Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Fiscal period Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest December 31 of the related year. The years ended December 31, 2022, and January 1, 2022, consisted of 52 weeks. The year ended January 2, 2021 consisted of 53 weeks. Principles of consolidation The consolidated financial statements present the results of the operations, financial position and cash flows of PGTI, and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We are consolidating all wholly owned subsidiaries, as well as Eco, based on the 75 % majority ownership. We refer to Note 20 for our accounting policies relating to the non-redeemable minority interest. Segment information We operate as two segments based on geography: the Southeast segment and the Western segment. See Note 19 for more information. Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Revenue recognition Revenue is recognized when our performance obligations are satisfied. Generally, our performance obligations are satisfied over time when control of our products is transferred, and revenue is recognized at a single point in time, when title transfers to our customer for product shipped or when services are provided. Revenues are recorded net of any sales incentives. See Note 4, “Revenue Recognition and Contracts with Customers.” Cost of sales Cost of sales represents costs directly related to the production of our products. Primary costs include raw materials, direct labor, and manufacturing overhead, which consist of salaries, wages, employee benefits, utilities, maintenance, lease costs and depreciation. Shipping and handling costs Shipping and handling costs incurred in the purchase of materials used in the manufacturing process are included in cost of sales. Costs relating to shipping, handling and distribution of finished products to our customers are included in selling, general and administrative expenses and totaled $ 75.1 million, $ 62.4 million and $ 39.3 million for the years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. Advertising We expense advertising costs as incurred. Advertising expense, which is included in selling, general and administrative expenses, was $ 22.7 million, $ 15.8 million and $ 11.6 million for the years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. NewSouth, acquired on February 1, 2020, relies heavily on advertising, consistent with its sales-direct-to-homeowner business model. Cash and cash equivalents Cash and cash equivalents consist of cash on hand or highly liquid investments with an original maturity date of three months or less when purchased. Accounts receivable, net In the ordinary course of business, we extend credit to qualified dealers and distributors, generally on a non-collateralized basis. The Company maintains an allowance for credit losses which is based on management’s assessments of the amount which may become uncollectible in the future and is determined through consideration of our write-off history, specific identification of uncollectible accounts based in part on the customer’s past due balance (based on contractual terms), and consideration of prevailing economic and industry conditions. Uncollectible accounts are written off after repeated attempts to collect from the customer have been unsuccessful. December 31, January 1, 2022 2022 (in thousands) Accounts receivable $ 173,763 $ 145,923 Less: Allowance for credit losses ( 13,656 ) ( 4,702 ) Accounts receivable, net $ 160,107 $ 141,221 Self-insurance reserves We are primarily self-insured for employee health benefits and workers’ compensation claims prior to 2010 and after 2017. Provisions for losses under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. Accruals for healthcare claims and workers’ compensation are included in accrued liabilities in the accompanying consolidated balance sheets. Warranty expense We have warranty obligations with respect to most of our manufactured products. Warranty periods, which vary by product components, generally range from 1 to 10 years , although the warranty period for a limited number of specifically identified components in certain applications is a lifetime. However, the majority of the products sold have warranties on components which range from 1 to 3 years . The Company has recorded a reserve for estimated warranty and related costs based on historical experience and periodically adjusts these provisions to reflect actual experience. During 2022, we recorded warranty expense at an average rate of 2.1 % of sales. This rate approximates the average rate of 2.0 % of sales recorded in 2021. The average rate of 2.0 % of sales in 2021 compares to an average rate of 1.7 % of sales recorded in 2020. The increase in our warranty expense rate in 2021, compared to 2020 was a result of costs associated with higher levels of warranty repair experience on larger commercial projects than experienced in 2020, which resulted in warranty costs incremental to those we would incur in the normal course of business. The increase in our warranty expense in 2021, compared to 2020, was also affected by costs associated with the wind-down of the commercial business of NewSouth in the first quarter of 2021, which resulted in warranty costs incremental to those we would incur in the normal course of business. We assess the adequacy of our warranty accrual on a quarterly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims yet to be serviced. The following provides information with respect to our warranty accrual. Accrued Warranty Beginning of Acquired (Acquisition Charged to Adjustments Settlements End of (in thousands) Year ended December 31, 2022 $ 13,504 $ ( 2,537 ) $ 31,223 $ 698 $ ( 27,500 ) $ 15,388 Year ended January 1, 2022 $ 8,001 $ 4,150 $ 23,637 $ ( 1,440 ) $ ( 20,844 ) $ 13,504 Year ended January 2, 2021 $ 6,244 $ 3,515 $ 15,256 $ 266 $ ( 17,280 ) $ 8,001 During the third quarter of 2022, we finalized our calculation of the reserve for warranty obligations assumed in the Anlin Acquisition. As a result, we recorded an acquisition adjustment to decrease Anlin's warranty reserve by $ 2.5 million from its initial estimate in our then preliminary allocation of the fair value of assets acquired and liabilities assumed, resulting in an equal decrease in goodwill. The accrual for warranty is included in accrued liabilities and other liabilities, depending on estimated settlement date, in the consolidated balance sheets as of December 31, 2022 and January 1, 2022. The portion of warranty expense related to the issuance of product of $ 3.9 million, $ 3.0 million and $ 3.8 million is included in cost of sales in the consolidated statements of operations for the years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. The portion related to servicing warranty claims including costs of the service department personnel is included in selling, general and administrative expenses in the consolidated statements of operations, and is $ 28.1 million, $ 19.2 million and $ 11.7 million, respectively, for the years ended December 31, 2022, January 1, 2022, and January 2, 2021. Inventories Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited work-in-progress and finished goods inventory as most products are custom, made-to-order products manufactured under noncancelable purchase orders and therefore are recognized as costs of sales relating to revenue recognized over time during the manufacturing process. All inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The reserve for obsolescence, which was immaterial at December 31, 2022 and January 1, 2022, is based on management’s assessment of the amount of inventory that may become obsolete in the future and is determined through Company history, specific identification and consideration of prevailing economic and industry conditions. Inventories consist of the following: December 31, January 1, 2022 2022 (in thousands) Raw materials $ 109,679 $ 87,164 Work in progress 916 3,248 Finished goods 2,077 1,028 Inventories $ 112,672 $ 91,440 Property, plant and equipment Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Depreciable assets are assigned estimated lives as follows: Building and improvements 5 to 40 years Leasehold improvements Shorter of lease term or estimated useful life Furniture and equipment 3 to 10 years Vehicles 5 to 10 years Computer software 3 years Maintenance and repair expenditures are charged to expense as incurred. Leases 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. The Company currently does not have any finance leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of 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 up-front lease payments made and initial direct costs incurred, less lease incentives received. Our lease terms may include options to extend or terminate the lease. Lease expense is recognized on a straight-line basis over the lease term. We elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets. Long-lived assets We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated . If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell, and depreciation is no longer recorded. Computer software We capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is complete, and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include: (i) external direct costs of materials and services consumed in developing or obtaining computer software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the software project, and (iii) interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized software as of December 31, 2022, and January 1, 2022, was $ 31.7 million and $ 31.8 million, respectively. Accumulated depreciation of capitalized software was $ 30.3 million and $ 29.0 million as of December 31, 2022, and January 1, 2022, respectively. Amortization expense for capitalized software was $ 3.0 million, $ 3.7 million, and $ 4.1 million for the years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. We review the carrying value of capitalized software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets. Goodwill Goodwill is calculated as the excess of the consideration paid in a business combination over the fair value of the identifiable net assets acquired. We test goodwill for impairment at the reporting unit level at least annually or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. Our annual test for impairment is done on the first date of our fiscal fourth quarter. We consider various qualitative factors, including macroeconomic and industry conditions, financial performance of the Company and changes in the stock price of the Company to determine whether it is necessary to perform a quantitative test for goodwill impairment. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Under the quantitative test, goodwill is tested under a one-step method for impairment at a level of reporting referred to as a reporting unit. This quantitative analysis involves identifying potential impairment by comparing the fair value of each reporting unit with its carrying amount and, if the carrying amount of a reporting unit exceeds its fair value, then a charge for goodwill impairment will be recognized in the amount by which a reporting unit’s carrying value exceeds its fair value. For our Southeast and Western reporting units, based on qualitative assessments, we concluded that quantitative assessments were not required to be performed. See Note 7 for further discussion of the goodwill of our reporting units. Trade names The Company has indefinite-lived intangible assets in the form of certain trade names. The impairment evaluation of the carrying amount of our indefinite-lived trade names is conducted annually, or more frequently, if events or changes in circumstances indicate that they might be impaired. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. If we elect to bypass the qualitative assessment or if we determine, based on qualitative factors, that it is more likely than not that the fair value of our indefinite-lived trade names is less than the carrying amount, an evaluation is performed by comparing their carrying amount to their estimated fair values. If the estimated fair value is less than the carrying amount of the indefinite-lived trade name, then an impairment charge is recorded to reduce the carrying value to its estimated fair value. The estimated fair value is determined using the relief from royalty method that is based upon the discounted projected cost savings (value) attributable to ownership of our trade names, our only indefinite-lived intangible assets. Other than the WinDoor trade name, based on qualitative assessments for 2022, the Company concluded it was more likely than not the fair value of the indefinite-lived intangible assets exceeded their carrying values. For the WinDoor trade name, we concluded that a quantitative assessment was required, given the recent decrease in sales of the brand and given the narrow excess of the fair value over the carrying value of our WinDoor trade name in our prior quantitative assessment, which resulted in an impairment charge of $ 7.4 million in the year ended December 31, 2022. We review the carrying value of our finite-lived trade name in accordance with our policy for long-lived assets. See Note 7 for further discussion of our trade name. Derivative financial instruments We utilize certain derivative instruments, from time to time, including forward contracts to manage variability in cash flow associated with commodity market price risk exposure in the aluminum market. We do not enter into derivatives for speculative purposes. Concentrations of credit risk Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents, trade accounts receivable and contract assets. Accounts receivable and contract assets are due primarily from dealers and distributors of building materials, and other companies in the construction industry, primarily located in Florida, California, Texas, Arizona and, with the Martin Acquisition in October 2022, Utah. Credit is extended based on an evaluation of the customer’s financial condition and credit history, and generally collateral is not required. The Company maintains an allowance for potential credit losses on trade receivables and contract assets. We maintain our cash with several financial institutions, the balance of which exceeds federally insured limits. At December 31, 2022 and January 1, 2022, our cash balance exceeded the insured limit by $ 61.4 million and $ 89.0 million, respectively. Comprehensive income (loss) The Company reports comprehensive income (loss), defined as the total of net income and other comprehensive income (loss), which is composed of all other non-owner changes in equity, and the components thereof, in its consolidated statements of comprehensive income. The components of other comprehensive income (loss) relate to gains and losses on cash flow hedges. Reclassification adjustments reflecting such gains and losses are recorded as income in the same period as the hedged items affect earnings. Stock-based compensation We use a fair-value based approach for measuring stock-based compensation and record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Our Company’s awards vest based on service conditions and certain performance conditions and compensation expense is recognized generally on a straight-line basis for each separately vesting portion of an award. Stock-based compensation expense is recognized only for those awards that ultimately vest. Income and Sales Taxes We account for income taxes utilizing the liability method. Deferred income taxes are recorded to reflect consequences on future years of differences between financial reporting and the tax basis of assets and liabilities measured using the enacted statutory tax rates and tax laws applicable to the periods in which differences are expected to affect taxable earnings. We have no liability for unrecognized tax benefits. However, should we accrue for such liabilities, when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision. Income taxes relating to gains and losses on our cash flow hedges are released at the same time as the underlying transactions are realized. Interest and penalties on income taxes, if any, are recorded as income taxes. Refer to Note 12 for additional information regarding the Company’s income taxes. Sales taxes collected from customers have been recorded on a net basis. Net income per common share Basic earnings per share (“EPS”) available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Diluted EPS available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period. Forfeiture of unvested equity are recognized on an actual basis, at the same time as the equity is forfeited. There were no anti-dilutive shares outstanding for the years ended December 31, 2022 and January 1, 2022. Our weighted average number of diluted shares outstanding excludes underlying securities of 23 thousand for the year ended January 2, 2021, because their effects were anti-dilutive. The table below presents the calculation of basic and diluted earnings per share, including a reconciliation of weighted average common shares: Year Ended December 31, January 1, January 2, 2022 2022 2021 (in thousands, except per share amounts) Net income $ 98,405 $ 35,196 $ 45,108 Less: Net income attributable to redeemable non-controlling interest ( 1,523 ) ( 2,318 ) — Net income attributable to the Company 96,882 32,878 45,108 Change in redemption value of redeemable non-controlling interest 2,000 ( 6,081 ) — Net income attributable to common shareholders $ 98,882 $ 26,797 $ 45,108 Weighted-average common shares - Basic 59,926 59,518 58,887 Add: Dilutive shares from equity plans 393 540 473 Weighted-average common shares - Diluted 60,319 60,058 59,360 Weighted average number of common shares outstanding: Basic $ 1.65 $ 0.45 $ 0.77 Diluted $ 1.64 $ 0.45 $ 0.76 Supplemental cash flow information and non-cash activity The table below presents supplemental cash flow information and non-cash activity for the years ended December 31, 2022, January 1, 2022, and January 2, 2021: Year Ended December 31, January 1, January 2, (in thousands) 2022 2022 2021 Supplemental cash flow information: Interest paid $ 27,948 $ 32,636 $ 25,156 Income tax payments, net of refunds $ 21,499 $ 12,166 $ 9,242 Non-cash activity: Establish right-of-use asset $ 29,031 $ 65,678 $ 19,185 Establish operating lease liability $ ( 29,031 ) $ ( 65,678 ) $ ( 19,185 ) Reclassification of accounts receivable to notes receivable $ 4,225 $ — $ 1,437 Property, plant and equipment additions in accounts payable $ 565 $ 772 $ 61 |