UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM10-Q

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

For the quarterly period ended September 30, 201728, 2019

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, FL 34275

Registrant’s telephone number:941-480-1600941-480-1600

 

Delaware20-0634715

State of

Incorporation

IRS Employer

Identification No.

Delaware

20-0634715

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

☐  (Do not check if a smaller reporting company)

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) 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 49,660,69958,404,734 shares, as of November 2, 2017.October 31, 2019.

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

PGTI

New York Stock Exchange, Inc.

 

 

 

 


PGT INNOVATIONS, INC.

TABLE OF CONTENTS

Form10-Q for the Three and Nine Months Ended September 30, 201728, 2019

 

Page

Number

Part I. Financial Information

Number

Part I.

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements (unaudited):

3

Condensed Consolidated Statements of Operations

3

Condensed Consolidated Statements of Comprehensive Income

3

4

Condensed Consolidated Balance Sheets

4

5

Condensed Consolidated Statements of Cash Flows

5

6

Condensed Consolidated Statements of Shareholders’ Equity

7

Notes to Condensed Consolidated Financial Statements

6

8

Item 2.

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

19

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

42

Item 4.

Controls and Procedures

32

42

Part II. Other Information

Part II.

Item 1. Legal ProceedingsOther Information

33

43

Item 1A. Risk Factors1.

Legal Proceedings

33

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

44

Item 3.

Defaults Upon Senior Securities

33

44

Item 4.

Mine Safety Disclosure

33

44

Item 5.

Other Information

33

44

Item 6.

Exhibits

45

34


- 2 -


PART I — FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ITEM 1. CONDENSEDCONSOLIDATED 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, 

September 28,

 

 

September 29,

 

 

September 28,

 

 

September 29,

 

  2017   2016 2017   2016 

2019

 

 

2018

 

 

2019

 

 

2018

 

  (unaudited) (unaudited) 

(unaudited)

 

 

(unaudited)

 

Net sales

  $126,876   $129,807  $376,981   $349,046 

$

197,823

 

 

$

199,084

 

 

$

570,130

 

 

$

508,606

 

Cost of sales

   87,128    88,721  260,941    240,507 

 

127,828

 

 

 

126,086

 

 

 

365,925

 

 

 

330,888

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

   39,748    41,086  116,040    108,539 

 

69,995

 

 

 

72,998

 

 

 

204,205

 

 

 

177,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

   24,950    22,533  72,385    63,209 

 

44,564

 

 

 

44,055

 

 

 

132,604

 

 

 

105,293

 

Fair value adjustment to contingent consideration

   —      (3,000  —      (3,000

Gains on sales of assets under APA

 

 

 

 

 

 

 

 

 

 

(2,551

)

Income from operations

 

25,431

 

 

 

28,943

 

 

 

71,601

 

 

 

74,976

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

   14,798    21,553  43,655    48,330 

Interest expense, net

   5,514    5,495  14,992    14,935 

 

6,452

 

 

 

11,741

 

 

 

19,922

 

 

 

19,393

 

Debt extinguishment costs

   —      —     —      3,431 

 

 

 

 

296

 

 

 

 

 

 

3,375

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

   9,284    16,058  28,663    29,964 

 

18,979

 

 

 

16,906

 

 

 

51,679

 

 

 

52,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

   2,992    5,262  9,117    10,339 

 

3,873

 

 

 

3,335

 

 

 

11,271

 

 

 

8,749

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

  $6,292   $10,796  $19,546   $19,625 

$

15,106

 

 

$

13,571

 

 

$

40,408

 

 

$

43,459

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  $0.13   $0.22  $0.40   $0.40 

$

0.26

 

 

$

0.26

 

 

$

0.69

 

 

$

0.86

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

  $0.12   $0.21  $0.38   $0.39 

$

0.26

 

 

$

0.26

 

 

$

0.68

 

 

$

0.83

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

   49,629    48,941  49,455    48,782 

 

58,433

 

 

 

51,682

 

 

 

58,320

 

 

 

50,619

 

  

 

   

 

  

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

   51,809    50,672  51,670    50,528 

 

59,142

 

 

 

53,068

 

 

 

59,192

 

 

 

52,378

 

  

 

   

 

  

 

   

 

 

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 STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 28,

 

 

September 29,

 

 

September 28,

 

 

September 29,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

(unaudited)

 

 

(unaudited)

 

Net income

$

15,106

 

 

$

13,571

 

 

$

40,408

 

 

$

43,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

(1,136

)

 

 

(649

)

 

 

(2,083

)

 

 

(1,122

)

Reclassification to earnings

 

1,532

 

 

 

58

 

 

 

3,670

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax

 

396

 

 

 

(591

)

 

 

1,587

 

 

 

(1,107

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense) related to components of

   other comprehensive income (loss)

 

(102

)

 

 

151

 

 

 

(406

)

 

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

294

 

 

 

(440

)

 

 

1,181

 

 

 

(824

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

15,400

 

 

$

13,131

 

 

$

41,589

 

 

$

42,635

 

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

- 4 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

September 28,

 

 

December 29,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

81,803

 

 

$

52,650

 

Accounts receivable, net

 

 

77,375

 

 

 

80,717

 

Inventories

 

 

47,566

 

 

 

44,666

 

Contract assets, net

 

 

12,735

 

 

 

6,757

 

Prepaid expenses

 

 

4,279

 

 

 

2,863

 

Other current assets

 

 

10,312

 

 

 

7,908

 

Total current assets

 

 

234,070

 

 

 

195,561

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

122,354

 

 

 

115,707

 

Operating lease right-of-use asset, net

 

 

26,899

 

 

 

 

Intangible assets, net

 

 

259,859

 

 

 

271,818

 

Goodwill

 

 

277,600

 

 

 

277,827

 

Other assets, net

 

 

1,012

 

 

 

1,240

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

921,794

 

 

$

862,153

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

61,249

 

 

$

68,557

 

Current portion of long-term debt

 

 

 

 

 

163

 

Current portion of operating lease liability

 

 

4,551

 

 

 

 

Total current liabilities

 

 

65,800

 

 

 

68,720

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

367,917

 

 

 

366,614

 

Operating lease liability, less current portion

 

 

24,639

 

 

 

 

Deferred income taxes

 

 

22,991

 

 

 

22,758

 

Other liabilities

 

 

14,815

 

 

 

18,517

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

496,162

 

 

 

476,609

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

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

   authorized; NaN outstanding

 

 

 

 

 

 

Common stock; par value $.01 per share; 200,000 shares authorized; 61,712 and

   60,729 shares issued and 58,354 and 58,082 shares outstanding at

   September 28, 2019 and December 29, 2018, respectively

 

 

617

 

 

 

607

 

Additional paid-in-capital

 

 

413,700

 

 

 

409,661

 

Accumulated other comprehensive loss

 

 

(1,884

)

 

 

(3,065

)

Retained earnings (accumulated deficit)

 

 

31,508

 

 

 

(8,900

)

Shareholders' equity

 

 

443,941

 

 

 

398,303

 

Less:  Treasury stock at cost

 

 

(18,309

)

 

 

(12,759

)

Total shareholders' equity

 

 

425,632

 

 

 

385,544

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

921,794

 

 

$

862,153

 

 

 

 

 

 

 

 

 

 

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

- 5 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS

(in thousands, except per share amounts)

(unaudited)thousands)

 

   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 
  

 

 

  

 

 

 

 

 

Nine Months Ended

 

 

 

September 28,

 

 

September 29,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

40,408

 

 

$

43,459

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

13,854

 

 

 

9,724

 

Amortization

 

 

11,959

 

 

 

6,126

 

Amortization of operating lease right-of-use asset

 

 

3,637

 

 

 

 

Provision for allowance for doubtful accounts

 

 

1,659

 

 

 

1,017

 

Stock-based compensation, including special employee grant

 

 

3,246

 

 

 

2,543

 

Amortization and write-offs of deferred financing costs and debt discount

 

 

1,303

 

 

 

7,086

 

Debt extinguishment costs

 

 

 

 

 

3,375

 

Gains on sales of assets

 

 

(3

)

 

 

(2,611

)

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,682

)

 

 

(27,598

)

Inventories

 

 

(2,900

)

 

 

(1,723

)

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

 

 

(7,720

)

 

 

(4,448

)

Change in operating lease liability

 

 

1,421

 

 

 

-

 

Accounts payable, accrued and other liabilities

 

 

(9,910

)

 

 

27,602

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

54,272

 

 

 

64,552

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(20,252

)

 

 

(21,740

)

Business acquisition

 

 

 

 

 

(355,213

)

Proceeds from sales of assets

 

 

43

 

 

 

5,866

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(20,209

)

 

 

(371,087

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of senior notes

 

 

 

 

 

315,000

 

Proceeds from issuance of common stock

 

 

 

 

 

152,653

 

Payments of long-term debt

 

 

(163

)

 

 

(152,220

)

Payments of financing costs

 

 

 

 

 

(12,066

)

Purchases of treasury stock under Board of Director approved plan

 

 

(5,550

)

 

 

-

 

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

 

 

(505

)

 

 

(637

)

Proceeds from exercise of stock options

 

 

1,262

 

 

 

1,928

 

Proceeds from issuance of common stock under employee

 

 

 

 

 

 

 

 

stock purchase plan (ESPP)

 

 

46

 

 

 

18

 

Other

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

(4,910

)

 

 

304,665

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

29,153

 

 

 

(1,870

)

Cash and cash equivalents at beginning of period

 

 

52,650

 

 

 

34,029

 

Cash and cash equivalents at end of period

 

$

81,803

 

 

$

32,159

 

 

 

 

 

 

 

 

 

 

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

- 6 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY

(in thousands)thousands, except shares)(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 
  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

Earnings/

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

Paid-in

 

 

Comprehensive

 

 

(Accumulated

 

 

Treasury

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit)

 

 

Stock

 

 

Total

 

THREE MONTHS ENDED SEPTEMBER 29, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

50,705,766

 

 

$

533

 

 

$

254,399

 

 

$

(384

)

 

$

(32,945

)

 

$

(12,759

)

 

$

208,844

 

Stock-based compensation

 

 

 

 

 

 

 

 

832

 

 

 

 

 

 

 

 

 

 

 

 

832

 

Exercise of stock options

 

 

183,808

 

 

 

2

 

 

 

365

 

 

 

 

 

 

 

 

 

 

 

 

367

 

Common stock issued under ESPP

 

 

385

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Issuances under Equity Offering

 

 

7,000,000

 

 

 

70

 

 

 

152,583

 

 

 

 

 

 

 

 

 

 

 

 

152,653

 

Issuances under Employee Grant

 

 

24,590

 

 

 

 

 

 

513

 

 

 

 

 

 

 

 

 

 

 

 

513

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,571

 

 

 

 

 

 

13,571

 

Other comprehensive loss, net of $151 tax benefit

 

 

 

 

 

 

 

 

 

 

 

(440

)

 

 

 

 

 

 

 

 

(440

)

Balance at September 29, 2018

 

 

57,914,549

 

 

$

605

 

 

$

408,700

 

 

$

(824

)

 

$

(19,374

)

 

$

(12,759

)

 

$

376,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 29, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2017

 

 

49,805,338

 

 

$

525

 

 

$

252,275

 

 

$

 

 

$

(64,716

)

 

$

(12,759

)

 

$

175,325

 

Cumulative effect of change in accounting

   principle, net of tax effect of $647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,883

 

 

 

 

 

 

1,883

 

Balance at December 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- as adjusted

 

 

49,805,338

 

 

 

525

 

 

 

252,275

 

 

 

 

 

 

(62,833

)

 

 

(12,759

)

 

 

177,208

 

Vesting of restricted stock

 

 

151,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(32,439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(637

)

 

 

(637

)

Retirement of treasury stock

 

 

 

 

 

(1

)

 

 

(636

)

 

 

 

 

 

 

 

 

637

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,030

 

 

 

 

 

 

 

 

 

 

 

 

2,030

 

Exercise of stock options

 

 

964,780

 

 

 

10

 

 

 

1,918

 

 

 

 

 

 

 

 

 

 

 

 

1,928

 

Common stock issued under ESPP

 

 

1,106

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Issuances under Equity Offering

 

 

7,000,000

 

 

 

70

 

 

 

152,583

 

 

 

 

 

 

 

 

 

 

 

 

152,653

 

Issuances under Employee Grant

 

 

24,590

 

 

 

 

 

 

513

 

 

 

 

 

 

 

 

 

 

 

 

513

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,459

 

 

 

 

 

 

43,459

 

Other comprehensive loss, net of $283 tax benefit

 

 

 

 

 

 

 

 

 

 

 

(824

)

 

 

 

 

 

 

 

 

(824

)

Balance at September 29, 2018

 

 

57,914,549

 

 

$

605

 

 

$

408,700

 

 

$

(824

)

 

$

(19,374

)

 

$

(12,759

)

 

$

376,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED SEPTEMBER 28, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 29, 2019

 

 

58,535,669

 

 

$

615

 

 

$

412,295

 

 

$

(2,178

)

 

$

16,402

 

 

$

(12,759

)

 

$

414,375

 

Purchases of treasury stock

 

 

(393,819

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,550

)

 

 

(5,550

)

Stock-based compensation

 

 

 

 

 

 

 

 

970

 

 

 

 

 

 

 

 

 

 

 

 

970

 

Exercise of stock options

 

 

210,931

 

 

 

2

 

 

 

420

 

 

 

 

 

 

 

 

 

 

 

 

422

 

Common stock issued under ESPP

 

 

1,022

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

15

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,106

 

 

 

 

 

 

15,106

 

Other comprehensive income, net of $102 tax expense

 

 

 

 

 

 

 

 

 

 

 

294

 

 

 

 

 

 

 

 

 

294

 

Balance at September 28, 2019

 

 

58,353,803

 

 

$

617

 

 

$

413,700

 

 

$

(1,884

)

 

$

31,508

 

 

$

(18,309

)

 

$

425,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 28, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2018

 

 

58,081,540

 

 

$

607

 

 

$

409,661

 

 

$

(3,065

)

 

$

(8,900

)

 

$

(12,759

)

 

$

385,544

 

Vesting of restricted stock

 

 

164,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

 

 

5

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(428,059

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,055

)

 

 

(6,055

)

Retirement of treasury stock

 

 

 

 

 

 

 

 

(505

)

 

 

 

 

 

 

 

 

505

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,246

 

 

 

 

 

 

 

 

 

 

 

 

3,246

 

Exercise of stock options

 

 

532,931

 

 

 

5

 

 

 

1,257

 

 

 

 

 

 

 

 

 

 

 

 

1,262

 

Common stock issued under ESPP

 

 

3,165

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,408

 

 

 

 

 

 

40,408

 

Other comprehensive income, net of $406 tax expense

 

 

 

 

 

 

 

 

 

 

 

1,181

 

 

 

 

 

 

 

 

 

1,181

 

Balance at September 28, 2019

 

 

58,353,803

 

 

$

617

 

 

$

413,700

 

 

$

(1,884

)

 

$

31,508

 

 

$

(18,309

)

 

$

425,632

 

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.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of PGT Innovations, Inc. and its direct and indirect wholly-owned subsidiary,subsidiaries, including, PGT Industries, Inc., and its wholly-owned subsidiaries CGI Window and Door Holdings, Inc. (“CGI”), which includes its wholly-owned subsidiary, CGI Commercial, Inc. (“CGIC”), and WinDoor, Incorporated, Coyote Acquisition Co. and WWS Acquisition LLC (formerly known as GEF WW Parent LLC) (collectively, the “Company”), after elimination of intercompany accounts and transactions.

PGT Innovations, Inc. (“PGTI”, “we,” or the “Company”), formerly named PGT, Inc., manufactures and supplies premium windows and doors. Our highly engineered and technically advanced products can withstand some of the toughest weather conditions on earth and unify indoor/outdoor living spaces. We are also the nation’s largest manufacturer of impact-resistant windows and doors. Our family of brands include CGI®, PGT® Custom Windows & Doors, WinDoor®, Western Window Systems®, CGI Commercial® and Eze-Breeze®. Products are sold through an authorized dealer and distributor network.

The majority of our sales are to customers in the state of Florida, but we sell products to customers in many states. We also have sales in the Caribbean, Canada, and in South and Central America. With the acquisition of Western Window Systems (“WWS”), we have an increased level of sales in the western United States. See Note 6 for a discussion of this acquisition.

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 (NASDAQ), and began trading on the NYSE under its existing ticker symbol of “PGTI”. We have 4 manufacturing operations in Florida, and 1 in Arizona. Our manufacturing facilities in Florida include 1 in North Venice, 2 in the greater Miami area, and 1 in Orlando. Our Arizona operations are in Phoenix. Additionally, we have 2 glass tempering and laminating plants and 1 insulation glass plant, all located in North Venice.

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

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. In the opinion of management, all adjustments (consisting(consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period is 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 quarters ended September 30, 2017,28, 2019, and October 1, 2016,September 29, 2018, consisted of 13 weeks.

The condensed consolidated balance sheet as of December 31, 2016,29, 2018, 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, 2016,29, 2018, and the unaudited condensed consolidated financial statements as of and for the periods ended September 30, 2017,28, 2019, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2016,29, 2018, 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 expenseleases discussed below, 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.

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:

ASU2016-09conformity with GAAP requires employersmanagement to make a policy election as to whether they will continue to use previous generally accepted accounting principles, which required employers to recognize stock-based compensation expense on grantsestimates and assumptions that affect the reported amounts of equity awards netassets and liabilities and disclosure of an estimate of the amount that will be forfeited, or to recognize forfeitures on an actual basis in the period they occur. We have 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, adopted on a modified-retrospective basis. This resulted in an adjustment to increase accumulated deficit for previously unrecognized stock compensation expense of approximately $0.1 million as of December 31, 2016, net of tax effect, with an offsetting increase in additionalpaid-in capital of approximately $0.2 million.

ASU2016-09 requires that employee taxes paid when an employer withholds shares fortax-withholding purposes be reported as a financing activity. The Company withholds shares of its common stock from employees to satisfy the employee’s tax withholding obligations in connection with the exercise of stock optionscontingent assets and lapse of restrictions on stock awards, which are then immediately retired. We previously included these cash flows in financing activities, therefore, there was no impact upon adoption.

ASU2016-09 requires that excess tax benefits resulting from the exercise of stock options and lapse of restriction on stock awards be recognized as a discrete item in tax expense, where previously such tax effects had been recognized in additionalpaid-in-capital. See Note 10 for a discussion of the impacts of the adoption of ASU2016-09 on the Company’s income tax expense for the three and nine months ended September 30, 2017.

ASU2016-09 requires previously unrecognized excess tax benefits to be recognized on a modified-retrospective basis, which results from taking a deduction for tax benefits relating to stock-based compensation that does not result in a reduction in taxes payable. Upon adoption, we recorded an adjustment to decrease the accumulated deficit for excess tax benefits that had not yet been recognized of approximately $0.3 million as of December 31, 2016, with an offsetting reduction in our net deferred tax liability resulting from the recognition of previously unrecorded deferred tax assets for tax credits in the state of Florida.

ASU2016-09 requires excess tax benefits to be presented as an operating activity on the statement of cash flows, either prospectively or on a full-retrospective basis, rather than as previously required as a financing activity. We have elected to present excess tax benefits in the operating section of the statement of cash flows on a prospective basis.

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.

Beginning in 2019, we concluded that we have 2 reportable segments: the Southeast segment, and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of our sales in Florida, the core market of our legacy business, as well as Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and the Caribbean. The Western reporting segment, also an operating segment, is composed of sales in the footnotes. It also makes certain targeted improvements to simplifyremainder of the applicationUnited States, along with Canada and Mexico. While both of hedge accounting guidance. ASU2017-12 becomes effective for us in the first quarter of 2019. We do not expect the adoption of this guidance toour operating segments have a significant effect on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU2017-05, “Other Income—Gainproducts, distribution methods 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 Definitioncustomers 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 amendmentssimilar nature, we determined to not aggregate them due to the differences in their geographic markets. Therefore, our operating segments are intended to help companies and other organizations evaluate whether transactions should be accountedour reportable segments. See Note 17 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.segment disclosures.

- 8 -


Recently Adopted Accounting Pronouncements

Leases

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, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”; ASU 2018-10, “Codification Improvements to Topic 842, Leases”; and ASU 2018-11, “Targeted Improvements”. The new standard requires a lessee to recognize a right-of-use asset and lease liability on theirthe balance sheets,sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and leaves lessorclassification of expense recognition in the income statement.

The new standard was effective for us on December 30, 2018 (the first day of our 2019 fiscal year), with early adoption permitted. We adopted the new standard on this date, using the required modified retrospective transition approach, applying the new standard to all leases existing on the effective date. Consequently, financial information was not updated, and the disclosures required under the new standard will not be provided for dates and periods prior to December 30, 2018. As of the date of adoption, all of our leases were operating leases, and we have no financing leases as of September 28, 2019.

The new standard provided a number of optional practical expedients in transition. We elected the “package of practical expedients”, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and direct costs, and implemented internal controls and additional lease accounting largely unchanged.and tracking procedures to enable the preparation of financial information on adoption. We did not elect the use-of-hindsight practical expedient, or the practical expedient pertaining to land easements as it was not applicable to us.

The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualified, primarily for leases that are month-to-month leases. This means, for those leases, we did not recognize right-of-use assets or lease liabilities. We also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets.

This standard had a material effect on our consolidated balance sheet relating to the recognition of an operating lease right-of-use asset and operating lease liability for our real estate leases and related to new disclosures about our leasing activities. On adoption, we recognized an operating lease right-of-use asset of $30.5 million, and an operating lease liability of $32.3 million, based on the present value of the remaining minimum rental payments under prior leasing standards for existing operating leases. Calculation of the present value of the remaining minimum rental payments required the use of judgment relating to the selection of the discount rate applied to future lease payments. We used a weighted-average interest rate of 6.2%, which was based on a current trade rate for our 2018 Senior Notes due 2026. See Note 10 for additional information relating to our leases.

Leases Accounting Policy

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liability, and operating lease liability, less current portion, on our consolidated balance sheets. Should we engage in any finance leases in the future, finance leases would be included in property and equipment, other current liabilities, and other liabilities on our consolidated balance sheets.  

Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.


- 9 -


Recently Issued Accounting Pronouncements

Fair Value Measurement Disclosures

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance modifies disclosure requirements related to fair value measurement. 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 periodyears, beginning after December 15, 2017, and interim periods within those annual periods.2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted, butpermitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company does not beforebelieve that the originaladoption of this guidance will have a significant impact on its fair value disclosures.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Subsequently, in November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. ASU 2018-19 clarifies the codification and corrects unintended application of the guidance. ASU’s 2016-13 and 2018-19 are effective date (periodsfor us for our fiscal year beginning after December 15, 2016).2019. We do not believe that the adoption of this guidance will have a significant impact on our consolidated financial statements.

In the ordinary course of business, we extend credit to qualified dealers and distributors, generally on a non-collateralized basis. The standard permitsCompany maintains an allowance for doubtful accounts which is based on management’s assessments of the use of either the full-retrospective (restating all years presentedamount which may become uncollectible in the Company’s financial statements), or modified-retrospective (recording the impactfuture and is determined through consideration 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 clarifiesour write-off history, specific identification of a performance obligationuncollectible accounts based in part on the customer’s past due balance (based on contractual terms), and addresses revenue recognition associated withconsideration of prevailing economic and industry conditions. Uncollectible accounts are written off after repeated attempts to collect from the licensingcustomer have been unsuccessful. As of intellectual property, ASU2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow Scope ImprovementsSeptember 28, 2019, and Practical Expedients”, which clarifies assessment of collectability criterion,non-cash considerationDecember 29, 2018, the allowance for doubtful accounts was $3.7 million and other technical corrections, and ASU2016-20, “Technical Corrections and Improvements to Topic 606, $2.8 million, respectively.

NOTE 2.  REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

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.Recognition Accounting Policy

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. 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, Due to 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 completioncustomized build-to-order nature of the manufacturing process, fromCompany’s products, the Company’s assessment is that the substantial portion of its current method of recognizing revenue upon delivery of the product to the customer. The Company is continuing to evaluate 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.

Disaggregation of Revenue from Contracts with Customers

As discussed in Note 1, beginning in 2019, we determined that we have 2 reportable segments: our Southeast business unit and our Western business unit. See Note 17 for more information. The following tables provide information about our net sales by product category and by market for the three and nine months ended September 28, 2019, by segment, and for the three and nine months ended September 29, 2018 (dollars in millions):

- 10 -


 

 

Segments

 

 

 

 

 

Three Months Ended September 28, 2019

 

Southeast

 

 

Western

 

 

Total

 

Product category:

 

 

 

 

 

 

 

 

 

 

 

 

Impact-resistant window and door products

 

$

129.5

 

 

$

1.6

 

 

$

131.1

 

Non-impact window and door products

 

 

28.8

 

 

 

37.9

 

 

 

66.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

158.3

 

 

$

39.5

 

 

$

197.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market:

 

 

 

 

 

 

 

 

 

 

 

 

New construction

 

$

59.7

 

 

$

35.9

 

 

$

95.6

 

Repair and remodel

 

 

98.6

 

 

 

3.6

 

 

 

102.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

158.3

 

 

$

39.5

 

 

$

197.8

 

 

 

Segments

 

 

 

 

 

Three Months Ended September 29, 2018

 

Southeast

 

 

Western

 

 

Total

 

Product category:

 

 

 

 

 

 

 

 

 

 

 

 

Impact-resistant window and door products

 

$

157.2

 

 

$

1.1

 

 

$

158.3

 

Non-impact window and door products

 

 

19.8

 

 

 

21.0

 

 

 

40.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

177.0

 

 

$

22.1

 

 

$

199.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market:

 

 

 

 

 

 

 

 

 

 

 

 

New construction

 

$

62.7

 

 

$

18.7

 

 

$

81.4

 

Repair and remodel

 

 

114.3

 

 

 

3.4

 

 

 

117.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

177.0

 

 

$

22.1

 

 

$

199.1

 

 

 

Segments

 

 

 

 

 

Nine Months Ended September 28, 2019

 

Southeast

 

 

Western

 

 

Total

 

Product category:

 

 

 

 

 

 

 

 

 

 

 

 

Impact-resistant window and door products

 

$

392.0

 

 

$

3.7

 

 

$

395.7

 

Non-impact window and door products

 

 

64.4

 

 

 

110.0

 

 

 

174.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

456.4

 

 

$

113.7

 

 

$

570.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market:

 

 

 

 

 

 

 

 

 

 

 

 

New construction

 

$

176.4

 

 

$

105.1

 

 

$

281.5

 

Repair and remodel

 

 

280.0

 

 

 

8.6

 

 

 

288.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

456.4

 

 

$

113.7

 

 

$

570.1

 

 

 

Segments

 

 

 

 

 

Nine Months Ended September 29, 2018

 

Southeast

 

 

Western

 

 

Total

 

Product category:

 

 

 

 

 

 

 

 

 

 

 

 

Impact-resistant window and door products

 

$

422.3

 

 

$

3.3

 

 

$

425.6

 

Non-impact window and door products

 

 

57.7

 

 

 

25.3

 

 

 

83.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

480.0

 

 

$

28.6

 

 

$

508.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market:

 

 

 

 

 

 

 

 

 

 

 

 

New construction

 

$

174.0

 

 

$

18.7

 

 

$

192.7

 

Repair and remodel

 

 

306.0

 

 

 

9.9

 

 

 

315.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

480.0

 

 

$

28.6

 

 

$

508.6

 

- 11 -


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 and nine months ended September 28, 2019, the Western segment’s net sales of its volume products were $13.8 million and $40.6 million, respectively. For the post-acquisition period from the August 13, 2018 acquisition date to September 29, 2018, the Western segment’s net sales of its volume products were $9.8 million.

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 September 28, 2019, and December 29, 2018, those contract liabilities totaled $7.6 million and $8.3 million, respectively, of which $6.1 million and $7.8 million, respectively, are classified within accrued liabilities, and $1.5 million and $0.5 million, respectively, are classified within contract assets, net, in the accompanying condensed consolidated balance sheets at September 28, 2019, and December 29, 2018.

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, substantially all of the contract liabilities at December 29, 2018 were satisfied in the first quarter of 2019, and contract assets at December 29, 2018 were transferred to accounts receivable in the first quarter of 2019. Contract liabilities at September 28, 2019 represents cash received during the three-month period ended September 28, 2019, excluding amounts recognized as revenue during that period. Contract assets at September 28, 2019 represents revenue recognized during the three-month period ended September 28, 2019, excluding amounts transferred to accounts receivable during that period.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue as the performance obligation is satisfied. Our contracts with our customers generally represent an approved purchase order, which is typically accounted for as a single performance obligation. In situations when our contract includes distinct goods that are substantially the same and have the same pattern of transfer to the customer over time, they are recognized as a series of distinct goods. 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.

Performance obligations are satisfied over time, generally for our custom products, and as of a point in time for our standard products. Performance obligations are supported by contracts with customers, and we have elected not to disclose our unsatisfied performance obligations as of September 28, 2019 under the short-term contract exemption as we expect such performance obligations will no longer include finished goods. 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. The Company currently recognizesrevenue. This policy is unchanged from the Company’s policy for recognizing shipping and handling costs as a fulfillment activity, and has preliminarily determinedprior to continue to treat such costs as a fulfillment activity.the adoption of the new revenue guidance.

The Company expectsutilizes the practical expedient which permits expensing of costs to continueobtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to evaluateemployees. We expense sales commissions paid to employees as sales are recognized, including sales from the impactcreation of the adoption of ASU2014-09 on its consolidated financial statements, and will provide updates and additional informationcontract assets, as the effective date of adoption approaches.expected amortization period is less than one year.


- 12 -


NOTE 2.3.  WARRANTY

Most of our manufactured products are sold with warranties. Warranty periods, which vary by product components, generally range from 1 to 10 years; however, the warranty period for a limited number of specifically identified components in certain applications is a lifetime. The majority of the products sold have warranties on components which range from 1 to 3 years. The 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, 2017,28, 2019, we recorded warranty expense at a rate of approximately 2.04%1.8% of sales, which decreased fromwas nearly equal to the rate in the second quarter of 2017 of 2.22%. During the three months ended October 1, 2016,September 29, 2018 of 1.7% of sales. During the nine months ended September 28, 2019, we recorded warranty expense at a rate of approximately 2.21%1.7% of sales, which was equal to the rate in the nine months ended September 28, 2018 of 1.7% of sales.

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, 2017,28, 2019, and October 1, 2016.September 29, 2018. The reserve is determined through specific identification and assessing Company history. Expected future obligations are discounted to a current value using a risk-free rate for obligations with similar maturities.

 

   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

 

 

 

 

 

 

Charged

 

 

 

 

 

 

 

 

 

 

End of

 

Accrued Warranty

 

of Period

 

 

Acquired

 

 

to Expense

 

 

Adjustments

 

 

Settlements

 

 

Period

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months Ended September 28, 2019

 

$

5,980

 

 

$

-

 

 

$

3,600

 

 

$

660

 

 

$

(3,381

)

 

$

6,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months Ended September 29, 2018

 

$

5,368

 

 

$

509

 

 

$

3,307

 

 

$

(21

)

 

$

(3,129

)

 

$

6,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months Ended September 28, 2019

 

$

6,149

 

 

$

-

 

 

$

9,595

 

 

$

868

 

 

$

(9,753

)

 

$

6,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months Ended September 29, 2018

 

$

5,386

 

 

$

509

 

 

$

8,524

 

 

$

(229

)

 

$

(8,156

)

 

$

6,034

 

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:

 

 

September 28,

 

 

December 29,

 

  September 30,
2017
   December 31,
2016
 

 

2019

 

 

2018

 

  (in thousands) 

 

(in thousands)

 

Raw materials

  $29,591   $24,946 

 

$

43,290

 

 

$

42,036

 

Work-in-progress

   3,543    2,521 

 

 

3,850

 

 

 

2,278

 

Finished goods

   5,997    3,044 

 

 

426

 

 

 

352

 

  

 

   

 

 

 

 

 

 

 

 

 

 

  $39,131   $30,511 

 

$

47,566

 

 

$

44,666

 

  

 

   

 

 


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NOTE 4.5.  STOCK BASED-COMPENSATION

Exercises

For the three months ended September 30, 2017,28, 2019, 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 341,069210,931 options exercised at a weighted average exercise price of $2.00 per share. For the nine months ended September 28, 2019, there were 532,931 options exercised at a weighted average exercise price of $2.37 per share.

Issuance

On March 4, 2017,February 14, 2019, we granted 251,474258,628 restricted stock awards to certain executives andnon-executive employees of the Company.Company under the 2019 Long-Term Incentive Plan (LTIP). 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 125,737129,314 shares, is fixed, whereas the quantity granted on the remaining half, or 125,737129,314 shares, is subject to Company-specific performance criteria. The restricted stock awards have a fair value on date of grant of $10.20$17.76 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.grant, if they are earned.

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 20172019 business plan. The performance percentages, ranging from less than 80% to greater than 120%, provide for the awarding of shares ranging from no0 shares to 150% of the original amounttarget number of shares.

On May 19, 2017,March 1, 2019, we granted 34,699an additional 33,663 restricted stock awards to certain executives and non-executive employees of the Company under last year’s 2018 LTIP, because the Company achieved more than 120% of the target level of our 2018 LTIP performance metric, bringing the total number of performance shares issued to each participant of the 2018 LTIP remaining with the Company on March 1, 2019 to 150% of the target number of performance shares granted to each participant.

On May 22, 2019, we granted a total of 37,000 restricted stock awards to the seven8 non-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$15.35 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.

Stock 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 $1.0 million for the three months ended September 30, 2017,28, 2019, and $0.4 $1.3 million for the three months ended October 1, 2016.September 29, 2018. We recorded compensation expense for stock basedstock-based awards of $1.6$3.2 million for the nine months ended September 30, 2017,28, 2019, and $1.6 $2.5 million for the nine months ended October 1, 2016.September 29, 2018. As of September 30, 2017, and October 1, 2016,28, 2019, there was $2.4$6.1 million and $1.9 million, respectively, of total unrecognized compensation cost related primarilyentirely to restricted share awards. These costs are expected to be recognized in earnings on an accelerated basis over the weighted average remaining vesting period of 1.51.9 years at September 30, 2017.28, 2019.


- 14 -


NOTE 6.  ACQUISITION

WESTERN WINDOW SYSTEMS

On August 13, 2018 (the “closing date”), we completed the acquisition of Western Window Systems (“WWS”), which became a wholly-owned subsidiary of PGT Innovations, Inc. The fair value of consideration transferred in the acquisition was $354.6 million. The acquisition was financed with proceeds of $315.0 million from the issuance of the 2018 Senior Notes due 2026, and with $39.6 million in cash on hand. See Note 9 for a discussion of the 2018 Senior Notes due 2026.

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

 

 

Initial

Allocation

 

 

Adjustments to

Allocation

 

 

Final

Allocation

 

Accounts and notes receivable

 

$

7,555

 

 

$

(217

)

 

$

7,338

 

Inventories

 

 

12,580

 

 

 

 

 

 

12,580

 

Contract assets, net

 

 

890

 

 

 

 

 

 

890

 

Prepaid expenses and other assets

 

 

1,190

 

 

 

 

 

 

1,190

 

Property and equipment

 

 

16,416

 

 

 

(447

)

 

 

15,969

 

Intangible assets

 

 

167,000

 

 

 

 

 

 

167,000

 

Goodwill

 

 

164,379

 

 

 

5,162

 

 

 

169,541

 

Accounts payable

 

 

(5,622

)

 

 

 

 

 

(5,622

)

Accrued and other liabilities

 

 

(9,175

)

 

 

53

 

 

 

(9,122

)

Deferred income taxes

 

 

 

 

 

(5,180

)

 

 

(5,180

)

Purchase price

 

$

355,213

 

 

$

(629

)

 

$

354,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

355,213

 

 

$

(629

)

 

$

354,584

 

Total fair value of consideration

 

$

355,213

 

 

$

(629

)

 

$

354,584

 

The fair value of certain working capital related items, including accounts receivable, prepaid expenses, and accounts payable and accrued liabilities, approximated their book values at the date of the WWS Acquisition. The fair value of inventory was estimated by major category, at net realizable value. The substantial majority of inventories at the acquisition date was composed of raw materials. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs.

The WWS Acquisition included its then-existing subsidiary, WWS Blocker LLC (Blocker). Blocker was a single-purpose U.S. tax blocker which held an 18.06% ownership percentage of the combined ownership of WWS, and for which that portion of the fair value of assets acquired and liabilities assumed in the WWS Acquisition was not eligible for a step-up in basis. As a result, we recorded a net deferred tax liability of $5.2 million in the WWS Acquisition, primarily relating to the fair value of the acquired identifiable indefinite-lived and amortizable intangible assets. Subsequent to the acquisition, Blocker was merged out of existence.

We incurred acquisition costs totaling $4.4 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the WWS Acquisition, which includes $0.7 million in additional costs in the first quarter of 2019, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 28, 2019. We began incurring these costs in the second quarter of 2018.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has been determined to be $169.5 million, of which we estimate $139.4 million is expected to be deductible for tax purposes. Goodwill represents the increased value of the combined entity through additional sales channel opportunities as well as penetration of a new geographic market with enhanced opportunities for cross-selling of our multiple brands in all markets.

The purchase agreement relating to the WWS Acquisition (PA) has a post-closing working capital calculation whereby we were required to prepare, and which we delivered to the sellers, a final statement of purchase price, including our calculation of actual net working capital as of the closing date. The calculation resulted in a net decrease in purchase price of $0.6 million.

Net sales and net income included in the consolidated condensed statements of comprehensive income for the three and nine months ended September 29, 2018, from WWS from the August 13, 2018 acquisition date was $18.7 million and $2.3 million, respectively.


- 15 -


Valuation of identified intangible assets

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

 

 

Valuation

 

 

Useful Life

 

 

Amount

 

 

(in years)

(in thousands)

 

 

 

 

 

 

Trade name

 

$

73,000

 

 

indefinite

Customer relationships

 

 

94,000

 

 

10

 

 

 

 

 

 

 

Other intangible assets, net

 

$

167,000

 

 

 

NOTE 5.7. NET INCOME PER COMMON SHARE

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders, by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the dilutive effect of potential common shares from securities such as stock options.

WeightedThere were 86 thousand anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three months ended September 28, 2019, and NaN for the three months ended September 29, 2018. There were 90 thousand anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the nine months ended September 30, 2017,28, 2019, and NaN for the three and nine months 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, 2017.29, 2018.

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

 

  Three Months Ended   Nine Months Ended 

Three Months Ended

 

 

Nine Months Ended

 

  September 30,   October 1,   September 30,   October 1, 

September 28,

 

 

September 29,

 

 

September 28,

 

 

September 29,

 

  2017   2016   2017   2016 

2019

 

 

2018

 

 

2019

 

 

2018

 

  (in thousands, except per share amounts) 

(in thousands, except per

share amounts)

 

Net income

  $6,292   $10,796   $19,546   $19,625 

$

15,106

 

 

$

13,571

 

 

$

40,408

 

 

$

43,459

 

  

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares—Basic

   49,629    48,941    49,455    48,782 

Weighted-average common shares - Basic

 

58,433

 

 

 

51,682

 

 

 

58,320

 

 

 

50,619

 

Add: Dilutive effect of stock compensation plans

   2,180    1,731    2,215    1,746 

 

709

 

 

 

1,386

 

 

 

872

 

 

 

1,759

 

  

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares—Diluted

   51,809    50,672    51,670    50,528 

Weighted-average common shares - Diluted

 

59,142

 

 

 

53,068

 

 

 

59,192

 

 

 

52,378

 

  

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  $0.13   $0.22   $0.40   $0.40 

$

0.26

 

 

$

0.26

 

 

$

0.69

 

 

$

0.86

 

  

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

  $0.12   $0.21   $0.38   $0.39 

$

0.26

 

 

$

0.26

 

 

$

0.68

 

 

$

0.83

 

  

 

   

 

   

 

   

 

 

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 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 on 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 thousand and 827 thousand shares, respectively, if we had adopted ASU2016-09 at the beginning of our 2016 fiscal year.

- 16 -


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, 2017 was $5.6 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 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 amounts 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 the 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, and relate to legal expenses, representations and warranties insurance, diligence, and accounting services.

The remaining consideration, after identified intangible assets and the net assets 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 represents the increased value of the combined entity through additional sales channel opportunities as well as operational efficiencies.

The stock purchase agreement for the acquisition 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 amount of all future payments that could be required to be paid under the contingentearn-out consideration arrangement was between $0 and $3.0 million. We had recorded anearn-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 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 part 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 agreement on the calculation of net working capital, which resulted in a payment of $0.7 million 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 beginning of the earliest period presented that does not include WinDoor’s actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of WinDoor adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the 2016 Credit Agreement entered into in connection with the acquisition. 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.

   Nine Months Ended 
   October 1, 2016 
(in thousands, except per share amounts)    

Pro Forma Results

  

Net sales

  $351,507 
  

 

 

 

Net income

  $18,280 
  

 

 

 

Net income per common share:

  

Basic

  $0.37 
  

 

 

 

Diluted

  $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, entered into an asset purchase agreement 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 value of the consideration transferred in the acquisition was $1.9 million, which was allocated to current and other assets totaling $1.8 million and amortizable intangible assets totaling $0.6 million, and goodwill 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 7.8.  GOODWILL TRADE NAMES, AND OTHER INTANGIBLE ASSETS

Goodwill trade names, and other intangible assets net, are as follows:

 

          Initial 

 

 

 

 

 

 

 

 

 

Initial

  September 30,   December 31,   Useful Life 

 

September 28,

 

 

December 29,

 

 

Useful Life

  2017   2016   (in years) 

 

2019

 

 

2018

 

 

(in years)

  (in thousands)     

 

(in thousands)

 

 

 

Goodwill

  $108,060   $108,060    indefinite 

 

$

277,600

 

 

$

277,827

 

 

indefinite

  

 

   

 

   

 

 

 

 

 

 

 

 

 

 

Trade names and other intangible assets:

      

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

Trade names

  $75,841   $75,841    indefinite 

 

$

148,841

 

 

$

148,841

 

 

indefinite

  

 

   

 

   

 

 

 

 

 

 

 

 

 

 

Customer relationships

   106,647    106,647    3-10 

 

 

200,647

 

 

 

200,647

 

 

3-10

Developed technology

   3,000    3,000    9-10 

 

 

3,000

 

 

 

3,000

 

 

9-10

Non-compete agreement

   1,668    1,668    2-5 

 

 

1,668

 

 

 

1,668

 

 

2-5

Software license

   590    —      2 

 

 

590

 

 

 

590

 

 

2

Less: Accumulated amortization

   (71,044   (66,226  

 

 

(94,887

)

 

 

(82,928

)

 

 

  

 

   

 

   

 

 

 

 

 

 

 

 

 

 

Subtotal

   40,861    45,089   

 

 

111,018

 

 

 

122,977

 

 

 

  

 

   

 

   

 

 

 

 

 

 

 

 

 

 

Other intangible assets, net

  $116,702   $120,930   

 

$

259,859

 

 

$

271,818

 

 

 

  

 

   

 

   

 

 

 

 

 

 

 

 

 

 

Goodwill at December 29, 2018

 

$

277,827

 

 

 

 

 

 

 

Decrease related to change in liabilities assumed in acquisition of WWS

 

 

(53

)

 

 

 

 

 

 

Decrease from change in deferred tax liability in acquisition of WWS

 

 

(174

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill at September 28, 2019

 

$

277,600

 

 

 

 

 

 

 

Software License

In July 2017,Estimated amortization of our amortizable intangible assets for future years is as follows:

(in thousands)

 

Total

 

Remainder of 2019

 

$

3,871

 

2020

 

 

15,859

 

2021

 

 

15,374

 

2022

 

 

14,515

 

2023

 

 

12,354

 

Thereafter

 

 

49,045

 

 

 

 

 

 

Total

 

$

111,018

 

- 17 -


NOTE 9.  LONG-TERM DEBT

 

 

September 28,

 

 

December 29,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

2018 Senior Notes due 2026

 

$

315,000

 

 

$

315,000

 

 

 

 

 

 

 

 

 

 

Term loan payable under the 2016 Credit Agreement

 

 

63,975

 

 

 

63,975

 

 

 

 

 

 

 

 

 

 

Other debt

 

 

-

 

 

 

163

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

378,975

 

 

 

379,138

 

 

 

 

 

 

 

 

 

 

Fees, costs and original issue discount

 

 

(11,058

)

 

 

(12,361

)

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

367,917

 

 

 

366,777

 

 

 

 

 

 

 

 

 

 

Less current portion of long-term debt

 

 

-

 

 

 

(163

)

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

$

367,917

 

 

$

366,614

 

2018 Senior Notes due 2026

On August 10, 2018, we purchased an enterprise-wide software licensecompleted the issuance of $315.0 million aggregate principal amount of 6.75% senior notes (“2018 Senior Notes due 2026”), issued at 100% of their principal amount. The 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 mature on August 10, 2026. Interest on the 2018 Senior Notes due 2026 is payable semi-annually, in arrears, beginning on February 16, 2019, with interest accruing at a rate of 6.75% per annum from August 10, 2018. We incurred financing costs relating to office productivity software. We estimatedbank fees and professional services costs relating to the then fair valueoffering and issuance of this software license to be $590 thousand, our purchase price. The software licensethe 2018 Senior Notes due 2026 totaling $10.4 million, which is being amortized under the effective interest method. See “Deferred Financing Costs” below. As of September 28, 2019, the face value of debt outstanding under the 2018 Senior Notes due 2026 was $315.0 million, and accrued interest totaled $3.5 million.

The indenture for the 2018 Senior Notes due 2026 gives us the option to redeem some or all of the 2018 Senior Notes due 2026 at the redemption prices and on the terms specified in the indenture governing the 2018 Senior Notes due 2026. The indenture governing the 2018 Senior Notes due 2026 does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a straight-line basis over its estimated useful life, which we have determinedchange of control, as defined in the indenture, the Company is required to be two years.

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.

NOTE 8. LONG-TERM DEBTThe indenture for the 2018 Senior Notes due 2026 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.

   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 due 2022

On February 16, 2016, we entered into athe 2016 Credit Agreement (“2016 Credit Agreement”),due 2022, among us, the lending institutions identified in the 2016 Credit Agreement due 2022, and DeutscheSunTrust Bank, AG New York Branch, as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 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 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 maturing in five yearsFebruary 2021 that includes a swing line facility and a letter of credit facility. Our obligations under the 2016 Credit Agreement due 2022 are subject to exceptions, guaranteed by substantially all of our wholly-owned direct and

- 18 -


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 2022 (the “Second Amendment”). The Second Amendment, among other things, decreases the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2022) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2022), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2022). On February 17, 2017, we entered into the first amendment to our 2016 Credit Agreement due 2022, which also resulted in decreases in the applicable margins, but which, unlike the Second Amendment, did not include any changes in lender positions.

In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $3.4 million is classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2017,29, 2018.

Regarding the first amendment as described above, as there were $0.2 millionno changes in lender positions, this action did not result in any modifications or extinguishments of letters of credit outstanding and $39.8 million available on the revolver.debt. Therefore, there was no charge for debt extinguishment costs in 2017.

Interest on all loans under the 2016 Credit Agreement due 2022 is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement due 2022 on February 17, 2017,March 16, 2018, as described below,above, borrowings under the term loans and the revolving credit facility accrued interest at 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 575475 basis points in the case of LIBOR and 475375 basis points in the case of the base rate. The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 5.69% as of September 28, 2019, and was 5.84% at December 29, 2018.

We willalso pay quarterly fees on the unused portion of the revolving credit facility equal to 50 basis points per annum as well as a quarterly letter of credit fee at 575 basis points per annum plus a 12.5 basis point facing fee per annum on the face amount of any outstanding letters of credit. The weighted averageall-in interest rate for borrowingsAs of September 28, 2019, there were $2.1 million in letters of credit outstanding and $37.9 million available under the term-loan portion of the 2016 Credit agreement was 6.02% as of September 30, 2017, and was 5.75% at December 31, 2016.

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.revolver.

The 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of twenty percent (20%) of the revolving facility which requirescommitment (excluding $7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 105% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us to maintainfrom exceeding a maximum totalfirst lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt for borrowed money to trailing EBITDA, eachEBITDA) as defined in the 2016 Credit Agreement), and will be tested quarterly based onof the last fourday of each applicable fiscal quarters andquarter. To the extent the springing financial covenant is set at levelsin effect, the first lien net leverage ratio cannot exceed 4.00:1.00 as described inof the 2016 Credit Agreement. Aslast day of the fiscal quarter ending on September 30, 2017, no such28, 2019. We were not required to test is required asour first lien net leverage ratio for the quarter ending September 28, 2019 because we havedid not exceededexceed 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 due 2022 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, entry into restrictive agreements, prepayments of certain debt and transactions with affiliates.affiliates, in each case, subject to exceptions and qualifications. The 2016 Credit Agreement due 2022 also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement due 2022 may be accelerated and may become immediately due and payable. As

On September 18, 2018, we completed an underwritten, public offering of September 30, 2017,7,000,000 shares of our common stock, at a public offering price of $23.00 per share (the “2018 Equity Issuance”).  The offering resulted in gross proceeds to the Company of $161.0 million. Net of an underwriting fee of $1.15 per share, net cash proceeds to the Company approximated $153.0 million. Contemporaneously with the 2018 Equity Issuance, we wereprepaid $152.0 million in compliance with all affirmative and restrictive covenants.

In connection with entering intoborrowings outstanding under the term loan portion of the 2016 Credit Agreement on February 16, 2016,due 2022. On December 19, 2018, 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 facilityvoluntarily prepaid an additional $8.0 million in borrowings under the 2016 Credit Agreement were used to repay amounts outstanding under the 2014 Credit Agreement, acquire WinDoor, and pay certain fees and expenses.

due 2022. As of September 30, 2017,28, 2019, the face valueprincipal amount of debt outstanding under the 2016 Credit Agreement due 2022 was $244.0 $64.0 million, and accrued interest was $0.4 $0.5 million. During

See Note 18, Subsequent Events, for a discussion of a third amendment to the third quarter2016 Credit Agreement due 2022, which we entered into effective on October 31, 2019.

- 19 -


Deferred Financing Costs

The activity relating to third-party fees and costs, lender fees and discount for the nine months ended September 28, 2019, are as follows. All debt-related fees, costs and original issue discount are classified as a reduction of 2017, we made voluntarythe carrying value of long-term debt:

(in thousands)

 

Total

 

At beginning of year

 

$

12,361

 

Less: Amortization expense relating to 2016 Credit Agreement

 

 

(552

)

Less:  Amortization expense relating to 2018 Senior Notes

 

 

(751

)

 

 

 

 

 

At end of period

 

$

11,058

 

Estimated amortization expense relating to third-party fees and costs, lender fees and discount for the years indicated as of September 28, 2019, is as follows:

(in thousands)

 

Total

 

Remainder of 2019

 

$

449

 

2020

 

 

1,913

 

2021

 

 

1,893

 

2022

 

 

1,353

 

2023

 

 

1,359

 

Thereafter

 

 

4,091

 

 

 

 

 

 

Total

 

$

11,058

 

As a result of prepayments of outstanding borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 totaling $20.0 $204.0 million composedsince its inception in February 2016, we have no future scheduled repayments until the maturity of a paymentthe facility on February 21, 2022. The contractual future maturities of $8.0 million made onlong-term debt outstanding, including the remaining balance of the financing arrangement described as other debt, as of September 29, 2017, and of $12.0 million made on July 7, 2017.28, 2019, are as follows (at face value):

(in thousands)

 

 

 

 

Remainder of 2019

 

$

 

2020

 

 

 

2021

 

 

 

2022

 

 

63,975

 

2023

 

 

 

Thereafter

 

 

315,000

 

 

 

 

 

 

Total

 

$

378,975

 

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 approximatesapproximated our then borrowing rate under the 2016 Credit Agreement due 2022, a Level 3 input. At September 30, 2017,28, 2019, this agreement had been fully repaid. At December 29, 2018, there was $529$163 thousand, outstanding under this financing arrangement.

- 20 -


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 9 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 activitylease expense relating to third-party fees and costs, lender fees and discount for the three months ended September 30, 2017, are as follows. As a resultthese leases is not significant.

The components 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 interestlease expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017. All debt-related fees, 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 
  

 

 

 

Estimated amortization expense relating to third-party fees and costs, lender fees and discount for the years indicated as of September 30, 2017, 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 
  

 

 

 

As a result of the voluntary prepayments totaling $20.0 million we made during the third quarter of 2017, we have no future scheduled repayments under the 2016 Credit Agreement until the maturity of the facility on February 21, 2022. The contractual future maturities of long-term debt outstanding, including the financing arrangement described as other debt, as of September 30, 2017,28, 2019, are as follows (at face value)(in thousands):

 

   (in thousands) 

Remainder of 2017

  $71 

2018

   295 

2019

   163 

2020

   —   

2021

   —   

2022

   243,975 
  

 

 

 

Total

  $244,504 
  

 

 

 

 

 

Three Months Ended

 

 

Nine Months

Ended

 

 

 

September 28,

 

 

September 28,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

1,546

 

 

$

4,506

 

Variable lease cost

 

 

714

 

 

 

2,046

 

Total lease cost

 

$

2,260

 

 

$

6,552

 

Other information relating to leases for the three and nine months ended September 28, 2019, are as follows (in thousands, except years and percentages):

 

 

Three Months Ended

 

 

Nine Months

Ended

 

 

 

September 28,

 

 

September 28,

 

 

 

2019

 

 

2019

 

Supplemental cash flows information

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Operating cash flows relating to operating leases

 

$

(1,546

)

 

$

(4,506

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Operating leases

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term in years

 

 

 

 

 

 

 

 

Operating leases

 

 

4.13

 

 

 

4.13

 

 

 

 

 

 

 

 

 

 

Weighted average discount rate

 

 

 

 

 

 

 

 

Operating leases

 

 

6.2

%

 

 

6.2

%


- 21 -


Future minimum lease payments under non-cancellable leases were as follows at September 28, 2019, and December 29, 2018 (in thousands):

 

 

September 28,

 

 

December 29,

 

 

 

2019

 

 

2018

 

Remainder of 2019

 

$

1,589

 

 

$

6,343

 

2020

 

 

6,093

 

 

 

6,354

 

2021

 

 

4,555

 

 

 

4,748

 

2022

 

 

3,673

 

 

 

3,831

 

2023

 

 

3,644

 

 

 

3,801

 

Thereafter

 

 

17,421

 

 

 

17,885

 

 

 

 

 

 

 

 

 

 

Total future minimum lease payments

 

 

36,975

 

 

$

42,962

 

 

 

 

 

 

 

 

 

 

Less:  Imputed interest

 

 

(7,785

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liability - total

 

$

29,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as of September 28, 2019

 

 

 

 

 

 

 

 

Current portion of operating lease liability

 

$

4,551

 

 

 

 

 

Operating lease liability, less current portion

 

 

24,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liability - total

 

$

29,190

 

 

 

 

 

As of September 28, 2019, we had no additional operating or finance leases that have not yet commenced. Our operating leases expire at various times through 2027. Lease expense prior to the adoption of ASU 2016-02 would have been $2.3 million for the three months ended, and $6.6 million for the nine months ended September 28, 2019 and was $1.9 million for the three months ended, and $4.9 million for the nine months ended September 29, 2018. Lease expense was $6.4 million for the year ended December 29, 2018.

NOTE 9.11.  COMMITMENTS AND CONTINGENCIES

Litigation

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

IncomeOur income tax expense was $3.0$3.9 million for the three months ended September 30, 2017,28, 2019, compared with $5.3$3.3 million for the three months ended October 1, 2016.September 29, 2018. Our effective tax rate for the three months ended September 30, 2017,28, 2019, was 32.2%20.4%, and was 32.8%19.7% for the three months ended October 1, 2016. IncomeSeptember 29, 2018. Our income tax expense was $9.1 $11.3 million for the nine months ended September 30, 2017,28, 2019, compared with $10.3 $8.7 million for the nine months ended October 1, 2016.September 29, 2018. Our effective tax rate for the nine months ended September 30, 2017,28, 2019, was 31.8%21.8%, and was 34.5%16.8% for the nine months ended October 1, 2016.September 29, 2018.

Income tax expense in the three and nine months ended September 30, 2017,28, 2019, and September 29, 2018, includes excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards, treated as a discrete item of income tax, upon our adoption of ASU2016-09 effective on January 1, 2017, totaling $347$665 thousand and $1.1$1.0 million, respectively.respectively. Excluding this discrete item, of incomeas well as other minor tax expense,credit adjustments recorded in the 2019 third quarter, the effective tax rates for the three months ended September 28, 2019, and September 29, 2018, would have been 24.8% and 25.5%, respectively. Income tax expense in the nine months ended September 30, 2017,28, 2019, and September 29, 2018, includes excess tax benefits totaling $1.7 million and $4.6 million, respectively. Excluding this discrete item, as well as other minor tax credit adjustments recorded in the 2019 third quarter, the effective tax rates for the nine months ended September 28, 2019, and September 29, 2018, would have been 36.0%25.3% and 35.8%25.6%, respectively.

The effective tax rates in all periods, excluding the effect of the discrete item discussed above in the 2017 periods, were lower than our combined statutory federal and state tax rate of 38.8% primarily as theAs a result of the estimated impact ofTax Cuts and Jobs Act, enacted effective on December 22, 2017, our Federal corporate income tax rate has been reduced from 35%, to 21%. This reduction in rate has lowered our overall effective tax rate. Additionally, the section 199 domestic manufacturing deduction partially offset bywas repealed. As such, our estimated annual effective tax rate, excluding the 50% deductibility-disallowancediscrete items discussed above, approximates our current combined statutory federal and state rate of meals and entertainment expenses.25.6%.

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, 2017,28, 2019, we did not make a paymentmade payments of estimated federal and state income taxes nor did we receive anytotaling $10.8 million. We received 0 refunds of federal or state income taxes. Pursuanttaxes in the first nine months of 2019. During the nine months ended September 29, 2018, we made payments of estimated federal and state income taxes totaling $17.2 million, including an estimated Federal income tax payment totaling $9.0 million relating to the 2017 tax relief from theyear. The Internal Revenue Service provided tax relief

- 22 -


relating to taxpayers in certain designated areas of Florida impacted by Hurricane Irma in September 2017, which includesincluded all counties in Florida in which we operate,operate. As a result, the deadline for remitting our required 2017 third quarter estimated payment for corporate income taxes as well as the deadline for filing our 2016 fiscal year corporate income tax return, has beenwas extended to January 31, 2018.

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.

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, 2017,28, 2019, or October 1, 2016,September 29, 2018, we did not0t 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 and other debt, whose carrying amounts approximate their fair values due to their short-term nature. Our financial instruments also include borrowings under our 2016 Credit Agreement due 2022, as well as the 2018 Senior Notes due 2026, both classified as long-term debt. The fair value of our long-term debtborrowings under the 2016 Credit Agreement due 2022 is based on debt with similar terms and characteristics and was approximately $248.5$64.1 million as of September 30, 2017,28, 2019, compared to a principal outstanding value of $244.0$64.0 million, and $264.6fair value of $63.2 million as of December 31, 2016,29, 2018, compared to a principal outstanding value of $264.0$64.0 million. The fair value of the 2018 Senior Notes due 2026 is also based on debt with similar terms and characteristics and was approximately $340.2 million as of September 28, 2019, compared to a principal outstanding value of $315.0 million, and the fair value was approximately $311.9 million as of December 29, 2018, compared to a principal outstanding value of $315.0 million. Fair values were determined based on observed trading prices of our debt between domestic financial institutions.

institutions, which we consider to be a Level 2 input.

Items Measured at Fair Value on a Recurring Basis

The following are measured in the 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

 

 

September 28,

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

2019

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum forward contracts, net

$

(2,531

)

 

$

-

 

 

$

(2,531

)

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(2,531

)

 

$

-

 

 

$

(2,531

)

 

$

-

 

- 23 -


 

Fair Value Measurements

 

 

Assets (Liabilities)

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

December 29,

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum forward contracts

$

(4,118

)

 

$

-

 

 

$

(4,118

)

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(4,118

)

 

$

-

 

 

$

(4,118

)

 

$

-

 

The following is a description of the methods and assumptions used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2.

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.

NOTE 14.  DERIVATIVES

Aluminum Contracts

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. 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.

Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities.

At September 28, 2019, the fair value of our aluminum forward contracts was in a net liabilityposition of $2.5 million. We had 36 outstanding forward contracts for the purchase of 34.5 million pounds of aluminum through June 2020, at an average price of $0.87 per pound, which excludes the Midwest premium, with maturity dates of between one month and fifteen months.We assessed the risk of non-performance of the Company to these contracts and determined it was insignificant and, therefore, did not record any adjustment to fair value as of September 28, 2019.

We assess the effectiveness of our aluminum forward 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 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. The amount of losses, net, recognized in the “accumulated other comprehensive loss” line item in the accompanying condensed consolidated balance sheet as of September 28, 2019, that we expect will be reclassified to earnings within the next twelve months, is approximately $2.4 million.

- 24 -


The fair value of our aluminum hedges are classified in the accompanying consolidated balance sheets at September 28, 2019, and December 29, 2018, as follows (in thousands):

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

September 28, 2019

 

 

 

September 28, 2019

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum forward contracts

 

Other current assets

 

$

 

 

 

Accrued liabilities

 

$

(2,436

)

Aluminum forward contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

(95

)

Total derivative instruments

 

  Total derivative assets

 

$

 

 

 

  Total derivative liabilities

 

$

(2,531

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

December 29, 2018

 

 

 

December 29, 2018

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum forward contracts

 

Other current assets

 

$

 

 

 

Accrued liabilities

 

$

(3,907

)

Aluminum forward contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

(211

)

Total derivative instruments

 

  Total derivative assets

 

$

 

 

 

  Total derivative liabilities

 

$

(4,118

)

The ending accumulated balance for the aluminum forward contracts included in accumulated other comprehensive losses, net of tax, was $1.9 million as of September 28, 2019, and $3.1 million at December 29, 2018.

The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three and nine months ended September 28, 2019, and September 29, 2018 (in thousands):

 

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

Amount of Gain or (Loss)

Recognized in OCI(L) on

Derivatives

 

 

Location of Gain or (Loss)

Reclassified from Accumulated

OCI(L) into Income

 

Amount of Gain or (Loss)

Reclassified from Accumulated

OCI(L) into Income

 

 

 

Three Months Ended

 

 

 

 

Three Months Ended

 

 

 

September 28,

 

 

September 29,

 

 

 

 

September 28,

 

 

September 29,

 

 

 

2019

 

 

2018

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

$

(1,136

)

 

$

(649

)

 

Cost of sales

 

$

(1,532

)

 

$

(58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

Amount of Gain or (Loss)

Recognized in OCI(L) on

Derivatives

 

 

Location of Gain or (Loss)

Reclassified from Accumulated

OCI(L) into Income

 

Amount of Gain or (Loss)

Reclassified from Accumulated

OCI(L) into Income

 

 

 

Nine Months Ended

 

 

 

 

Nine Months Ended

 

 

 

September 28,

 

 

September 29,

 

 

 

 

September 28,

 

 

September 29,

 

 

 

2019

 

 

2018

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

$

(2,083

)

 

$

(1,122

)

 

Cost of sales

 

$

(3,670

)

 

$

(15

)


- 25 -


NOTE 15.  ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 28, 2019 and September 29, 2018 (in thousands):

 

 

Aluminum

 

Three months ended September 28, 2019

 

Forward

 

(in thousands)

 

Contracts

 

Balance at June 29, 2019

 

$

(2,178

)

Change in fair value of derivatives

 

 

(1,136

)

Amounts reclassified from other comprehensive loss

 

 

1,532

 

Tax effect

 

 

(102

)

Net current-period other comprehensive income

 

 

294

 

Balance at September 28, 2019

 

$

(1,884

)

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum

 

Nine months ended September 28, 2019

 

Forward

 

(in thousands)

 

Contracts

 

Balance at December 29, 2018

 

$

(3,065

)

Change in fair value of derivatives

 

 

(2,083

)

Amounts reclassified from other comprehensive loss

 

 

3,670

 

Tax effect

 

 

(406

)

Net current-period other comprehensive income

 

 

1,181

 

Balance at September 28, 2019

 

$

(1,884

)

 

 

Aluminum

 

Three months ended September 29, 2018

 

Forward

 

(in thousands)

 

Contracts

 

Balance at June 30, 2018

 

$

(384

)

Change in fair value of derivatives

 

 

(649

)

Amounts reclassified from other comprehensive loss

 

 

58

 

Tax effect

 

 

151

 

Net current-period other comprehensive loss

 

 

(440

)

Balance at September 29, 2018

 

$

(824

)

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum

 

Nine months ended September 29, 2018

 

Forward

 

(in thousands)

 

Contracts

 

Balance at December 30, 2017

 

$

 

Change in fair value of derivatives

 

 

(1,122

)

Amounts reclassified from other comprehensive loss

 

 

15

 

Tax effect

 

 

283

 

Net current-period other comprehensive loss

 

 

(824

)

Balance at September 29, 2018

 

$

(824

)


- 26 -


NOTE 16. SHAREHOLDERS’ EQUITY

On May 22, 2019, our Board of Directors authorized and approved a share repurchase program of up to $30 million. The repurchases may be made in open market or private transactions from time to time. Repurchases of shares may be made under a Rule 10b5-1 plan, which would permit repurchases when we might otherwise be precluded from doing so under applicable laws. We base repurchase decisions, including the timing of repurchases, on factors such as our stock price, general economic and market conditions, the potential impact on our capital structure, the expected return on competing uses of capital such as strategic acquisitions and capital investments, and other corporate considerations, as determined by our management. The repurchase program may be suspended or discontinued at any time. 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 our discretion, and the program may be suspended, terminated or modified at any time for any reason. NaN repurchases were made under the program during the period from the inception of the program on May 22, 2019, through the end of the second quarter of 2019. During the three months ended September 28, 2019, we made repurchases of 393,819 shares of our common stock at a total cost of $5.5 million.

NOTE 17. SEGMENTS

We have 2 reportable segments: the Southeast segment, and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of our sales in Florida, the core market of our legacy business, as well as Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and the Caribbean. The Western reporting segment, also an operating segment, is composed of sales in the remainder of the United States, along with Canada and Mexico. The operations of the Western reporting segment are composed primarily of the results of WWS and the results of the legacy operations of the Company in the west. While both of our operating segments have products, distribution methods and customers of a similar nature, we determined to not aggregate them due to the differences in their geographic markets. Therefore, our operating segments are also our reportable segments.

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

The following table represents summary financial data attributable to our operating segments for the three and nine months ended September 28, 2019, and September 29, 2018. Results of the Western segment are composed substantially of the results of WWS, which was acquired on August 13, 2018 (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28,

 

 

September 29,

 

 

September 28,

 

 

September 29,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast segment

 

$

158,377

 

 

$

176,961

 

 

$

456,435

 

 

$

479,974

 

Western segment

 

 

39,446

 

 

 

22,123

 

 

 

113,695

 

 

 

28,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

197,823

 

 

$

199,084

 

 

$

570,130

 

 

$

508,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast segment

 

$

22,745

 

 

$

26,334

 

 

$

61,081

 

 

$

71,397

 

Western segment

 

 

2,686

 

 

 

2,609

 

 

 

10,520

 

 

 

3,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income from operations

 

 

25,431

 

 

 

28,943

 

 

 

71,601

 

 

 

74,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

6,452

 

 

 

11,741

 

 

 

19,922

 

 

 

19,393

 

Debt extinguishment costs

 

 

 

 

 

296

 

 

 

 

 

 

3,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income before income taxes

 

$

18,979

 

 

$

16,906

 

 

$

51,679

 

 

$

52,208

 


- 27 -


NOTE 18. SUBSEQUENT EVENTS

Amendment to 2016 Credit Agreement

On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2022 (“Third Amendment”). The Third Amendment provides for, among other things, (i) a new three-year Term A loan in the aggregate principal amount of $64.0 million (the “Initial Term A Loan”), which refinances in full our existing Term B term loan facility under the 2016 Credit Agreement, and has no regularly scheduled amortization, and (ii) a new five-year revolving credit facility due 2024 in an aggregate principal amount of up to $80.0 million (the “New Revolving Facility”), which replaces our 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.

Pursuant to the Third Amendment, interest on all loans under the 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto.  The Third Amendment decreases the applicable interest rate margins for the Initial Term Loan A from (i) 2.50% to a spread of 1.00% to 1.75% based on our first lien net leverage ratio, in the case of the Base Rate Loans (with a floor of 100 basis points), and (ii) 3.50% to a spread ranging from 2.00% to 2.75% based on our first lien leverage ratio, in the case of the Eurodollar Loans (with a floor of 0 basis points).

Also, in connection with the Third Amendment, we will pay quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Third Amendment also modifies the springing financial covenant under the 2016 Credit Agreement to provide that such financial covenant will not be tested until the Initial Term A Loan is paid in full. We estimate that fees and costs relating to the Third Amendment will be approximately $0.8 million, which we expect can be deferred and amortized.

In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. We expect that deferred financing costs and original issue discount allocated to these lenders of approximately $1.5 million will be written-off and classified as debt extinguishment costs in the condensed consolidated statement of operations for our fiscal year ended December 28, 2019.

Announcement of Executive Departure

On October 27, 2019, Scott Gates notified the Company that he will resign his position as President of the Company’s Western Business Unit and its Western Window Systems business, effective January 31, 2020. Following his resignation, Mr. Gates plans to establish a social entrepreneurship organization that will provide jobs, skills training and career paths for those in prison and former inmates.

- 28 -


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

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2016,29, 2018, included in our most recent Annual Report on Form10-K as well as our reportsfiled with the Securities and Exchange Commission on Forms10-Q and8-K and other publicly available information.February 27, 2019. All amounts herein are unaudited.

Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the matters set forth in this Quarterly Report on Form10-Q are forward-looking statements. These 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 terminology such as “may,“expected,“will,“excited,“believe, “guidance,” “believe,” “expect,” “forecast,“may,“guidance,“outlook,” “forecast,” “intend,” “could,” “project,” “estimate,” “anticipate,” “should,” “plan” and similar terminology. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the filing date of this Quarterly Report and which involve risks and uncertainties that may cause our actual results to differ materially from those set forth in the forward lookingforward-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:

 

Changes

adverse changes in new home starts and home repair and remodeling trends, especially in the state of Florida, where the substantial portion of our sales are currently generated, and in the western United States, where the substantial portion of the sales of Western Window Systems’ operations are generated, and in the U.S. generally;

The economy in the U.S. generally or

macroeconomic conditions in Florida, where the substantial portion of our sales are generated, and in the Western United States, where the substantial portion of the sales of Western Window Systems are currently generated, and in the U.S. generally;

Raw material prices, especially for aluminum, glass and vinyl

our level of indebtedness, which significantly increased in connection with the acquisition of Western Window Systems (the “Western Window Systems Acquisition”);

Transportation costs

the effects of increased expenses or unanticipated liabilities incurred as a result of, or due to activities related to, the Western Window Systems Acquisition;

Our level of indebtedness

the risk that the anticipated cost savings, synergies, revenue enhancement strategies and other benefits expected from the Western Window Systems Acquisition may not be fully realized or may take longer to realize than expected or that our actual integration costs may exceed our estimates;

Dependence on our impact-resistant product lines

raw material prices, especially for aluminum, glass and vinyl, including, price increases due to the implementation of tariffs and other trade-related restrictions;

Integration of acquisition(s), including our acquisition of WinDoor, Inc.

our dependence on a limited number of suppliers for certain of our key materials;

Product liability and warranty claims made against us

our dependence on our impact-resistant product lines and contemporary indoor/outdoor window and door systems, and on consumer preferences for those types and styles of products;

Federal, and state and local regulations, including changes to state and local building codes

sales fluctuations to and changes in our relationships with key customers;

Dependence on our limited number of manufacturing facilities

increases in bad debt owed to us by our customers in the event of a downturn in the home repair and remodel or new home construction businesses in our core markets and our inability to collect such debt;

The continuing impact of Hurricane Irma on our sales and profitability

in addition to our Western Window Systems Acquisition, our ability to successfully integrate businesses we may acquire, or that any business we acquire in the future may not perform as we expected when we acquired it;

The risks and uncertainties discussed under Item 1A, “Risk Factors,” in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2016.

increases in transportation costs, including due to increases in fuel prices;

product liability and warranty claims brought against us;

federal, state and local laws and regulations, including unfavorable changes in local building codes and environmental and energy code regulations;

our dependence on our limited number of geographically concentrated manufacturing facilities;

risks associated with our information technology systems, including cybersecurity-related risks, such as unauthorized intrusions into our systems by “hackers” and theft of data and information from our systems, and the risks that our information technology systems do not function as intended or experience temporary or long-term failures to perform as intended; and,

the other risks and uncertainties discussed under “Risk Factors” in Part I, Item 1A, in our Annual Report on Form 10-K for the year ended December 29, 2018.

Any forward-looking statements made by us or on our behalf, including our full-year guidance range for 2019, speak only as of the date they are made and, except as may be required by law, we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances.

- 29 -


EXECUTIVE OVERVIEW

Sales and Operations

We recordedWith our acquisition of Western Windows Systems (“WWS”) in August 2018, we believe we have positioned PGT Innovations as a national leader in the premium window and door space. The addition of Western Window Systems’ footprint supports the component of our strategic vision focused on expanding outside of Florida with niche products that we expect to maintain and strengthen our margin profile. The WWS acquisition also helped us achieve more geographic and product diversity.   

Although we achieved sales growth in our Western segment in the third quarter of $126.9 million, down 2.3 percent2019 compared to the third quarter of 2016. Sales were $377.0 million for2018, our 2019 third quarter results reflect an expected decrease of sales into both the nine-month period ended September 30, 2017, up 8.0 percentrepair and remodel market, and to a lesser extent our new construction market, of our legacy business, after as compared to the same period last year.record-setting growth we experienced in 2018, which was driven by increased customer awareness of the benefits of our impact resistant products and increased repair and remodeling activity after two major hurricanes in 2017. Sales in the 2019 third quarter were also negatively affected by the disruptions to many of our customers’ businesses caused by Hurricane Dorian in late August 2019, which resulted in a decrease in customer orders and shipments for us.

OurGross margin decreased 1.3 percentage points, to 35.4% in this year’s third quarter, compared to 36.7% in the third quarter of 2017 started strong as2018, primarily due to the unfavorable effects of shifts in the mix of products sold, the decrease in sales volume in Julyour legacy business, and Augustdecreases in our product prices due to certain promotions during the quarter. These negative factors were up over 5 percentpartially offset by the inclusion of the gross profits of our WWS for the entire third quarter in 2019, compared to only the post-acquisition period in the third quarter of 2018. The unfavorable impact of the challenging factors affecting our gross profit in the 2019 third quarter was partially offset by the benefits we experienced from our ability to leverage fixed costs.

Net income per diluted share of $0.26, which was flat compared to last year’s third quarter, was impacted by a higher level of weighted-average outstanding shares as a result of our issuance of an additional 7,000,000 shares of our Company’s common stock (“Equity Issuance”) in September 2018. Despite the decline in our legacy sales into the repair and remodel and new construction markets, as compared to the record year which benefitted operational performance. During this period, we were regularly recording order weeksexperienced in 2018, we believe we will continue to benefit from the strength of between $10our brands, and $11 million,are implementing advertising, marketing 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 landfallsales initiatives that we believe will drive sales 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 customers in our key Florida markets suspended operations. Some of the most severely impacted areas were in 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 working 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.2019 and in 2020.

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.

For the full year 2017, the Company expects to finish within the previous guidance range for consolidated sales of $490 to $500 million.- 30 -


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 indicated (in thousands, except percentages):

 

  Three Months Ended 

 

Three Months Ended

 

  September 30, October 1, 

 

September 28,

 

 

September 29,

 

  2017 2016 

 

2019

 

 

2018

 

  (unaudited) 

 

(unaudited)

 

Net sales

  $126,876    100.0 $129,807    100.0

 

$

197,823

 

 

100.0%

 

 

$

199,084

 

 

100.0%

 

Cost of sales

   87,128    68.7 88,721    68.3

 

 

127,828

 

 

64.6%

 

 

 

126,086

 

 

63.3%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

   39,748    31.3 41,086    31.7

 

 

69,995

 

 

35.4%

 

 

 

72,998

 

 

36.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

   24,950    19.7 22,533    17.4

 

 

44,564

 

 

22.5%

 

 

 

44,055

 

 

22.1%

 

Fair value adjustment to contingent consideration

   —      —    (3,000   (2.3)% 
  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

   14,798    11.7 21,553    16.6

 

 

25,431

 

 

12.9%

 

 

 

28,943

 

 

14.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

   5,514    4.3 5,495    4.2

 

 

6,452

 

 

3.3%

 

 

 

11,741

 

 

5.9%

 

Debt extinguishment costs

 

 

 

 

-

 

 

 

296

 

 

0.1%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

   9,284    7.3 16,058    12.4

 

 

18,979

 

 

9.6%

 

 

 

16,906

 

 

8.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

   2,992    2.4 5,262    4.1

 

 

3,873

 

 

2.0%

 

 

 

3,335

 

 

1.7%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

  $6,292    5.0 $10,796    8.3

 

$

15,106

 

 

7.6%

 

 

$

13,571

 

 

6.8%

 

  

 

    

 

   

 

  Nine Months Ended 

 

Nine Months Ended

 

  September 30, October 1, 

 

September 28,

 

 

September 29,

 

  2017 2016 

 

2019

 

 

2018

 

  (unaudited) 

 

(unaudited)

 

Net sales

  $376,981    100.0 $349,046    100.0

 

$

570,130

 

 

100.0%

 

 

$

508,606

 

 

100.0%

 

Cost of sales

   260,941    69.2 240,507    68.9

 

 

365,925

 

 

64.2%

 

 

 

330,888

 

 

65.1%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

   116,040    30.8 108,539    31.1

 

 

204,205

 

 

35.8%

 

 

 

177,718

 

 

34.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

   72,385    19.2 63,209    18.1

 

 

132,604

 

 

23.3%

 

 

 

105,293

 

 

20.7%

 

Fair value adjustment to contingent consideration

   —      —    (3,000   (0.9)% 

Gains on sales of assets under APA

 

 

 

 

-

 

 

 

(2,551

)

 

(0.5)%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

   43,655    11.6 48,330    13.8

 

 

71,601

 

 

12.6%

 

 

 

74,976

 

 

14.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

   14,992    4.0 14,935    4.3

 

 

19,922

 

 

3.5%

 

 

 

19,393

 

 

3.8%

 

Debt extinguishment costs

   —      —    3,431    1.0

 

 

 

 

-

 

 

 

3,375

 

 

0.7%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

   28,663    7.6 29,964    8.6

 

 

51,679

 

 

9.1%

 

 

 

52,208

 

 

10.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

   9,117    2.4 10,339    3.0

 

 

11,271

 

 

2.0%

 

 

 

8,749

 

 

1.7%

 

  

 

    

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

  $19,546    5.2 $19,625    5.6

 

$

40,408

 

 

7.1%

 

 

$

43,459

 

 

8.5%

 

  

 

    

 

   


- 31 -


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 201728, 2019 AND OCTOBER 1, 2016

The following table represents total sales by product category for the three months ended September 30, 2017, and October 1, 2016 (in millions):SEPTEMBER 29, 2018

 

   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 during the third quarter of 2017 were $126.9 million, a decrease of $2.9 million, or 2.3%, from $129.8 million in total net

 

 

Three Months Ended

 

 

 

September 28, 2019

 

 

September 29, 2018

 

 

 

Net Sales

 

 

Net Sales

 

(in millions)

 

 

 

 

 

 

 

 

Total net sales

 

$

197.8

 

 

$

199.1

 

Net sales for the third quarter of 2016. Our primary market is2019 were $197.8 million, a $1.3 million, or 0.6%, decrease in sales, from $199.1 million in the Statethird quarter of Florida, from which we derive approximately 90%the prior year. Net sales of our sales. On September 10, 2017, Hurricane Irma made landfallSoutheast segment were $158.3 million in the Florida Keys and moved north overthird quarter of 2019, compared with $177.0 million in the entire state, affecting all areas2018 third quarter, a decrease of Florida. Irma caused disruption to 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$18.7 million. Net sales of our locations. Irma also affected our customers’ ability to accept deliveriesWestern segment were $39.5 million in the third quarter of 2019, compared with $22.1 million in the third quarter of 2018, an increase of $17.4 million. Sales of our products. We estimate that lostWestern segment are composed of the sales directly attributable toof WWS, which were $35.9 million in the disruption caused by Irma forthird quarter of 2019, compared with $18.7 million in the third quarter of 2018 from the date of the acquisition, and sales of our legacy business into the west, which were $3.5 million in the three months ended September 30, 2017, totaled approximately $13 million.28, 2019, and $3.4 million in the three months ended September 29, 2018.

Net sales of impact-resistant window and door products were $108.8 The $1.3 million for the third quarter of 2017, a decrease of $1.4 million, or 1.3%, from $110.2 million in net sales for the third quarter of 2016. Included2019 of was driven by the $18.7 million decline in sales of our impact-resistant windowSoutheast segment, which includes a $15.7 million decrease in sales into the repair and door products were $77.2 millionremodel market of aluminum impact sales, a decrease of $4.3 million, or 5.3%, and $31.6 million of vinyl impact sales, anour legacy business, partially offset by the net increase of $2.9 million, or 10.2%.

Netin sales ofnon-impact window and door products were $18.1 $17.2 million from inclusion of our WWS business for an entire quarter in 2019, compared to only the post-acquisition period in 2018. Sales in the 2019 third quarter were also negatively affected by the disruptions to many of 2017, a decrease of $1.5 million, or 7.7%, from $19.6 millionour customers caused by Hurricane Dorian in net saleslate August 2019, which resulted in decreased orders and shipments for the third quarter of 2016.us.

Gross profit and gross margin

Gross profit was $39.7 $70.0 million in the third quarter of 2017,2019, a decrease of $1.3 $3.0 million, or 3.3%4.1%, from $41.1 $73.0 million in the third quarter of 2016.2018. The gross margin percentage was 31.3%35.4% in the third quarter of 2017,2019, compared to 31.7%36.7% in the prior year third quarter, a decrease of 0.4%1.3%. Adjusting for costs relating to Hurricane Irma, and transition costs associated with WinDoor leadership and the glass supply-chain, which combined totaled $1.0 million in the 2017 three-month period, and product line termination costs totaling $0.8 million in the 2016 three-month period, the grossGross margin percentage was 32.1%decreased in the third quarter of 2017, compared2019 due primarily to 32.3%the unfavorable effects of a change in the prior year third quarter, a decreasemix of 0.2%. Improvements in scrap rates and efficiencies, which benefittedproducts sold, lower gross margin on lower volume, and decreases in our product prices due to certain promotions in the quarter. These decreases were partially offset by 0.5% during the inclusion of the gross profits of WWS for the entire third quarter of 2017, and a price increase, which benefitted gross margin by 0.7%, were more than offset by decreases of 0.6% due to the impact of higher depreciation on higher capital spending in recent years, 0.7% due to higher aluminum prices2019, as compared to last year’sonly the post-acquisition period in the 2018 third quarter, and 0.1% due to the combined effects of lower sales volume and mix of sales.

Selling, general and administrative expensesquarter.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $25.0 $44.6 million in the third quarter of 2017,2019, an increase of approximately $2.4 $0.5 million, or 10.7%, from $22.5 $44.1 million in the third quarter of 2016. As a percentage 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 increased2018. SG&A in the third quarter of 2017,2019 was 22.5% of net sales, compared to 22.1% of net sales in the third quarter of 2018. The increase in SG&A is primarily the result of the inclusion of the SG&A expenses of WWS for the entire third quarter of 2019, compared with only the post-acquisition-period in 2018, which resulted in an increase in SG&A totaling $6.1 million, including an increase of $1.2 million in amortization of the amortizable intangible asset acquired in the acquisition. Excluding the increase in SG&A from the inclusion of WWS, SG&A decreased $5.6 million in the third quarter of 2019, compared to the third quarter of last year, due to higher distribution2018. The decrease in SG&A was primarily driven by a decrease of personnel-related costs, due to disruptions caused by Irma. Selling, general and administrative expenses during the three months ended September 30, 2017, also increased due to our community outreach activities which we undertook to assist those affected by Irma locally.

We record warrantya decrease of acquisition 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, which decreased when compared$2.8 million relating to the rateWWS acquisition included in the secondthird quarter of 2017 of 2.22%. During the three months ended October 1, 2016, we recorded warranty expense at a rate of 2.21% of sales. We believe the decrease2018. These decreases were partially offset by an increase in warranty expense as a percentage of sales was the result of our workforce becoming more seasoned through experiencemarketing costs, including higher promotional costs, 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.

other selling cost increases.

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 $5.5 $6.5 million in the third quarter of 2017, representing no change2019, a decrease of $5.3 million, or 45.0%, from $5.5 $11.7 million in the third quarter of 2016.2018. Interest expense decreased due to a decrease in the average level of outstanding debt during the third quarter of 2017,2018 included $5.3 million in accelerated amortization of lenders fees and discount relating to the prepayment of $152.0 million in borrowings under the term loan portion of the 2016 Credit Agreement we made on September 18, 2018. There were no prepayments of term loan borrowings during 2019. Excluding the decrease in interest expense from the $5.3 million of accelerated amortization of lenders fees and discount included in the third quarter of 2018, interest expense was flat in the third quarter of 2019, 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 by2018. There was an increase in interest expense due to accelerated amortizationthe issuance of lenders feesthe 2018 Senior Notes due 2026, composed of $315.0 million aggregate principal amount of 6.75% unsecured senior notes due 2026, which carries a higher per-annum interest rate and discounthas a higher principal amount outstanding than borrowings under the term loan portion of $1.0 million, which is includedthe 2016 Credit Agreement due 2022. This increase in interest expense was offset by the effect on interest expense from the prepayment of $152.0 million in borrowings under the 2016 Credit Agreement due 2022 from the proceeds of the Equity Issuance in September 2018.

Debt extinguishment costs

Debt extinguishment costs were $296 thousand in the third quarter of 2018. At the time of the issuance of the 2018 Senior Notes, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $296 thousand is classified as debt

- 32 -


extinguishment costs in the accompanying condensed consolidated comprehensive incomestatement of operations for the three months ended September 30, 2017.29, 2018.

AsIncome from operations

Income from operations was $25.4 million in the third quarter of 2019, a decrease of $3.5 million, from $28.9 million in the third quarter of 2018. Income from operations in the third quarter of 2019 includes $22.7 million from our Southeast segment and $2.7 million from our Western segment, compared to $26.3 million and $2.6 million from our Southeast and Western segments, respectively, in the third quarter of 2018, all after allocation of corporate operating costs in both periods. The decrease in income from operations in the third quarter of 2019 compared to the third quarter of 2018 is primarily a result of recent increasesthe previously discussed decrease 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.gross profits and related gross margin effects.

Income tax expense

Our income tax expense was $3.0 $3.9 million for the third quarter of 2017,2019, compared with $5.3 $3.3 million for the third quarter of 2016.2018. Our effective tax rate for the third quarter of 2017three months ended September 28, 2019, was 32.2%20.4%, and was 32.8%19.7% for the third quarter of 2016. three months ended September 29, 2018.

Income tax expense in the third quarter of 2017 is net ofthree months ended September 28, 2019, and September 29, 2018, includes excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards, treated as discrete items of income tax upon our adoption of ASU2016-09 effective on January 1, 2017, totaling $347 thousand. Excluding thisa discrete item of income tax, expense,totaling $665 thousand and $1.0 million, respectively. Excluding this discrete item, as well as other minor tax credit adjustments recorded in the 2019 third quarter, the effective tax raterates for the third quarter of 2017three months ended September 28, 2019, and September 29, 2018, would have been 36.0%.24.8% and 25.5%, respectively.

The effective tax rates in all periods, excluding the effect of the discrete item relating to the treatment of excess tax benefits as discussed above, were lower than our combined statutory federal and state tax rate of 38.8% primarily as theAs a result of the estimated impact ofTax Cuts and Jobs Act, enacted effective on December 22, 2017, our Federal corporate income tax rate has been reduced from 35%, to 21%. This reduction in rate has lowered our overall effective tax rate. Additionally, the section 199 domestic manufacturing deduction partially offset bywas repealed. As such, our estimated annual effective tax rate, excluding the 50% deductibility-disallowancediscrete items discussed above, approximates our current combined statutory federal and state rate of meals and entertainment expenses.

25.6%.


- 33 -


RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 201728, 2019 AND OCTOBER 1, 2016

The following table represents total sales by product category for the nine months ended September 30, 2017, and October 1, 2016 (in millions):SEPTEMBER 29, 2018

 

   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 during the first nine months of 2017 were $377.0 million, an increase of over $27.9 million, or 8.0%, from $349.0 million in total net

 

 

Nine Months Ended

 

 

 

September 28, 2019

 

 

September 29, 2018

 

 

 

Net Sales

 

 

Net Sales

 

(in millions)

 

 

 

 

 

 

 

 

Total net sales

 

$

570.1

 

 

$

508.6

 

Net sales for the first nine months of 2016. Our primary market is2019 were $570.1 million, a $61.5 million, or 12.1%, increase in sales, from $508.6 million in the Statefirst nine months of Florida, from which we derive approximately 90%the prior year. Net sales of our sales. On September 10, 2017, Hurricane Irma made landfallSoutheast segment were $456.4 million in the Florida Keys and moved north overfirst nine months of 2019, compared with $480.0 million in the entire state, affecting all areasfirst nine months of Florida. Irma caused disruption to our ability to manufacture and distribute our products, and required us to shut-down and cease operations for2018, a perioddecrease of up to six days at certain$23.6 million. Net sales of our locations. Irma also affected our customers’ ability to accept deliveriesWestern segment were $113.7 million in the first nine months of 2019, compared with $28.6 million in the first nine months of 2018, an increase of $85.1 million. Sales of our products. We estimate that lostWestern segment are composed of sales directly attributable toof WWS, which were $105.0 million in the disruptions caused by Irma forfirst nine months of 2019, compared with $18.7 million in the three months ended,third quarter of 2018 from the date of the acquisition, and thereforesales of our legacy business into the western U.S., which were $8.6 million in the nine months ended September 30, 2017, totaled approximately $13 million.

Net sales of impact-resistant window28, 2019, and door products were $320.2 $9.9 million forin the first nine months of 2017, anended September 29, 2018.

The increase of $29.1 million, or 10.0%, from $291.1 million in net sales for the first nine months of 2016. Included2019 of $61.5 million was driven by the net increase in sales of $86.3 million from WWS, partially offset by the $23.6 million decline in sales of our impact-resistant windowSoutheast segment, which includes a $26.0 million decrease in sales into the repair and door products were $227.3 millionremodel market 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 forour legacy business. Sales in the first nine months of 2017, an2019 were also negatively affected by the disruptions to many of our customers’ operations caused by Hurricane Dorian in late August 2019, which resulted in a decrease of $1.1 million, or 2.0%, from $57.9 million in net salesorders and shipments for the first nine months of 2016.us.

Gross profit and gross margin

Gross profit was $116.0 $204.2 million in the first nine months of 2017,2019, an increase of $7.5 $26.5 million, or 6.9%14.9%, from $108.5 $177.7 million in the first nine months of 2016.2018. The gross margin percentage was 30.8%35.8% in the first nine months of 2017,2019, compared to 31.1% in the prior year first nine months, a decrease of 0.3%. Adjusting for costs relating to Hurricane Irma, transition costs associated with WinDoor leadership and the glass supply-chain, and costs relating to thestart-up of our Thermal Plastic Spacer system line totaling $1.5 million in the 2017 nine-month period, and product line termination costs totaling $0.8 million in the 2016 nine-month period, the 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 margin34.9% in the first nine months of 2017 was negatively impacted by higher material costs,2018, an increase of 0.9%. Gross margin improved in the first nine months of 2019 due primarily related to aluminum costs, which loweredthe addition of WWS. Increases in gross margin due to benefits from price increases in the first quarter of 2019, and operating efficiencies in the first nine months of 2019 compared to the same period last year, were offset by 0.7%, and by higher depreciation on higher capital spendingthe unfavorable effects of a change in recent years, which loweredthe mix of products sold, lower gross margin by 0.6%. These decreases were partially offset by a benefit of 0.4% from improvements in scrap rateson lower volume, and efficiencies, a benefit of 0.5% from an improved mix of sales, to higher margin products in our repair and modeling markets, and a benefit of 0.3% due to a price increase.

Selling, general and administrative expensesincreased material costs.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $72.4 $132.6 million in the first nine months of 2017,2019, an increase of $9.2 $27.3 million, or 14.5%, from $63.2 $105.3 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% from2018. SG&A in the first nine months of 2016.2019 was 23.3% of net sales, compared to 20.7% of net sales in the first nine months of 2018. The increase in selling, general and administrative expenses wasSG&A is primarily related to $3.1 million in higher accrued incentive costs as athe result of the improved performance, $0.7 inclusion of the SG&A expenses of WWS for the entire first nine months of 2019, compared with only the post-acquisition-period in 2018, which resulted in an increase in SG&A totaling $31.1 million, including an increase of costs related to management reorganization actions, $0.9 $5.9 million in amortization of costs from our attendance at and participationthe amortizable intangible asset acquired in the National AssociationWWS acquisition. Excluding the increase in SG&A from the inclusion 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 disruptions 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.

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 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 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 WWS, SG&A decreased $3.8 million in the first nine months of 2017, an increase of $0.1 million, from $14.9 million in the first nine months of 2016. During 2016, concurrent with the acquisition of WinDoor 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 2017,2019, compared to the first nine months of 2016, but2018. The decrease in SG&A was partially offsetprimarily driven by a decrease inof personnel-related costs, and a decrease of acquisition costs of $3.8 million relating to the average level of outstanding debt as the result of a total of $20 millionWWS acquisition included in voluntary prepayments made during the third quarter of 2017. Interest expense2018. These decreases were partially offset by an increase in legacy business selling and distribution costs in the first nine months of 2019 compared to 2018. There was also an increase in SG&A relating to an unusually high level of bad debt expense recorded in the second quarter of 2019, and an increase in marketing costs, including higher promotional costs. The remaining increase is related to a higher level of overall spending on SG&A related costs, including higher legal and other professional fees.

Gains on sales of assets under APA

On September 22, 2017, also benefitted fromwe entered into the February 17, 2017 repricingAPA with Cardinal for the sale to Cardinal of certain manufacturing equipment we used in processing glass components for PGT-branded doors. Substantially all of the 2016 Credit Agreement,remaining machinery and equipment was transferred to Cardinal during the second quarter of 2018, which resulted inhad aone-percentage point reduction in net book value of $3.2 million and fair value of $5.8 million. We recognized gains on disposals for the interest rate underdifference totaling $2.6 million during the term loan portion of the facility. This benefit was offset by the accelerated amortization of lenders fees and discount of $1.0 million relating to the third quarter 2017 voluntary prepayments of term loan borrowings, which is included in interest expensenine months ended September 29, 2018, classified as a separate line item in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2017.29, 2018.

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

- 34 -


Interest expense, net

Interest expense was 6.02% as of September 30, 2017.

Debt extinguishment costs

Debt extinguishment costs were $3.4 $19.9 million in the first nine months of 2016. These costs related2019, an increase of $0.5 million, or 2.7%, from $19.4 million in the first nine months of 2018. Interest expense in the first nine months of 2018 included $5.3 million in accelerated amortization of lenders fees and discount relating to thewrite-off prepayment of deferred financing costs and debt discount$152.0 million in connection with entering intoborrowings under the term loan portion of the 2016 Credit Agreement effectivewe made on February 16,September 18, 2018. There were no prepayments of term loan borrowings during 2019. Excluding the decrease in interest expense from the $5.3 million in accelerated amortization of lenders fees and discount included in the first nine months of 2018, interest expense increased $5.8 million in the first nine months of 2019, compared to the first nine months of 2018. The increase in interest expense is due primarily to the issuance of the 2018 Senior Notes due 2026, composed of $315.0 million aggregate principal amount of 6.75% unsecured senior notes due 2026. The 2018 Senior Notes due 2026 carry a higher per-annum interest rate and have a higher principal amount outstanding than borrowings under the term loan portion of the 2016 which resultedCredit Agreement due 2022. This increase in interest expense was partially offset by the effect of the prepayment of $152.0 million in borrowings under the 2016 Credit Agreement due 2022 from the proceeds of the Equity Issuance in September 2018.

Debt extinguishment costs

Debt extinguishment costs were $3.4 million in the first nine months of 2018. In connection with the Second Amendment, certain then existing lenders exitingmodified their positions in or exited the facility, and certain continuing lenders being considered debt extinguishments in the refinancing. This2016 Credit Agreement, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $3.4 million is classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the nine months ended September 29, 2018, including $296 thousand during the three months ended September 29, 2018.

Income from operations

Income from operations was $71.6 million in the first nine months of 2019, a decrease of $3.4 million, from $75.0 million in the first nine months of 2018. Income from operations in the first nine months of 2019 includes $61.1 million from our Southeast segment and $10.5 million from our Western segment, compared to $71.4 million and $3.6 million from our Southeast and Western segments, respectively, in the first nine months of 2018, all after allocation of corporate operating costs in both periods. The decrease in income from operations in the first nine months of 2019 compared to the first nine months of 2018 is a result of the increase in SG&A, including higher amortization, substantially offset by a higher amount of gross profit in the first nine months of 2019 compared to the same period of last year. Income from operations also includes the gains on sales of assets under the APA with Cardinal of $2.6 million in the nine months ended September 29, 2018.

Income tax expense

Our income tax expense was $9.1 $11.3 million for the first nine months of 2017,2019, compared with $10.3 $8.7 million for the first nine months of 2016.2018. Our effective tax rate for the first nine months of 2017ended September 28, 2019, was 31.8%21.8%, and was 34.5%16.8% for the first nine months of 2016. ended September 29, 2018.

Income tax expense in the first nine months of 2017 is net ofended September 28, 2019, and September 29, 2018, includes excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards, treated as discrete items of income tax upon our adoption of ASU2016-09 effective on January 1, 2017, totaling $1.1 million. Excluding thisa discrete item of income tax, expense,totaling $1.7 million and $4.6 million, respectively. Excluding this discrete item, as well as other minor tax credit adjustments recorded in the 2019 third quarter, the effective tax raterates for the first nine months of 2017ended September 28, 2019, and September 29, 2018, would have been 35.8%.25.3% and 25.6%, respectively.

The effective tax rates in all periods, excluding the effect of the discrete item relating to the treatment of excess tax benefits as discussed above, were lower than our combined statutory federal and state tax rate of 38.8% primarily as theAs a result of the estimated impact ofTax Cuts and Jobs Act, enacted effective on December 22, 2017, our Federal corporate income tax rate has been reduced from 35%, to 21%. This reduction in rate has lowered our overall effective tax rate. Additionally, the section 199 domestic manufacturing deduction partially offset bywas repealed. As such, our estimated annual effective tax rate, excluding the 50% deductibility-disallowancediscrete items discussed above, approximates our current combined statutory federal and state rate of meals and entertainment expenses.

25.6%.


- 35 -


LIQUIDITY AND CAPITAL RESOURCES

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. 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 Flows

Operating activities. Cash provided by operating activities during the first nine months of 20172019 was $34.7 $54.3 million, compared to $33.2 cash provided of $64.6 million in the first nine months of 2016.2018. The reductiondecrease in cash provided by operating activities for the first nine months of 2017,2019, as compared to the first nine months of 2016,2018, of $10.3 million, was due to the factors set forth in the table below.

Direct cash flows from operations for the first nine months of 20172019 and 20162018 are as follows:

 

 

Direct Operating

Cash Flows

 

  Direct Operating
Cash Flows
 

 

Nine Months Ended

 

  Nine Months Ended 

 

September 28,

 

 

September 29,

 

(in millions)  September 30,
2017
   October 1,
2016
 

 

2019

 

 

2018

 

Collections from customers

  $373.4   $341.5 

 

$

574.6

 

 

$

490.7

 

Other collections of cash

   3.9    3.9 

 

 

6.4

 

 

 

5.2

 

Disbursements to vendors

   (230.2   (208.2

 

 

(356.0

)

 

 

(308.8

)

Personnel related disbursements

   (99.1   (93.9

 

 

(136.5

)

 

 

(114.5

)

Income taxes refunded, net

   —      1.3 

Income taxes paid, net

 

 

(10.8

)

 

 

(17.2

)

Debt service payments

   (13.3   (11.4

 

 

(23.3

)

 

 

(9.8

)

Cash received from Cardinal under supply agreement

 

 

-

 

 

 

19.0

 

Other cash activity, net

 

 

(0.1

)

 

 

-

 

  

 

   

 

 

 

 

 

 

 

 

 

 

Cash from operations

  $34.7   $33.2 

 

$

54.3

 

 

$

64.6

 

  

 

   

 

 

Days sales outstanding (DSO), which we calculate as accounts receivable divided by quarterly average daily sales, was 42 daysat September 30, 2017,28, 2019, compared to 3639 days at October 1, 2016. Our DSO’s 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 balance as of September 30, 2017. DSO’s were also affected by certain larger customer projects for CGI and WinDoor, which have longer payment terms.29, 2018.

Inventory on hand as of September 30, 2017,28, 2019, was $39.1 $47.6 million, compared to $30.5 $44.7 million at December 31, 2016,29, 2018, an increase of $8.6 $2.9 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, we have only a smalllow amount of finished goods andwork-in-process inventory. As a result of these factors, our inventories are not excessive, and we believe the value of such inventories will be realized through sales.

Investing activities.Cash used in investing activities was $9.6 $20.2 million for the first nine months of 2017,2019, compared to cash used in investing activities of $114.6 $371.1 million for the first nine months of 2016. We used $101.3 million of cash2018, a decrease in the first nine months of 2016 to acquire businesses. Excluding cash used to acquire businesses, therein investing activities of $350.9 million. There was a decrease in cash used in investing activities due to a decrease in capital expenditures of $3.6 $1.5 million, which went from $13.3 $21.7 million in the first nine month of 2018, to $20.2 million in the first nine months of 2016, to $9.7 2019. Proceeds from disposals of assets in the first nine months of 2019 was less than $0.1 million, compared with $5.9 million in the first nine months of 2017.2018, which was almost entirely composed of cash received from the sales of assets under the Cardinal APA. Finally, in the third quarter of 2018, we used $355.2 million in cash to acquire WWS.


- 36 -


Financing activities.Cash used in financing activities was $19.6 $4.9 million in the first nine months of 2017,2019, compared to cash provided by financing activities of $49.8 $304.7 million in the first nine months of 2016,2018, a decrease in cash provided of $69.4 $309.6 million. WeIn the third quarter of 2018, we issued the 2018 Senior Notes, which provided proceeds of $315.0 million. Also in the third quarter of 2018, we issued Company common stock in the 2018 Equity Issuance, which provided net proceeds of $152.7 million. Using primarily the proceeds from the 2018 Equity Issuance, we made repayments of long-term debt of $20.1 nearly $152.2 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,2018, compared to cash used forwith repayments 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 $0.2 million in the first nine months of 2016 was2019.During the resultthree months ended September 28, 2019, we made repurchases of the February 2016 refinancing and contemporaneouspay-down of $197.5 million393,819 shares of our then existing credit facility. Subsequent tocommon stock totaling $5.5 million under a repurchase program authorized by our Board of Directors. See the refinancing, $2.0 million had been repaid as scheduled debt repayments through the end of the third quarter of 2016. In addition, we made 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, theresection below titled Share Repurchase Program for additional information regarding this program. There were payments of financing costs totaling $12.1 million in the first nine months of $7.2 million2018, related to the refinancing.Second Amendment. 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 $0.5 million in the first nine months of 2017,2019, versus $0.1 $0.6 million in the first nine months of 2016, an increase2018, a decrease in cash used of $0.1 $0.1 million. There was a decrease of $2.7 million in cash used to purchase treasury shares. Proceeds from the exercises of stock options were approximately equal$1.3 million in the first nine months of 2017, versus2019, compared to $1.9 million in the first nine months of 2016. Also, there was2018, a $1.6 decrease in proceeds of $0.6 million.

During the nine months ended September 28, 2019, we made payments of estimated federal and state income taxes of $10.8 million. We received no refunds of federal or state income taxes in the first nine months of 2019. During the nine months ended September 29, 2018, we made payments of estimated federal and state income taxes totaling $17.2 million, decreaseincluding an estimated Federal income tax payment totaling $9.0 million relating to excessthe 2017 tax benefits dueyear. The Internal Revenue Service provided tax relief relating to taxpayers in certain designated areas of Florida impacted by Hurricane Irma in September 2017, which included all counties in Florida in which we operate. As a result, the deadline for remitting our adoption of ASU2016-09, which no longer requires excess tax benefitsrequired 2017 third quarter estimated payment for corporate income taxes was extended to be presented as a financing activity.January 31, 2018.

Capital Resources and Debt Covenant.

2018 Equity Issuance

On September 18, 2018, we completed an underwritten, public offering of 7,000,000 shares of our common stock, at a public offering price of $23.00 per share. Pursuant to the offering, we granted the underwriters an option for a 30-day period to purchase up to an additional 1,050,000 shares of common stock. The 30-day option period expired with no additional shares issued.

The offering resulted in gross proceeds to the Company of $161.0 million. Net of an underwriting fee of $1.15 per share, net cash proceeds to the Company approximated $153.0 million. We used $152.0 million of these proceeds to prepay borrowings outstanding under the term loan portion of the 2016 Credit Agreement. The remainder of the proceeds were used for working capital or general corporate purposes, including payment of offering expenses of approximately $447 thousand, classified as a reduction of additional paid-in capital.

2018 Senior Notes due 2026

On August 10, 2018, we completed the issuance of $315.0 million aggregate principal amount of 6.75% senior notes (“2018 Senior Notes Due 2026”), issued at 100% of their principal amount. The 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 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 2018 Senior Notes due 2026 mature on August 10, 2026. Interest on the 2018 Senior Notes due 2026 is payable semi-annually, in arrears, beginning on February 16, 2019, with interest accruing at a rate of 6.75% per annum from August 10, 2018. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2018 Senior Notes due 2026 totaling $10.4 million, which is being amortized under the effective interest method. See “Deferred Financing Costs” below. As of September 28, 2019, the face value of debt outstanding under the 2018 Senior Notes due 2026 was $315.0 million, and accrued interest totaled $3.5 million.

The indenture for the 2018 Senior Notes due 2026 gives us the option to redeem some or all of the 2018 Senior Notes due 2026 at the redemption prices and on the terms specified in the indenture governing the 2018 Senior Notes due 2026. The indenture governing the 2018 Senior Notes due 2026 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.

- 37 -


The indenture for the 2018 Senior Notes due 2026 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 2022

On February 16, 2016, we entered into the 2016 Credit Agreement due 2022, among us, the lending institutions identified in the 2016 Credit Agreement due 2022, and DeutscheSunTrust Bank, AG New York Branch, as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 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 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 maturing in five yearsFebruary 2021 that includes a swing line facility and a letter of credit facility. Our obligations under the 2016 Credit Agreement due 2022 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 the Second Amendment, which, among other things, decreases the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2022) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2022), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2022). On February 17, 2017, we entered into the first amendment to our 2016 Credit Agreement due 2022, which also resulted in decreases in the applicable margins, but which, unlike the Second Amendment, did not include any changes in lender positions.

In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $3.4 million is classified as debt extinguishment costs in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2017,29, 2018.

Regarding the first amendment to the 2016 Credit Agreement due 2022, as described above, as there were $0.2 millionno changes in lender positions, this action did not result in any modifications or extinguishments of letters of credit outstanding and $39.8 million available on the revolver.debt. Therefore, there was no charge for debt extinguishment costs in 2017.

Interest on all loans under the 2016 Credit Agreement due 2022 is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement due 2022 on February 17, 2017,March 16, 2018, as described below,above, borrowings under the term loans and the revolving credit facility accrued interest at 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 575475 basis points in the case of LIBOR and 475375 basis points in the case of the base rate. The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 5.69% as of September 28, 2019, and was 5.84% at December 29, 2018.

We also pay quarterly fees on the unused portion of the revolving credit facility equal to 50 basis points per annum as well as a quarterly letter of credit fee at 575 basis points per annum plus a 12.5 basis point facing fee per annum on the face amount of any outstanding letters of credit. The weighted averageall-in interest rate for borrowingsAs of September 28, 2019, there were $2.1 million in letters of credit outstanding and $37.9 million available under the term-loan portion of the 2016 Credit Agreement was 6.02% as of September 30, 2017, and was 5.75% at December 31, 2016.

On February 17, 2017, we entered into an amendment of our 2016 Credit Agreement. 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.revolver.

The 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of twenty percent (20%) of the revolving facility which requirescommitment (excluding $7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 105% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us to maintainfrom exceeding a maximum totalfirst lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt for borrowed money to EBITDA, eachEBITDA) as defined in the 2016 Credit Agreement), and is tested quarterly based onof the last fourday of each applicable fiscal quarters andquarter. To the extent the springing financial covenant is set at levelsin effect, the first lien net leverage ratio cannot exceed 4.00:1.00 as described inof the 2016 Credit Agreement. Aslast day of the fiscal quarter ending on September 30, 2017, no28, 2019. We were not required to test is required asour first lien net leverage ratio for the quarter ending September 28, 2019 because we havedid not exceededexceed 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 2017the third quarter of 2019 has been, and during the remainder of 2019 will continue to be, in compliance with the 2016 Credit Agreement due 2022, and that we are in compliance with all covenants.

- 38 -


The 2016 Credit Agreement due 2022 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, entry into restrictive agreements, prepayments of certain debt and transactions with affiliates.affiliates, in each case, subject to exceptions and qualifications. The 2016 Credit Agreement due 2022 also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement due 2022 may be accelerated and may become immediately due and payable.

On September 18, 2018, contemporaneously with the 2018 Equity Issuance, we prepaid $152.0 million in borrowings outstanding under the term loan portion of the 2016 Credit Agreement due 2022. On December 19, 2018, we voluntarily prepaid an additional $8.0 million in borrowings under the 2016 Credit Agreement due 2022. As of September 30, 2017, we were in compliance with all affirmative and restrictive covenants.

As of September 30, 2017,28, 2019, the face valueprincipal amount of debt outstanding under the 2016 Credit Agreement due 2022 was $244.0 $64.0 million, and accrued interest was $0.4 $0.5 million. During

Amendment to 2016 Credit Agreement

On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2022 (“Third Amendment”). The Third Amendment provides for, among other things, (i) a new three-year Term A loan in the third quarteraggregate principal amount of 2017, we made voluntary prepayments of outstanding borrowings$64.0 million (the “Initial Term A Loan”), which refinances in full our existing Term B term loan facility under the term-loan portion of the 2016 Credit Agreement, totaling $20.0and has no regularly scheduled amortization, and (ii) a new five-year revolving credit facility due 2024 in an aggregate principal amount of up to $80.0 million composed(the “New Revolving Facility”), which replaces our 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.

Pursuant to the Third Amendment, interest on all loans under the 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto.  The Third Amendment decreases the applicable interest rate margins for the Initial Term Loan A from (i) 2.50% to a paymentspread of $8.01.00% to 1.75% based on our first lien net leverage ratio, in the case of the Base Rate Loans (with a floor of 100 basis points), and (ii) 3.50% to a spread ranging from 2.00% to 2.75% based on our first lien leverage ratio, in the case of the Eurodollar Loans (with a floor of zero basis points).

Also, in connection with the Third Amendment, we will pay quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Third Amendment also modifies the springing financial covenant under the 2016 Credit Agreement to provide that such financial covenant will not be tested until the Initial Term A Loan is paid in full. We estimate that fees and costs relating to the Third Amendment will be approximately $0.8 million, made on September 29, 2017,which we expect can be deferred and amortized.

In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. We expect that deferred financing costs and original issue discount allocated to these lenders of $12.0approximately $1.5 million made on July 7, 2017.

will be written-off and classified as debt extinguishment costs in the condensed consolidated statement of operations for our fiscal year ended December 28, 2019.

Deferred Financing Costs

The activityactivities relating to third-party fees and costs, lender fees and discount for the three months ended September 30, 2017, are set forth in the table below. 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. 28, 2019, are as follows.All debt-related fees, 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

 

$

12,361

 

Less: Amortization expense relating to 2016 Credit Agreement

 

 

(552

)

Less:  Amortization expense relating to 2018 Senior Notes

 

 

(751

)

 

 

 

 

 

At end of period

 

$

11,058

 

- 39 -


Estimated amortization expense relating to third-party fees and costs, lender fees and discount for the years indicated as of September 30, 2017,28, 2019, is as follows:

 

(in thousands)  Total 

 

Total

 

Remainder of 2017

  $670 

2018

   2,785 

2019

   2,966 

Remainder of 2019

 

$

449

 

2020

   3,224 

 

 

1,913

 

2021

   3,011 

 

 

1,893

 

2022

   381 

 

 

1,353

 

2023

 

 

1,359

 

Thereafter

 

 

4,091

 

  

 

 

 

 

 

 

Total

  $13,037 

 

$

11,058

 

  

 

 

As a result of prepayments of the voluntary prepayments2016 Credit Agreement due 2022 totaling $20.0 $204.0 million we made during the third quarter of 2017,since its inception in February 2016, we have no future scheduled repayments under the 2016 Credit Agreement until the maturity of the facility on February 21, 2022. The contractual future maturities of long-term debt outstanding, including the remaining balance of the financing arrangement described as other debt, as of September 30, 2017,28, 2019, are as follows (at face value):

 

  (in thousands) 

Remainder of 2017

  $71 

2018

   295 

2019

   163 

(in thousands)

 

 

 

 

Remainder of 2019

 

$

 

2020

   —   

 

 

 

2021

   —   

 

 

 

2022

   243,975 

 

 

63,975

 

2023

 

 

 

Thereafter

 

 

315,000

 

  

 

 

 

 

 

 

Total

  $244,504 

 

$

378,975

 

  

 

 

Capital Expenditures.Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first nine months of 2017,2019, capital expenditures were $9.7$20.2 million, compared to $13.3 $21.7 million for the first nine months of 2016.2018. In 2017,2019, including the capital expenditures of WWS, we expect to spend approximately$12-$15 $32 to $38 million on capital expenditures. Our capital expenditure program is geared towards making investments in capital assets targeted at increasing both gross sales and margins, but also includes capital expenditures primarily including machineryfor maintenance capital.

Aluminum Forward Contracts. We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusions we use in production. At September 28, 2019, the fair value of our aluminum forward contracts was in a net liabilityposition of $2.5 million. We had 36 outstanding forward contracts for the purchase of 34.5 million pounds of aluminum through December 2019, at an average price of $0.87 per pound, which excludes the Midwest premium, with maturity dates of between one month and equipment,fifteen months.We assessed the risk of non-performance of the Company to these contracts and distribution equipment suchdetermined it was insignificant and, therefore, did not record any adjustment to fair value as tractorsof September 28, 2019.

We assess the effectiveness of our aluminum forward 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 loss and trailers.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. The amount of losses, net, recognized in the “accumulated other comprehensive loss” line item in the accompanying condensed consolidated balance sheet as of September 28, 2019, that we expect will be reclassified to earnings within the next twelve months, will be approximately $2.4 million.

Share Repurchase Program. On October 28, 2015, theMay 22, 2019, our Board of Directors authorized and approved a share repurchase program of up to $20$30 million. Repurchases areThe repurchases may be made in open market or privately negotiatedprivate transactions subjectfrom time to time. Repurchases of shares may be made under a Rule 10b5-1 plan, which would permit repurchases when we might otherwise be precluded from doing so under applicable laws. We base repurchase decisions, including the timing of repurchases, on factors such as our stock price, general economic and market conditions, applicable legal requirements,the potential impact on our 2016 Credit Agreement,capital structure, the expected return on competing uses of capital such as strategic acquisitions and capital investments, and other relevant factors.corporate considerations, as determined by our management. The repurchase program may be suspended or discontinued at any time. 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’sour 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. No repurchases were made under the program during the period from the inception of the program on May 22, 2019, through

- 40 -


the end of the second quarter of 2019. During the first ninethree months of 2017,ended September 28, 2019, we made no repurchases of 393,819 shares of our common stock under this program. Inat a total cost of $5.5 million. During the future,remainder of 2019, we may continue to make opportunistic repurchases of our common stock as we see fit, subject to the approvalfit.

Subsequent Event

Announcement of our Board of Directors.Executive Departure

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, 2017, was $5.6 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 fromOctober 27, 2019, Scott Gates notified 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 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 Companyhe will purchase, and Cardinal will supply, allresign his position as President of the Company’s requirementsWestern Business Unit and its Western Window Systems business, effective January 31, 2020. Following his resignation, Mr. Gates plans to establish a social entrepreneurship organization that will provide jobs, skills training and career paths for certain glass components usedthose in PGT-branded doors through the end of 2024. The terms of the manufacture by Cardinalprison 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 amounts 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.former inmates.

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, 2016.29, 2018.

Significant Accounting Policies and Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Significant accounting policies are those that are both important to the accurate portrayal of a Company’s financial condition and results, and those that require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the condensed consolidated financial statements and the possibility that future events may be significantly different from our expectations.

We identified our significant accounting policies in our Annual Report on Form10-K annual report for the year ended December 31, 2016. There29, 2018. Except for the adoption of the guidance relating to leases pursuant to ASU 2016-02, discussed below, there have been no changes to our critical accounting policies during the first nine months of 2017.

2019.

Leases Accounting Policy

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liability, and operating lease liability, less current portion, on our consolidated balance sheets. Should we engage in any finance leases in the future, finance leases would be included in property and equipment, other current liabilities, and other liabilities on our consolidated balance sheets.  

Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Recently Issued Accounting Pronouncements

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.Fair Value Measurement Disclosures

In August 2017,2018, the FASB issued ASU2017-12, “Derivatives and Hedging 2018-13, “Fair Value Measurement (Topic 815): Targeted Improvements820) - Disclosure Framework—Changes to Accountingthe Disclosure Requirements for Hedging Activities.”Fair Value Measurement”. The amendments under ASU2017-12 refine and expand hedge accountingnew guidance modifies disclosure 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 face of the financial statements and in the footnotes. It also makes certain targeted improvementsrelated to simplify the application of hedge accounting guidance. ASU2017-12 becomes effective for us in the first quarter of 2019. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial statements.

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 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.fair value measurement. 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 periodyears, beginning after December 15, 2017, and interim periods within those annual periods.2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted, butpermitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company does not beforebelieve that the originaladoption of this guidance will have a significant impact on its fair value disclosures.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and

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supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Subsequently, in November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. ASU 2018-19 clarifies the codification and corrects unintended application of the guidance. ASU’s 2016-13 and 2018-19 are effective date (periodsfor us for our fiscal year 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 is2019. We do 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 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 to the customer. The Company is continuing to evaluate its manufacturing processes 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 products 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 than prior to the adoption of ASU2014-09, but that such effect may not materially affect itsthis guidance will have a significant impact on our consolidated statementsfinancial statements.

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. As of operations post-adoption due toSeptember 28, 2019, we are covered for approximately 81% of our anticipated needs through December 2019 at an average price of $0.95 per pound, and for approximately 50% of our anticipated needs in 2020 at an average price of $0.83 per pound. These calculations are based only on the fact that such effects will exist at bothLME price of aluminum and excludes an estimate for the beginning and endMidwest premium.

Regarding our aluminum hedging instruments for the purchase of fiscal periods after the initial transition.

ASU2014-09 also requires entities, primarilyaluminum as of September 28, 2019, a 10% decrease in the manufacturing segment, to make policy elections relating to shippingprice of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $2.8 million. This calculation utilizes our actual commitment of 34.5 million pounds under contract (to be settled throughout December 2020) and handling charges. Entities may elect to treat shippingthe market price of aluminum as of September 28, 2019. This calculation is based only on the LME price of aluminum and handling as a separate performance activity, and recognize revenue from shipping and handling as performance occurs. Conversely, entities may also elect to treat shipping and handling as a fulfillment activity, which will require shipping and handling costsexcludes an estimate 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.Midwest premium.

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.

ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 $64.0 million, a 100 basis pointbasis-point increase in interest rate would result in approximately $2.4$0.6 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.

We implemented internal controls to ensure we properly assessed the impact of the new accounting standards related to leases on our financial statements to facilitate its adoption on December 30, 2018 (the first day of our 2019 fiscal year, and the effective date of our adoption of ASU 2016-02).

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PART II — OTHER INFORMATION

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

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

ITEM 1A. RISK FACTORS

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 for the year ended December 31, 2016, which could materially affect29, 2018. If any of the events described in the risk factors actually occur, our business, financial condition or future results.

Additional risk and uncertainties not currently known to us or that we currently deem tooperating results, as well as the market price of our securities, could be immaterial, may also materially adversely affect our business, financial condition, and/or operating results.affected.


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

Unregistered Sales of Equity Securities and Use of Proceeds

None during the quarter.

Issuer Purchases of Equity

None duringOn May 22, 2019, our Board of Directors authorized and approved a share repurchase program of up to $30 million. The repurchases may be made in open market or private transactions from time to time. Repurchases of shares may be made under a Rule 10b5-1 plan, which would permit repurchases when the quarter.Company might otherwise be precluded from doing so under applicable laws. The Company bases repurchase decisions, including the timing of repurchases, on factors such as the Company’s stock price, general economic and market conditions, the potential impact on the Company’s capital structure, the expected return on competing uses of capital such as strategic acquisitions and capital investments, and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time.

The following table presents information regarding the total number of shares repurchased, average price paid per share, the number of shares repurchased under the program, and maximum approximate dollar value of shares that may yet be purchased under the plan, by month for the three-month period ended September 28, 2019:

 

 

 

 

Purchases of Equity Securities

 

Period

 

Beginning and

Ending Dates

 

(a) Total Number of Shares Purchased

 

 

(b) Average Price Paid per Share

 

 

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

 

 

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

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2019

 

June 30 to July 27

 

 

-

 

 

-

 

 

 

-

 

 

$

30.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 2019

 

July 28 to August 24

 

 

358,719

 

 

$

14.0815

 

 

 

358,719

 

 

$

24.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 2019

 

August 25 to September 28

 

 

35,100

 

 

$

13.9818

 

 

 

35,100

 

 

$

24.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

393,819

 

 

$

14.0726

 

 

 

393,819

 

 

 

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

 

10.1*  10.1

First Amendment to SupplyEmployment Agreement dated July 1, 2017, bybetween Sherri Baker and between PGT Industries, Inc. and ENERGI Fenestration Solutions USA,Innovations, Inc., which amends that certain Supply Agreement, dated April 28, 2014, by and between PGT Industries, Inc. and Royal Group, Inc., which such Supply Agreement subsequently was assigned to ENERGI Fenestration Solutions USA, Inc., in connection with ENERGI Fenestration Solutions USA, Inc.’s purchase of the window and door division of Royal Group, Inc.

10.2

Supply Agreement dated as of September 22, 2017, by and between PGT Industries, Inc. and Cardinal LG CompanyMarch 26, 2019 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated September 22, 2017, filed with the Securities and Exchange Commission on September 22, 2017,March 26, 2019, Registration No.Number 001-37971)

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101.INS*

101.INS

Inline XBRL Instance Document

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

101.SCH*

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

101.DEF

Inline XBRL Taxonomy Definition Linkbase

101.LAB*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

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

 

*

Filed herewith.
**Furnished herewith.

**Furnished herewith.


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SIGNATURE

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

 

PGT INNOVATIONS, INC.

(Registrant)

Date: November 2, 20177, 2019

/s/ Bradley WestSherri Baker

Bradley WestSherri Baker

Senior Vice President and Chief Financial Officer

 

 

35- 46 -