Acquisitions | NOTE 6. ACQUISITIONS See Note 18, Subsequent Events, for a discussion of events relating to an acquisition that occurred after October 1, 2022. ANLIN WINDOWS & DOORS On October 25, 2021 , we completed the acquisition of Anlin Windows & Doors. The acquisition was done by Western Window Holding LLC, a Delaware limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired substantially all of the assets, properties and rights owned, used or held for use in the business, as operated by Anlin Industries, a California corporation, of manufacturing vinyl windows and doors for the replacement market and the new construction market, and all activities conducted in connection therewith (the "Anlin Acquisition"), pursuant to that certain Asset Purchase Agreement dated as of September 1, 2021 (the “Anlin Purchase Agreement”), by and among the Company, and Anlin Industries. The fair value of consideration transferred in the Anlin Acquisition was $ 121.7 million, composed of $ 115.0 million in cash, including $ 113.5 million for purchase price and $ 1.5 million in working capital adjustments, including $ 0.8 million paid during the three months ended October 1, 2022, and fair value of contingent consideration of $ 6.7 million, discussed in greater detail below. The cash portion of the Anlin Acquisition of $ 115.0 million was financed with borrowings under the fourth amendment of our 2016 Credit Agreement due 2024 of $ 60.0 million, which resulted in net proceeds after fees of $ 59.4 million, with the remaining $ 55.6 million from cash on hand. Cash on hand for the Anlin Acquisition was ultimately provided by the issuance of $ 575.0 million of 4.375 % senior notes due 2029 and related transactions, further explained in Note 9, Long-Term Debt, as well as cash generated through operations. The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Anlin Acquisition, are as follows: Initial Adjustments to Final Accounts receivable $ 10,803 $ — $ 10,803 Inventories 7,633 ( 327 ) 7,306 Contract assets, net 7,027 — 7,027 Prepaid expenses and other assets 1,626 ( 954 ) 672 Property and equipment 22,800 1,509 24,309 Operating lease right-of-use asset 3,450 14 3,464 Intangible assets 77,800 ( 5,800 ) 72,000 Total assets acquired 131,139 ( 5,558 ) 125,581 Accounts payable ( 5,175 ) 593 ( 4,582 ) Accrued and other liabilities ( 7,993 ) 2,537 ( 5,456 ) Operating lease liability ( 3,450 ) ( 14 ) ( 3,464 ) Total liabilities assumed ( 16,618 ) 3,116 ( 13,502 ) Net assets acquired 114,521 ( 2,442 ) 112,079 Goodwill 5,596 4,017 9,613 Fair value of consideration transferred $ 120,117 $ 1,575 $ 121,692 Consideration: Cash $ 114,196 $ 786 $ 114,982 Contingent consideration 5,921 789 6,710 Fair value of consideration transferred $ 120,117 $ 1,575 $ 121,692 The fair value of certain working capital related items, including Anlin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities, approximated their book values at the date of the Anlin Acquisition. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Inventories at the acquisition date was primarily composed of raw materials. Further review during the first quarter of 2022 resulted in an adjustment to decrease the estimated net realizable value of inventory. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. During the first quarter of 2022, additional value was assigned to acquired property and equipment, primarily due to an increase in the estimate of the fair value of acquired land. Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. During the first quarter of 2022, we made several adjustments to the estimated fair value of the initial valuation of certain intangible assets. Additionally, we determined that a portion of the customer relationship asset we acquired related to Anlin's backlog, which had an estimated useful life of less than three months, resulting in its estimated fair value of $ 2.2 million becoming fully amortized in the first quarter of 2022, discussed below, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine-month period ended October 1, 2022. We incurred acquisition costs totaling $ 1.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Anlin Acquisition, incurred during the year ended January 1, 2022, primarily during the third and fourth quarters. The Anlin Purchase Agreement provides for the potential for earn-out contingency payments to sellers should Anlin achieve a certain level of earnings before interest, taxes, depreciation and amortization, ("Anlin EBITDA"), as defined in the Anlin Purchase Agreement, for its fiscal years of 2021 and 2022, of up to $ 3.2 million to be paid out by March 31, 2022, and of up to $ 9.5 million to be paid out by March 31, 2023, respectively. We had recorded a preliminary earn-out contingent liability of $ 5.9 million as of our year ended January 1, 2022, which represented its then estimated fair value based on probability adjusted levels of estimated Anlin EBITDA. Estimated Anlin EBITDA is a significant input that is not observable in the market, which ASC 820 considers to be a Level 3 input. In the first quarter of 2022, we finalized the fair value of the earn-out contingency, which we adjusted by an additional $ 0.8 million, to a total of $ 6.7 million of estimated fair value of contingent consideration as of the effective date of the Anlin Acquisition. This amount included $ 2.4 million for the contingent consideration relating to 2021 Anlin EBITDA and $ 4.3 million for the contingent consideration relating to the 2022 Anlin EBITDA. The first contingent consideration payment was agreed to be $ 2.7 million, which exceeded its estimated fair value by $ 0.3 million. This excess is classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended October 1, 2022. The payment was made during the second quarter of 2022 after both parties agreed to extend the deadline for the first payment past the March 31, 2022 due date stated in the Anlin Purchase Agreement. During the third quarter of 2022, we updated our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA, which was estimated to be $ 9.1 million. As such, we recognized an expense of approximately $ 4.8 million, representing the difference between this updated estimated fair value, and the fair value estimated in our purchase price allocation, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended October 1, 2022. We will continue to update our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA each reporting period, as required by ASC 805, and record any adjustments within operating income until finalized by March 31, 2023. Regarding the allocation of the fair value of consideration transferred in the Anlin Acquisition, as discussed in Note 5 of our Annual Report on Form 10-K/A for the year ended January 1, 2022, specific items being finalized are our calculations of contingencies assumed in the Anlin acquisition, including the earn-out contingencies and reserves for warranty obligations. During the three months ended October 1, 2022, we finalized our calculation of the reserves for warranty obligations assumed in the Anlin Acquisition. As a result, we recorded a decrease in accrued and other liabilities of $ 2.5 million, resulting in an equal decrease in goodwill. For tax purposes, contingent consideration does not become part of tax goodwill until paid. As such, the amount of goodwill deductible for tax purposes will not be finalized until the outcome of both earn-out contingency payments are known. As of October 1, 2022, the initial estimated fair value of the contingent consideration in the allocation relating to the remaining payment was $ 4.3 million, and goodwill according to the current allocation of consideration is $ 9.6 million. As such, as of October 1, 2022, the amount of goodwill estimated to be tax deductible is the difference of $ 5.3 million. Anlin's goodwill is included as part of the Western reporting. We believe Anlin's goodwill relates to the expansion of our footprint in a key, strategic market we have identified as a geographic area of growth for our Company. Our estimate of the amount of tax deductible goodwill may change as the amounts of the payments of contingent consideration are finalized. As discussed above, we made changes to the initial estimated fair values of the trade name and customer relationships assets in the Anlin Acquisition, and we determined that a portion of our customer relationships intangible asset relates to the backlog acquired in the acquisition, which we estimated to be $ 2.2 million. Due to the short useful life of the customer-related backlog, its estimated fair value of $ 2.2 million was fully amortized by the end of the first quarter of 2022, which is classified within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine-month period ended October 1, 2022. The Anlin Purchase Agreement has a post-closing working capital calculation we were required to prepare, and delivered to sellers during the second quarter of 2022. This resulted in an additional payment of consideration to the seller of $ 0.8 million, made during the second quarter of 2022. Valuation of Identified Intangible Assets The valuation of the identifiable intangible assets acquired in the Anlin Acquisition and our estimate of their respective useful lives are as follows: Initial Initial Adjustment to Preliminary Useful Life Valuation Valuation Valuation (in years) (in thousands) Trade name $ 35,400 $ ( 3,700 ) $ 31,700 indefinite Customer relationships 42,100 ( 4,300 ) 37,800 15 Customer-related backlog — 2,200 2,200 < 1 Developed technology 300 — 300 9 Intangible assets, net $ 77,800 $ ( 5,800 ) $ 72,000 Pro Forma Financial Information The following unaudited pro forma financial information assumes the acquisition had occurred at the beginning of the earliest period presented that does not include Anlin's actual results for the entire period. The following unaudited pro forma financial information has been prepared by adjusting our historical results to include the results of Anlin adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the refinancing of the 2018 Senior Notes due 2026 and the third amendment of the 2016 Credit Agreement due 2024 into the 2021 Senior Notes due 2029 (the "2021 Senior Notes") and the fourth amendment of the 2016 Credit Agreement due 2024. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results. Three Months Ended Nine Months Ended Pro Forma Results (unaudited) October 2, 2021 October 2, 2021 (in thousands, except per share amounts) (unaudited) Net sales $ 329,613 $ 939,395 Net income (loss) attributable to common shareholders $ ( 3,326 ) $ 18,410 Net income (loss) per common share attributable to common shareholders: Basic $ ( 0.06 ) $ 0.31 Diluted $ ( 0.06 ) $ 0.31 Net sales of Anlin included in the condensed consolidated statement of operations for the three and nine months ended October 1, 2022, was $ 35.0 million and $ 106.2 million, respectively. The net income of Anlin in the condensed consolidated statement of operations for the three and nine months ended October 1, 2022, was $ 4.4 million and $ 14.6 million, respectively. CRI SOCAL, INC. On May 2, 2021, pursuant to an asset purchase agreement dated April 9, 2021, we acquired substantially all of the assets and assumed certain liabilities of CRi SoCal, Inc. (“CRi”), a California corporation doing business in California as Combined Resources (the “CRi Acquisition”). CRi is engaged in the sales, distribution and installation of window and door products, and related design services, to homebuilders in the residential new construction market from its leased facility in Rancho Santa Margarita, California. Until its acquisition by the Company, CRi was a customer of the Company’s western business unit. The fair value of consideration transferred in the acquisition of CRi totaled $ 12.5 million, and included $ 12.1 million in cash, funded from cash on hand, and $ 0.4 million in accounts receivable owed by CRi to the Company’s western business unit relating to sales prior to the acquisition, which are considered settled as a result of the acquisition. The preliminary estimated fair value of assets acquired and liabilities assumed totaled $ 17.6 million and $ 5.1 million, respectively, which included offsetting operating lease right of use assets and operating lease liabilities totaling $ 2.6 million. The estimated fair value of assets acquired also included current assets totaling $ 4.1 million, primarily accounts receivable, identifiable intangible assets totaling $ 7.0 million, goodwill of $ 3.7 million, all of which we believe is tax deductible, and a small amount of property and equipment. Liabilities assumed included the aforementioned operating lease liability, as well as a total of $ 2.5 million in trade accounts payable and customer deposits. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. We believe goodwill in the acquisition relates to the expansion of our footprint in an existing market, in a way that we believe will enhance our long-term profitability in that market of our Western business. Sales and net income from CRi included in the three and nine months ended October 1, 2022 was immaterial. ECO WINDOW SYSTEMS On February 1, 2021 , we completed the acquisition of a 75 % ownership stake in Eco Enterprises and its related companies, Eco Windows Systems, LLC, Eco Glass Production, LLC, and Unity Windows, LLC (together “Eco”). Eco is a manufacturer and installer of aluminum, impact-resistant windows and doors, serving the South Florida region since 2009. Eco is headquartered in Medley, Florida, near Miami, Florida, and has three manufacturing locations in the region, including a glass processing facility. The fair value consideration for Eco was $ 102.0 million, including $ 94.4 million in cash, after favorable adjustments totaling $ 5.6 million relating to working capital and customer deposits which were agreed to and settled in the second quarter of 2021, and estimated contingent consideration of $ 1.5 million recorded in the second quarter of 2022, which was required by the purchase agreement. During the third quarter of 2022, the amount of the contingent consideration was finalized and determined to be $ 1.9 million, with the difference of $ 427 thousand classified as selling, general and administrative expense in the three and nine months ended October 1, 2022. The fair value of consideration also included PGT Innovations, Inc. common stock with a then estimated fair value of $ 6.1 million. The cash portion of the purchase price was financed by a second add-on issuance of $ 60.0 million aggregate principal amount of 6.75 % senior notes to the 2018 Senior Notes due 2026 on January 25, 2021 (the “Additional Senior Notes”), issued at 105.5 % of their principal amount, resulting in a premium to us of $ 3.3 million, together with cash on hand of $ 31.1 million. The common stock portion of the purchase price was represented by the issuance of 357,797 shares of PGT Innovations, Inc. common stock on February 1, 2021, with a closing price value of $ 21.34 per share on that date, or approximately $ 7.6 million based on that price. However, the seller of Eco, who is also the holder of the 25 % redeemable non-controlling interest in Eco Enterprises, is restricted from selling these shares for a three-year period from the date of the acquisition. As such, we estimated that there was an approximately 20 % discount for the lack of marketability of the shares. The fair value of the redeemable non-controlling interest in the acquisition has been estimated to be $ 28.5 million, resulting in total fair value of the Eco business in the acquisition, including the redeemable non-controlling interest, of $ 130.4 million. The fair value of the redeemable non-controlling interest has been calculated as 25 % of the initial estimated fair value of the entity at the acquisition date, less a discount for seller’s lack of control in the new entity, estimated to be 5 % , and a discount for the seller’s lack of marketability of the minority stake, estimated to be 10 % . See Note 17 for more information regarding the redeemable non-controlling interest. The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Eco Acquisition, are as follows: Initial Adjustments to Final Accounts receivable $ 5,031 $ ( 241 ) $ 4,790 Inventories 7,728 ( 684 ) 7,044 Contract assets, net 4,312 ( 123 ) 4,189 Prepaid expenses and other assets 1,706 ( 759 ) 947 Property and equipment 24,009 ( 191 ) 23,818 Operating lease right-of-use asset 27,864 ( 1,049 ) 26,815 Intangible assets 72,700 1,600 74,300 Total assets acquired 143,350 ( 1,447 ) 141,903 Accounts payable ( 6,809 ) ( 116 ) ( 6,925 ) Accrued and other liabilities, including customer deposits ( 4,215 ) ( 604 ) ( 4,819 ) Operating lease liability ( 27,864 ) 1,049 ( 26,815 ) Total liabilities assumed ( 38,888 ) 329 ( 38,559 ) Net assets acquired 104,462 ( 1,118 ) 103,344 Redeemable non-controlling interest ( 34,084 ) 5,620 ( 28,464 ) Net assets acquired, net of redeemable non-controlling interest 70,378 4,502 74,880 Goodwill 30,051 ( 2,967 ) 27,084 Fair value of consideration transferred $ 100,429 $ 1,535 $ 101,964 Consideration: Cash $ 94,321 $ 35 $ 94,356 PGTI common stock 6,108 — 6,108 Contingent consideration — 1,500 1,500 Fair value of consideration transferred $ 100,429 $ 1,535 $ 101,964 The fair value of certain working capital related items, including Eco’s accounts receivable, prepaid and other expenses, and accounts payable and accrued liabilities, approximated their book values at the date of the Eco Acquisition. Subsequent to our initial allocation, we adjusted the fair value of certain acquired commercial receivable accounts based on a further post-acquisition assessment of their collectability. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Substantially all of inventories at the acquisition date was composed of raw materials. The fair value of property and equipment was estimated with the assistance of a third-party valuation firm, using the indirect cost approach, which we consider to be Level 3 in the fair value hierarchy. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. We incurred acquisition costs totaling $ 1.7 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Eco Acquisition, which includes $ 1.0 million in the fourth quarter of 2020, and $ 0.7 million in first three months of 2021, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended October 2, 2021. The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has currently been estimated to be $ 27.1 million, classified as part of the Southeast reporting unit goodwill, which we expect the portion of goodwill relating to our 75 % investment to be deductible for tax purposes. We believe goodwill represents the strengthening of our supply chain for glass through faster glass production, as well as diversification and expansion of product offerings in the high-growth commercial market, and an expansion of our dealer network with minimal overlap with our existing deal network. Valuation of Identified Intangible Assets in the Eco Acquisition The valuation of the identifiable intangible assets acquired in the Eco Acquisition and our estimate of their respective useful lives are as follows: Initial Initial Adjustment to Final Useful Life Valuation Valuation Valuation (in years) (in thousands) Trade names $ 36,000 $ ( 1,100 ) $ 34,900 indefinite Customer relationships 36,700 2,700 39,400 5 - 15 Intangible assets, net $ 72,700 $ 1,600 $ 74,300 |