172022 and 20162021 are as follows:
| Direct Operating |
| ||||||||||||||
Direct Operating Cash Flows |
| Nine Months Ended |
| |||||||||||||
Nine Months Ended |
| October 1, |
| October 2, |
| |||||||||||
(in millions) | September 30, 2017 | October 1, 2016 |
| 2022 |
|
| 2021 |
| ||||||||
Collections from customers | $ | 373.4 | $ | 341.5 |
| $ | 1,145.8 |
|
| $ | 806.8 |
| ||||
Other collections of cash | 3.9 | 3.9 |
|
| 12.2 |
|
|
| 9.5 |
| ||||||
Disbursements to vendors | (230.2 | ) | (208.2 | ) |
|
| (681.1 | ) |
|
| (537.9 | ) | ||||
Personnel related disbursements | (99.1 | ) | (93.9 | ) |
|
| (289.1 | ) |
|
| (213.9 | ) | ||||
Income taxes refunded, net | — | 1.3 | ||||||||||||||
Income taxes paid, net of refunds |
|
| (20.9 | ) |
|
| (12.2 | ) | ||||||||
Debt service payments | (13.3 | ) | (11.4 | ) |
|
| (14.7 | ) |
|
| (32.4 | ) | ||||
Other cash activity, net |
|
| (0.1 | ) |
|
| (0.1 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Cash from operations | $ | 34.7 | $ | 33.2 | ||||||||||||
|
| |||||||||||||||
Cash provided by operations |
| $ | 152.1 |
|
| $ | 19.8 |
|
Days sales outstanding (DSO), which
During the second quarter of 2022, a customer with whom we calculate as accounts receivable divided by quarterly average daily sales, was 42 days at September 30, 2017, comparedhave had a long-term relationship experienced financial difficulties. As such, we determined to 36 days atcease 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, 2016. Our DSO’s2022, we recorded provisions for credit losses totaling $7.4 million, including the provision relating to begin the month of September 2017, were 36 days, but were negatively impacted by Irma, which caused disruptions to our customers’ invoice-payment activities, resulting in an increase in our accounts receivable balancethis customer.
Inventory as of September 30, 2017. DSO’s were also affected by certain larger customer projects for CGI and WinDoor, which have longer payment terms.
Inventory on hand as of September 30, 2017,October 1, 2022, was $39.1$112.3 million, compared to $30.5$91.4 million at December 31, 2016,January 1, 2022, an increase of $8.6$20.9 million. The increase in inventory was due to the seasonal inventorybuild-up due to the summer continuation of the repair and remodeling season, but also due to delivery disruptions caused by Irma, which affected our customers’ ability to accept deliveries of our products, which required us to return finished products to our warehouses until such time as our customers were able to accept deliveries.
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 alla significant portion of our products aremade-to-order, which requires us to relieve inventory and recognize revenue over time, we have only a smalllow amount of work-in-process and finished goods andwork-in-process inventory.inventories. As a result of these factors, our inventories are not excessive andsuch, we believe the value of suchour inventories will be realized through sales.
Investing activities.Cash used in investing activities was $9.6$25.5 million for the first nine months of 2017,2022, compared to cash used in investing activities of $114.6over $132.0 million for the first nine months of 2016. We used $101.3 million of cash in the first nine months of 2016 to acquire businesses. Excluding cash used to acquire businesses, there was2021, a decrease in cash used in investing activities dueof $106.5 million. There was cash used to acquire businesses in the first nine months of 2022 relating to the finalization of the Anlin acquisition working capital adjustment, resulting in a final payment to sellers of $0.8 million. Cash used to acquire businesses in the first nine months of 2021 totaled $106.5 million, which included $94.4 million related to our acquisition of Eco, and $12.1 million relating to our acquisition of CRi. There was an decrease in cash used in capital expenditures of $3.6$1.0 million which went from $13.3$25.7 million in the first nine months of 2016,2021, to $9.7$24.7 million in the first nine months of 2017.
Financing activities.Cash used in financing activities2022. Proceeds from the sales of assets was $19.6less than $0.1 million in the first nine months of 2017,2022, compared to cash provided by financing activities of $49.8with $0.2 million in the first nine months of 2016, a decrease2021.
Financing activities. Cash used in cash provided of $69.4 million. We made repayments of long-term debt of $20.1financing activities was $4.0 million in the first nine months of 2017, including a total of $20.0 million in voluntary prepayments of outstanding borrowing under the term loan facility of the 2016 Credit Agreement,2022, compared to cash used for repaymentsprovided in financing activities of long-term debt in the first nine months of 2016 of $203.5 million. Cash used for payments of long-term debt of $203.5$126.6 million in the first nine months of 2016 was2021, a decrease in cash provided of $130.6 million. In the resultfirst nine months 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 February 2016 refinancing and contemporaneouspay-downacquisition, we classified the portion of $197.5 million of our then existing credit facility. Subsequent tothese payments representing the refinancing, $2.0 million had been repaid as scheduled debt repayments through the endfair value of the third quarter of 2016. In addition, we madefirst payment, which was $2.4 million, as a voluntary prepayment of $4.0 million on September 30, 2016.
The February 2016 refinancing resulted in $261.0 million in net proceeds from the issuance of long-term debt. In addition, there were payments of financing costs of $7.2 million related to the refinancing. Taxes paid relating to common stock withheld from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards were $0.2$1.9 million in the first nine months of 2017,2022, versus $0.1$1.2 million in the first nine months of 2016,2021, an increase in cash used of $0.1$0.7 million. There was a decreasewere proceeds from stock issued under our 2019 Employee Stock Purchase Plan of $2.7$0.3 million in cash usedduring the first nine months of 2022, compared to purchase treasury shares.$0.2 million during the first nine months of 2021. Proceeds from the exercises of stock options for the first nine months of 2021 was $0.1 million,
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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 approximately equalused, 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 2017, versus the first nine months of 2016. Also, there was a $1.6 million decrease2021, including financing costs relating to excess tax benefitsbank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes due to our adoption of ASU2016-09, which no longer requires excess tax benefits to be presented as a financing activity.2026.
Capital Resources and Debt Covenant.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”), issued at 100% of their principal amount. The 2021 Senior Notes 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 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 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 mature on October 1, 2029. Interest on the 2021 Senior Notes is payable semi-annually, in arrears, beginning on April 1, 2022, with interest accruing at a rate of 4.375% per annum from September 24, 2021. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes totaling $8.7 million, which included a 1.25% lender spread on the total principal value of the 2021 Senior Notes, or $7.2 million, and $1.5 million of other costs, all of which are being amortized under the effective interest method.
As of October 1, 2022, the face value of debt outstanding under the 2021 Senior Notes was $575.0 million, and accrued interest was $12.6 million. Proceeds from the 2021 Senior Notes 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 2016 Credit Agreement of $54.0 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 gives us the option to redeem some or all of the 2021 Senior Notes at the redemption prices and on the terms specified in the indenture governing the 2021 Senior Notes. The indenture governing the 2021 Senior Notes 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 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 2024
On February 16, 2016, we entered into the 2016 Credit Agreement due 2024, among us, the lending institutions identified in the 2016 Credit Agreement due 2024, and Deutsche Bank AG New York Branch,Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2024 establishes new 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 six yearsFebruary 2022 that will amortizeamortizes on a basis of 1% annually during theits six-year term, and a $40.0 million revolving credit facility originally maturing in five yearsFebruary 2021 that includesincluded 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.
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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.
On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Third Amendment provided for, among other things, (i) a three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022, which refinanced in full our existing Term B term loan facility under the 2016 Credit Agreement, and had no regularly scheduled amortization, and (ii) 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. Asassets, and is senior in position to the 2021 Senior Notes.
On October 25, 2021, we entered into an amendment of September 30, 2017, there were $0.2 million of letters of credit outstanding and $39.8 million available on the revolver.
Interest on all loans under theour 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement on February 17, 2017, as described below, borrowings under the term loans and the revolving credit facility accrued interest at("Fourth Amendment"). The Fourth Amendment provides for, among other things, a rate equal to, at our option, LIBOR (with a floor of 100 basis points in respect of the term loan), or a base rate (with a floor of 200 basis points in respect of the term loan) plus an applicable margin. The applicable margin was 575 basis pointsthree-year Term A loan in the caseaggregate maximum available amount of LIBOR and 475 basis points in$60.0 million (the "Incremental Term A Loan"), proceeds from which were used to fund the case ofAnlin Acquisition. The Fourth Amendment did not change any terms relating to the base rate. We payRevolving Facility, under which we paid quarterly fees on the unused portion of the revolving credit facility equal to 50 basis points per annum as well as a quarterly letterpercentage 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 fee at 575 basis points per annum plus a 12.5 basis point facing fee per annum onoutstanding and $74.3 million available under the face amount of any outstanding letters of credit. Revolving Facility.
The weighted averageall-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2024 was 6.02%5.12% as of September 30, 2017,October 1, 2022, and was 5.75%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. The Fifth Amendment provides for, among other things, a new five-year revolving credit facility in an aggregate principal amount of $250.0 million (the “New Revolving Credit Facility”). The New Revolving Credit Facility refinances and replaces the previously existing $80.0 million revolving credit facility under the Credit Agreement. The Company’s obligations under the 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 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 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 such that it will be tested on a quarterly basis, commencing with the fiscal quarter ending December 31, 2016.2022.
On February 17, 2017, we entered into an amendmentThe 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. The First Amendment, among other things, (a) decreasesAgreement, under which we drew $160.0 million on October 14, 2022, the applicable interest rate margins for the Initial Term Loans (as defined in the Credit Agreement) from (i) 4.75%proceeds of which were used to 3.75%, in the casepay $98.4 million of the Base Rate Loans (as defined in$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 Credit Agreement), and (ii) 5.75% to 4.75%, in the caseFourth Amendment of the Eurodollar Loans (as defined in the Credit Agreement), and (b) adds a soft call premium equal to 1.0% of the principal repaid or repriced if the Initial Term Loans are voluntarily refinanced or repriced pursuant to certain refinancing transactions within twelve months of the effective date of the First Amendment.
Theour 2016 Credit Agreement, contains a springing financial covenant, if we drawplus $1.6 million in excess of twenty percent (20%)fees, costs and accrued interest. The remainder of the revolving facility, which requires us to maintain a maximum total net leverage ratio (based on the ratio of total debt for borrowed money to EBITDA, each as defined in the 2016 Credit Agreement), and is tested quarterly based on the last four fiscal quarters and is set at levels as described in the 2016 Credit Agreement. As of September 30, 2017, no test is required as we have not exceeded 20% of our revolving capacity. During 2017, the maximum permitted total net leverage ratio as stated in the 2016 Credit agreement is 4.25:1. We believe that our total net leverage ratio during 2017 has been and will continue to be in compliance with the 2016 Credit Agreement, and that we are in compliance with all covenants.
The 2016 Credit Agreement also contains a number of affirmative and restrictive covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of our capital stock, prepayments of certain debt and transactions with affiliates. The 2016 Credit Agreement also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement may be accelerated and may become immediately due and payable. As of September 30, 2017, we were in compliance with all affirmative and restrictive covenants.
As of September 30, 2017, the facefair value of debt outstanding under the 2016 Credit Agreementconsideration transferred totaling $89.4 million was $244.0 million,funded with cash and accrued interest was $0.4 million. During the third quarter of 2017, we made voluntary prepayments of outstanding borrowings under the term-loan portion of the 2016 Credit Agreement totaling $20.0 million, composed of a payment of $8.0 million madecash equivalents on September 29, 2017, and of $12.0 million made on July 7, 2017.
The activity relating to third-partyhand previously generated through operations. We also paid buyer fees and costs lender fees and discountrelating 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 September 30, 2017, are set forth inOctober 1, 2022 for services received prior to the table below. As a resultclosing of the voluntary prepayments of debt discussed above, we accelerated the amortization of lenders feesMartin Acquisition, classified as selling, general and discount relating to the term-loan portion of the 2016 Credit Agreement of $1.0 million, which is included in interest expenseadministrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017. All debt-relatedOctober 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. 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 activity relating to deferred financing costs, composed of third-party fees and costs, and original issue discountlender fees, for the nine months ended October 1, 2022, are as follows. All deferred financing costs are classified as a reduction of the carrying value of long-term debt:
(in thousands) | Total | |||
At beginning of year | $ | 16,102 | ||
Amortization expense through February 17, 2017 | (359 | ) | ||
|
| |||
At time of repricing | 15,743 | |||
Less: Amortization expense after repricing | (1,726 | ) | ||
Less: Accelerated amortization relating to debt prepayments | (980 | ) | ||
|
| |||
At end of period | $ | 13,037 | ||
|
|
(in thousands) |
| Total |
| |
At beginning of year |
| $ | 9,345 |
|
Less: Amortization expense |
|
| (921 | ) |
At end of period |
| $ | 8,424 |
|
Estimated amortization expense relating to third-party fees anddeferred financing costs lender fees and discount for the years indicated as of September 30, 2017,October 1, 2022, is as follows:
(in thousands) | Total | |||
Remainder of 2017 | $ | 670 | ||
2018 | 2,785 | |||
2019 | 2,966 | |||
2020 | 3,224 | |||
2021 | 3,011 | |||
2022 | 381 | |||
|
| |||
Total | $ | 13,037 | ||
|
|
(in thousands) |
| Total |
| |
Remainder of 2022 |
| $ | 312 |
|
2023 |
|
| 1,282 |
|
2024 |
|
| 1,282 |
|
2025 |
|
| 1,083 |
|
2026 |
|
| 1,114 |
|
Thereafter |
|
| 3,351 |
|
|
|
|
| |
Total |
| $ | 8,424 |
|
As a result of the voluntary prepayments totaling $20.0 million we made during the third quarter of 2017, we
We have no future scheduled repayments underpayments of outstanding debt until the contractual maturity of the 2016 Credit Agreement until the maturity of the facility on February 21, 2022. Thein October 2024. Our contractual future maturities of long-term debt outstanding, including the financing arrangement described as other debt, as of September 30, 2017, are as follows (at face value):
(in thousands) | ||||
Remainder of 2017 | $ | 71 | ||
2018 | 295 | |||
2019 | 163 | |||
2020 | — | |||
2021 | — | |||
2022 | 243,975 | |||
|
| |||
Total | $ | 244,504 | ||
|
|
(in thousands) |
|
|
| |
Remainder of 2022 |
| $ | — |
|
2023 |
|
| — |
|
2024 |
|
| 60,000 |
|
2025 |
|
| — |
|
2026 |
|
| — |
|
Thereafter |
|
| 575,000 |
|
|
|
|
| |
Total |
| $ | 635,000 |
|
Capital Expenditures.Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first nine months of 2017,2022, capital expenditures were $9.7$24.7 million, compared to $13.3$25.7 million for the first nine months of 2016. In 2017,2021. Our capital expenditure program is directed towards making investments in capital assets that we expect to spend approximately$12-$15 million onbelieve will increase both gross sales and margins, but also includes capital expenditures primarily including machineryfor maintenance.
Aluminum Forward and equipment, and distribution equipment such as tractors and trailers.
Share Repurchase Program. On October 28, 2015,Midwest Transaction Premium Contracts.We enter into aluminum forward contracts to hedge the Board of Directors authorized and approved a share repurchase program of up to $20 million. Repurchases are madefluctuations in open market or privately negotiated transactions, subject to market conditions, applicable legal requirements, our 2016 Credit Agreement, and other relevant factors. We do not intend to repurchase any shares from directors, officers, or other affiliates. The program does not obligate us to acquire any specific number of shares. The timing, manner, price and amount of repurchases will be determined at the Company’s discretion,
subject to the approval of its Board of Directors, and the program may be suspended, terminated or modified at any time for any reason. During the first nine months of 2017, we made no repurchases of our common stock under this program. In the future, we may make opportunistic repurchases of our common stock as we see fit, subject to the approval of our Board of Directors.
Sale of Door Glass Processing Assets. On September 22, 2017, we entered into an Asset Purchase Agreement (APA) with Cardinal LG Company (Cardinal) for the sale to Cardinal of certain manufacturing equipment we used in processing glass components forPGT-branded doors for a cash purchase price of $28 million. Contemporaneously with entering into the APA,aluminum extrusions we entered into a seven-year supply agreement (SA) with Cardinal for Cardinal to supply us with glass components forPGT-branded doors. The Company determined to sell these assets, whose net book value at September 30, 2017, was $5.6 million, anduse in production. We also enter into forward contracts to hedge the SAfluctuations in order to allow us to heightenthe price of the delivery component of our focusaluminum extrusion purchases, known as the Midwest Transaction Premium (MTP).
At October 1, 2022, the fair value of our aluminum forward contracts was in our core areasa liability position of window and door manufacturing and, at the same time, strengthen our supply chain for high-quality door glass from a supplier with whom we have been doing business for many years.
The APA provides$4.0 million. We had 8 outstanding forward contracts for the transferpurchase of the assets from the Company to Cardinal in two phases, with the first date being on or about November 1, 2017, and the second date being on or about March 1, 2018. Under the APA, the cash purchase11.5 million pounds of aluminum through December 2022, at an average price of $28 million is$1.33 per pound, which excludes the Midwest premium, with maturity dates of between one and three months.
At October 1, 2022, the fair value of our MTP contracts was in an asset position of $0.6 million. We had 2 outstanding MTP contracts to be paid by Cardinal tohedge the Company in three separate payments of $3 million at the time of the first transfer of the assets to Cardinal, $10 million on January 15, 2018, and $15 million at the time of the second transfer of assets to Cardinal.
The SA provides that the Company will purchase, and Cardinal will supply, all of the Company’s requirements for certain glass components used in PGT-branded doors through the end of 2024. The terms of the manufacture by Cardinal and purchase by the Company of such glass components as to purchase orders, forecasts of purchases, pricing, invoicing, delivery and payment terms and other terms, are all as described in the SA.
The Company has determined that, although the APA and SA are separate agreements, they were negotiated contemporaneously. Therefore, the Company has concluded that the $28 million of proceeds under the APA should be bifurcated between the sale of the door glass manufacturing assets, and paymentPlatt US MW Transaction price per pound for the Company’s commitment to buy glass components forPGT-branded doors from Cardinal underdelivery of 5.3 million pounds of aluminum through December 2022, at an average price of $0.11 per pound, with maturity dates of between one and three months.
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We assess the SA, and that such bifurcation is predicated oneffectiveness of our aluminum forward contracts by comparing the change in the fair value of the door glass manufacturing assets being sold on or aboutforward contract to the date of sale.change in the expected cash to be paid for the hedged item. The Company has engaged an independent machinery and equipment valuation specialist to provide a fair market value appraisaleffective portion of the assets sold to Cardinal, whichgain or loss on our aluminum forward contracts is currentlyreported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in process. Accordingly,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 market value appraisal is not yet finalized, and there had been no exchanges of assets or cash under the APAvalues as of September 30, 2017, and no purchases or salesOctober 1, 2022. We expect the amount of glass components forPGT-branded doors under the SA asaccumulated other comprehensive loss of September 30, 2017, no amounts relating to either the APA or SA have been recognizedapproximately $3.4 million in the accompanying condensed consolidated financial statementsbalance sheet as of and forOctober 1, 2022, to be reclassified to earnings within the three and nine months ended September 30, 2017.next twelve months.
Contractual Obligations
There have been no significant changes to the “Disclosures of Contractual Obligations and Commercial Commitments” table in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form10-K for the year ended December 31, 2016.
Significant Accounting Policies and Critical Accounting Estimates
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 Form10-K annual report 10-K/A for the year ended December 31, 2016.January 1, 2022. There have been no changes to our critical accounting policies during the first nine months of 2017.
Recently Issued Accounting Pronouncements
Pronouncements. Reference Rate Reform. In addition to the pronouncements issued during 2017, ASU2016-02, “Leases”, and ASU2014-09, “Revenue from Contracts with Customers”, presented below, see Note 3 to the consolidated financial statements included in our recently filed Annual Report on Form10-K for the year ended December 31, 2016.
In August 2017,March 2020, the FASB issued ASU2017-12, “Derivatives and Hedging 2020-04, “Reference Rate Reform (Topic 815)848): Targeted Improvements to Accounting for Hedging Activities.” The amendments under ASU2017-12 refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the faceFacilitation of the financial statementsEffects of Reference Rate Reform on Financial Reporting” and in March 2021, a subsequent amendment to the footnotes. It also makesinitial 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 targeted improvements to simplify the application of hedge accounting guidance. ASU2017-12 becomes effective for us in the first quarter of 2019.criteria are met. We are currently assessing the impact thehave not elected adoption of this ASU will haveoptional 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.
In February 2017,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 FASBCompany, completed the acquisition ("Martin Acquisition") of all of the issued ASU2017-05, “Other Income - Gain and Lossesoutstanding 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 Derecognition of Nonfinancial Assets.” ASU2017-05 clarifies the scope of Subtopic610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Subtopic610-20, which was issued in May 2014 as a part of ASU2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts withnon-customers. This update is effective at the same time as the amendments in ASU2014-09, therefore, for our fiscal year beginning after December 15, 2017, and may apply them either under a full- or modified-retrospective basis. We do not expect the adoption of this guidance to have a significant effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU2017-04 simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. The amendment also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This update is effective for our fiscal year beginning after December 15, 2019, and shall be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this guidance to have a significant effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” ASU2017-01 affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business. It also provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. This update is effective for our fiscal year beginning after December 15, 2017, including interim periods therein. We do not expect adoption of this guidance to have a significant effect on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842)”. This guidance supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for all entities. ASU2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an optionthe closing of the Martin Acquisition. Martin's assets include those typical to elect to use certain transition relief. The Company is continuing to evaluate the impactoperation of this new standard on its consolidated financial statements.
Approaching Adoption of ASU2014-09, ��Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers”. ASU2014-09 replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model. The core principle is to recognize revenue upon the transfer of goodsbusiness including accounts receivable, inventories, property and equipment, as well as intangibles assets which we expect will include one or services to customers at an amount that reflects the consideration expectedmore Martin trade names, customer relationships, developed technology, and possibly other yet to be received. The FASB also issued ASU2015-14, “Deferralidentified intangible assets, and which we expect to engage a third-party valuation firm to assist with the valuation of Effective Date”. ASU2015-14 deferredsuch assets.
On October 13, 2022, the effective date forCompany entered into the new guidance until the annual reporting period beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, but not before the original effective date (periods beginning after December 15, 2016). The standard permits the use of either the full-retrospective (restating all years presented in the Company’s financial
statements), or modified-retrospective (recording the impact of adoption as an adjustment to retained earnings at the beginningFifth Amendment of the year of adoption) transition methods. Since its issuance,2016 Credit Agreement. The Fifth Amendment provides for, among other things, the FASB has also amended several aspects of the new guidance, including; ASU2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; which clarifies the Topic 606 guidance on principal versus agent considerations, ASU2016-10, “Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing”, which clarifies identification of a performance obligation and addresses revenue recognition associated with the licensing of intellectual property, ASU2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow Scope Improvements and Practical Expedients”, which clarifies assessment of collectability criterion,non-cash consideration and other technical corrections, and ASU2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”, which is the result of the FASB Board decision to issue a separate Update for technical corrections and improvements. The Company currently plans to adopt the provisions of this new accounting standard at the beginning of fiscal year 2018, using the modified-retrospective method.
The Company completed its preliminary assessment of the impact of its upcoming adoption of ASU2014-09 on its consolidated financial statements. The Company recognizes revenue currently under existing generally accepted accounting principles,New Revolving Credit Facility, which is a modelnew 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 transferFifth Amendment, we will pay quarterly fees on the unused portion of the risks and rewards of ownership. Predominantly, for the Company, this has been at the point in time that possession of goods has transferredNew Revolving Credit Facility equal to the customer upon delivery. The model for recognizing revenue will change under ASU2014-09,a percentage spread (ranging from 0.25% to one0.35%) based on our first lien net leverage ratio. The Fifth Amendment also modifies the transfer of control offinancial covenant under the product to the customer. Under ASU2014-09, revenue is recognized when an entity satisfies its obligation by transferring control of the goods or services to the customer, and transfer of possession of the product is not required in order for transfer of control of the product to the customer to have occurred.
ASU2014-09 states that if any one of three defined criteria is met, it is likely that an entity will be required to recognize revenue over time, where previously the entity has recognized revenue at the point in time which possession of the goods or services pass to the customer. Pursuant to our preliminary assessment, we believe that, of these three criteria, the Company meets the criteria which states that revenue is recognized over time if an entity’s performance (i.e. creation of a good or service for the customer) does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completedto-date. ASU2014-09 further states that, when evaluating whether or not the goods or services have an alternative use, an entity should consider the level of customization of the goods or services. A high level of customization is a strong indicator that the goods or services do not have an alternative use and, therefore, revenue would be recognized over time as an entity performs.
The Company is a manufacturer of fully-customized windows and doors, and manufactures products 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 from the customer. The Company’s initial assessment is that its goods have no alternative use, as that term is defined in ASU2014-09, and that control of the product passes to the customer no later than completion of the manufacturing of each or all of the products in an order, but before delivery of the products to the customer. Additionally, the Company has an enforceable right to payment at the agreed-upon sales prices contained in our agreements with our customers for all manufacturing efforts expended by the Company on behalf of its customers.
Based on this initial assessment, the Company believes2016 Credit Agreement such that it will be requiredtested 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 change its method of recognizing revenue, to one of potentially recognizing revenue as products are manufactured, but no later than completionpay $98.4 million of the manufacturing process, from its current method$187.8 million total fair value of recognizing revenue upon deliveryconsideration 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 producttotal 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 customer. The Company is continuing to evaluate its manufacturing processesMartin Acquisition, which we are analyzing for proper accounting treatment. We accrued an estimated $1.25 million of acquisition-related expenses in order to assess at what point the products have no alternative use and the recognition of revenue should begin. However, because revenue will have been recognized on at least all productsthree months ended October 1, 2022 for which manufacturing has been completed, the Company believes that upon adoption of ASU2014-09, inventories on its consolidated balance sheets will no longer include finished goods. The Company also believes that it will recognize revenue at an earlier point thanservices received prior to the adoptionclosing of ASU2014-09, but that such effect may not materially affect itsthe Martin Acquisition, classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations post-adoption due tofor the fact that such effects will exist at boththree and nine months ended October 1, 2022. Since the beginning and end of fiscal periods after the initial transition.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.
ASU2014-09Subsequent 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 requires entities, primarilyworking closely with cybersecurity experts and legal counsel. The Company is in the manufacturing segment, to make policy elections relating to shippingearly stages of its investigation and handling charges. Entities may elect to treat shippingassessment of the security event and handlingcannot 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 separate performance activity,result of this event. In addition to these risks and recognize revenue from shippingother information set forth in this report, one should carefully consider the discussion on the other risks and handlinguncertainties 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 performance occurs. Conversely, entities may also elect to treat shippingthe Midwest Transaction Premium (“MTP”). As of October 1, 2022, we are covered for approximately 80% of our anticipated aluminum needs for the remainder of 2022 at an average price of $1.33 per pound. These calculations are based only on the LME price of aluminum and handling as a fulfillment activity,excludes an estimate for the MTP, which will require shipping and handlingwe hedge separately. As of October 1, 2022, we are covered for approximately 37% of our anticipated MTP costs for undelivered products to be accrued in order to match this cost with the revenue previously recognized over time. The Company currently recognizes shipping and handling costs as a fulfillment activity, and has preliminarily determined to continue to treat such costs as a fulfillment activity.
The Company expects to continue to evaluate the impactremainder of 2022 at an average price of $0.11 per pound. As of the adoption of ASU2014-09 on its consolidated financial statements, and will provide updates and additional information as the effective date of adoption approaches.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.
Regarding our aluminum hedging instruments for the purchase of aluminum, as of October 1, 2022, a 10% decrease in the price of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $1.1 million. This calculation utilizes our actual commitment of 11.5 million pounds under contract (to be settled through December 2022) and the market price of aluminum as of October 1, 2022. This calculation is based only on the LME price of aluminum and excludes an estimate for the MTP. Regarding our MTP contracts for hedging of the delivery component of our aluminum needs, as of October 1, 2022, a 10% decrease in the Platts MW US Transaction price per pound would decrease the fair value of our MTP contracts an estimated $0.1 million. This calculation utilizes our actual commitment of 5.3 million pounds under contract (to be settled through December 2022) and the then current Platts MW US Transaction price per pound as of October 1, 2022.
We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding with a variable rate as of the date of filing of this Quarterly Report on Form10-Q of $244.0$98.4 million, a 100 basis pointbasis-point increase in interest rate would result in approximately $2.4$1.0 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 chief financial officer, with the assistance of management, evaluated the design, operation and effectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-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 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 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, 2022, we acquired Eco and Anlin. We are currently integrating Eco and Anlin into our operations, compliance programs and internal control processes. As such Eco and Anlin were not included in our assessment of internal control over financial reporting as of January 1, 2022. We will include Eco and Anlin into our assessment of internal controls as of December 31, 2022, the end of our 2022 fiscal year. Eco Enterprises and Anlin Industries were included in the 2021 consolidated financial statements of the Company and constituted 22.0% of total assets as of January 1, 2022 and 9.2% of revenues for the fiscal year then ended.PART II — OTHER INFORMATION
We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities with respect to claims and lawsuits. We do not believe that the ultimate resolution of the matters pending or threatened against us at this time will have a material adverse impact on our financial position or results of operations.
Although our business and facilities are subject to federal, state, and local environmental regulation, environmental regulation does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and regulations. As owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances, or the discovery of previously unknown environmental conditions.
In additionOur operations are subject to the other information set fortha number of risks. When considering an investment in this report,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 discussedset forth in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form10-K annual report 10-K/A for the year ended December 31, 2016, which could materially affectJanuary 1, 2022. If any of the events described in the risk factors actually occur, our business, financial condition or futureoperating 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.
Additional riskWe may not be able to achieve the full potential strategic and uncertainties not currently known to us orfinancial benefits that we currently deemexpect to be immaterial,achieve from the Martin Acquisition. We may also materially adversely affectnot 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 financial condition, and/or operating results.could be harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities and Use of Proceeds
None during the quarter.quarter cover by this report.
Issuer Purchases of Equity
None during the quarter.- 49 -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
None.
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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*Filed herewith.
SIGNATURE**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.
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Date: November 10, 2022 | By: /s/ John Kunz | |
Name: John Kunz | ||
Title: Senior Vice President and Chief Financial Officer |
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