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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 3, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                  

Commission file number 001-37971

PGT Innovations, Inc.

 

1070 Technology Drive

North Venice, FL 34275

Registrant’s telephone number: 941-480-1600

 

State of Incorporation

 

IRS Employer Identification No.

Delaware

 

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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Common Stock, $0.01 par value, outstanding was 59,544,807 shares, as of April 30, 2021.

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

 

Form 10-Q for the Three months Ended April 3, 2021

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

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

 

4

 

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity

 

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

Item 2.

 

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

 

28

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

Part II.

 

Other Information

 

40

 

 

Item 1.

 

Legal Proceedings

 

40

 

 

Item 1A.

 

Risk Factors

 

40

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

Item 6.

 

Exhibits

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


- 2 -


 

PART I — FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

 

(unaudited)

 

Net sales

$

271,092

 

 

$

220,204

 

Cost of sales

 

177,130

 

 

 

139,077

 

 

 

 

 

 

 

 

 

Gross profit

 

93,962

 

 

 

81,127

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

69,766

 

 

 

54,220

 

 

 

 

 

 

 

 

 

Income from operations

 

24,196

 

 

 

26,907

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7,457

 

 

 

7,169

 

 

 

 

 

 

 

 

 

Income before income taxes

 

16,739

 

 

 

19,738

 

 

 

 

 

 

 

 

 

Income tax expense

 

3,944

 

 

 

4,138

 

 

 

 

 

 

 

 

 

Net income

 

12,795

 

 

 

15,600

 

 

 

 

 

 

 

 

 

Less:  Net income attributable to redeemable non-controlling interest

 

411

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

12,384

 

 

 

15,600

 

 

 

 

 

 

 

 

 

Change in redemption value of redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

$

12,384

 

 

$

15,600

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common shareholders:

 

 

 

 

 

 

 

Basic

$

0.21

 

 

$

0.27

 

Diluted

$

0.21

 

 

$

0.26

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

59,286

 

 

 

58,668

 

Diluted

 

59,894

 

 

 

59,121

 

 

 

 

 

 

 

 

 

 

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

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

 

(unaudited)

 

Net income

$

12,795

 

 

$

15,600

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

Change in fair value of derivatives

 

8,288

 

 

 

(5,213

)

Reclassification to earnings

 

(1,775

)

 

 

612

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

  before tax

 

6,513

 

 

 

(4,601

)

 

 

 

 

 

 

 

 

Income tax expense (benefit) related to other

  comprehensive income

 

1,618

 

 

 

(1,151

)

 

 

 

 

 

 

 

 

Other comprehensive income (loss),

  net of tax

 

4,895

 

 

 

(3,450

)

 

 

 

 

 

 

 

 

Comprehensive income

 

17,690

 

 

 

12,150

 

 

 

 

 

 

 

 

 

Less:  Comprehensive income attributable to

   redeemable non-controlling interest

 

411

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to the Company

$

17,279

 

 

$

12,150

 

 

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)

 

 

 

April 3,

 

 

January 2,

 

 

 

2021

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

58,979

 

 

$

100,320

 

Accounts receivable, net

 

 

117,239

 

 

 

92,844

 

Inventories

 

 

72,352

 

 

 

60,317

 

Contract assets, net

 

 

49,225

 

 

 

28,723

 

Prepaid expenses

 

 

10,627

 

 

 

8,357

 

Other current assets

 

 

17,916

 

 

 

11,111

 

Total current assets

 

 

326,338

 

 

 

301,672

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

160,129

 

 

 

135,155

 

Operating lease right-of-use asset, net

 

 

65,763

 

 

 

38,567

 

Intangible assets, net

 

 

324,458

 

 

 

256,507

 

Goodwill

 

 

359,746

 

 

 

329,695

 

Other assets, net

 

 

3,224

 

 

 

925

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,239,658

 

 

$

1,062,521

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST

   AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

111,892

 

 

$

84,344

 

Current portion of operating lease liability

 

 

8,682

 

 

 

6,132

 

Total current liabilities

 

 

120,574

 

 

 

90,476

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

474,265

 

 

 

412,098

 

Operating lease liability, less current portion

 

 

60,140

 

 

 

35,130

 

Deferred income taxes

 

 

29,947

 

 

 

28,329

 

Other liabilities

 

 

10,971

 

 

 

11,354

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

695,897

 

 

 

577,387

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

34,495

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

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

  authorized; no shares outstanding

 

 

 

 

 

 

Common stock; par value $.01 per share; 200,000 shares authorized; 63,106 and

  62,542 shares issued and 59,461 and 58,999 shares outstanding at

  April 3, 2021 and January 2, 2021, respectively

 

 

631

 

 

 

625

 

Additional paid-in-capital

 

 

427,210

 

 

 

420,202

 

Accumulated other comprehensive income

 

 

7,615

 

 

 

2,720

 

Retained earnings

 

 

92,119

 

 

 

79,896

 

Treasury stock at cost

 

 

(18,309

)

 

 

(18,309

)

Total shareholders' equity

 

 

509,266

 

 

 

485,134

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable non-controlling interest and shareholders' equity

 

$

1,239,658

 

 

$

1,062,521

 

 

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

- 5 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended

 

 

 

April 3,

 

 

April 4,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

12,795

 

 

$

15,600

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

(used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

6,697

 

 

 

5,186

 

Amortization

 

 

4,749

 

 

 

4,742

 

Provision for allowance for doubtful accounts

 

 

2,411

 

 

 

646

 

Stock-based compensation

 

 

1,750

 

 

 

1,530

 

Amortization of deferred financing costs, debt discount and premium

 

 

230

 

 

 

311

 

Loss (gain) on sales of assets

 

 

67

 

 

 

(82

)

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(24,980

)

 

 

(17,857

)

Inventories

 

 

(4,307

)

 

 

(4,039

)

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

 

 

(20,898

)

 

 

(1,029

)

Accounts payable, accrued and other liabilities

 

 

20,039

 

 

 

5,916

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(1,447

)

 

 

10,924

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(6,512

)

 

 

(2,327

)

Investment in and acquisition of businesses

 

 

(94,321

)

 

 

(90,145

)

Proceeds from sales of assets

 

 

7

 

 

 

82

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(100,826

)

 

 

(92,390

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of senior notes

 

 

63,300

 

 

 

53,188

 

Payments of financing costs

 

 

(1,363

)

 

 

(1,266

)

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

 

 

(1,005

)

 

 

(815

)

Proceeds from exercise of stock options

 

 

 

 

 

549

 

Proceeds from issuance of common stock under employee stock purchase plan (ESPP)

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

60,932

 

 

 

51,775

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(41,341

)

 

 

(29,691

)

Cash and cash equivalents at beginning of period

 

 

100,320

 

 

 

97,243

 

Cash and cash equivalents at end of period

 

$

58,979

 

 

$

67,552

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

Issuance of common stock in Eco Acquisition

 

$

6,108

 

 

$

 

Establish right-of-use asset

 

$

29,490

 

 

$

14,605

 

Establish operating lease liability

 

$

(29,490

)

 

$

(14,605

)

Property, plant and equipment additions in accounts payable

 

$

1,022

 

 

$

119

 

 

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

- 6 -


PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except shares)(unaudited)

 

 

 

PGT Innovations, Inc. Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

Paid-in

 

 

Comprehensive

 

 

Retained

 

 

Treasury

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Stock

 

 

Total

 

THREE MONTHS ENDED APRIL 4, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 28, 2019

 

 

58,504,734

 

 

$

619

 

 

$

414,688

 

 

$

(238

)

 

$

34,788

 

 

$

(18,309

)

 

$

431,548

 

Vesting of restricted stock

 

 

175,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

 

 

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(51,479

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(815

)

 

 

(815

)

Retirement of treasury stock

 

 

 

 

 

(1

)

 

 

(814

)

 

 

 

 

 

 

 

 

815

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,530

 

 

 

 

 

 

 

 

 

 

 

 

1,530

 

Exercise of stock options

 

 

274,353

 

 

 

3

 

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

549

 

Common stock issued under ESPP

 

 

15,191

 

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

119

 

Net income attributable to the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,600

 

 

 

 

 

 

15,600

 

Other comprehensive loss, net of

  tax benefit of $1,151

 

 

 

 

 

 

 

 

 

 

 

(3,450

)

 

 

 

 

 

 

 

 

(3,450

)

Balance at April 4, 2020

 

 

58,918,623

 

 

$

626

 

 

$

416,064

 

 

$

(3,688

)

 

$

50,388

 

 

$

(18,309

)

 

$

445,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED APRIL 3, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2021

 

 

58,998,711

 

 

$

625

 

 

$

420,202

 

 

$

2,720

 

 

$

79,896

 

 

$

(18,309

)

 

$

485,134

 

Vesting of restricted stock

 

 

147,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of restricted stock

 

 

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

 

 

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(42,414

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,005

)

 

 

(1,005

)

Retirement of treasury stock

 

 

 

 

 

 

 

 

 

(844

)

 

 

 

 

 

(161

)

 

 

1,005

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,750

 

 

 

 

 

 

 

 

 

 

 

 

1,750

 

Issuance in acquisition of Eco

 

 

357,797

 

 

 

4

 

 

 

6,104

 

 

 

 

 

 

 

 

 

 

 

 

6,108

 

Net income attributable to the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,384

 

 

 

 

 

 

12,384

 

Change in redemption value of redeemable

  non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of

  tax expense of $1,618

 

 

 

 

 

 

 

 

 

 

 

4,895

 

 

 

 

 

 

 

 

 

4,895

 

Balance at April 3, 2021

 

 

59,461,200

 

 

$

631

 

 

$

427,210

 

 

$

7,615

 

 

$

92,119

 

 

$

(18,309

)

 

$

509,266

 

 

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

- 7 -


PGT INNOVATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

About PGT Innovations, Inc.

The accompanying unaudited condensed consolidated financial statements include the accounts of PGT Innovations, Inc. and its direct and indirect wholly-owned subsidiaries, including, PGT Industries, Inc., CGI Window and Door Holdings, Inc. (“CGI”), CGI Commercial, Inc. (“CGIC”), WinDoor, Incorporated, Coyote Acquisition Co., WWS Acquisition LLC (formerly known as GEF WW Parent LLC) (“WWS”), and with their acquisition by PGT Innovations, Inc. effective on February 1, 2020, NewSouth Window Solutions LLC, and NewSouth Window Solutions of Orlando LLC (“NewSouth”), as well as, as of and for the period from February 1, 2021 through April 3, 2021, the accounts of Eco Enterprises, LLC (formerly New Eco Windows Holding, LLC), and its subsidiaries Eco Windows Systems, LLC, Eco Glass Production, LLC, and Unity Windows, LLC (together “Eco”), relating to our acquisition of a 75% ownership stake in Eco Enterprises on February 1, 2021 (the “Eco Acquisition”), after elimination of intercompany accounts and transactions (collectively, the “Company”).

PGT Innovations, Inc. (“PGTI,” “we,” or the “Company”), formerly named PGT, Inc., manufactures and supplies premium windows and doors. Our highly-engineered 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®, Eze-Breeze®, NewSouth Window Solutions®, and Eco Windows Systems®. Our products other than NewSouth products are sold through an authorized dealer and distributor network. Our NewSouth products are sold directly to the end-user consumer through store-front locations throughout Florida, and through direct-to-homeowner door-to-door sales. We are also opening NewSouth store-front locations in other states as part of our strategy of expanding NewSouth’s geographic presence, including new locations opened in 2020 in Charleston, South Carolina, Pensacola, Florida, and Houston, Texas.

The majority of our sales are to customers in the state of Florida, which further increased with our acquisition of Eco, but we sell products to customers in many states, including the western United States through WWS. We also have sales in the Caribbean, Canada, and in South and Central America. See Note 6 for a discussion of the Eco 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 six window manufacturing operations in Florida, and one in Arizona. Our manufacturing facilities in Florida include one in North Venice, four in the greater Miami area, which includes two as a result of our investment in Eco, and one in Tampa with the acquisition of NewSouth. Our Arizona operations are in Phoenix. Regarding glass processing, we have two glass tempering and laminating plants and one insulation glass plant, all located in North Venice. Our Eco investment also has a glass processing facility in the greater Miami, Florida area.

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

COVID-19 Pandemic

 

During March 2020, a global pandemic (the “Pandemic”) was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The Pandemic has resulted in a significant number of infections, hospitalizations and deaths in several of our key markets, including Arizona, California, Florida and Texas. The Pandemic has significantly affected economic conditions in those markets, and in the United States in general, and internationally, including due to federal, state and local governments and employers reacting to the public health crisis with mitigation measures, and also due to the general fear and uncertainty created by the Pandemic, all of which has resulted in workforce, supply chain and production disruptions, along with reduced demand and spending in many industries and markets, including in our core markets in the western United States (“U.S.”), creating significant uncertainties in the U.S. economy. Although many of the government-mandated restrictions on economic and social activities that were put in place as part of the initial response to the Pandemic have been lifted, and vaccines with high degrees of efficacy have been approved, with others pending approval, by the United States Food and Drug Administration, or when the nation-wide program of vaccination will result in herd immunity to the coronavirus in the United States or globally, which is being impacted by several factors, including vaccine hesitancy or resistance, it is still currently unclear when, or if, social, business, occupational, educational and economic conditions will return to pre-Pandemic conditions. The extent to which the continuing


- 8 -


 

circumstances around the Pandemic could affect our future business, operations and financial results will depend upon numerous evolving factors that we are not able to accurately predict, including the timing of any relief that may come from the current program of nationwide vaccinations and its effect on the duration of the continuing economic and market disruptions related to the Pandemic, and whether such vaccines are effective against any new variants of coronavirus, and the nature, amounts and duration of any additional government stimulus measures designed to bolster the economy. As such, we continue to be unable to accurately predict the impact the Pandemic and the challenges it has created for the U.S. and global economies, will have on our financial performance and operations going forward due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, when or if herd immunity is achieved in the United States, especially in our key markets, actions that may be taken by governmental authorities to attempt to control the Pandemic, the impact to our customers’ and suppliers’ businesses and other factors identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on March 2, 2021. We will continue to evaluate the nature and extent of the impact of the Pandemic to our business, consolidated results of operations, and financial condition.

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods. The Company’s fiscal first quarter in 2021 ended April 3, 2021, consisted of 13 weeks, and our fiscal first quarter in 2020 ended April 4, 2020, consisted of 14 weeks.

The condensed consolidated balance sheet as of January 2, 2021, is derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of January 2, 2021, and the unaudited condensed consolidated financial statements as of and for the periods ended April 3, 2021 and April 4, 2020, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended January 2, 2021, included in the Company’s most recent Annual Report on Form 10-K. The accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K.

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.

As described above, the extent to which the COVID-19 pandemic and resulting measures that may be taken by the Company and/or its customers or suppliers and/or by governmental entities will impact the Company's business will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time. Management's estimates and assumptions are highly dependent on estimates of future developments and may change significantly in the future due to unforeseen direct and indirect impacts of the COVID-19 pandemic.

We have two reportable segments: the Southeast segment and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida. The Western reporting segment, also an operating segment, is composed of sales from our facility in Arizona. See Note 16 for segment disclosures.

Recently Adopted Accounting Pronouncements

Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles and also clarifies and amends existing guidance. This standard is effective beginning January 1, 2021, with early adoption permitted. The adoption of this standard did not have any impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in March 2021, subsequent amendment to the initial guidance, ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP


- 9 -


 

to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We are currently assessing the impacts of the practical expedients provided in Topic 848 and which, if any, we will adopt.

NOTE 2.  REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

Revenue Recognition Accounting Policy

The Company primarily manufactures fully customized windows and doors based on design specifications, measurements, colors, finishes, framing materials, glass-types, and other options selected by the customer at the point in time an order is received. The Company has an enforceable right to payment at the time an order is received and accepted at the agreed-upon sales prices contained in our agreements with our customers for all manufacturing efforts expended on behalf of its customers. Due to the customized build-to-order nature of these products, the Company’s assessment is that the substantial portion of its finished goods and certain unused glass components have no alternative use, and that control of these products and components passes to the customer over time during the manufacturing of the products in an order, or upon our receipt of certain pre-cut glass components from our supplier attributed to specific customer orders.

Based on these factors, the Company recognizes a substantial portion of revenue over time during the manufacturing process once customization begins, and for certain unused glass components on hand, at the end of a reporting period. Revenue on work-in-process at the end of a reporting period is recognized in proportion to costs incurred to total estimated cost of the product being manufactured. Except for the Western segment’s volume products, discussed in the section titled Disaggregation of Revenue from Contracts with Customers below, revenue recognized at a point in time is immaterial.

Disaggregation of Revenue from Contracts with Customers

As discussed in Note 1, we have two reportable segments: our Southeast segment and our Western segment. See Note 16 for more information. The following tables provide information about our net sales by reporting segment, product category and market for the three months ended April 3, 2021 and April 4, 2020 (dollars in millions):

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

Disaggregation of revenue (in millions):

2021

 

 

2020

 

Reporting segment:

 

 

 

 

 

 

 

Southeast

$

233.6

 

 

$

183.6

 

Western

 

37.5

 

 

 

36.6

 

 

 

 

 

 

 

 

 

Total net sales

$

271.1

 

 

$

220.2

 

 

 

 

 

 

 

 

 

Product category:

 

 

 

 

 

 

 

Impact-resistant window and door products

$

191.4

 

 

$

153.6

 

Non-impact window and door products

 

79.7

 

 

 

66.6

 

 

 

 

 

 

 

 

 

Total net sales

$

271.1

 

 

$

220.2

 

 

 

 

 

 

 

 

 

Market:

 

 

 

 

 

 

 

New construction

$

120.0

 

 

$

109.1

 

Repair and remodel

 

151.1

 

 

 

111.1

 

 

 

 

 

 

 

 

 

Total net sales

$

271.1

 

 

$

220.2

 

 

The Company’s Western segment includes both custom and volume products. This segment’s volume products are not made-to-order and are of standardized sizes and design specifications. Therefore, the Company’s assessment is that the Western segment’s volume products have alternative uses, and that control of these products passes to the customer at a point in time, which is typically when the product has been delivered to the customer. For the three months ended April 3, 2021 and April 4, 2020, the Western segment’s net sales of its volume products were $19.6 million and $15.2 million, respectively.

 


- 10 -


 

Contract Balances

Contract assets represent sales recognized in excess of billings related to finished goods not yet shipped and certain unused glass components not yet placed into the production process for which revenue is recognized over time as noted above. Contract liabilities relate to customer deposits at the end of reporting periods. At April 3, 2021 and January 2, 2021, those contract liabilities totaled $34.0 million and $22.8 million, respectively, of which $27.8 million and $18.1 million, respectively, are classified within accrued liabilities, and $6.2 million and $4.6 million, respectively, are classified as a reduction to the contract assets to which they relate.  Contract assets, net, totaled $49.2 million at April 3, 2021 and $28.7 million at January 2, 2021, in the accompanying condensed consolidated balance sheets.

Because of the short-term nature of our performance obligations, as discussed below, substantially all of our performance obligations are satisfied within the quarter following the end of a reporting period. As such, substantially all of the contract liabilities at January 2, 2021 were satisfied in the first quarter of 2021, and contract assets at January 2, 2021 were transferred to accounts receivable in the first quarter of 2021. Contract liabilities at April 3, 2021 represents cash received during the three-month period ended April 3, 2021, excluding amounts recognized as revenue during that period. Contract assets at April 3, 2021 represents revenue recognized during the three-month period ended April 3, 2021, 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 together with our standard terms and conditions. Our custom product contracts include distinct goods that are substantially the same and have the same pattern of transfer to the customer over time, and therefore represent a series of distinct goods accounted for as a single performance obligation. For volume products, we allocate the contract’s transaction price to each distinct performance obligation based on the estimated relative standalone selling price of each distinct good. Observable standalone sales are used to determine the standalone selling price. Certain customers are eligible for rebates based on their volume or purchases during an annual period. Rebates are recorded as a reduction to sales and were immaterial in all periods presented.

Performance obligations are satisfied over time, generally for our custom products, and as of a point in time for our volume products. Performance obligations are supported by contracts with customers, and we have elected not to disclose our unsatisfied performance obligations as of April 3, 2021 under the short-term contract exemption as we expect such performance obligations will be satisfied within the quarter following the end of a reporting period.

On February 1, 2021, we completed our investment in Eco. Eco’s contracts with customers include the manufacturing of goods and installation services related to those goods. Both the manufacturing of goods and installation services represent distinct and separate performance obligations of Eco. As the goods are custom in nature, and Eco ensures its ability to collect payment from the customer by collecting a substantial portion of the contract price before production begins, the performance obligations are satisfied over time, as opposed to a point in time. The contract transaction price is allocated to each performance obligation based on an estimate of stand-alone selling price. Because installation is performed shortly after completion of production, revenue on the total contract is recognized over a relatively short period of time.

Policies Regarding Shipping and Handling Costs and Commissions on Contract Assets

The Company has made a policy election to continue to recognize shipping and handling costs as a fulfillment activity. Treating shipping and handling as a fulfillment activity requires estimated shipping and handling costs for undelivered products and certain glass components on which we have recognized revenue and created a contract asset, to be accrued to match this cost with the recognized revenue. Sales taxes collected from customers are recorded on a net basis.

The Company utilizes the practical expedient which permits expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to employees. We expense sales commissions paid to employees as sales are recognized, including sales from the creation of contract assets, as the expected amortization period is less than one year.

Allowance for Doubtful Accounts

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 doubtful accounts which is based on management’s assessments of the amount which may become uncollectible in the future and is determined through consideration of our write-off history, specific identification of uncollectible accounts based in part on the customer’s past due balance (based on contractual terms), and consideration of prevailing economic and industry conditions, and may include anticipated unfavorable impacts of the COVID-19 pandemic on the businesses of


- 11 -


 

our customers, such as dealers and distributors. Uncollectible accounts are written off after repeated attempts to collect from the customer have been unsuccessful. As of April 3, 2021 and January 2, 2021, the allowance for doubtful accounts was $4.6 million and $3.7 million, respectively.

 

NOTE 3.  WARRANTY

Most of our manufactured products are sold with warranties. Warranty periods, which vary by product components, generally range from 1 to 10 years; however, the warranty period for a limited number of specifically identified components in certain applications is a lifetime. The majority of the products sold have warranties on components which range from 1 to 3 years. The amount charged to expense for warranties is based on management’s assessment of the cost per service call and the number of service calls expected to be incurred to satisfy warranty obligations on the current net sales.

During the three months ended April 3, 2021, we recorded warranty expense at a rate of approximately 2.6% of sales, which was higher than rate in the three months ended April 4, 2020 of 1.7% of sales. The increase in our warranty expense rate in the first three months of April 3, 2021 compared to April 4, 2020 is a result of costs associated with the wind-down of the commercial business of NewSouth in the three months ended April 3, 2021, which resulted in warranty costs incremental to those we would incur in the normal course of business.

The following table 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 months ended April 3, 2021 and April 4, 2020. 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. Of the accrued warranty reserve of $9.6 million at April 3, 2021, $7.8 million is classified within accrued expenses on the condensed consolidated balance sheet at April 3, 2021, with the remainder classified within other liabilities. Of the accrued warranty reserve of $8.0 million at January 2, 2021, $6.5 million is classified within accrued expenses on the condensed consolidated balance sheet at January 2, 2021, with the remainder classified within other liabilities.

 

 

 

Beginning

 

 

Acquisition-

 

 

Charged

 

 

 

 

 

 

 

 

 

 

End of

 

Accrued Warranty

 

of Period

 

 

Related

 

 

to Expense

 

 

Adjustments

 

 

Settlements

 

 

Period

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 3, 2021

 

$

8,001

 

 

$

 

 

$

6,966

 

 

$

389

 

 

$

(5,713

)

 

$

9,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 4, 2020

 

$

6,244

 

 

$

1,592

 

 

$

3,841

 

 

$

(20

)

 

$

(4,269

)

 

$

7,388

 

 

NOTE 4.  INVENTORIES

Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited finished goods inventory since the substantial majority of our products are custom, made-to-order and the revenue on these products, as well as the related cost, has been fully recognized upon completion of the manufacturing process. Finished goods inventory and work-in-progress costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Inventories consisted of the following:

 

 

 

April 3,

 

 

January 2,

 

 

 

2021

 

 

2021

 

 

 

(in thousands)

 

Raw materials

 

$

66,179

 

 

$

55,916

 

Work-in-progress

 

 

5,718

 

 

 

4,058

 

Finished goods

 

 

455

 

 

 

343

 

 

 

 

 

 

 

 

 

 

 

 

$

72,352

 

 

$

60,317

 

 

NOTE 5.  STOCK BASED-COMPENSATION

We record stock compensation expense over an equity award’s vesting period based on the award’s fair value at the date of grant. We recorded compensation expense for stock-based awards of $1.8 million for the three months ended April 3, 2021, and $1.5 million for the three months ended April 4, 2020. As of April 3, 2021, there was $11.2 million in total unrecognized compensation cost related entirely 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 1.9 years at April 3, 2021.


- 12 -


 

Of the $1.8 million and $1.5 million in stock-based compensation expense in the three months ended April 3, 2021 and April 4, 2020, respectively, $1.5 million and $1.4 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales.

NOTE 6.  ACQUISITIONS

ECO WINDOW SYSTEMS

On February 1, 2021, we completed an 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”), for fair value consideration of $100.4 million, including $94.3 million in cash, which was after an estimated working capital adjustment in our favor of approximately $5.6 million received at the closing, and PGT Innovations, Inc. common stock with a then fair value estimated to be $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 “Second Additional Senor 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 $31.0 million. See Note 9 for a discussion of the Second Additional Senior Notes.

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 preliminarily estimated to be $34.1 million, resulting in total fair value of the Eco business in the acquisition, including the redeemable non-controlling interest, of $134.5 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 5% estimated discount for seller’s lack of control in the new entity. See Note 17 for more information regarding the redeemable non-controlling interest. 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.

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

 

 

Preliminary

Allocation

 

Accounts receivable

 

$

5,031

 

Inventories

 

 

7,728

 

Contract assets, net

 

 

4,312

 

Prepaid expenses and other assets

 

 

1,706

 

Property and equipment

 

 

24,009

 

Operating lease right-of-use asset

 

 

27,864

 

Intangible assets

 

 

72,700

 

Goodwill

 

 

30,051

 

Total assets acquired

 

 

173,401

 

Accounts payable

 

 

(6,809

)

Accrued and other liabilities, including customer deposits

 

 

(4,215

)

Operating lease liability

 

 

(27,864

)

Total liabilities assumed

 

 

(38,888

)

Net assets acquired

 

 

134,513

 

Redeemable non-controlling interest

 

 

(34,084

)

Fair value of consideration transferred

 

$

100,429

 

 

 

 

 

 

Consideration:

 

 

 

 

Cash

 

$

94,321

 

PGTI common stock

 

 

6,108

 

Fair value of consideration transferred

 

$

100,429

 

 

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


- 13 -


 

materials. The fair value of property and equipment is being 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 quarter of 2021, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three months ended April 3, 2021.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has currently been estimated to be $30.1 million, classified as part of Southeast reporting unit goodwill, which we expect the portion of goodwill relating to our 75% investment to be deductible for tax purposes. In addition, we are currently evaluating the historical book and tax bases of assets and liabilities relating to the redeemable non-controlling interest, which may not be eligible for a step-up in basis, for any deferred tax assets and liabilities that may need to be recorded in the Eco Acquisition.

As of April 3, 2021, the purchase price allocation is still preliminary, and its finalization may result in changes to the preliminary estimate of goodwill. 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

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

 

 

 

 

 

 

Initial

 

 

Preliminary

 

 

Useful Life

 

 

Valuation

 

 

(in years)

(in thousands)

 

 

 

 

 

 

Trade name

 

$

36,000

 

 

indefinite

Customer relationships

 

 

36,700

 

 

5 - 15

 

 

 

 

 

 

 

Intangible assets, net

 

$

72,700

 

 

 

Pro Forma Financial Information

 

The following unaudited pro forma financial information assumes the Eco Acquisition had occurred at the beginning of the earliest period presented that does not include Eco’s actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of Eco adjusted for the following: amortization expense related to the estimated intangible assets arising from the acquisition and interest expense to reflect the Second Additional Senior Notes. 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

 

 

 

April 3,

 

 

April 4,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Net sales

 

$

279,044

 

 

$

231,353

 

 

 

 

 

 

 

 

 

 

Net income attributable to PGTI stockholders:

 

$

12,542

 

 

$

15,297

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to PGTI stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

0.26

 

Diluted

 

$

0.21

 

 

$

0.26

 

Net sales of Eco included in the condensed consolidated statement of operations for the three months ended April 3, 2021, was nearly $16 million. The net income of Eco in the condensed consolidated statement of operations for the three months ended April 3, 2021, after allocation of interest expense and other corporate costs to Eco, was $1.6 million, including the portion attributable to the redeemable non-controlling interest of $411 thousand.

- 14 -


 

NEWSOUTH WINDOW SOLUTIONS

On February 1, 2020 (the “closing date”), we completed the acquisition of NewSouth Window Solutions LLC and NewSouth Window Solutions of Orlando LLC (together, “NewSouth”, and the “NewSouth Acquisition”), which became wholly-owned subsidiaries of PGT Innovations, Inc. The fair value of consideration transferred in the acquisition was $90.4 million. The acquisition was financed with proceeds of $53.2 million from an add-on issuance of $50.0 million in 2018 Senior Notes due 2026 (“First Additional Senior Notes”), including a premium of $3.2 million, and with $37.2 million in cash. See Note 9 for a discussion of the First Additional Senior Notes.

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

 

 

 

Final

Allocation

 

Accounts receivable

 

$

8,434

 

Inventories

 

 

2,936

 

Contract assets, net

 

 

4,413

 

Prepaid expenses and other assets

 

 

1,756

 

Property and equipment

 

 

7,433

 

Operating lease right-of-use asset

 

 

10,578

 

Intangible assets

 

 

27,370

 

Goodwill

 

 

52,094

 

Accounts payable

 

 

(6,621

)

Accrued and other liabilities

 

 

(7,447

)

Operating lease liability

 

 

(10,578

)

Purchase price

 

$

90,368

 

 

 

 

 

 

Consideration:

 

 

 

 

Cash

 

$

90,368

 

Total fair value of consideration

 

$

90,368

 

 

The fair value of certain working capital related items, including NewSouth’s retail accounts receivable, prepaid expenses, and accounts payable and accrued liabilities, approximated their book values at the date of the NewSouth 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. 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, with the assistance of a third-party valuations firm.

We incurred acquisition costs totaling $2.4 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the NewSouth Acquisition, which includes $0.9 million in 2020, and $1.5 million in 2019. Of the expenses in 2020, $0.5 million were incurred in the first quarter of 2020, and classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three months ended April 4, 2020.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has been determined to be $52.1 million, all of which we expected to be deductible for tax purposes. Goodwill represents the increased value of the combined entity through new direct-to-consumer sales channel opportunities, as well as NewSouth’s extensive advertising throughout Florida, and NewSouth’s market intelligence, which we expect to utilize.


- 15 -


 

Valuation of Identified Intangible Assets

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

 

 

 

 

 

 

Initial

 

 

Final

 

 

Useful Life

 

 

Valuation

 

 

(in years)

(in thousands)

 

 

 

 

 

 

Trade name

 

$

22,200

 

 

15

Non-compete agreements

 

 

1,670

 

 

5

Developed technology

 

 

2,600

 

 

6

Customer-related intangible

 

 

900

 

 

<1

 

 

 

 

 

 

 

Intangible assets, net

 

$

27,370

 

 

 

 

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 NewSouth’s actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of NewSouth adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the First Additional Senior Notes. 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

 

 

 

April 4,

 

 

 

2020

 

 

 

(unaudited)

 

Net sales

 

 

227,956

 

 

 

 

 

 

Net income

 

 

15,830

 

 

 

 

 

 

Net income per common share:

 

 

 

 

Basic

 

$

0.27

 

Diluted

 

$

0.27

 

 

 

NOTE 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 and unvested stock awards.

There were no anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three months ended April 3, 2021, and 586 thousand for the three months ended April 4, 2020.


- 16 -


 

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

 

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

 

(in thousands, except per share amounts)

 

Net income

$

12,795

 

 

$

15,600

 

Less:  Net income attributable to redeemable non-controlling interest

 

411

 

 

 

 

Net income attributable to the Company

 

12,384

 

 

 

15,600

 

Change in redemption value of redeemable non-controlling interest

 

 

 

 

 

Net income attributable to common shareholders

$

12,384

 

 

$

15,600

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Basic

 

59,286

 

 

 

58,668

 

Add:  Dilutive shares from equity plans

 

608

 

 

 

453

 

 

 

 

 

 

 

 

 

Weighted-average common shares - Diluted

 

59,894

 

 

 

59,121

 

 

 

 

 

 

 

 

 

Net income per common share attributable to common shareholders:

 

 

 

 

 

 

 

Basic

$

0.21

 

 

$

0.27

 

Diluted

$

0.21

 

 

$

0.26

 

 

 

NOTE 8.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

Initial

 

 

April 3,

 

 

January 2,

 

 

Useful Life

 

 

2021

 

 

2021

 

 

(in years)

 

 

(in thousands)

 

 

 

Goodwill

 

$

359,746

 

 

$

329,695

 

 

indefinite

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

Trade names (indefinite-lived)

 

$

176,841

 

 

$

140,841

 

 

indefinite

 

 

 

 

 

 

 

 

 

 

 

Customer relationships and customer-related assets

 

 

238,247

 

 

 

201,547

 

 

<1-15

Trade name (amortizable)

 

 

22,200

 

 

 

22,200

 

 

15

Developed technology

 

 

5,600

 

 

 

5,600

 

 

6-10

Non-compete agreement

 

 

3,338

 

 

 

3,338

 

 

2-5

Software license

 

 

590

 

 

 

590

 

 

2

Less:  Accumulated amortization

 

 

(122,358

)

 

 

(117,609

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

147,617

 

 

 

115,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets, net

 

$

324,458

 

 

$

256,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill at January 2, 2021

 

$

329,695

 

 

 

 

 

 

 

Increase in goodwill from our investment in Eco

 

 

30,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill at April 3, 2021

 

$

359,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names at January 2, 2021

 

$

140,841

 

 

 

 

 

 

 

Increase in trade names from our investment in Eco

 

 

36,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names at April 3, 2021

 

$

176,841

 

 

 

 

 

 

 


- 17 -


 

Estimated amortization of our amortizable intangible assets for future years is as follows:

 

(in thousands)

 

Total

 

Remainder of 2021

 

$

15,247

 

2022

 

 

19,342

 

2023

 

 

17,181

 

2024

 

 

17,135

 

2025

 

 

16,896

 

Thereafter

 

 

61,816

 

 

 

 

 

 

Total

 

$

147,617

 

 

Amortization expense relating to amortizable intangible assets for the three months ended April 3, 2021 and April 4, 2020, was $4.7 million and $4.7 million, respectively.

 

We perform our annual goodwill and indefinite-lived intangible asset impairment testing on the first day of our fiscal fourth quarter of each year, and at interim periods if needed based on occurrence of triggering events. During the three months ended April 3, 2021, we did not identify any events which we believe would trigger the need for tests for impairments of our indefinite-lived intangibles assets. As of April 3, 2021 and January 2, 2021, the carrying value of our Southeast reporting unit goodwill is $231.3 million and $201.3 million, respectively. As of April 3, 2021 and January 2, 2021, the carrying value of our Western reporting unit goodwill is $128.4 million and $128.4 million, respectively. Goodwill of our Southeast reporting unit includes the goodwill relating to Eco.

 

NOTE 9.  LONG-TERM DEBT

 

 

 

April 3,

 

 

January 2,

 

 

 

2021

 

 

2021

 

 

 

(in thousands)

 

2018 Senior Notes due 2026, maturing in August 2026

 

$

425,000

 

 

$

365,000

 

 

 

 

 

 

 

 

 

 

2016 Credit Agreement due 2022, maturing in October 2022

 

 

54,000

 

 

 

54,000

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

479,000

 

 

 

419,000

 

 

 

 

 

 

 

 

 

 

Fees, costs, discount and premium

 

 

(4,735

)

 

 

(6,902

)

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

$

474,265

 

 

$

412,098

 

 

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.

On January 24, 2020, we completed an add-on issuance of $50.0 million aggregate principal amount of 6.75% 2018 Senior Notes due 2026, or the First Additional Senior Notes, issued at 106.375% of their principal amount, resulting in a premium to us of $3.2 million. The First Additional Senior Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the First Additional Senior Notes, including premium, were used, together with cash on hand, to pay the $90.4 million purchase price in the NewSouth Acquisition.

On January 25, 2021, we completed a second add-on issuance of $60.0 million aggregate principal amount of 6.75% 2018 Senior Notes due 2026, or the Second Additional Senior Notes, issued at 105.5% of their principal amount, resulting in a premium to us of $3.3 million. The Second Additional Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the Second Additional Senior Notes, including premium, were used, together with $31.0


- 18 -


 

million in cash on hand, to pay the $94.3 million cash portion of the $100.4 million purchase price in the ECO Acquisition. The common stock portion of the purchase consideration was represented by the issuance of 357,797 shares of PGT Innovations, Inc. common stock on February 1, 2021, with a then current value of $21.34 per share, which we discounted by an estimate of 20% for lack of marketability, as they are legally restricted from being sold by the recipient for a three-year period from February 1, 2021.

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, the First Additional Senior Notes totaling $1.3 million, offset by the $3.2 million premium on the First Additional Senior Notes, and the Second Additional Senior Notes totaling $1.4 million, offset by the $3.3 million premium on the Second Additional Senior Notes, all of which are being amortized under the effective interest method. See “Deferred Financing Costs” below.

As of April 3, 2021, the face value of debt outstanding under the 2018 Senior Notes due 2026 was $425.0 million, and accrued interest totaled $4.9 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.

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 Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 establishes senior secured credit facilities in an aggregate amount of $310.0 million, consisting of a $270.0 million Term B term loan facility originally maturing in February 2022 that amortizes on a basis of 1% annually during its six-year term, and a $40.0 million revolving credit facility originally maturing in February 2021 that 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 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.

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 three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022, which 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 in an aggregate principal amount of up to $80.0 million (the “Revolving Facility”), maturing in October 2024, which replaced our then existing $40.0 million revolving credit facility under the 2016 Credit Agreement, and includes a swing-line facility and letter of credit facility. Our obligations under the 2016 Credit Agreement continue to be secured by substantially all of our assets, as well as our direct and indirect subsidiaries’ assets.

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 zero basis points).


- 19 -


 

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. As of April 3, 2021, there were $5.8 million in letters of credit outstanding and $74.2 million available under the Revolving Facility.

Fees and costs relating to the Third Amendment were $0.9 million, which are deferred and being amortized. In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. Deferred financing costs and original issue discount allocated to these lenders of $1.5 million were written-off and classified as debt extinguishment costs in our consolidated statement of operations for the year ended December 28, 2019. As of April 3, 2021, after making prepayments of borrowings totaling $10.0 million during the third quarter of 2020, the principal amount of debt outstanding under the 2016 Credit Agreement due 2022 was $54.0 million. Accrued interest at April 3, 2021 was $16 thousand.

The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 2.14% as of April 3, 2021, and was 2.15% at January 2, 2021.

Pursuant to the Third Amendment, the 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of thirty-five percent (35%) of the revolving facility commitment (excluding $7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 103% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us from exceeding a maximum first lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt to EBITDA) as of the last day of each applicable fiscal quarter. To the extent the springing financial covenant is in effect, the first lien net leverage ratio currently cannot exceed 4.00:1.00 (4.50:1.00 during a significant acquisition period, as defined, which we are in as of April 3, 2021). We have not been required to test our first lien net leverage ratio because we have not exceeded 35% of our revolving capacity.

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, 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.

Deferred Financing Costs

The activity relating to third-party fees and costs, lender fees, discount and premiums for the three months ended April 3, 2021, are as follows. All debt-related fees, costs, discount and premiums are classified as a reduction of the carrying value of long-term debt:

 

(in thousands)

 

Total

 

At beginning of year

 

$

6,902

 

Add: Deferred financing costs from the issuance of Second Additional Senior Notes

 

 

1,363

 

Less: Premium on the Second Additional Senior Notes

 

 

(3,300

)

Less: Amortization expense

 

 

(230

)

 

 

 

 

 

At end of period

 

$

4,735

 

 

Estimated amortization expense relating to third-party fees and costs, lender fees, discount and premiums for the years indicated as of April 3, 2021, is as follows:

 

(in thousands)

 

Total

 

Remainder of 2021

 

$

657

 

2022

 

 

905

 

2023

 

 

844

 

2024

 

 

889

 

2025

 

 

861

 

Thereafter

 

 

579

 

 

 

 

 

 

Total

 

$

4,735

 

 


- 20 -


 

As a result of prepayments of the 2016 Credit Agreement due 2022 totaling $214.0 million since its inception in February 2016 through April 3, 2021, we have no future scheduled repayments until the maturity of the facility on October 31, 2022. The contractual future maturities of long-term debt outstanding, as of April 3, 2021, are as follows (at face value):

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

 

2022

 

 

54,000

 

2023

 

 

 

2024

 

 

 

2025

 

 

 

Thereafter

 

 

425,000

 

 

 

 

 

 

Total

 

$

479,000

 

 

NOTE 10.  LEASES

We lease certain of our manufacturing facilities under operating leases. We also lease production equipment, vehicles, computer equipment, storage units and office equipment under operating leases. Our leases have remaining lease terms of 1 year to 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 lease expense relating to these leases is not significant.

The components of lease expense for the three months ended April 3, 2021 and April 4, 2020, are as follows. Certain amounts in the prior year period have been reclassified to conform to the current presentation (in thousands):

 

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

Operating lease cost

$

2,879

 

 

$

2,104

 

Variable lease cost

 

2,200

 

 

 

786

 

Total lease cost

$

5,079

 

 

$

2,890

 

Other information relating to leases for the three months ended April 3, 2021 and April 4, 2020, are as follows (in thousands, except years and percentages):

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

Supplemental cash flows information

 

 

 

 

 

 

 

Cash paid for amounts included in the

  measurement of lease liabilities:

 

 

 

 

 

 

 

Operating cash flows relating to

  operating leases

$

(2,764

)

 

$

(2,009

)

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange

  for lease obligations:

 

 

 

 

 

 

 

Operating leases

$

29,490

 

 

$

14,605

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term in years

 

 

 

 

 

 

 

Operating leases

 

7.23

 

 

 

7.27

 

 

 

 

 

 

 

 

 

Weighted average discount rate

 

 

 

 

 

 

 

Operating leases

 

5.6

%

 

 

5.9

%


- 21 -


 

Future maturities under operating leases were as follows at April 3, 2021 and January 2, 2021 (in thousands):

 

 

April 3,

 

 

January 2,

 

 

 

2021

 

 

2021

 

Remainder of 2021

 

$

9,278

 

 

$

8,327

 

2022

 

 

11,830

 

 

 

7,626

 

2023

 

 

11,557

 

 

 

7,149

 

2024

 

 

11,286

 

 

 

6,748

 

2025

 

 

10,871

 

 

 

6,253

 

Thereafter

 

 

28,847

 

 

 

13,800

 

 

 

 

 

 

 

 

 

 

Total future minimum lease payments

 

 

83,669

 

 

 

49,903

 

 

 

 

 

 

 

 

 

 

Less:  Imputed interest

 

 

(14,847

)

 

 

(8,641

)

 

 

 

 

 

 

 

 

 

Operating lease liability - total

 

$

68,822

 

 

$

41,262

 

 

 

 

 

 

 

 

 

 

Reported as of April 3, 2021 and January 2, 2021:

 

 

 

 

 

 

 

 

Current portion of operating lease liability

 

$

8,682

 

 

$

6,132

 

Operating lease liability, less current portion

 

 

60,140

 

 

 

35,130

 

 

 

 

 

 

 

 

 

 

Operating lease liability - total

 

$

68,822

 

 

$

41,262

 

As of April 3, 2021, we had no additional operating or finance leases that have not yet commenced. Our operating leases expire at various times through 2030. Lease expense was $5.1 million for the three months ended April 3, 2021 and was $2.9 million for the three months ended April 4, 2020. Of the $5.1 million for the three months ended April 3, 2021, $2.2 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses. Of the $2.9 million for the three months ended April 4, 2020, $1.5 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses.

The $29.5 million in operating lease right-of-use assets obtained in exchange for operating lease obligations during the three months ended April 3, 2021 includes $27.9 million related to the Eco Acquisition. See Note 6 for additional information.

NOTE 11.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Our Company is a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of those proceedings cannot be predicted with certainty, management believes the outcome of any claim that is pending or threatened, either individually or in the aggregate, will not have a material adverse effect on our operations, financial position or cash flows.

 

NOTE 12.  INCOME TAXES

Our income tax expense was $3.9 million for the three months ended April 3, 2021, compared with income tax expense of $4.1 million for the three months ended April 4, 2020. Our effective tax rate for the three months ended April 3, 2021, was an expense rate of 23.6%, and was an expense rate of 21.0% for the three months ended April 4, 2020. Our income tax expense for the three months ended April 3, 2021 includes $305 thousand relating to our 75% share of the pre-tax earnings of Eco.

Income tax expense in the three months ended April 3, 2021 included a minor discrete item of income tax benefit. The three months ended April 4, 2020 included excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards totaling $766 thousand. Excluding discrete items of income tax, the effective tax rates for the three months ended April 3, 2021, and April 4, 2020, would have been income tax expense rates of 24.1% and 24.8%, respectively.

We estimate that our annual effective tax rate for 2021, excluding discrete items, will approximate our current combined statutory federal and state rate of 24.7%.

We made no payments of estimated Federal or state income taxes during either of the three-month periods ended April 3, 2021 and April 4, 2020.


- 22 -


 

NOTE 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 an instrument-by-instrument basis as they are acquired or incurred.

During the three months ended April 3, 2021 or April 4, 2020, we did not make any transfers between Level 2 and Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, and accounts payable and accrued liabilities, whose carrying amounts approximate their fair values due to their short-term nature. Our financial instruments also include borrowings under 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 borrowings under the 2016 Credit Agreement due 2022 approximates its carrying value due to its variable-rate nature, and was approximately $54.0 million as of April 3, 2021, compared to a principal outstanding value of $54.0 million, and fair value of $54.0 million as of January 2, 2021, compared to a principal outstanding value of $54.0 million. The fair value of the 2018 Senior Notes due 2026 is based on debt with similar terms and characteristics and was approximately $450.5 million as of April 3, 2021, compared to a principal outstanding value of $425.0 million, which includes the Second Additional Senior Notes, and the fair value was approximately $387.8 million as of January 2, 2021, compared to a principal outstanding value of $365.0 million. Fair values were determined based on observed trading prices of our debt between domestic financial 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 condensed consolidated financial statements at fair value on a recurring basis and are categorized in the table below based upon the lowest level of significant input to the valuation (in thousands):

 

 

Fair Value Measurements

 

 

Assets (Liabilities)

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

April 3,

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

$

5,885

 

 

$

 

 

$

5,885

 

 

$

 

MTP contracts

 

4,239

 

 

 

 

 

 

4,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,124

 

 

$

 

 

$

10,124

 

 

$

 


- 23 -


 

 

 

Fair Value Measurements

 

 

Assets (Liabilities)

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

January 2,

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

$

3,190

 

 

$

 

 

$

3,190

 

 

$

 

MTP contracts

 

421

 

 

 

 

 

 

421

 

 

 

 

 

$

3,611

 

 

$

 

 

$

3,611

 

 

$

 

 

See Note 14 for a description of the methods and assumptions used in the determination of the fair values of our aluminum forward and Midwest Transaction Premium (“MTP”) contracts, as well as the basis for classifying these assets and liabilities as Level 2.

NOTE 14.  DERIVATIVES

Aluminum Contracts and Midwest Transaction Premium

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. Beginning late in the first quarter of 2020, we began entering into forward contracts to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium, or MTP. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum and the related MTP.

We record our aluminium hedge contracts at fair value, based on trading values for aluminum forward contracts. Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”). The LME provides a transparent forum and is the world’s largest center for the trading of futures contracts for non-ferrous metals. The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle. Based on this high degree of volume and liquidity in the LME, we believe the valuation price at any measurement date for contracts with identical terms as to prompt date, trade date and trade price as those we hold at any time represents a contract’s exit price to be used for purposes of determining fair value.

We record our MTP hedge contracts at fair value based on the Platts MW US Transaction price per pound assessment, which has been a benchmark for decades in the North American aluminium industry. Platts surveys the North American market daily to capture trades, bids and offers on a delivered Midwest basis. Data is normalized to reflect the typical price per pound between the largest number of market participants, for delivery within 7 to 30 days from date of publication, net-30-day payment terms, for typical order quantities, chemistries and freight allowances. The survey is extensive and encompasses both domestic and offshore producers, traders and brokers that are varied in scope. Based on the extensive nature of this pricing mechanism, we believe the Platts MW US Transaction price at any time represents a contract’s exit price to be used for purposes of determining fair value.

Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities. We do not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement.

At April 3, 2021, the fair value of our aluminum forward contracts was in a asset position of $5.9 million. We had 25 outstanding forward contracts for the purchase of 33.7 million pounds of aluminum through June 2022, at an average price of $0.84 per pound, which excludes the Midwest premium, with maturity dates of between one month and fifteen months. At April 3, 2021, the fair value of our MTP contracts was in a net asset position of $4.2 million. We had 29 outstanding MTP contracts to hedge the Platt US MW Transaction price per pound for the delivery of 56.1 million pounds of aluminum through December 2022, at an average price of $0.12 per pound, with maturity dates of between one month and twenty-one months. We assessed the risk of non-performance of the Company and our counterparty to these contracts, as applicable, and determined it was immaterial and, therefore, did not record any adjustment to their fair values as of April 3, 2021.


- 24 -


 

We assess the effectiveness of our aluminum forward and MTP contracts by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. The amount of income, net, recognized in the “accumulated other comprehensive income (loss)” line item in the accompanying condensed consolidated balance sheet as of April 3, 2021, that we expect will be reclassified to earnings within the next twelve months, is approximately $8.7 million.

The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at April 3, 2021 and January 2, 2021, as follows (in thousands):

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

April 3, 2021

 

 

 

April 3, 2021

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

5,714

 

 

 

Accrued liabilities

 

$

 

MTP contracts

 

Other current assets

 

 

3,010

 

 

 

Accrued liabilities

 

 

 

Aluminum contracts

 

Other assets

 

 

171

 

 

 

Other liabilities

 

 

 

MTP contracts

 

Other assets

 

 

1,229

 

 

 

Other liabilities

 

 

 

Total derivative instruments

 

  Total derivative assets

 

$

10,124

 

 

 

  Total derivative liabilities

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

Derivative Liabilities

 

 

 

January 2, 2021

 

 

 

January 2, 2021

 

Derivatives designated as hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

   instruments under Subtopic 815-20:

 

Balance Sheet Location

 

Fair Value

 

 

 

Balance Sheet Location

 

Fair Value

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

Other current assets

 

$

3,243

 

 

 

Accrued liabilities

 

$

(28

)

MTP contracts

 

Other current assets

 

 

423

 

 

 

Accrued liabilities

 

 

(24

)

Aluminum contracts

 

Other assets

 

 

 

 

 

Other liabilities

 

 

(25

)

MTP contracts

 

Other assets

 

 

26

 

 

 

Other liabilities

 

 

(4

)

Total derivative instruments

 

Total derivative assets

 

$

3,692

 

 

 

Total derivative liabilities

 

$

(81

)

 

The ending accumulated balance for the aluminum forward and MTP contracts included in accumulated other comprehensive income (losses), net of tax, was an accumulated other comprehensive income of $7.6 million as of April 3, 2021, and was an accumulated other comprehensive income of $2.7 million at January 2, 2021. The income tax effects of accumulated comprehensive income (losses) are released as amounts are reclassified out of accumulated comprehensive income (losses) at the income tax rate used at the time those income tax effects were provided, which generally represents our blended statutory income tax rate.

The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three months ended April 3, 2021 and April 4, 2020 (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

 

 

 

April 3,

 

 

April 4,

 

 

 

 

April 3,

 

 

April 4,

 

 

 

2021

 

 

2020

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aluminum contracts

 

$

4,083

 

 

$

(5,160

)

 

Cost of sales

 

$

1,388

 

 

$

(612

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTP contracts

 

$

4,205

 

 

$

(53

)

 

Cost of sales

 

$

387

 

 

$

 

 


- 25 -


 

NOTE 15.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the components of accumulated other comprehensive income (loss) for the three months ended April 3, 2021 and April 4, 2020 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 3, 2021

 

Aluminum

 

 

MTP

 

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at January 2, 2021

 

$

2,403

 

 

$

317

 

 

$

2,720

 

Change in fair value of derivatives

 

 

4,083

 

 

 

4,205

 

 

 

8,288

 

Amounts reclassified from other comprehensive loss

 

 

(1,388

)

 

 

(387

)

 

 

(1,775

)

Tax effect

 

 

(670

)

 

 

(948

)

 

 

(1,618

)

Net current-period other comprehensive income

 

 

2,025

 

 

 

2,870

 

 

 

4,895

 

Balance at April 3, 2021

 

$

4,428

 

 

$

3,187

 

 

$

7,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended April 4, 2020

 

Aluminum

 

 

MTP

 

 

 

 

 

(in thousands)

 

Contracts

 

 

Contracts

 

 

Total

 

Balance at December 28, 2019

 

$

(238

)

 

$

-

 

 

$

(238

)

Change in fair value of derivatives

 

 

(5,160

)

 

 

(53

)

 

 

(5,213

)

Amounts reclassified from other comprehensive loss

 

 

612

 

 

 

 

 

 

612

 

Tax effect

 

 

1,138

 

 

 

13

 

 

 

1,151

 

Net current-period other comprehensive income

 

 

(3,410

)

 

 

(40

)

 

 

(3,450

)

Balance at April 4, 2020

 

$

(3,648

)

 

$

(40

)

 

$

(3,688

)

 

NOTE 16. SEGMENTS

We have two reportable segments: the Southeast segment and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida, including the net sales of our recent investment in Eco. The Western reporting segment, also an operating segment. Results of the Western segment are composed of the results of WWS.

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 months ended April 3, 2021 and April 4, 2020 (in thousands):

 

 

Three Months Ended

 

 

April 3,

 

 

April 4,

 

 

2021

 

 

2020

 

Net sales:

 

 

 

 

 

 

 

Southeast segment

$

233,638

 

 

$

183,641

 

Western segment

 

37,454

 

 

 

36,563

 

 

 

 

 

 

 

 

 

Total net sales

$

271,092

 

 

$

220,204

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

Southeast segment

$

18,743

 

 

$

25,821

 

Western segment

 

5,453

 

 

 

1,086

 

 

 

 

 

 

 

 

 

Total income from operations

 

24,196

 

 

 

26,907

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7,457

 

 

 

7,169

 

 

 

 

 

 

 

 

 

Total income before income taxes

$

16,739

 

 

$

19,738

 

 


- 26 -


 

NOTE 17. REEDEMABLE NON-CONTROLLING INTEREST

On February 1, 2021, we completed an acquisition of a 75% ownership stake in Eco. The seller of Eco obtained 25% equity interest in the newly formed company, Eco Enterprises. The seller’s redeemable non-controlling interest was initially established at fair value.

The agreement between PGT Innovations, Inc. and the seller provides the Company with a call right for seller’s equity interest which the Company may exercise during the three-years following the date of the acquisition, and provides the seller with a put right which can be exercised during the 15-day period following the three-year anniversary of the date of the acquisition. Upon exercise of the put or call right, the purchase price is calculated based on a 10-multiple of the sum of Eco’s trailing twelve-month earnings before interest, taxes, depreciation and amortization (TTM EBITDA), and certain synergy-related TTM EBITDA which may result from our investment in Eco (both as more specifically defined in the operating agreement). The put option makes the non-controlling interest redeemable and, therefore, the redeemable non-controlling interest is classified as temporary equity outside of shareholders’ equity.

The Company calculates the redemption value of the non-controlling interest on a quarterly basis using a 10-multiple of TTM EBITDA as determined in accordance with the agreement as described above. After giving effect to the change from the net income (loss) attributable to the redeemable non-controlling interest, the redeemable non-controlling interest is adjusted to be reported at its currently calculated redemption value. Any resulting change in the redemption value of the redeemable non-controlling interest is offset against retained earnings and impacts earnings used in the calculation of earnings per share attributable to common shareholders.

For the three months ended April 3, 2021, based on the formula for determining the value of the seller’s put option in the operating agreement governing this transaction, the redemption value of the redeemable non-controlling interest was estimated to be less than $34.5 million, the value of the redeemable non-controlling interest before giving effect to seller’s put option, as of April 3, 2021. As such, there was no change in redemption value to be recorded relating to the redeemable non-controlling interest for the three months ended April 3, 2021. There was no redeemable non-controlling interest in the first quarter of 2020.

 

The following table presents the changes in the Company’s redeemable non-controlling interest for the period presented:

 

 

Three Months Ended

 

 

April 3,

 

(in thousands)

2021

 

Balance at beginning of period

$

 

Redeemable non-controlling interest in Eco at initially estimated fair value

 

34,084

 

Net income attributable to redeemable non-controlling interest

 

411

 

Change in value of redeemable non-controlling interest

 

 

Balance at end of period

$

34,495

 

 


- 27 -


 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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 January 2, 2021, included in our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 2, 2021. All amounts herein are unaudited.

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “assume,” “believe,” “could,” “estimate,” “guidance,” “may,” “outlook,” “forecast,” “intend,” “could,” “project,” “estimate,” “anticipate,” “should,” “plan” and similar references to future periods.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

 

the impact of the COVID-19 pandemic and related measures taken by governmental or regulatory authorities to combat the pandemic, including the impact of the pandemic and these measures on the economies and demand for our products in the states where we sell them, and on our customers, suppliers, labor force, business, operations and financial performance;

 

unpredictable weather and macroeconomic factors that may negatively impact the repair and remodel and new construction markets and the construction industry generally, especially in the state of Florida and the western United States, where the substantial portion of our sales are currently generated, and in the U.S. generally;

 

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

 

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

 

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

 

the effects of increased expenses or unanticipated liabilities incurred as a result of, or due to activities related to, our acquisition of NewSouth and our Eco Acquisition;

 

our level of indebtedness, which increased in connection with our acquisition of NewSouth, and increased further in connection with our Eco Acquisition;

 

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 channels in our core markets and our inability to collect such debt;

 

the risks that the anticipated cost savings, synergies, revenue enhancement strategies and other benefits expected from our acquisition of NewSouth and from our Eco Acquisition may not be fully realized or may take longer to realize than expected or that our actual integration costs may exceed our estimates;

 

increases in transportation costs, including increases in fuel prices;

 

our dependence on our limited number of geographically concentrated manufacturing facilities, which increased further due to our Eco Acquisition;

 

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

 

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

 

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;

 

product liability and warranty claims brought against us;

 

in addition to our acquisition of NewSouth, and our Eco Acquisition, our ability to successfully integrate businesses we may acquire in the future, or that any business we acquire may not perform as we expected at the time we acquired it; and

 

the other risks and uncertainties discussed under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended April 3, 2021, and under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 2, 2021 and our other filings with the Securities and Exchange Commission.

- 28 -


 

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

EXECUTIVE OVERVIEW

Sales and Operations

During the first quarter of 2021, we experienced an increase in sales at our Southeast segment, as demand in Florida continued to increase, and also due to inclusion of the net sales of our investment in Eco of nearly $16 million. Strength in the housing sector in our key markets in the southeast drove solid growth in order entry in the first quarter of 2021 compared to last year’s first quarter. Excluding sales of Eco, our Southeast segment net sales were $215 million in the first quarter of 2021, compared to $184 million in the first quarter of 2020, an increase of $32 million, or 17%. Net sales of our Western segment increased $1 million, or 2%, to $38 million in the first quarter of 2021, from $37 million in the first quarter of 2020. Although we saw improved economic condition in our western markets, which also drove increasing order levels at our Western business unit in the 2021 first quarter compared to last year’s first quarter, we believe this market is slower to recover from the effects on the economy as a result of the Pandemic, especially in our core markets of California, Arizona and Nevada. We expect demand at both our Southeast and Western business units to continue to recover as the economy reopens and the country approaches pre-Pandemic activity. Our legacy business grew order levels during the first quarter of 2021 by 31% over the prior-year first quarter, including an increase of $35 million, or 42%, at NewSouth. We continue to execute on several strategic selling and marketing initiatives, which have also been key drivers of sales.

Although 2021 first quarter consolidated net sales increased $50.9 million, or 23.1%, compared to last year’s first quarter, our gross margin decreased to 34.7% in the first quarter of 2021, compared to 36.8% in the prior year first quarter. Company-wide, we saw inflationary pressures on material costs and labor rates, which contributed to this overall decline in gross margin. We recently announced price increases to attempt to offset these inflationary conditions, which we expect will begin to offset these cost impacts beginning in the last month of the second quarter of 2021. Over the past several quarters, we have made significant enhancements to manufacturing operations at our Western business unit facility in Phoenix, which has resulted in an improvement in gross margin at our Western business unit in the first quarter of 2021 compared to last year’s first quarter of 70 basis-points in our consolidated gross margin. Gross margin in the first quarter of 2021 was also impacted by incremental costs relating to our wind-down of NewSouth’s commercial business, which totaled  $4.2 million, including $2.7 million classified as cost of sales, which impacted gross profit and gross margin in the three months ended April 3, 2021.

Because we believe housing demand in the United States will continue to strengthen in our key markets, we have increased our 2021 full-year sales guidance to a range of $1.050 billion to $1.125 billion, from our prior guidance of $1.0 billion to $1.075 billion. These ranges include Eco from the date of our investment of February 1, 2021 at 100% of its sales.


- 29 -


 

Performance Summary

The following table presents financial data derived from our unaudited condensed consolidated statements of operations as a percentage of total net sales for the periods indicated. The three-month period ended April 3, 2021 is composed of 13 weeks. The three-month period ended April 4, 2020 is composed of 14 weeks (in thousands, except percentages):

 

 

 

Three Months Ended

 

 

 

April 3,

 

 

April 4,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Net sales

 

$

271,092

 

 

100.0%

 

 

$

220,204

 

 

100.0%

 

Cost of sales

 

 

177,130

 

 

65.3%

 

 

 

139,077

 

 

63.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

93,962

 

 

34.7%

 

 

 

81,127

 

 

36.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

69,766

 

 

25.7%

 

 

 

54,220

 

 

24.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

24,196

 

 

8.9%

 

 

 

26,907

 

 

12.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

7,457

 

 

2.8%

 

 

 

7,169

 

 

3.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

16,739

 

 

6.2%

 

 

 

19,738

 

 

9.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

3,944

 

 

1.5%

 

 

 

4,138

 

 

1.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

12,795

 

 

4.7%

 

 

 

15,600

 

 

7.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:  Net income attributable to redeemable non-controlling interest

 

 

411

 

 

0.2%

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

 

12,384

 

 

4.6%

 

 

 

15,600

 

 

7.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in redemption value of redeemable non-controlling interest

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

12,384

 

 

4.6%

 

 

$

15,600

 

 

7.1%

 

 


- 30 -


 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 2021 AND APRIL 4, 2020

 

The three-month period ended April 3, 2021 is composed of 13 weeks, whereas the three-month period ended April 4, 2020 was composed of 14 weeks. We do not believe that this difference significantly affects comparability of the following results of operations.

 

Net sales

 

 

Three Months Ended

 

 

 

 

 

 

 

April 3, 2021

 

 

April 4, 2020

 

 

 

 

 

 

 

Net Sales

 

 

% of sales

 

 

Net Sales

 

 

% of sales

 

 

% change

 

By segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast segment

 

$

233.6

 

 

86.2%

 

 

$

183.6

 

 

83.4%

 

 

27.2%

 

Western segment

 

 

37.5

 

 

13.8%

 

 

 

36.6

 

 

16.6%

 

 

2.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

271.1

 

 

100.0%

 

 

$

220.2

 

 

100.0%

 

 

23.1%

 

Net sales for the first quarter of 2021 were $271.1 million, a $50.9 million, or 23.1%, increase in sales, from $220.2 million in the first quarter of the prior year.

Net sales of our Southeast segment were $233.6 million in the first quarter of 2021, compared with $183.6 million in the 2020 first quarter, an increase of $50.0 million, or 27.2%. Southeast segment sales in the first quarter of 2021 includes nearly $16 million from our investment in Eco. Net sales of our Western segment were $37.5 million in the first quarter of 2021, compared with $36.6 million in the first quarter of 2020, an increase of $0.9 million, or 2.4%. Sales of our Western segment are composed of the sales of WWS.

The $50.9 million increase in net sales for the first quarter of 2021 was primarily driven by organic growth, and the effects of the recovery from the Pandemic, primarily at our Southeast segment, but also at our Western segment, and the inclusion in the first quarter of 2021 of the net sales of our investment in Eco. Net sales of our Southeast segment, excluding the sales of Eco of nearly $16 million, increased $31.6 million, or 17.2% as compared to the first quarter of 2020. We believe the organic increase in sales of our Southeast segment is due to a resumption of demand for our products in both the new construction and repair and remodel markets that approached the pre-Pandemic strength that existed in our 2020 first quarter. Our NewSouth direct-to-consumer brand also experienced solid organic growth in the 2021 first quarter, compared to last year’s first quarter. However, the first quarter of 2020 only included the post-acquisition sales of NewSouth from its February 2, 2020 acquisition date, whereas NewSouth’s net sales are included in the entire first quarter of 2021. Our Western segment experienced slight incremental growth in the first quarter of 2021, compared to the 2020 first quarter, which we believe continued to see a strengthening housing market in the western United States that began in late 2020, but to a lesser extent than in the Southeast.

Gross profit and gross margin

Gross profit was $94.0 million in the first quarter of 2021, an increase of $12.8 million, or 15.8%, from $81.1 million in the first quarter of 2020. The gross margin percentage was 34.7% in the first quarter of 2021, compared to 36.8% in the prior year first quarter. Gross margin in the first quarter of 2021, compared to the first quarter of 2020, was negatively impacted by inflationary conditions which increased material and labor costs in the U.S. during the first quarter of 2021, partially offset by improved operating efficiencies in our Western segment, and the addition of and accretion from our investment in Eco. Gross margin in the first quarter of 2021 was also impacted by incremental costs relating to our wind-down of NewSouth’s commercial business, which negatively impacted gross profit by $2.7 million. Excluding the costs relating to NewSouth’s commercial business, gross margin in the first quarter of 2021 would have been 35.7%.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $69.8 million in the first quarter of 2021, an increase of $15.5 million, from $54.2 million in the first quarter of 2020. SG&A in the first quarter of 2021 was 25.7% of net sales, compared to 24.6% of net sales in the first quarter of 2020. The increase in SG&A is primarily the result of the inclusion of the SG&A expenses of NewSouth for the entire first quarter of 2021, compared to just the post-acquisition period from February 1, 2020 in the first quarter of 2020. NewSouth’s SG&A in the first quarter of 2021, compared to the first quarter of 2020, increased $8.5 million. The increase in NewSouth’s SG&A in the first quarter of 2021 included costs relating to our wind-down of NewSouth’s commercial business, which totaled $1.5 million relating to write-offs of uncollectible commercial accounts and related legal costs.

The increase in SG&A is also due to the inclusion of SG&A from our investment in Eco, and the related expenses, which totaled $0.7 million in the first quarter of 2021. Additionally, there were increases compared to the first quarter of 2020 in several other categories, including depreciation, stock-based compensation, as well as additional costs from investing in our strategic selling and marketing initiatives, as well as higher distribution costs on increased sales levels.


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Income from operations

Income from operations was $24.2 million in the first quarter of 2021, a decrease of $2.7 million, from $26.9 million in the first quarter of 2020. Income from operations in the first quarter of 2021 includes $18.7 million from our Southeast segment and $5.5 million from our Western segment, compared to $25.8 million and $1.1 million from our Southeast and Western segments, respectively, in the first quarter of 2020, all after allocation of corporate operating costs in both periods. The decrease in income from operations in the first quarter of 2021 compared to the first quarter of 2020 is primarily a result of the $4.2 million of costs relating to our wind-down of NewSouth’s commercial business as discussed in “Gross profit and gross margin”, and “Selling, general and administrative expenses” above. The decrease in income from operations was also related to the increase in SG&A in the first quarter of 2021, compared to last year’s first quarter, driven by the inclusion of a full quarter of NewSouth SG&A in 2021 compared to 2020, partially offset by the accretion to gross profit from the addition of our investment in Eco.

Interest expense, net

Interest expense was $7.5 million in the first quarter of 2021, an increase of $0.3 million, or 4.0%, from $7.2 million in the first quarter of 2020. Interest expense in the first quarter of 2021 includes an increase in interest expense due to the issuance of the Second Additional Senior Notes totaling $60.0 million effective on January 25, 2021, which we used to finance a portion of the purchase price for our investment in Eco. This increase was partially offset by a decrease in interest costs relating to the amortization of the $3.3 million premium we received on the Second Additional Senior Notes.

Income tax expense

Our income tax expense was $3.9 million for the three months ended April 3, 2021, compared with income tax expense of $4.1 million for the three months ended April 4, 2020. Our effective tax rate for the three months ended April 3, 2021, was an expense rate of 23.6%, and was an expense rate of 21.0% for the three months ended April 4, 2020. Our income tax expense for the three months ended April 3, 2021 includes $305 thousand relating to our 75% share of the pre-tax earnings of Eco.

Income tax expense in the three months ended April 3, 2021 included a minor discrete item of income tax benefit. The three months ended April 4, 2020 included excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards totaling $766 thousand. Excluding discrete items of income tax, the effective tax rates for the three months ended April 3, 2021 and April 4, 2020, would have been income tax expense rates of 24.1% and 24.8%, respectively.

We estimate that our annual effective tax rate for 2021, excluding discrete items, will approximate our current combined statutory federal and state rate of 24.7%.

Net income attributable to redeemable non-controlling interest

Net income attributable to redeemable non-controlling interest for the three months ended April 3, 2021, was $411 thousand and represents the share of the net income of Eco for the period subsequent to the date of our investment of February 1, 2021 through April 3, 2021, attributable to the 25% interest of Eco not acquired by the Company. There was no redeemable non-controlling interest in the first quarter of 2020.

Change in redemption value of redeemable non-controlling interest

For the three months ended April 3, 2021, based on the formula for determining the redemption value of the seller’s put option in the operating agreement governing this transaction, the redemption value of the redeemable non-controlling interest was estimated to be less than $34.5 million, the redemption value of the redeemable non-controlling interest before giving effect to seller’s put option, as of April 3, 2021. As such, there was no change in value to be recorded relating to the redeemable non-controlling interest for the three months ended April 3, 2021. There was no redeemable non-controlling interest in the first quarter of 2020.


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LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Our principal source of liquidity is cash flow generated by operations and supplemented by borrowings under our credit facilities. We expect that this cash generating capability will provide us with financial flexibility in meeting operating and investing needs, but there can be no assurance that will be the case in future periods. Our primary capital requirements are to fund working capital needs, meet required debt service payments on our credit facilities and fund capital expenditures.

The following table summarizes our cash flow results for the first three months of 2021 and 2020:

 

 

 

Components of Cash Flows

 

 

 

Three Months Ended

 

 

 

April 3,

 

 

April 4,

 

(in millions)

 

2021

 

 

2020

 

Cash (used in) provided by operating activities

 

$

(1.4

)

 

$

10.9

 

Cash used in investing activities

 

 

(100.8

)

 

 

(92.4

)

Cash provided by financing activities

 

 

60.9

 

 

 

51.8

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

$

(41.3

)

 

$

(29.7

)

Operating activities. Cash used in operating activities during the first three months of 2021 was $1.4 million, compared to cash provided of $10.9 million in the first three months of 2020. The decrease in cash provided by operating activities for the first three months of 2021, as compared to the first three months of 2020, of $12.3 million, was due to the factors set forth in the table below.

Direct cash flows from operations for the first three months of 2021 and 2020 are as follows:

 

 

 

Direct Operating

Cash Flows

 

 

 

Three Months Ended

 

 

 

April 3,

 

 

April 4,

 

(in millions)

 

2021

 

 

2020

 

Collections from customers

 

$

245.0

 

 

$

219.1

 

Other collections of cash

 

 

3.9

 

 

 

2.4

 

Disbursements to vendors

 

 

(163.2

)

 

 

(139.7

)

Personnel related disbursements

 

 

(74.4

)

 

 

(59.5

)

Debt service payments

 

 

(12.8

)

 

 

(11.4

)

Other cash activity, net

 

 

0.1

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Cash (used in) from operations

 

$

(1.4

)

 

$

10.9

 

 

Days sales outstanding (DSO), which we calculate as accounts receivable divided by quarterly average daily sales, was 42 days at April 3, 2021, compared to 42 days at April 4, 2020.

Inventory on hand as of April 3, 2021, was $72.4 million, compared to $60.3 million at January 2, 2021, an increase of $12.1 million. Inventory on hand at April 3, 2021 includes $8.2 million relating to our investment in Eco.

We monitor and evaluate raw material inventory levels based on the need for each discrete item to fulfill short-term requirements calculated from current order patterns and to provide appropriate safety stock. Because a significant portion of our products are made-to-order, we have a low amount of work-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 $100.8 million for the first three months of 2021, compared to cash used in investing activities of $92.4 million for the first three months of 2020, an increase in cash used in investing activities of $8.4 million. Cash used to invest in Eco in the first three months of 2021 totaled $94.3 million, compared with cash used in the first three months of 2020 to acquire NewSouth of $90.1 million. There was also an increase in cash used in investing activities due to an increase in capital expenditures of $4.2 million, which went from $2.3 million in the first three months of 2020, to $6.5 million in the first three months of 2021. In the first three months of 2020, management made the decision to decrease spending on a majority of capital projects as part of its cash preservation strategy due to the uncertainty around the Pandemic and its potential impact to the Company’s liquidity.


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During the third quarter of 2020, the Company’s management determined to begin funding certain previously deferred capital projects in view of the increased order entry, sales, cash position and overall liquidity the Company experienced, and has continued to return capital spending to near pre-Pandemic levels.

Financing activities. Cash provided in financing activities was $60.9 million in the first three months of 2021, compared to cash provided in financing activities of $51.8 million in the first three months of 2020, an increase in cash provided of $9.2 million. In the first three months of 2021, we issued the Second Additional Senior Notes, which provided proceeds of $63.3 million, including a premium of $3.3 million. Proceeds from the issuance of the Second Additional Senior Notes were used to partially fund our investment in Eco. In the first three months of 2020, we issued the First Additional Senior Notes, which provided proceeds of $53.2 million, including a premium of $3.2 million. Proceeds from the issuance of the First Additional Senior Notes were used to partially fund our acquisition of NewSouth. We paid financing costs totaling $1.4 million in the first three months of 2021, related to the issuance of the Second Additional Senior Notes, compared to $1.3 million in the first three months of 2020, related to the issuance of the First Additional Senior Notes. Taxes paid relating to common stock withheld from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards were $1.0 million in the first three months of 2021, versus $0.8 million in the first three months of 2020, an increase in cash used of $0.2 million. Proceeds from the exercises of stock options for the first three months of 2020 were $0.5 million. There were proceeds from stock issued under our 2019 Employee Stock Purchase Plan of $0.1 million during the first three months of 2020.

Capital Resources and Debt Covenant

 

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.

On January 24, 2020, we completed an add-on issuance of $50.0 million aggregate principal amount of 6.75% 2018 Senior Notes due 2026 (“First Additional Senior Notes”), issued at 106.375% of their principal amount, resulting in a premium to us of $3.2 million. The First Additional Senior Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the First Additional Senior Notes, including premium, were used, together with cash on hand, to pay the $90.4 million purchase price in the NewSouth Acquisition.

On January 25, 2021, we completed a second add-on issuance of $60.0 million aggregate principal amount of 6.75% 2018 Senior Notes due 2026 (the “Second Additional Senior Notes”), issued at 105.5% of their principal amount, resulting in a premium to us of $3.3 million. The Second Additional Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the Second Additional Senior Notes, including premium, were used, together with $31.0 million in cash on hand, to pay the $94.3 million cash portion of the $100.4 million purchase consideration in the ECO Acquisition. 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 then current value of $21.34 per share, which we discounted by an estimate of 20% for lack of marketability, as they are legally restricted from being sold by the recipient for a three-year period from February 1, 2021.

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, the First Additional Senior Notes totaling $1.3 million, offset by the $3.2 million premium on the First Additional Senior Notes, and the Second Additional Senior Notes totaling $1.4 million, offset by the $3.3 million premium on the Second Additional Senior Notes, all of which are being amortized under the effective interest method. See “Deferred Financing Costs” below.

As of April 3, 2021, the face value of debt outstanding under the 2018 Senior Notes due 2026 was $425.0 million, and accrued interest totaled $4.9 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.

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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 Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 establishes senior secured credit facilities in an aggregate amount of $310.0 million, consisting of a $270.0 million Term B term loan facility originally maturing in February 2022 that amortizes on a basis of 1% annually during its six-year term, and a $40.0 million revolving credit facility originally maturing in February 2021 that 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 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.

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 three-year Term A loan in the then aggregate principal amount of $64.0 million (the “Initial Term A Loan”), maturing in October 2022, which 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 in an aggregate principal amount of up to $80.0 million (the “Revolving Facility”), maturing in October 2024, which replaced our then existing $40.0 million revolving credit facility under the 2016 Credit Agreement, and includes a swing-line facility and letter of credit facility. Our obligations under the 2016 Credit Agreement continue to be secured by substantially all of our assets, as well as our direct and indirect subsidiaries’ assets.

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 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. As of April 3, 2021, there were $5.8 million in letters of credit outstanding and $74.2 million available under the Revolving Facility.

Fees and costs relating to the Third Amendment were $0.9 million, which are deferred and being amortized. In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. Deferred financing costs and original issue discount allocated to these lenders of $1.5 million were written-off and classified as debt extinguishment costs in our consolidated statement of operations for the year ended December 28, 2019. As of April 3, 2021, after making prepayments of borrowings totaling $10.0 million during the third quarter of 2020, the principal amount of debt outstanding under the 2016 Credit Agreement due 2022 was $54.0 million. Accrued interest at April 3, 2021 was $16 thousand.

The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 2.14% as of April 3, 2021, and was 2.15% at January 2, 2021.

Pursuant to the Third Amendment, the 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of thirty-five percent (35%) of the revolving facility commitment (excluding $7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 103% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us from exceeding a maximum first lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt to EBITDA) as of the last day of each applicable fiscal

- 35 -


 

quarter. To the extent the springing financial covenant is in effect, the first lien net leverage ratio currently cannot exceed 4.00:1.00 (4.50:1.00 during a significant acquisition period, as defined, which we are in as of April 3, 2021). We have not been required to test our first lien net leverage ratio because we have not exceeded 35% of our revolving capacity.

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, 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.

Deferred Financing Costs

The activity relating to third-party fees and costs, lender fees, discount and premiums for the three months ended April 3, 2021, are as follows. All debt-related fees, costs, discount and premiums are classified as a reduction of the carrying value of long-term debt:

 

(in thousands)

 

Total

 

At beginning of year

 

$

6,902

 

Add: Deferred financing costs from the issuance of Second Additional Senior Notes

 

 

1,363

 

Less: Premium on the Second Additional Senior Notes

 

 

(3,300

)

Less: Amortization expense

 

 

(230

)

 

 

 

 

 

At end of period

 

$

4,735

 

 

Estimated amortization expense relating to third-party fees and costs, lender fees, discount and premiums for the years indicated as of April 3, 2021, is as follows:

 

(in thousands)

 

Total

 

Remainder of 2021

 

$

657

 

2022

 

 

905

 

2023

 

 

844

 

2024

 

 

889

 

2025

 

 

861

 

Thereafter

 

 

579

 

 

 

 

 

 

Total

 

$

4,735

 

 

As a result of prepayments of the 2016 Credit Agreement due 2022 totaling $214.0 million since its inception in February 2016, we have no future scheduled repayments until the maturity of the facility on October 31, 2022. The contractual future maturities of long-term debt outstanding, including the remaining balance of the financing arrangement described as other debt, as of April 3, 2021, are as follows (at face value):

 

(in thousands)

 

 

 

 

Remainder of 2021

 

$

 

2022

 

 

54,000

 

2023

 

 

 

2024

 

 

 

2025

 

 

 

Thereafter

 

 

425,000

 

 

 

 

 

 

Total

 

$

479,000

 

Investment in Eco Windows Systems. On February 1, 2021, we completed our previously announced acquisition of a 75% ownership stake in Eco Windows Systems and its related companies, Eco Glass Production, LLC, and Unity Windows, LLC (together “Eco”), Florida limited liability companies, for fair value consideration of $100.4 million, including $94.3 million in cash, which was after an estimated working capital adjustment in our favor of approximately $5.6 million received at the closing, and PGT Innovations, Inc. common stock with a then fair value estimated to be $6.1 million. The cash portion of the purchase price was financed by a Second Additional Senior Notes composed of an add-on issuance on January 25, 2021 of $60.0 million aggregate principal amount of 6.75% senior notes to the 2018 Senior Notes due 2026 on January 25, 2021, issued at 105.5% of their principal amount, resulting in a premium to us of $3.3 million, together with cash on hand of $31.0 million.

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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 preliminarily estimated to be $34.1 million, resulting in total fair value of the Eco business in the acquisition, including the redeemable non-controlling interest, of $134.5 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 5% estimated discount for seller’s lack of control in the new entity. 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.

 

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first three months of 2021, capital expenditures were $6.5 million, compared to $2.3 million for the first three months of 2020. During the first half of 2020, management made the decision to decrease spending on a majority of capital projects as part of its cash preservation strategy implemented in response to the uncertainty around the Pandemic’s impact on the Company’s business and liquidity. During the third quarter of 2020, the Company’s management determined to begin funding certain previously deferred capital projects in view of the increased order entry, sales, cash position and overall liquidity the Company has experienced, and has continued to return capital spending to near pre-Pandemic levels. The Company’s management will continue to evaluate the level of capital expenditures the Company may incur for the remainder of 2021 and thereafter, but we expect to continue to fund previously deferred capital projects, which may continue to result in a higher level of capital spending in 2021 as compared to 2020. However, we may return to a more conservative approach to managing capital expenditures going forward based on our evaluation of future economic conditions and the performance of our businesses and operations, including any further impact of the Pandemic and the economic uncertainty it has caused on our sales, cash position and overall liquidity. Our capital expenditure program is directed towards making investments in capital assets that we believe will increase both gross sales and margins, but also includes capital expenditures for maintenance capital.

Aluminum Forward and Midwest Transaction Premium Contracts. We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusions we use in production. Beginning late in the first three months of 2021, we began entering into forward contracts to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium (MTP).

At April 3, 2021, the fair value of our aluminum forward contracts was in a net asset position of $5.9 million. We had 25 outstanding forward contracts for the purchase of 33.7 million pounds of aluminum through June 2022, at an average price of $0.84 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 immaterial and, therefore, did not record any adjustment to fair value as of April 3, 2021.

At April 3, 2021, the fair value of our MTP contracts was in a net asset position of $4.2 million. We had 29 outstanding MTP contracts to hedge the Platt US MW Transaction price per pound for the delivery of 56.1 million pounds of aluminum through December 2022, at an average price of $0.12 per pound, with maturity dates of between one month and twenty-one months. We assessed the risk of non-performance of the Company to these contracts and determined it was immaterial and, therefore, did not record any adjustment to fair value as of April 3, 2021.

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 income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. The amount of income (loss), net, recognized in the “accumulated other comprehensive income (loss)” line item in the accompanying condensed consolidated balance sheet as of April 3, 2021, that we expect will be reclassified to earnings within the next twelve months, will be approximately $8.7 million.

Contractual Obligations. Except for the issuance of the Second Additional Senior Notes, as described in Part I., Item 1., Note 9, and the addition of $29.5 million in operating lease liabilities in the three months ended April 3, 2021, as described in Part I., Item 1., Note 10, including the $27.9 million in operating lease liabilities we are consolidating as a result of our investment in Eco, described in Part I., Item 1., Note 6, 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 Form 10-K for the year ended January 2, 2021.


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Significant Accounting Policies and Critical Accounting Estimates. Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Significant accounting policies are those that are both important to the accurate portrayal of a Company’s financial condition and results, and those that require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the condensed consolidated financial statements and the possibility that future events may be significantly different from our expectations. We identified our significant accounting policies in our Annual Report on Form 10-K for the year ended January 2, 2021. There have been no changes to our critical accounting policies during the first three months of 2021.

Recently Issued Accounting Pronouncements. Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in March 2021, a subsequent amendment to the initial guidance, ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We are currently assessing the impacts of the practical expedients provided in Topic 848 and which, if any, we will adopt.


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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize derivative financial instruments to hedge price movements in aluminum materials used in our manufacturing process and to hedge the delivery component of our aluminum needs, known as the Midwest Transaction Premium (“MTP”). As of April 3, 2021, we are covered for approximately 66% of our anticipated aluminum needs during the remainder of 2021 at an average price of $0.83 per pound, and for approximately 4% of our anticipated aluminum needs in 2022 at an average price of $0.93 per pound. These calculations are based only on the LME price of aluminum and excludes an estimate for the MTP, which we hedge separately. As of April 3, 2021, we are covered for approximately 69% of our anticipated MTP costs for the remainder of 2021 at an average price of $0.12 per pound, and for approximately 34% of our anticipated MTP costs in 2022 at an average price of $0.12 per pound.

Regarding our aluminum hedging instruments for the purchase of aluminum, as of April 3, 2021, a 10% decrease in the price of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $3.4 million. This calculation utilizes our actual commitment of 33.7 million pounds under contract (to be settled throughout June 2022) and the market price of aluminum as of April 3, 2021. This calculation is based only on the LME price of aluminum and excludes an estimate for the MTP. Regarding our MTP contracts for hedging of the delivery component of our aluminum needs, as of April 3, 2021, a 10% decrease in the Platts MW US Transaction price per pound would decrease the fair value of our MTP contracts an estimated $1.1 million. This calculation utilizes our actual commitment of 56.1 million pounds under contract (to be settled throughout December 2022) and the then current Platts MW US Transaction price per pound as of April 3, 2021.

We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding with a variable rate as of the date of filing of this Quarterly Report on Form 10-Q, of $54.0 million, a 100 basis-point increase in interest rate would result in approximately $0.5 million of additional interest costs annually.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

A control system, however, no matter how well conceived and operated, can at best provide reasonable, not absolute, assurance that the objectives of the control system are met. Additionally, a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our Company have been detected, and due to these inherent limitations, misstatements due to error or fraud may occur and not be detected.

Our chief executive officer and interim chief financial officer, with the assistance of management, evaluated the design, operation and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (“Evaluation Date”). Based on that evaluation, our chief executive officer and interim chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective for the purposes of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.

During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, during our first quarter ended April 3, 2021, we invested in Eco. We have elected to exclude Eco from our assessment of effectiveness of our internal controls over financial reporting as of January 1, 2022, the end of our 2021 fiscal year, but will include Eco in our assessment for our 2022 fiscal year.


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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

Our operations are subject to a number of risks. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, including the risk factors set forth in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended January 2, 2021. If any of the events described in the risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected.

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

Unregistered Sales of Equity Securities and Use of Proceeds

On February 1, 2021, we issued 357,797 shares of PGT Innovations, Inc. common stock, composed of 279,529 shares to Seller of Eco, and 78,268 shares to U.S. Bank, N.A., as escrow agent, as the common stock portion of the purchase price of the Eco Acquisition. The shares were issued in reliance upon the exemption under Section 4(a)(2) of the Securities Act. See Part I, Item 1. Note 6 for additional information about the Eco Acquisition.

 


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ITEM 6. EXHIBITS

 

10.1*

Employment Agreement between PGT Innovations, Inc., and Robert Keller, dated January 1, 2021

 

 

10.2*

Employment Agreement between PGT Innovations, Inc., and Brad West, dated January 1, 2021

 

 

10.3*

Employment Agreement between PGT Innovations, Inc., and Brent C. Boydston, dated January 1, 2021

 

 

10.4*

Employment Agreement between PGT Innovations, Inc., and Michael Wothe, dated January 1, 2021

 

 

31.1*

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

 

 

31.2*

Certification of Interim 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 Interim 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

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

Inline XBRL Taxonomy Extension Schema

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

Inline XBRL Taxonomy Definition Linkbase

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

 

 

104

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

 

*Filed herewith.

**Furnished herewith.


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SIGNATURE

 

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

 

 

PGT INNOVATIONS, INC.

 

(Registrant)

 

 

 

 

Date: May 13, 2021

/s/ Brad West

 

Brad West

 

Interim Chief Financial Officer and Senior Vice President of Corporate Development and Treasurer

 

 

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