UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended January 2, 2010
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period
from
to
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PGT,
Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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20-0634715
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1070
Technology Drive
North
Venice, Florida
(Address of
principal executive offices)
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34275
(Zip
Code)
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Registrant’s
telephone number, including area code:
(941) 480-1600
Former
name, former address and former fiscal year, if changed since last
report: Not applicable
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common
stock, par value $0.01 per share
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NASDAQ
Global Market
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Securities
registered pursuant to Section 12 (g) of the
Act: None
.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No þ
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 þ
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated
filer o
Non-accelerated filer þ
Smaller reporting company o
(Do not
check if a smaller reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act). Yes o
No þ
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant as of July 2, 2009 was approximately $23,261,535 based on the
closing price per share on that date of $1.54 as reported on the NASDAQ Global
Market.
The
number of shares of the registrant’s common stock, par value $0.01, outstanding
as of March 16, 2010 was 54,005,439.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Proxy Statement for the Company’s 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
Form 10-K.
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Item 1.
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BUSINESS
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GENERAL DEVELOPMENT OF
BUSINESS
Description
of the Company
We are
the leading U.S. manufacturer and supplier of residential impact-resistant
windows and doors and pioneered the U.S. impact-resistant window and door
industry. Our impact-resistant products, which are marketed under the WinGuard®,
PremierVue ™ and PGT Architectural Systems brand names, combine heavy-duty
aluminum or vinyl frames with laminated glass to provide protection from
hurricane-force winds and wind-borne debris by maintaining their structural
integrity and preventing penetration by impacting objects. Impact-resistant
windows and doors satisfy increasingly stringent building codes in
hurricane-prone coastal states and provide an attractive alternative to shutters
and other “active” forms of hurricane protection that require installation and
removal before and after each storm. Combining the impact resistance of WinGuard
with our insulating glass creates energy efficient windows that can
significantly reduce cooling and heating costs. We also manufacture
non-impact resistant products in both aluminum and vinyl frames including our
new SpectraGuard ™ line of products launched over the past two
years. Our current market share in Florida, which is the largest
U.S. impact-resistant window and door market, is significantly greater than
that of any of our competitors.
The
geographic regions in which we currently operate include the Southeastern U.S.,
the Gulf Coast, the Caribbean, Central America and Canada. We distribute our
products through multiple channels, including over 1,300 window distributors,
building supply distributors, window replacement dealers and enclosure
contractors. This broad distribution network provides us with the flexibility to
meet demand as it shifts between the residential new construction and repair and
remodeling end markets.
We
operate manufacturing facilities in North Venice, Florida and in Salisbury,
North Carolina, which produce fully-customized windows and doors. We are
vertically integrated with glass tempering and laminating facilities in both
states, which provide us with a consistent source of impact-resistant laminated
glass, shorter lead times, and lower costs relative to third-party sourcing. Our
facility in Lexington, North Carolina is vacant and subsequent to January 2,
2010 is being marketed for sale.
History
Our
subsidiary, PGT Industries, Inc., was founded in 1980 as Vinyl Technology, Inc.
The PGT brand was established in 1987, and we introduced our WinGuard branded
product line in the aftermath of Hurricane Andrew in 1992.
PGT, Inc.
is a Delaware corporation formed on December 16, 2003, as JLL Window
Holdings, Inc. by an affiliate of JLL Partners, our largest stockholder, in
connection with its acquisition of PGT Holding Company on January 29,
2004. On February 15, 2006, we changed our name to PGT, Inc.,
and on June 27, 2006 we became a publicly listed company on the NASDAQ National
Market under the symbol “PGTI”.
FINANCIAL INFORMATION ABOUT
INDUSTRY SEGMENTS
The FASB
has issued guidance under the Segment Reporting topic of
the Codification which defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Under this definition, we have concluded
that we operate as one segment, the manufacture and sale of windows and
doors. Additional required information is included in Item
8.
NARRATIVE DESCRIPTION OF
BUSINESS
Our
Products
We
manufacture complete lines of premium, fully customizable aluminum and vinyl
windows and doors and porch enclosure products targeting both the residential
new construction and repair and remodeling end markets. All of our products
carry the PGT brand, and our consumer-oriented products carry an additional,
trademarked product name, including WinGuard, Eze-Breeze, SpectraGuard, and,
introduced in late 2009, PremierVue.
Window
and door products
WinGuard. WinGuard is an
impact-resistant product line and combines heavy-duty aluminum or vinyl frames
with laminated glass to provide protection from hurricane-force winds and
wind-borne debris that satisfy increasingly stringent building codes and
primarily target hurricane-prone coastal states in the U.S., as well as the
Caribbean and Central America. Combining the impact resistance of WinGuard with
our insulating glass creates energy efficient windows that can significantly
reduce cooling and heating costs.
Aluminum. We offer a complete
line of fully customizable, non-impact-resistant aluminum frame windows and
doors. These products primarily target regions with warmer climates, where
aluminum is often preferred due to its ability to withstand higher temperatures
and humidity. Adding our insulating glass creates energy efficient windows that
can significantly reduce cooling and heating costs.
Vinyl. We offer a complete
line of fully customizable, non-impact-resistant vinyl frame windows and doors
primarily targeting regions with colder climates, where the energy-efficient
characteristics of vinyl frames are critical. In early 2008, we introduced
SpectraGuard, a new line of vinyl windows for new construction with insulating
glass and unsurpassed wood-like aesthetics, such as brick-mould frames,
wood-like trim detail and simulated divided lights. In early 2009, we added to
the SpectraGuard line with new vinyl replacement windows combining superior
energy performance and protection with unsurpassed wood-like detail and
character.
PremierVue. Introduced
in the Fall of 2009, PremierVue is a complete line of impact-resistant vinyl
window products that are tailored for the mid to high end of the replacement
market, primarily targeting single and multi-family homes and low to mid-rise
condominiums in Florida and other coastal regions of the Southeastern U.S..
Combining structural strength and energy efficiency, these products are designed
for flexibility in today’s market, offering both laminated and
laminated-insulated impact-resistant glass options. PremierVue’s large test
sizes and high design pressures, combined with vinyl’s inherent thermal
efficiency, make these products truly unique in the window
industry.
Architectural Systems.
Similar to WinGuard, Architectural Systems products are impact-resistant,
offering protection from hurricane-force winds and wind-borne debris for mid-
and high-rise buildings rather than single family homes.
Porch-enclosure
products
Eze-Breeze. Eze-Breeze
sliding panels for porch enclosures are vinyl-glazed, aluminum-framed products
used for enclosing screened-in porches that provide protection from inclement
weather.
Sales
and Marketing
Our sales
strategy primarily focuses on attracting and retaining distributors and dealers
by consistently providing exceptional customer service, leading product quality,
and competitive pricing and using our advanced knowledge of building code
requirements and technical expertise.
Our
marketing strategy is designed to reinforce the high quality of our products and
focuses on both coastal and inland markets. We support our markets
through print and web based advertising, consumer and builder
promotions, and selling and collateral materials. We also work with our dealers
and distributors to educate consumers and homebuilders on the advantages of
using impact-resistant and energy efficient products. We market our
products based on quality, building code compliance, outstanding service,
shorter lead times, and on-time delivery using our fleet of trucks and
trailers.
Our
Customers
We have a
highly diversified customer base that is comprised of over 1,300 window
distributors, building supply distributors, window replacement dealers and
enclosure contractors. Our largest customer accounts for
approximately 4.8% of net sales and our top ten customers account for
approximately 18.2% of net sales. Our sales are composed of residential new
construction and home repair and remodeling end markets, which represented
approximately 27% and 73% of our sales, respectively, during
2009. This compares to 37% and 63% in 2008.
We do not
supply our products directly to homebuilders but believe demand for our products
is also a function of our relationships with a number of national homebuilders,
which we believe are strong.
Materials
and Supplier Relationships
Our
primary manufacturing materials include aluminum and vinyl extrusions, glass,
and polyvinyl butyral. Although in many instances we have agreements with our
suppliers, these agreements are generally terminable by either party on limited
notice. All of our materials are typically readily available from
other sources. Aluminum and vinyl extrusions accounted for approximately 44% of
our material purchases during fiscal year 2009. Sheet glass, which is sourced
from two major national suppliers, accounted for approximately 17% of our
material purchases during fiscal year 2009. Sheet glass that we purchase comes
in various sizes, tints, and thermal properties. Polyvinyl butyral and
ionoplast, which are both used as inner layer in laminated glass, accounted for
approximately 17% of our material purchases during fiscal year 2009. We are in
the process of renegotiating our agreement, which ended in December 2009, with
our supplier for the purchase of polyvinyl butyral. We have an
agreement with this same supplier for the purchase of ionoplast, which is in
effect until 2012.
Backlog
As of
January 2, 2010, backlog was $8.5 million compared to $9.3 million at January 3,
2009. Our backlog consists of orders that we have received from
customers that have not yet shipped, and we expect that substantially all of our
current backlog will be recognized as sales in the first quarter of
2010. The decrease in our backlog resulted from the continuation of
the downturn in the housing market and the overall economy, which has had a
negative impact on order intake, but also due to a decrease in lead time between
order intake and product shipment. Future period to period
comparisons of backlog may be negatively affected if sales and the level of
order intake decrease further.
Intellectual
Property
We own
and have registered trademarks in the United States. In addition, we own several
patents and patent applications concerning various aspects of window assembly
and related processes. We are not aware of any circumstances that
would have a material adverse effect on our ability to use our trademarks and
patents. As long as we continue to renew our trademarks when
necessary, the trademark protection provided by them is perpetual.
Manufacturing
Our
manufacturing facilities, located in Florida and North Carolina, are capable of
producing fully-customized products. The manufacturing process typically begins
in one of our glass plants where we cut, temper and laminate sheet glass to meet
specific requirements of our customers’ orders.
Glass is
transported to our window and door assembly lines in a make-to-order sequence
where it is combined with an aluminum or vinyl frame. These frames are also
fabricated to order, as we start with a piece of extruded material that we cut
and shape into a frame that fits our customers’ specifications. After an order
has been completed, it is immediately staged for delivery and shipped within an
average of 48 hours of completion.
Competition
The
window and door industry is highly fragmented and the competitive landscape is
based on geographic scope. The competition falls into one of two categories:
local and regional manufacturers, and national window and door
manufacturers.
Local and Regional Window and Door
Manufacturers: This group of competitors consists of numerous local job
shops and small manufacturing facilities that tend to focus on selling products
to local or regional dealers and wholesalers. Competitors in this group
typically lack marketing support and the service levels and quality controls
demanded by larger distributors, as well as the ability to offer a full
complement of products.
National Window and Door
Manufacturers: This group of competitors tends to focus on selling
branded products nationally to dealers and wholesalers and has multiple
locations.
The
principal methods of competition in the window and door industry are the
development of long-term relationships with window and door dealers and
distributors, and the retention of customers by delivering a full range of
high-quality products on time while offering competitive pricing and flexibility
in transaction processing. Trade professionals such as contractors,
homebuilders, architects and engineers also engage in direct interaction and
look to the manufacturer for training and education of product and code.
Although some of our competitors may have greater geographic scope and access to
greater resources and economies of scale than do we, our leading position in the
U.S. impact-resistant window and door market and the high quality of our
products position us well to meet the needs of our customers and retain an
advantage over our competitors.
Environmental
Considerations
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, and we believe that our facilites are in material
compliance with such laws and regulations.
Employees
As of
February 28, 2010, we employed approximately 1,150 people, none of whom were
represented by a union. We believe that we have good relations with our
employees.
FINANCIAL INFORMATION ABOUT
GEOGRAPHIC AREAS
Our net
sales to customers in the United States were $156.5 million in 2009, $205.9
million in 2008, and $263.2 million in 2007. Our net foreign
sales, including sales into the Caribbean, Central America and Canada, were $9.5
million in 2009, $12.7 million in 2008, and $15.2 million in 2007.
AVAILABLE
INFORMATION
Our Internet address is www.pgtindustries.com. Through our Internet website under
“Financial Information” in the Investors section, we make available free of
charge, as soon as reasonably practical after such information has been filed
with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act. Also available through
our Internet website under “Corporate Governance” in the Investors section is
our Code of Ethics for Senior Financial Officers. We are not including this or
any other information on our website as a part of, nor incorporating it by
reference into this Form 10-K, or any of our other SEC filings. The SEC
maintains an Internet site that contains our reports, proxy and information
statements, and other information that we file electronically with the SEC at
www.sec.gov.
Item 1A. RISK
FACTORS
We are subject to
regional and national economic conditions. The unprecedented decline in
the economy in Florida and throughout the United States could continue to
negatively affect demand for our products which has had, and which could
continue to have, an adverse impact on our sales and results of
operations.
A continuation of
the downturn in our markets could adversely impact our credit agreement.
As of January 2, 2010, we had $68.3 million of outstanding indebtedness.
As noted elsewhere in this report, we have experienced a significant
deterioration in the various markets in which we compete. A sustained and
continued significant deterioration in these markets may adversely impact our
ability to meet certain covenants under our credit agreement. Management
continues to evaluate what, if any, action or actions may be available or
necessary to maintain compliance with these various covenants, including cost
saving actions and the prepayment of debt.
The new home
construction and repair and remodeling markets have declined. Beginning
in the second half of 2006, we saw a significant slowdown in the Florida housing
market. This slowdown continued during 2007, 2008, and 2009, and we
expect this trend to continue through 2010 and possibly further. Like
many building material suppliers in the industry, we have been and will continue
to be faced with a challenging operating environment due to this decline in the
housing market. Specifically, new single family housing permits in
Florida decreased by 49% in 2007, 47% in 2008, and 30% in 2009, each as compared
to the prior year. Beginning in the third quarter of 2008, we began
to see a decrease in consumer spending for repair and remodeling projects as
credit tightened and many homeowners lost substantial equity in their homes. The
resulting decline in new home and repair and remodeling construction levels by
our customers has decreased demand for our products which has had, and which
could continue to have, an adverse impact on our sales and results of
operations.
Current economic
and credit market conditions have increased the risk that we may not collect a
greater percentage of our receivables. Economic and credit conditions
have negatively impacted our bad debt expense which has adversely impacted our
results of operations. If these conditions persist, our results of
operations may continue to be adversely impacted by bad debts. We monitor our
customers’ credit profiles carefully and make changes in our terms when
necessary in response to this heightened risk.
We are subject to
fluctuations in the prices of our raw materials. We experience
significant fluctuations in the cost of our raw materials, including aluminum
extrusion, polyvinyl butyral and glass. A variety of factors over which we have
no control, including global demand for aluminum, fluctuations in oil prices,
speculation in commodities futures and the creation of new laminates or other
products based on new technologies impact the cost of raw materials we purchase
for the manufacture of our products. While we attempt to minimize our risk from
severe price fluctuations by entering into aluminum forward contracts to hedge
these fluctuations in the purchase price of aluminum extrusion we use in
production, substantial, prolonged upward trends in aluminum prices could
significantly increase the cost of the unhedged portions of our aluminum needs
and have an adverse impact on our results of operations. We anticipate that
these fluctuations will continue in the future. While we have entered into a
three-year supply agreement through early 2012 with a major producer of
ionoplast inner layer that we believe provides us with a reliable, single source
for ionoplast with stable pricing on favorable terms, if one or both parties to
the agreement do not satisfy the terms of the agreement it may be terminated
which could result in our inability to obtain ionoplast on commercially
reasonable terms having an adverse impact on our results of operations.
Additionally, ionoplast accounted for approximately 22% of our inner layer
purchases in 2009, and we are currently negotiating for the purchase of
polyvinyl butyral (which accounted for approximately 78% of our inner layer
purchases in 2009). If we are unable to negotiate a long-term
agreement for the supply of polyvinyl butyral on commercially reasonable terms,
it may have an adverse impact on our results of operations. While
historically we have to some extent been able to pass on significant cost
increases to our customers, our results between periods may be negatively
impacted by a delay between the cost increases and price increases in our
products.
We depend on
third-party suppliers for our raw materials. Our ability to offer a wide
variety of products to our customers depends on receipt of adequate material
supplies from manufacturers and other suppliers. Generally, our raw materials
and supplies are obtainable from various sources and in sufficient quantities.
However, it is possible that our competitors or other suppliers may create
laminates or products based on new technologies that are not available to us or
are more effective than our products at surviving hurricane-force winds and
wind-borne debris or that they may have access to products of a similar quality
at lower prices. Although in many instances we have agreements with our
suppliers, these agreements are generally terminable by either party on limited
notice. Moreover, other than with our suppliers of polyvinyl butyral and
aluminum, we do not have long-term contracts with the suppliers of our raw
materials.
Transportation
costs represent a significant part of our cost structure. Although prices
decreased significantly in the fourth quarter of 2008 and stabilized somewhat in
2009, the increase in fuel prices earlier in 2008 had a negative effect on our
distribution costs. Another rapid and prolonged increase in fuel
prices may significantly increase our costs and have an adverse impact on our
results of operations.
The home building
industry and the home repair and remodeling sector are regulated. The
homebuilding industry and the home repair and remodeling sector are subject to
various local, state, and federal statutes, ordinances, rules, and regulations
concerning zoning, building design and safety, construction, and similar
matters, including regulations that impose restrictive zoning and density
requirements in order to limit the number of homes that can be built within the
boundaries of a particular area. Increased regulatory restrictions could limit
demand for new homes and home repair and remodeling products and could
negatively affect our sales and results of operations.
Our operating
results are substantially dependent on sales of our WinGuard branded line of
products. A majority of our net sales are, and are expected to continue
to be, derived from the sales of our WinGuard branded line of products.
Accordingly, our future operating results will depend on the demand for WinGuard
products by current and future customers, including additions to this product
line that are subsequently introduced. If our competitors release new products
that are superior to WinGuard products in performance or price, or if we fail to
update WinGuard products with any technological advances that are developed by
us or our competitors or introduce new products in a timely manner, demand for
our products may decline. A decline in demand for WinGuard products as a result
of competition, technological change or other factors could have a material
adverse effect on our ability to generate sales, which would negatively affect
our sales and results of operations.
Changes in
building codes could lower the demand for our impact-resistant windows and
doors. The market for our impact-resistant windows and doors depends in
large part on our ability to satisfy state and local building codes that require
protection from wind-borne debris. If the standards in such building codes are
raised, we may not be able to meet their requirements, and demand for our
products could decline. Conversely, if the standards in such building codes are
lowered or are not enforced in certain areas, demand for our impact-resistant
products may decrease. Further, if states and regions that are affected by
hurricanes but do not currently have such building codes fail to adopt and
enforce hurricane protection building codes, our ability to expand our business
in such markets may be limited.
Our industry is
competitive, and competition may increase as our markets grow or as more states
adopt or enforce building codes that require impact-resistant products.
The window and door industry is highly competitive. We face significant
competition from numerous small, regional producers, as well as a small number
of national producers. Some of these competitors make products from alternative
materials, including wood. Any of these competitors may (i) foresee the
course of market development more accurately than do we, (ii) develop
products that are superior to our products, (iii) have the ability to
produce similar products at a lower cost, (iv) develop stronger
relationships with window distributors, building supply distributors, and window
replacement dealers, or (v) adapt more quickly to new technologies or
evolving customer requirements than do we. As a result, we may not be able to
compete successfully with them.
In
addition, while we are skilled at creating finished impact-resistant and other
window and door products, the materials we use can be purchased by any existing
or potential competitor. New competitors can enter our industry, and existing
competitors may increase their efforts in the impact-resistant market.
Furthermore, if the market for impact-resistant windows and doors continues to
expand, larger competitors could enter, or expand their presence in the market
and may be able to compete more effectively. Finally, we may not be able to
maintain our costs at a level sufficiently low for us to compete effectively. If
we are unable to compete effectively, demand for our products and our
profitability may decline.
Our business is
currently concentrated in one state. Our business is concentrated
geographically in Florida. In fiscal year 2009, approximately 81% of our sales
were generated in Florida, and new single family housing permits in Florida
decreased by 30% in 2009 compared to the prior year. A further or prolonged
decline in the economy of the state of Florida or of the coastal regions of
Florida, a change in state and local building code requirements for hurricane
protection, or any other adverse condition in the state could cause a decline in
the demand for our products in Florida, which could have an adverse impact on
our sales and results of operations.
Our level of
indebtedness could adversely affect our ability to raise additional capital to
fund our operations, limit our ability to react to changes in the economy or our
industry, and prevent us from meeting our obligations under our debt
instruments. As of January 2, 2010, our indebtedness under our first lien
term loan was $68.0 million. All of our debt was at a variable interest
rate. In the event that interest rates rise, our interest expense would
increase. A 1.0% increase in interest rates would result in approximately
$0.7 million of additional interest expense annually.
The level
of our debt could have certain consequences, including:
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· increasing
our vulnerability to general economic and industry
conditions;
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· requiring
a substantial portion of our cash flow from operations to be dedicated to
the payment of principal and interest on our indebtedness, therefore
reducing our ability to use our cash flow to fund our operations, capital
expenditures, and future business opportunities;
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· exposing
us to the risk of increased interest rates because certain of our
borrowings, including borrowings under our credit facilities, will be at
variable rates of interest;
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· limiting
our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions, and general
corporate or other purposes; and
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· limiting
our ability to adjust to changing market conditions and placing us at a
competitive disadvantage compared to our competitors who have less
debt.
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We may incur
additional indebtedness. We may incur additional indebtedness under our
credit facilities, which provide for up to $25 million of revolving credit
borrowings, under the current Third Amendment which became effective on March
17, 2010. In addition, we and our subsidiary may be able to incur substantial
additional indebtedness in the future, including secured debt, subject to the
restrictions contained in the agreements governing our credit facilities. If new
debt is added to our current debt levels, the related risks that we now face
could intensify.
Our debt
instruments contain various covenants that limit our ability to operate our
business. Our credit facility contains various provisions that limit our
ability to, among other things, transfer or sell assets, including the equity
interests of our subsidiary, or use asset sale proceeds; pay dividends or
distributions on our capital stock or repurchase our capital stock; make certain
restricted payments or investments; create liens to secure debt; enter into
transactions with affiliates; merge or consolidate with another company; and
engage in unrelated business activities.
In
addition, our credit facilities require us to meet specified financial ratios.
These covenants may restrict our ability to expand or fully pursue our business
strategies. Our ability to comply with these and other provisions of our credit
facilities may be affected by changes in our operating and financial
performance, changes in general business and economic conditions, adverse
regulatory developments, or other events beyond our control. The breach of any
of these covenants, including those contained in our credit facilities, could
result in a default under our indebtedness, which could cause those and other
obligations to become due and payable. If any of our indebtedness is
accelerated, we may not be able to repay it.
We may be
adversely affected by any disruption in our information technology systems.
Our operations are dependent upon our information technology systems,
which encompass all of our major business functions. A disruption in our
information technology systems for any prolonged period could result in delays
in receiving inventory and supplies or filling customer orders and adversely
affect our customer service and relationships.
We may be
adversely affected by any disruptions to our manufacturing facilities or
disruptions to our customer, supplier, or employee base. Any disruption
to our facilities resulting from hurricanes and other weather-related events,
fire, an act of terrorism, or any other cause could damage a significant portion
of our inventory, affect our distribution of products, and materially impair our
ability to distribute our products to customers. We could incur significantly
higher costs and longer lead times associated with distributing our products to
our customers during the time that it takes for us to reopen or replace a
damaged facility. In addition, if there are disruptions to our customer and
supplier base or to our employees caused by hurricanes, our business could be
temporarily adversely affected by higher costs for materials, increased shipping
and storage costs, increased labor costs, increased absentee rates, and
scheduling issues. Furthermore, some of our direct and indirect suppliers have
unionized work forces, and strikes, work stoppages, or slowdowns experienced by
these suppliers could result in slowdowns or closures of their facilities. Any
interruption in the production or delivery of our supplies could reduce sales of
our products and increase our costs.
The nature of our
business exposes us to product liability and warranty claims. We are
involved in product liability and product warranty claims relating to the
products we manufacture and distribute that, if adversely determined, could
adversely affect our financial condition, results of operations, and cash flows.
In addition, we may be exposed to potential claims arising from the conduct of
homebuilders and home remodelers and their sub-contractors. Although we
currently maintain what we believe to be suitable and adequate insurance in
excess of our self-insured amounts, we may not be able to maintain such
insurance on acceptable terms or such insurance may not provide adequate
protection against potential liabilities. Product liability claims can be
expensive to defend and can divert the attention of management and other
personnel for significant periods, regardless of the ultimate outcome. Claims of
this nature could also have a negative impact on customer confidence in our
products and our company.
We are subject to
potential exposure to environmental liabilities and are subject to environmental
regulation. We are subject to various federal, state, and local
environmental laws, ordinances, and regulations. Although we believe that our
facilities are in material compliance with such laws, ordinances, 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. Remediation may be required in the future as a result of spills
or releases of petroleum products or hazardous substances, the discovery of
unknown environmental conditions, or more stringent standards regarding existing
residual contamination. More burdensome environmental regulatory requirements
may increase our general and administrative costs and may increase the risk that
we may incur fines or penalties or be held liable for violations of such
regulatory requirements.
We conduct all of
our operations through our subsidiary, and rely on payments from our subsidiary
to meet all of our obligations. We are a holding company and derive all
of our operating income from our subsidiary, PGT Industries, Inc. All of our
assets are held by our subsidiary, and we rely on the earnings and cash flows of
our subsidiary to meet our debt service obligations. The ability of our
subsidiary to make payments to us will depend on its respective operating
results and may be restricted by, among other things, the laws of its
jurisdiction of organization (which may limit the amount of funds available for
distributions to us), the terms of existing and future indebtedness and other
agreements of our subsidiary, including our credit facilities, and the covenants
of any future outstanding indebtedness we or our subsidiary incur.
We are exposed to
risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act of 2002. We are required to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. While we have concluded that
at January 2, 2010, we have no material weaknesses in our internal controls over
financial reporting, we cannot assure you that we will not have a material
weakness in the future. A “material weakness” is a
deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. If we
fail to maintain a system of internal controls over financial reporting that
meets the requirements of Section 404, we might be subject to sanctions or
investigation by regulatory authorities such as the SEC or by the NASDAQ Stock
Market LLC. Additionally, failure to comply with Section 404 or the report
by us of a material weakness may cause investors to lose confidence in our
financial statements and our stock price may be adversely affected. If we fail
to remedy any material weakness, our financial statements may be inaccurate, we
may not have access to the capital markets, and our stock price may be adversely
affected.
The controlling
position of an affiliate of JLL Partners limits the ability of our minority
stockholders to influence corporate matters. An affiliate of
JLL Partners owned 52.6% of our outstanding common stock as of January 2,
2010. Accordingly, such affiliate of JLL Partners has significant influence
over our management and affairs and over all matters requiring stockholder
approval, including the election of directors and significant corporate
transactions, such as a merger or other sale of our company or its assets. This
concentration of ownership may have the effect of delaying or preventing a
transaction such as a merger, consolidation, or other business combination
involving us, or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control, even if such a transaction or change of
control would benefit minority stockholders. In addition, this concentrated
control limits the ability of our minority stockholders to influence corporate
matters, and such affiliate of JLL Partners, as a controlling stockholder, could
approve certain actions, including a going-private transaction, without approval
of minority stockholders, subject to obtaining any required approval of our
board of directors for such transaction. As a result, the market price of our
common stock could be adversely affected.
The controlling
position of an affiliate of JLL Partners exempts us from certain Nasdaq
corporate governance requirements. Although we have satisfied all
applicable Nasdaq corporate governance rules, for so long as an affiliate of
JLL Partners continues to own more than 50% of our outstanding shares, we
will continue to avail ourselves of the Nasdaq Rule 4350(c) “controlled
company” exemption that applies to companies in which more than 50% of the
stockholder voting power is held by an individual, a group, or another company.
This rule grants us an exemption from the requirements that we have a majority
of independent directors on our board of directors and that we have independent
directors determine the compensation of executive officers and the selection of
nominees to the board of directors. However, we intend to comply with such
requirements in the event that such affiliate of JLL Partners’ ownership
falls to or below 50%.
Our directors and
officers who are affiliated with JLL Partners do not have any obligation to
report corporate opportunities to us. Because some individuals may serve
as our directors or officers and as directors, officers, partners, members,
managers, or employees of JLL Partners or its affiliates or investment funds and
because such affiliates or investment funds may engage in similar lines of
business to those in which we engage, our amended and restated certificate of
incorporation allocates corporate opportunities between us and JLL Partners and
its affiliates and investment funds. Specifically, for so long as JLL Partners
and its affiliates and investment funds own at least 15% of our shares of common
stock, none of JLL Partners, nor any of its affiliates or investment funds, or
their respective directors, officers, partners, members, managers, or employees
has any duty to refrain from engaging directly or indirectly in the same or
similar business activities or lines of business as do we. In addition, if any
of them acquires knowledge of a potential transaction that may be a corporate
opportunity for us and for JLL Partners or its affiliates or investment funds,
subject to certain exceptions, we will not have any expectancy in such corporate
opportunity, and they will not have any obligation to communicate such
opportunity to us.
|
Item 2.
|
PROPERTIES
|
We own
facilities in one location in Florida and two locations in North Carolina that
are capable of producing all of our product lines. In North Venice, Florida, we
own a 363,000 square foot facility that contains our corporate headquarters
and main manufacturing plant. We also own an adjacent 80,000 square foot
facility used for glass tempering and laminating, a 42,000 square foot
facility for producing Architectural System products and simulated wood-finished
products, and a 3,590 square foot facility used for employee and customer
training. In Salisbury, North Carolina, we own a 393,000 square foot
manufacturing facility including glass tempering and laminating capabilities. We
also own a 225,000 square foot facility in Lexington, North Carolina which
is currently vacant and in January 2010 we entered into an agreement to market
that location for sale.
We lease
four properties in North Venice, Florida. The leases for the fleet maintenance
building, glass plant line maintenance building, fleet parking lot, and facility
maintenance/test lab in North Venice, Florida expire in January 2012, November
2011, June 2014 and November 2010, respectively. Each of the
leases provides for a fixed annual rent. The leases require us to pay taxes,
insurance and common area maintenance expenses associated with the
properties.
All of
our owned properties secure borrowings under our first lien credit agreement. We
believe all of these operating facilities are adequate in capacity and condition
to service existing customer locations.
|
LEGAL
PROCEEDINGS
|
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 in
respect of claims and lawsuits. We do not believe that the ultimate resolution
of these matters will have a material adverse impact on our financial position,
cash flows or results of operations.
|
RESERVED
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
Common Stock has been traded on the NASDAQ Global Market ® under the symbol “PGTI”. On
February 8, 2010, the closing price of our Common Stock as reported on the
NASDAQ Global Market was $1.72. The approximate number of stockholders of record
of our Common Stock on that date was 128, although we believe that the number of
beneficial owners of our Common Stock is substantially
greater.
The table
below sets forth the price range of our Common Stock during the periods
indicated.
|
High
|
Low
|
|||||||
|
2009
1st
Quarter
|
$
|
1.50
|
$
|
0.80
|
||||
|
2nd
Quarter
|
$
|
2.88
|
$
|
1.20
|
||||
|
3rd
Quarter
|
$
|
3.19
|
$
|
1.50
|
||||
|
4th
Quarter
|
$
|
2.85
|
$
|
2.00
|
||||
|
2008
1st
Quarter
|
$
|
5.00
|
$
|
2.59
|
||||
|
2nd
Quarter
|
$
|
4.25
|
$
|
2.18
|
||||
|
3rd
Quarter
|
$
|
5.95
|
$
|
3.00
|
||||
|
4th
Quarter
|
$
|
3.98
|
$
|
0.85
|
||||
Dividends
We do not
pay a regular dividend. Any determination relating to dividend policy will be
made at the discretion of our board of directors. The tems of our senior secured
credit facility governing our notes currently restrict our ability to pay
dividends.
Unregistered
Sales of Equity Securities
None.
Performance
Graph
The
following graphs compare the percentage change in PGT, Inc.’s cumulative total
stockholder return on its Common Stock with the cumulative total stockholder
return of the Standard & Poor’s Building Products Index and the NASDAQ
Composite Index over the period from June 27, 2006 (the date we became a public
company) to January 2, 2010.
COMPARISON
OF 42 MONTH CUMULATIVE TOTAL RETURN*
AMONG
PGT, INC., THE NASDAQ COMPOSITE INDEX,
AND
THE S&P BUILDING PRODUCTS INDEX
|
6/27/2006
|
6/06 | 9/06 | 12/06 | 3/07 | 6/07 | 9/07 | 12/07 | |||||||||||||||||||||||||
|
PGT,
Inc.
|
100.00 | 112.86 | 100.43 | 90.36 | 85.71 | 78.07 | 56.64 | 34.50 | ||||||||||||||||||||||||
|
S&P
Building Products
|
100.00 | 102.51 | 96.65 | 105.41 | 106.85 | 114.67 | 95.04 | 103.78 | ||||||||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 103.42 | 107.53 | 115.00 | 115.30 | 123.95 | 128.63 | 126.28 | ||||||||||||||||||||||||
| 3/08 | 6/08 | 9/08 |
01/03/09
|
3/09 | 6/09 | 9/09 |
01/02/10
|
|||||||||||||||||||||||||
|
PGT,
Inc.
|
21.21 | 22.71 | 23.29 | 8.43 | 10.71 | 11.71 | 19.71 | 14.93 | ||||||||||||||||||||||||
|
S&P
Building Products
|
98.60 | 83.05 | 94.71 | 58.76 | 40.44 | 46.04 | 63.88 | 72.91 | ||||||||||||||||||||||||
|
NASDAQ
Composite
|
108.52 | 109.18 | 99.60 | 75.09 | 76.61 | 86.83 | 97.17 | 109.17 | ||||||||||||||||||||||||
* $100
invested on 06/27/2006 in stock or in index-including reinvestment of dividends
for 42 months ending January 2, 2010.
|
SELECTED
FINANCIAL DATA
|
The
following table sets forth selected historical consolidated financial
information and other data as of and for the periods indicated and have been
derived from our audited consolidated financial statements.
All information included in the following tables should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in Item 7, and with the consolidated financial statements
and related notes in Item 8. All years consisted of 52 weeks except for the
year ended January 3, 2009 which consisted of 53 weeks. We do not believe the
impact on comparability of results is significant.
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
|
Consolidated
Selected Financial Data
|
January
2,
|
January
3,
|
December 29,
|
December 30,
|
December 31,
|
|||||||||||||||
|
(in
thousands except per share data)
|
2010
|
2009
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Net
sales
|
$ | 166,000 | $ | 218,556 | $ | 278,394 | $ | 371,598 | $ | 332,813 | ||||||||||
|
Cost
of sales
|
121,622 | 150,277 | 187,389 | 229,867 | 209,475 | |||||||||||||||
|
Gross
margin
|
44,378 | 68,279 | 91,005 | 141,731 | 123,338 | |||||||||||||||
|
Impairment
charges(1)
|
742 | 187,748 | 826 | 1,151 | 7,200 | |||||||||||||||
|
Stock
compensation expense(2)
|
- | - | - | 26,898 | 7,146 | |||||||||||||||
|
Selling,
general and administrative
|
||||||||||||||||||||
|
expenses
|
51,902 | 63,109 | 77,004 | 86,219 | 83,634 | |||||||||||||||
|
(Loss)
income from operations
|
(8,266 | ) | (182,578 | ) | 13,175 | 27,463 | 25,358 | |||||||||||||
|
Interest
expense
|
6,698 | 9,283 | 11,404 | 28,509 | 13,871 | |||||||||||||||
|
Other
(income) expense, net(3)
|
37 | (40 | ) | 692 | (178 | ) | (286 | ) | ||||||||||||
|
(Loss)
income before income taxes
|
(15,001 | ) | (191,821 | ) | 1,079 | (868 | ) | 11,773 | ||||||||||||
|
Income
tax (benefit) expense
|
(5,584 | ) | (28,789 | ) | 456 | 101 | 3,910 | |||||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | $ | (969 | ) | $ | 7,863 | |||||||
|
Net
(loss) income per common share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | $ | (0.04 | ) | $ | 0.47 | |||||||
|
Diluted
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | $ | (0.04 | ) | $ | 0.43 | |||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||
|
Basic(4)
|
36,451 | 32,104 | 29,247 | 22,673 | 16,800 | |||||||||||||||
|
Diluted(4)
|
36,451 | 32,104 | 30,212 | 22,673 | 18,376 | |||||||||||||||
|
Other
financial data:
|
||||||||||||||||||||
|
Depreciation
|
$ | 10,435 | $ | 11,518 | $ | 10,418 | $ | 9,871 | $ | 7,503 | ||||||||||
|
Amortization
|
5,731 | 5,570 | 5,570 | 5,742 | 8,020 | |||||||||||||||
|
As
Of
|
As
Of
|
As
Of
|
As
Of
|
As
Of
|
||||||||||||||||
|
January
2,
|
January
3,
|
December 29,
|
December 30,
|
December 31,
|
||||||||||||||||
| 2010 | 2009 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Balance
Sheet data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 7,417 | $ | 19,628 | $ | 19,479 | $ | 36,981 | $ | 3,270 | ||||||||||
|
Total
assets
|
173,630 | 200,617 | 407,865 | 442,794 | 425,553 | |||||||||||||||
|
Total
debt, including current portion
|
68,268 | 90,366 | 130,000 | 165,488 | 183,525 | |||||||||||||||
|
Shareholders’
equity
|
68,209 | 74,185 | 210,472 | 205,206 | 156,571 | |||||||||||||||
|
(1)
|
In
2009, 2007 and 2006, amount relates to write-down of the value of our
Lexington, North Carolina property. In 2008, amount relates to intangible
asset impairment charges. See Note 7 in Item 8. In 2005,
amount relates to write-down of a trademark in connection with the sale of
the related product line.
|
|
(2)
|
Represents
compensation expense paid to stock option holders (including applicable
payroll taxes) in lieu of adjusting exercise prices in connection with the
dividends paid to shareholders in September 2005 and February 2006 of $7.1
million, including expenses, and $26.9 million, respectively. These
amounts include amounts paid to stock option holders whose other
compensation is a component of cost of sales of $1.3 million and $5.1
million, respectively.
|
|
(3)
|
Relates
to derivative financial
instruments.
|
|
(4)
|
Weighted
average common shares outstanding for all periods have been restated
to give effect to the bonus element in the 2010 rights
offering.
|
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
We advise
you to read Management’s Discussion and Analysis of Financial Condition and
Results of Operations in conjunction with our Consolidated Financial Statements
and the Notes to the Consolidated Financial Statements included in Item 8. We
also advise you read the risk factors in Item 1A. You should consider
the information in these items, along with other information included in this
Annual Report on Form 10-K.
RECENT
DEVELOPMENTS
In the
first quarter of 2010, we entered into an agreement with a broker to list our
Lexington, NC, plant facility. In the second quarter of 2009, we
ceased operating out of that facility and do not expect a potential sale to have
a material impact on our operations in the future.
On March
12, 2010, we completed our rights offering which generated net proceeds of $27.5
million used to repay a portion of the outstanding indebtedness under our
amended credit agreement in the amount of $15.0 million, and for general
corporate purposes in the amount of $12.5 million. See “Liquidity and
Capital Resources” for further information.
On March
18, 2010 our Board of Directors approved the Amended and Restated 2006 Equity
Incentive Plan, and authorized an Equity Exchange. Also, on March 8,
2010, our Board of Directors authorized a stock option exchange to eligible
employees. These three items are subject to approval at our annual
stockholders' meeting. Additional information appears in our
definitive proxy statement for our annual meeting of stockholders under the
captions “Amended and Restated 2006 Equity Incentive Plan”, “Issuer Tender
Offer”, and “Equity Exchange”.
EXECUTIVE
OVERVIEW
Sales
and Operations
On
February 11, 2010, we issued a press release and held a conference call on
Friday, February 19, 2010 to review the results of operations for our fiscal
year ended January 2, 2010. During the call, we also discussed
current market conditions, and progress made regarding certain of our growth
initiatives. The overview and estimates contained in this report are consistent
with those given in our press release. We are neither updating nor confirming
that information.
There
have been some positive signs in our industry lately, but certain statistics
such as housing starts are still at record lows. Single-Family
housing starts in Florida remained at approximately 6,000 per quarter in 2009,
compared to 60,000 during the housing boom and a realistic average of 25,000
based on Florida population. Other economic indicators such as
continuing high unemployment are likely to hamper the rate of growth for the
immediate future.
The
slowdown that we first experienced in fiscal 2007 has continued through fiscal
2009. Our 2009 net revenue was 40% lower than net revenue in 2007 and 24% lower
than net revenue in 2008. We believe over inflation in the housing market,
followed by a significant drop in consumer confidence and a lack of liquidity in
the credit markets, slowed the economy to a pace not experienced since the Great
Depression. As such, we believe the return of consumer confidence and a
sustained stabilization in the housing market are important aspects in the
recovery of our business. However, despite these conditions, we
maintained a positive cash flow while executing our strategic vision of gaining
market share in our core market of Florida and expanding our out-of-state
presence.
We
continue to believe in our ability to expand our sales into out-of-state
markets, which increased 24% during 2009 driven by the introduction of new
products and the expansion of our distribution base. Launched in 2008, our
SpectraGuard vinyl product line sales grew to $8.0 million in 2009 compared to
$1.4 million in 2008.
Our sales
into the new construction and repair and remodeling markets are down 45% and 12%
respectively in 2009. However, our mix of sales between these two end markets
has notably shifted over the past two years. Sales into the repair and
remodeling market represented 73% in 2009 compared to 54% in 2007 and 63% in
2008. This prominent shift has helped our company somewhat off-set the
significant decline in the new home construction market.
We sought
to balance between short-term cash flow goals and long-term strategic goals,
during the difficult market conditions described above. We
consistently re-evaluated our cost structure, identifying opportunities to drive
efficiencies and savings initiatives while remaining aware of the resources
needed to effectively serve our customers and exceed their
expectations.
As
a result, we implemented various initiatives to take cost out of our system
including reductions in our workforce, reductions in pay, renegotiating supply
agreements and cutting discretionary spending. We recorded $5.4 million in
restructuring costs in 2009 and $2.1 million in 2008 related to our efforts.
When combined, these actions are estimated to drive substantial cost savings
that will exceed $25 million annually. These efforts have helped off-set the
decline in sales volume which causes an unfavorable deleveraging of our fixed
costs.
Liquidity
and Cash Flow
We began
2007 with a total net debt balance of $128 million and ended fiscal 2009 with a
net debt of $61 million. Over the past three years we were able to reduce our
debt by combining our ability to generate cash from operations totaling $54
million, with net proceeds from the fully subscribed 2008 rights offering of
$29.3 million. Due to the focus on reducing debt, our net debt level
is currently at its lowest point since 2004.
As we
entered into 2010 we announced another rights offering which closed on March 12,
2010. This rights offering was 90% subscribed and generated $27.5
million of additional capital for our Company, bringing our net debt levels down
further to $34 million.
We used
$15.0 million of the proceeds to further pay down our term debt and make our
Third amendment to our credit facility, which we entered into on December 24,
2009, effective. This amendment further secures our position and
provides more flexibility to focus on long-term strategic
goals.
Acquisition
Pursuant
to an asset purchase agreement by and between Hurricane Window and Door Factory,
LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT
Industries, Inc., effective on August 14, 2009, we acquired certain operating
assets of Hurricane for approximately $1.5 million in cash. Hurricane
designed and manufactured high-end vinyl impact products for the single- and
multi-family residential markets. The products provide long-term energy and
structural benefits, while qualifying homeowners for the government’s energy tax
credits through the American Recovery and Reinvestment Act of
2009. This product line was developed specifically for the hurricane
protection market and combines some of the highest structural ratings in the
industry with excellent energy efficiency. The acquisition of this
business expands our presence in the energy efficient vinyl impact-resistant
market, increases our ability to serve the multi-story condominium market, and
enhances our ability to offer a complete line of impact products to the
customer.
The
purchase price paid was allocated to the assets acquired based on their
estimated fair value on August 14, 2009. The assets acquired included
Hurricane’s inventory, comprised almost entirely of raw materials, and property
and equipment, primarily comprised of machinery and other manufacturing
equipment. We also acquired the right to use Hurricane’s design
technology through the end of 2010 and the option to purchase the technology at
any time through the end of 2010 and, if desired, we can extend the right to use
and the option to purchase Hurricane’s design technology for an additional one
year period through the end of 2011. The allocation of the $1.5
million cash purchase price to the fair value of the assets acquired as of the
August 14, 2009 acquisition date is as follows:
|
(in
thousands)
|
Fair Values
|
|||
|
Inventory
|
$ | 254 | ||
|
Property
and equipment
|
623 | |||
|
Identifiable
intangibles
|
575 | |||
|
Net
assets acquired
|
1,452 | |||
|
Purchase
price
|
1,452 | |||
|
Goodwill
|
$ | - | ||
The value
of inventory was established based on then current purchase prices of identical
materials available from Hurricane’s existing vendors. The value of
property and equipment was established based on Hurricane’s net carrying values
which we determined to approximate fair value due to, among other things, their
having been in service for less than one year. We engaged a
third-party valuation specialist to assist us in estimating the fair value of
the identifiable intangible assets consisting of the right to use Hurricane’s
design technology and the related purchase option. The fair value of
the identifiable intangible assets was estimated using an income approach based
on projections provided by management. The carrying value of the intangible
assets of $0.4 million is included in other intangible assets, net, in the
accompanying condensed consolidated balance sheet at January 2,
2010. The intangible assets are being amortized on the straight-line
basis over their estimated lives of approximately 1.4 years through the end of
2010. Amortization expense of $0.2 million is included in selling,
general and administrative expenses in the accompanying condensed consolidated
statement of operations for the year ended January 2,
2010. Acquisition costs of less than $0.1 million are included in
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the year ended January 2,
2010. Hurricane’s operating results prior to the acquisition were
insignificant.
Restructurings
On
October 25, 2007, we announced a restructuring as a result of an in-depth
analysis of our target markets, internal structure, projected run-rate, and
efficiency. The restructuring resulted in a decrease in our workforce
of approximately 150 employees and included employees in both Florida and North
Carolina. The restructuring was undertaken in an effort to streamline
operations, as well as improve processes to drive new product development and
sales. As a result of the restructuring, we recorded a restructuring
charge of $2.4 million in 2007, of which $0.7 million was classified within cost
of goods sold and $1.7 million was classified within selling, general and
administrative expenses. The charge related primarily to employee
separation costs. Of the $2.4 million charge, $1.5 million was
disbursed in 2007 and $0.9 million was disbursed in 2008.
On March
4, 2008, we announced a second restructuring as a result of continued analysis
of our target markets, internal structure, projected run-rate, and
efficiency. The restructuring resulted in a decrease in our workforce
of approximately 300 employees and included employees in both Florida and North
Carolina. As a result of the restructuring, we recorded a
restructuring charge of $2.1 million in 2008, of which $1.1 million is
classified within cost of goods sold and $1.0 million is classified within
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the year ended January 3, 2009. The
charge related primarily to employee separation costs. Of the $2.1
million, $1.8 million was disbursed in the first quarter of 2008. The
remaining $0.3 million is classified within accrued liabilities in the
accompanying consolidated balance sheet as of January 3, 2009 (Note 8) and was
disbursed in 2009.
On
January 13, 2009, March 10, 2009, September 24, 2009 and November 12, 2009, we
announced restructurings as a result of continued analysis of our target
markets, internal structure, projected run-rate, and efficiency. The
restructuring resulted in a decrease in our workforce of approximately 260 in
the first quarter, 80 in the second quarter and 140 in the fourth quarter for a
total of 480 employees in both Florida and North Carolina. As a
result of the restructurings, we recorded restructuring charges of $5.4 million
in the accompanying consolidated statement of operations for the year ended
January 2, 2010, of which $3.1 million is classified within cost of goods sold
with $1.4 million charged in the first quarter, $0.5 million in the third
quarter and $1.2 million in the fourth. The remaining $2.3 million is classified
within selling, general and administrative expenses of which $1.6 million is
charged in the first quarter, $0.4 million in the second quarter and $0.3
million in the fourth quarter in the accompanying consolidated statement of
operations for the year ended January 2, 2010. The charge related
primarily to employee separation costs. Of the $5.4 million, $2.6
million was disbursed in the first quarter of 2009, $0.3 million in the second
quarter, $0.4 million in the third quarter and $1.2 million in the fourth
quarter. The remaining $0.9 million is classified within accrued
liabilities in the accompanying consolidated balance sheet as of January 2, 2010
(Note 8) and is expected to be disbursed in 2010.
The
following table provides information with respect to the accrual for
restructuring costs:
|
Beginning
of Year
|
Charged
to Expense
|
Disbursed
in Cash
|
End
of Year
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Year
ended January 2, 2010:
|
||||||||||||||||
|
2008
Restructuring
|
$ | 332 | $ | - | $ | (332 | ) | $ | - | |||||||
|
2009
Restructurings
|
- | 5,395 | (4,497 | ) | 898 | |||||||||||
|
For
the year ended January 2, 2010
|
$ | 332 | $ | 5,395 | $ | (4,829 | ) | $ | 898 | |||||||
|
Year
ended January 3, 2009:
|
||||||||||||||||
|
2007
Restructuring
|
$ | 850 | $ | - | $ | (850 | ) | $ | - | |||||||
|
2008
Restructuring
|
- | 2,131 | (1,799 | ) | 332 | |||||||||||
|
For
the year ended January 3, 2009
|
$ | 850 | $ | 2,131 | $ | (2,649 | ) | $ | 332 | |||||||
|
Year
ended December 29, 2007:
|
||||||||||||||||
|
2007
Restructuring
|
$ | - | $ | 2,375 | $ | (1,525 | ) | $ | 850 | |||||||
Non-GAAP
Financial Measures – Items Affecting Comparability
Below is
a presentation of EBITDA, a non-GAAP measure, which we believe is useful
information for investors (in thousands):
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | ||||
|
Interest
expense
|
6,698 | 9,283 | 11,404 | |||||||||
|
Income
tax (benefit) expense
|
(5,584 | ) | (28,789 | ) | 456 | |||||||
|
Depreciation
|
10,435 | 11,518 | 10,418 | |||||||||
|
Amortization
|
5,731 | 5,570 | 5,570 | |||||||||
|
EBITDA
(1)(2)
|
$ | 7,863 | $ | (165,450 | ) | $ | 28,471 | |||||
|
(1)
Includes the impact of the following expenses:
|
||||||||||||
|
Restructuring
charges (a)
|
$ | (5,395 | ) | $ | (2,131 | ) | $ | (2,375 | ) | |||
|
Impairment
charges (b)
|
(742 | ) | (187,748 | ) | (826 | ) | ||||||
|
(a)
|
Represents
charges related to restructuring actions taken in 2009, 2008 and
2007. These charges relate primarily to employee separation
costs.
|
|
(b)
|
In
2009 and in 2007, represents the write-down of the value of the Lexington,
North Carolina property. In 2008, represents goodwill and indefinite lived
asset impairment charges.
|
|
|
(2)
EBITDA is defined as net income plus interest expense (net of interest
income), income taxes, depreciation, and amortization. EBITDA is a measure
commonly used in the window and door industry, and we present EBITDA to
enhance your understanding of our operating performance. We use EBITDA as
one criterion for evaluating our performance relative to that of our
peers. We believe that EBITDA is an operating performance measure that
provides investors and analysts with a measure of operating results
unaffected by differences in capital structures, capital investment
cycles, and ages of related assets among otherwise comparable companies.
While we believe EBITDA is a useful measure for investors, it is not a
measurement presented in accordance with United States generally accepted
accounting principles, or GAAP. You should not consider EBITDA in
isolation or as a substitute for net income, cash flows from operations,
or any other items calculated in accordance with
GAAP.
|
RESULTS
OF OPERATIONS
Analysis
of Selected Items from our Consolidated Statements of Operations
|
Year
Ended
|
Percent
Change
|
|||||||||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
Increase
/ (Decrease)
|
|||||||||||||||||
|
2010
|
2009
|
2007
|
2009-2008 | 2008-2007 | ||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Net
sales
|
$ | 166,000 | $ | 218,556 | $ | 278,394 | (24.0%) | (21.5%) | ||||||||||||
|
Cost
of sales
|
121,622 | 150,277 | 187,389 | (19.1%) | (19.8%) | |||||||||||||||
|
Gross
margin
|
44,378 | 68,279 | 91,005 | (35.0%) | (25.0%) | |||||||||||||||
|
As
a percentage of sales
|
26.7% | 31.2% | 32.7% | |||||||||||||||||
|
Impairment
charges
|
742 | 187,748 | 826 | |||||||||||||||||
|
SG&A
expenses
|
51,902 | 63,109 | 77,004 | (17.8%) | (18.0%) | |||||||||||||||
|
SG&A
expenses as a percentage of sales
|
31.3% | 28.9% | 27.7% | |||||||||||||||||
|
(Loss)
income from operations
|
(8,266 | ) | (182,578 | ) | 13,175 | |||||||||||||||
|
Interest
expense, net
|
6,698 | 9,283 | 11,404 | |||||||||||||||||
|
Other
expense (income), net
|
37 | (40 | ) | 692 | ||||||||||||||||
|
Income
tax (benefit) expense
|
(5,584 | ) | (28,789 | ) | 456 | |||||||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | ||||||||||||
|
Net
(loss) income per common share:
|
||||||||||||||||||||
|
Diluted
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | ||||||||||||
2009
Compared with 2008
The year
ended January 2, 2010 consisted of 52 weeks. The year ended January 3, 2009
consisted of 53 weeks. We do not believe the impact on
comparability of results is significant.
Net
sales
Net sales
for 2009 were $166.0 million, a $52.6 million, or 24.0%, decrease in
sales from $218.6 million in the prior year.
The
following table shows net sales classified by major product category (in
millions):
|
Year
Ended
|
||||||||||||||||||||
|
January
2, 2010
|
January
3, 2009
|
|||||||||||||||||||
|
Sales
|
%
of sales
|
Sales
|
%
of sales
|
%
change
|
||||||||||||||||
|
Product
category:
|
||||||||||||||||||||
|
WinGuard
Windows and Doors
|
$ | 108.2 | 65.2% | $ | 151.8 | 69.4% | (28.7%) | |||||||||||||
|
Other
Window and Door Products
|
57.8 | 34.8% | 66.8 | 30.6% | (13.5%) | |||||||||||||||
|
Total
net sales
|
$ | 166.0 | 100.0% | $ | 218.6 | 100.0% | (24.0%) | |||||||||||||
Net sales
of WinGuard Windows and Doors were $108.2 million in 2009, a decrease of
$43.6 million, or 28.7%, from $151.8 million in net sales for the
prior year. Volume attributed to $36.5 million of the decline, while
the remaining $7.1 million decline is mainly a result of a shift in mix towards
vinyl WinGuard products which carry a lower selling price than aluminum WinGuard
products. During 2009, sales of vinyl WinGuard products were up 12%
compared to 2008, while sales of aluminum WinGuard were down 33%. The
decrease in sales of our WinGuard products was driven mainly by the impact of
the credit crisis affecting the consumers’ ability and desire to remodel their
homes as well as the decline in new home construction. Finally, the
decline is also a result, to some extent, of the lack of storm activity during
the three most recent hurricane seasons in the coastal markets of Florida we
serve.
Net sales
of Other Window and Door Products were $57.8 million in 2009, a decrease of
$9.0 million, or 13.5%, from $66.8 million for the prior year. The
decrease was mainly due to a reduction in aluminum non-impact and commercial
products sales of 33%, offset by an increase in vinyl non-impact and other sales
which were up 46%. The increase in vinyl non-impact sales is a result
of our continued strategy to grow in markets outside the state of
Florida. To further that goal, we have introduced several new vinyl
non-impact products over the past two years, whose sales have exceeded
expectations. These new products accounted for $8.0 million in sales
in 2009, and $1.4 million in sales in 2008.
Gross
margin
Gross
margin was $44.4 million in 2009, a decrease of $23.9 million, or
35.0%, from $68.3 million in the prior year. The gross margin percentage
was 26.7% in 2009 compared to 31.2% in the prior year. This decrease was largely
due to lower overall sales volumes which reduced our ability to leverage fixed
costs, a shift in mix towards non-impact products which carry a lower margin, as
well as an increase in restructuring charges of $2.0 million in
2009. Offsetting these items in part is a decrease in the
average cost of aluminum of approximately $0.26 per pound, and overhead cost
reductions from the cost savings initiatives. Cost of goods sold
includes charges of $3.1 million in 2009 and $1.1 million in 2008 related to the
restructuring actions taken in each year.
In 2008,
we recognized a business interruption insurance recovery of $0.7 million,
classified as a reduction of cost of goods sold in the accompanying consolidated
statement of operations for the year ended January 3, 2009, of incremental
expenses we incurred relating to a November 2005 fire that idled a major
laminated glass manufacturing asset and which required us to purchase laminated
glass from an outside vendor at a price exceeding our cost to
manufacture. Such amount is included in other current assets in the
accompanying consolidated balance sheet at January 3, 2009 and was received in
cash shortly thereafter. The proceeds were used for general corporate
purposes.
Impairment
Charges
In 2009,
there was an impairment charge of $0.7 million related to a manufacturing
facility for which we entered into an agreement to list the property for sale in
January 2010. Impairment charges totaled $187.7 million in 2008, of which $169.6
million related to goodwill and $18.1 million related to our
trademarks.
Due to
the continued decline in the housing markets, during the second quarter of 2008,
we determined that the carrying value of goodwill exceeded its fair value,
indicating that it was impaired. Having made this determination, we
then began performing the second step of the goodwill impairment test which
involves calculating the implied fair value of our goodwill by allocating the
fair value to all of our assets and liabilities other than goodwill (including
both recognized and unrecognized intangible assets) and comparing it to the
carrying amount of goodwill. We recorded a $92.0 million estimated
goodwill impairment charge in the second quarter of 2008. During the
third quarter of 2008, we finalized the second step of the goodwill impairment
test and, as a result, recorded an additional $1.3 million goodwill impairment
charge.
During
the third quarter of 2008, as part of finalizing our goodwill impairment test
discussed above, we made certain changes to the assumptions that affected the
previous estimate of fair value and, when compared to the carrying value of our
trademarks, resulted in a $0.3 million impairment charge in the third quarter of
2008.
We
performed our annual assessment of goodwill impairment as of January 3, 2009.
Given a further decline in housing starts and the overall tightening of the
credit markets, our revised forecasts indicated additional impairment of our
goodwill. After allocating the fair value to our assets and
liabilities other than goodwill, we concluded that goodwill had no implied fair
value and the remaining carrying value was written-off. After
recognizing these charges, we do not have any goodwill remaining on the
accompanying consolidated balance sheet as of January 3, 2009.
We
also performed our annual assessment of our trademarks as of January 3, 2009,
which indicated that further impairment was present resulting in an additional
impairment charge of $17.8 million in the fourth quarter of 2008.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $51.9 million, a decrease of $11.2
million, or 17.8%, from $63.1 million in the prior year. This
decrease was mainly due to decreases of $6.7 million in personnel related costs
due to lower employment levels, $1.4 million in marketing costs due to decreased
levels of general advertising and promotional costs, $1.8 million in fuel costs
related to lower sales and lower prices for diesel. The remaining
$1.3 million decrease in selling, general and administrative expenses is volume
related as the general level of spending in this area has declined with
sales. As a percentage of sales, selling, general and administrative
expenses increased to 31.3% in 2009 compared to 28.9% for the prior year. This
increase was due to the fact that our ability to leverage certain fixed portions
of support and administrative costs did not decrease at the same rate as the
decrease in net sales.
Charges
of $2.3 million in 2009 and $1.0 million in 2008 related to the restructuring
actions taken in each year are included in selling, general and administrative
expenses.
Interest
expense
Interest
expense was $6.7 million in 2009, a decrease of $2.6 million from
$9.3 million in the prior year. During 2009, we prepaid $22.0 million of
debt resulting in a lower average level of debt when compared to 2008. The
interest rate on our debt increased from 6.25% at the end of 2008 to 7.25% at
the end of 2009 due to an increase in our leverage ratio which increased our
interest rates in accordance with our tiered interest rate
structure.
Other
expenses (income), net
There was
other expense of less than $0.1 million in 2009 compared to other income of less
than $0.1 million in 2008. In both years, the other expense (income)
relates to effective over-hedges of aluminum.
Income
tax benefit
Our
effective combined federal and state tax rate was a benefit of 37.2% and 15.0%
for the years ended January 2, 2010 and January 3, 2009,
respectively. The 37.2% tax rate in 2009 relates primarily to a loss
carry-back receivable of approximately $3.7 million related to the recently
passed legislation allowing companies to carry-back 2009 or 2008 losses up to 5
years, as well as an income tax allocation of $1.8 million between current
operations and other comprehensive income. All other deferred tax assets created
in 2009 were fully reserved with additional valuation allowances. The
15.0% effective tax rate in 2008 resulted from the tax effects
totaling $41.3 million related to the write-off of the non-deductible portion of
goodwill and $4.6 million related to the valuation allowance on deferred tax
assets recorded in the fourth quarter of 2008. Excluding the effects of these
items, our 2009 and 2008 effective tax rates would have been 34.6% and 39.0%,
respectively.
2008
Compared with 2007
The year
ended January 3, 2009 consisted of 53 weeks. The year ended December 29, 2007
consisted of 52 weeks. We do not believe the impact on comparability of
results is significant.
Net
sales
Net sales
for 2008 were $218.6 million, a $59.8 million, or 21.5%, decrease in
sales from $278.4 million in the prior year.
The
following table shows net sales classified by major product category (in
millions):
|
Year
Ended
|
||||||||||||||||||||
|
January
3, 2009
|
December
29, 2007
|
|||||||||||||||||||
|
Sales
|
%
of sales
|
Sales
|
%
of sales
|
%
change
|
||||||||||||||||
|
Product
category:
|
||||||||||||||||||||
|
WinGuard
Windows and Doors
|
$ | 151.8 | 69.4% | $ | 189.7 | 68.1% | (20.0%) | |||||||||||||
|
Other
Window and Door Products
|
66.8 | 30.6% | 88.7 | 31.9% | (24.7%) | |||||||||||||||
|
Total
net sales
|
$ | 218.6 | 100.0% | $ | 278.4 | 100.0% | (21.5%) | |||||||||||||
Net sales
of WinGuard Windows and Doors were $151.8 million in 2008, a decrease of
$37.9 million, or 20.0%, from $189.7 million in net sales for the
prior year. Demand for WinGuard branded products is driven by, among
other things, increased enforcement of strict building codes mandating the use
of impact-resistant products, increased consumer and homebuilder awareness of
the advantages provided by impact-resistant windows and doors over “active”
forms of hurricane protection, and our successful marketing efforts. The
decrease in sales of our WinGuard branded products was driven mainly by the
decline in new home construction but also, to some extent, by the lack of storm
activity during the two most recent hurricane seasons in the coastal markets of
Florida we serve.
Net sales
of Other Window and Door Products were $66.8 million in 2008, a decrease of
$21.9 million, or 24.7%, from $88.7 million for the prior year. The
decrease was mainly due to the decline in new home construction. New
housing demand has historically impacted sales of our Other Window and Door
Products more than our WinGuard Window and Door Products.
The
decline in the housing industry began in the second half of 2006 and continued
and intensified throughout 2007 and 2008.
Gross
margin
Gross
margin was $68.3 million in 2008, a decrease of $22.7 million, or
25.0%, from $91.0 million in the prior year. The gross margin percentage
was 31.2% in 2008 compared to 32.7% in the prior year. This decrease was largely
due to lower sales volumes of all of our products, but most significantly of our
WinGuard branded windows and doors, sales of which decreased 20.0% compared to
the prior year. The decrease in sales as a result of the housing downturn has
negatively impacted our gross margin in total and as a percentage of sales and
reduced our ability to leverage fixed costs. Cost of goods sold includes charges
of $1.1 million in 2008 and $0.7 million in 2007 related to the restructuring
actions taken in each year.
In 2008,
we recognized a business interruption insurance recovery of $0.7 million,
classified as a reduction of cost of goods sold in the accompanying consolidated
statement of operations for the year ended January 3, 2009, of incremental
expenses we incurred relating to a November 2005 fire that idled a major
laminated glass manufacturing asset and which required us to purchase laminated
glass from an outside vendor at a price exceeding our cost to
manufacture. Such amount is included in other current assets in the
accompanying consolidated balance sheet at January 3, 2009 and was received in
cash shortly thereafter. The proceeds were used for general corporate
purposes.
Impairment
Charges
Impairment
charges totaled $187.7 million in 2008, of which $169.6 million related to
goodwill and $18.1 million related to our trademarks. In 2007, there
was an impairment charge of $0.8 million related to a then-idle manufacturing
facility which was held for sale and subsequently returned to use.
Due to
the continued decline in the housing markets, during the second quarter of 2008,
we determined that the carrying value of goodwill exceeded its fair value,
indicating that it was impaired. Having made this determination, we
then began performing the second step of the goodwill impairment test which
involves calculating the implied fair value of our goodwill by allocating the
fair value to all of our assets and liabilities other than goodwill (including
both recognized and unrecognized intangible assets) and comparing it to the
carrying amount of goodwill. We recorded a $92.0 million estimated
goodwill impairment charge in the second quarter of 2008. During the
third quarter of 2008, we finalized the second step of the goodwill impairment
test and, as a result, recorded an additional $1.3 million goodwill impairment
charge.
During
the third quarter of 2008, as part of finalizing our goodwill impairment test
discussed above, we made certain changes to the assumptions that affected the
previous estimate of fair value and, when compared to the carrying value of our
trademarks, resulted in a $0.3 million impairment charge in the third quarter of
2008.
We
performed our annual assessment of goodwill impairment as of January 3, 2009.
Given a further decline in housing starts and the overall tightening of the
credit markets, our revised forecasts indicated additional impairment of our
goodwill. After allocating the fair value to our assets and
liabilities other than goodwill, we concluded that goodwill had no implied fair
value and the remaining carrying value was written-off. After
recognizing these charges, we do not have any goodwill remaining on the
accompanying consolidated balance sheet as of January 3, 2009.
We also
performed our annual assessment of our trademarks as of January 3, 2009, which
indicated that further impairment was present resulting in an additional
impairment charge of $17.8 million in the fourth quarter of 2008.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $63.1 million, a decrease of $13.9
million, or 18.0% from $77.0 million in the prior year. This
decrease was mainly due to decreases of $7.1 million in personnel related costs
due to lower employment levels, $3.9 million in marketing costs due to decreased
levels of general advertising and promotional costs, $1.4 million in warranty
expense primarily due to the lower sales volume, $0.8 million in public company
costs, primarily related to our compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 (“SOX”), $0.7 million in non-cash stock-based
compensation expense and $0.6 million in operating lease
expense. These decreases were partially offset by a $1.4 million
increase in bad debt expense primarily related to collection issues with two
customers and a $1.3 million increase in distribution costs related to the
increase in fuel prices during 2008. The remaining $2.2 million
decrease in selling, general and administrative expenses is volume related as
the general level of spending in this area has declined with
sales. As a percentage of sales, selling, general and administrative
expenses increased to 28.9% in 2008 compared to 27.7% for the prior year. This
increase was due to the fact that our ability to leverage certain fixed portions
of support and administrative costs did not decrease at the same rate as the
decrease in net sales.
Charges
of $1.0 million in 2008 and $1.7 million in 2007 related to the restructuring
actions taken in each year are included in selling, general and administrative
expenses.
Interest
expense
Interest
expense was $9.3 million in 2008, a decrease of $2.1 million from
$11.4 million in the prior year. During 2008, we prepaid $40.0
million of debt resulting in a lower average level of debt when compared to 2007
and the interest rate on our debt decreased from 8.38% at the end of 2007 to
6.25% at the end of 2008 due to a decrease in interest rates.
Other
expenses (income), net
There was
other income of less than $0.1 million in 2008 compared to other expenses of
$0.7 million in 2007. For 2008, the other income relates to effective
over-hedges of aluminum. The other expenses in 2007 relate to the
ineffective portions of interest and aluminum hedges.
Income
tax expense
Our
effective combined federal and state tax rate was 15.0% and 42.3% for the years
ended January 3, 2009 and December 29, 2007, respectively. The 15.0%
effective tax rate resulted from the tax effects totaling $41.3 million related
to the write-off of the non-deductible portion of goodwill and $4.6 million
related to the valuation allowance on deferred tax assets recorded in the fourth
quarter of 2008. Excluding the effects of these items, our 2008 effective tax
rate would have been 39.0%. The 42.3% tax rate in 2007 relates
primarily to non-deductible expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal source of liquidity is cash flow generated by operations, supplemented
by borrowings under our credit facility. This cash generating
capability provides us with financial flexibility in meeting operating and
investing needs. Our primary capital requirements are to fund working
capital needs, and to meet required debt payments, including debt service
payments on our credit facilities and fund capital expenditures.
2010
Rights Offering
On
January 29, 2010, the Company filed Amendment No. 1 to the Registration
Statement on Form S-1 filed on December 24, 2009 relating to a previously
announced offering of rights to purchase 20,382,326 shares of the Company’s
common stock with an aggregate value of approximately $30.6
million. The registration statement relating to the rights offering
was declared effective by the United States Securities and Exchange Commission
on February 10, 2010, and the Company distributed to each holder of record of
the Company’s common stock as of close of business on February 8, 2010, at no
charge, one (1) non-transferable subscription right for every one and
three-quarters (1.75) shares of common stock held by such holder under the basic
subscription privilege. Each whole subscription right entitled its
holder to purchase one share of PGT’s common stock at the subscription price of
$1.50 per share. The rights offering also contained an
over-subscription privilege that permitted all basic subscribers to purchase
additional shares of the Company’s common stock up to an amount equal to the
amount available to each such holder under the basic subscription
privilege. Shares issued to each participant in the over-subscription
were determined by calculating each subscriber’s percentage of the total shares
over-subscribed, multiplied by the number of shares available in the
over-subscription privilege. The rights offering expired on March 12,
2010.
The
rights offering was 90.0% subscribed resulting in the Company distributing
18,336,368 shares of its common stock, including 15,210,184 shares under the
basic subscription privilege and 3,126,184 under the over-subscription
privilege, representing a 74.6% basic subscription participation
rate. There were requests for 3,126,184 shares under the
over-subscription privilege representing an allocation rate of 100% to each
over-subscriber. Of the 18,336,368 shares issued, 13,333,332 shares
were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder,
including 10,719,389 shares issued under the basic subscription privilege and
2,613,943 shares issued under the over-subscription privilege. Prior
to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s
outstanding common stock. With the completion of the rights offering,
the Company has 54,005,439 total shares of common stock outstanding of which JLL
holds 59.4%.
Net
proceeds of $27.5 million from the rights offering were used to repay a portion
of the outstanding indebtedness under our amended credit agreement in the amount
of $15.0 million, and for general corporate purposes in the amount of $12.5
million.
2008
Rights Offering
On August
1, 2008, the Company filed Amendment No. 1 to the Registration Statement on Form
S-3 filed on March 28, 2008 relating to a previously announced offering of
rights to purchase 7,082,687 shares of the Company’s common stock with an
aggregate value of approximately $30 million. The registration
statement relating to the rights offering was declared effective by the United
States Securities and Exchange Commission on August 4, 2008 and the Company
distributed to each holder of record of the Company’s common stock as of close
of business on August 4, 2008, at no charge, one non-transferable subscription
right for every four shares of common stock held by such holder under the basic
subscription privilege. Each whole subscription right entitled its
holder to purchase one share of PGT’s common stock at the subscription price of
$4.20 per share. The rights offering also contained an
over-subscription privilege that permitted all basic subscribers to purchase
additional shares of the Company’s common stock up to an amount equal to the
amount available to each under the basic subscription
privilege. Shares issued to each participant in the over-subscription
were determined by calculating each subscribers’ percentage of the total shares
over-subscribed, multiplied by the number of shares available in the
over-subscription privilege. The rights offering expired on September
4, 2008.
The
rights offering was fully subscribed resulting in the Company distributing all
7,082,687 shares of its common stock available, including 6,157,586 shares under
the basic subscription privilege and 925,101 under the over-subscription
privilege, representing an 86.9% basic subscription participation
rate. There were requests for 4,721,763 shares under the
over-subscription privilege representing an allocation rate of 19.6% to each
over-subscriber for the 925,101 shares available in the over
subscription. Of the 7,082,687 shares issued, 4,295,158 shares were
issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder,
including 3,615,944 shares issued under the basic subscription privilege and
679,214 shares issued under the over-subscription privilege. Prior to
the rights offering, JLL held 14,463,776 shares, or 51.1%, of the Company’s
outstanding common stock. With the completion of the rights offering,
the Company has 35,413,438 total shares of common stock outstanding of which JLL
holds 53.0%.
Net
proceeds of $29.3 million from the rights offering were used to repay a portion
of the outstanding indebtedness under our amended credit agreement.
Consolidated
Cash Flows
Operating
activities. Cash provided by operating activities was $9.5
million for 2009, compared to cash provided by operating activities of $19.9
million for the prior year. In 2008, cash provided by operating activities was
down $4.9 million from $24.8 million in 2007. Both year over year
declines are due mainly to the impact of lower sales, offset somewhat by cost
savings initiatives. Direct cash flows from operations for 2009, 2008 and 2007
are as follows:
|
Direct
Operating Cash Flows
|
||||||||||||
|
(in
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Collections
from customers
|
$ | 170.2 | $ | 224.5 | $ | 288.5 | ||||||
|
Other
collections of cash
|
2.8 | 3.4 | 4.6 | |||||||||
|
Disbursements
to vendors
|
(94.7 | ) | (122.5 | ) | (156.0 | ) | ||||||
|
Personnel
related disbursements
|
(63.6 | ) | (80.2 | ) | (100.0 | ) | ||||||
|
Debt
service costs
|
(6.2 | ) | (9.1 | ) | (12.0 | ) | ||||||
|
Other
cash activity, net
|
1.0 | 3.8 | (0.3 | ) | ||||||||
|
Cash
from operations
|
$ | 9.5 | $ | 19.9 | $ | 24.8 | ||||||
The
majority of other cash collections is from scrap aluminum sales. Other cash
activity, net, includes $1.1 million and $3.3 million in state and federal tax
refunds the years ended January 2, 2010 and January 3, 2009,
respectively.
Days
sales outstanding (DSO), which we calculate as accounts receivable divided by
average daily sales, was 41 days at January 2, 2010, compared to 39 days at
January 3, 2009. DSO was 39 days at January 3, 2009 compared to
37 days at December 29, 2007. This increase in DSO over the past two
years was primarily due to collection issues with three customers, as well as
the effect on our customer base of the decline in the housing market in Florida
and the overall economy.
Investing activities. Cash
from investing activities was $0.4 million for 2009, compared to cash used of
$8.5 million for 2008. The increase in cash from investing activities was due to
the impact of net cash received from excess margin returns for settlements of
forward contracts related to our aluminum hedging program. In 2009,
we settled $3.4 million in contracts that were funded by margin calls in 2008,
as well as received a return of $0.7 million in excess margin as a result of the
increase in aluminum prices, especially during the fourth quarter of
2009. Capital spending, including the acquisition of Hurricane
Window and Door Factory assets totaled $3.8 million in 2009, which is $0.7
million lower than total capital spending of $4.5 million in 2008 due to
continued efforts to reduce capital spending.
Cash used in investing
activities was $8.5 million for 2008, compared to $10.5 million for 2007. The
decrease in cash used in investing activities was due to our focused efforts to
reduce capital spending in 2008, which resulted in a decrease in capital
expenditures of $6.1 million, to $4.5 million in 2008 from $10.6 million in
2007. This decrease in capital spending was partially offset by $4.1
million of net cash used for margin calls on forward contracts on aluminum
hedges as of January 3, 2009.
Financing activities. Cash
used in financing activities was $22.1 million in 2009. With cash
generated from operations during 2009 and cash on hand we prepaid $8.0 million
of our long-term debt in June, $12.0 million in September and another $2.0
million in December, for a total of $22 million in debt prepayments in
2009. In December 2009, we also repaid the $12.0 million of revolver
borrowing that occurred in October 2009.
Cash
used in financing activities was $11.2 million in 2008. In June 2008, we prepaid
$10.0 million of our long-term debt with cash generated from
operations. Using proceeds from the rights offering, which resulted
in $29.3 million in net cash proceeds, we prepaid an additional $20.0 million of
our long-term debt in August 2008 and another $10.0 million in September 2008,
for a total of $40 million in debt prepayments in 2008. Cash proceeds
from stock option exercises in 2008 totaled $0.2 million. Payment of
deferred financing costs related to the effectiveness of the amendment of our
credit agreement totaled $0.6 million.
Cash used
in financing activities was $31.8 million in 2007. In 2007, we made a total of
$35.5 million of debt payments including prepayments of $20.0 million in
February 2007, $5.0 million in June 2007, $4.5 million in July 2007 and $6.0
million in September 2007, using cash generated by operations. These
financing cash uses were partially offset by proceeds from option exercises of
$1.9 million and the classification of $1.8 million of related excess tax
benefits within financing activities.
Capital Expenditures. Capital
expenditures vary depending on prevailing business factors, including current
and anticipated market conditions. For 2009, capital expenditures
were $2.3 million, compared to $4.5 million for 2008. In 2008 and
2009, we reduced certain discretionary capital spending to conserve
cash. We anticipate that cash flows from operations and liquidity
from the revolving credit facility will be sufficient to execute our business
plans.
Capital Resources. On
February 14, 2006, we entered into a second amended and restated
$235 million senior secured credit facility and a $115 million second
lien term loan due August 14, 2012, with a syndicate of banks. The senior
secured credit facility is composed of a $30 million revolving credit
facility and, initially, a $205 million first lien term loan. As of January
2, 2010, there was $26.0 million available under the revolving credit
facility.
On April
30, 2008, we announced that we entered into an amendment to the credit
agreement. The amendment, among other things, relaxes certain
financial covenants through the first quarter of 2010, increases the applicable
rate on loans and letters of credit, and sets a LIBOR floor. The
effectiveness of the amendment was conditioned, among other things, on the
repayment of at least $30 million of loans under the credit agreement no later
than August 14, 2008, of which no more than $15 million was permitted to come
from cash on hand. In June 2008, we used cash generated from
operations to prepay $10 million of outstanding borrowings under the credit
agreement. Using proceeds from the rights offering, we made an
additional prepayment of $20 million on August 11, 2008, bringing total
prepayments of debt at that time to $30 million as required under the amended
credit agreement. Having made the total required prepayment and
having satisfied all other conditions to bring the amendment into effect,
including the payment of the fees and expenses of the administrative agent and a
consent fee to participating lenders of 25 basis points of the then outstanding
balance under the credit agreement of $100 million, the amendment became
effective on August 11, 2008.
Under the
amendment, the first lien term loan bears interest at a rate equal to an
adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or
a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our
option. The margin in either case is dependent on our leverage
ratio. The loans under the revolving credit facility bear interest at
a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage
ratio ranging from 3.0% per annum to 4.75% per annum or a base rate plus a
margin ranging from 2.0% per annum to 3.75% per annum, at our
option. The amendment established a floor of 3.25% for adjusted
LIBOR. Prior to the effectiveness of the amendment, the first lien
term loan bore interest at a rate equal to an adjusted LIBOR rate plus
3.0% per annum or a base rate plus 2.0% per annum, at our option. The
loans under the revolving credit facility bore interest initially, at our
option, at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a
base rate plus 1.75% per annum, and the margins above LIBOR and base rate
could have declined to 2.00% for LIBOR loans and 1.00% for base rate loans if
certain leverage ratios were met.
On
December 24, 2009, we announced that we entered into a third amendment to the
credit agreement. The amendment, among other things, provides a
leverage covenant holiday for 2010, increases the maximum leverage amount for
the first quarter of 2011 to 6.25 times (then dropping 0.25X per quarter from
the second quarter until the end of the term), extends the due date on the
revolver loan until the end of 2011, increases the applicable rate on any
outstanding revolver loan by 25 basis points, and sets a base rate floor of
4.25%. The effectiveness of the amendment was conditioned, among
other things, on the repayment of at least $17 million of term loan under the
credit agreement no later than March 31, 2010, of which no more than $2 million
was permitted to come from cash on hand. In December 2009, the
Company used cash generated from operations to prepay $2 million of outstanding
borrowings under the credit agreement. Using proceeds from the second
rights offering, the Company made an additional prepayment of $15 million on
March 17, 2010, bringing total prepayments of debt at that time to $17 million
as required under the amended credit agreement. See Note 16 for a discussion of
the second rights offering. Having made the total required prepayment and having
satisfied all other conditions to bring the amendment into effect, including the
payment of the fees and expenses of the administrative agent and a consent fee
to participating lenders of 50 basis points of the then outstanding balance of
the term loan and the revolving commitment under the credit agreement of $100
million, the amendment became effective on March 17, 2010. Fees paid
to the administrative agent and lenders totaled $1.0 million. Such
fees are being amortized using the effective interest method over the remaining
term of the credit agreement.
Under the
third amendment, the first lien term loan bears interest at a rate equal to an
adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or
a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our
option, which is equivalent to the rates in the second amendment. The
margin in either case is dependent on our leverage ratio. The loans
under the revolving credit facility bear interest at a rate equal to an adjusted
LIBOR rate plus a margin depending on our leverage ratio ranging from 3.00% per
annum to 5.00% per annum or a base rate plus a margin ranging from 2.00% per
annum to 4.00% per annum, at our option. The amendment established a
floor of 4.25% for base rate loans and continued the 3.25% floor for adjusted
LIBOR established in the previous amendment.
Based on
our ability to generate cash flows from operations and our borrowing capacity
under the revolver and under the senior secured credit facility, we believe we
will have sufficient capital to meet our short-term and long-term needs,
including our capital expenditures and our debt obligations in
2010.
Long-term
debt consisted of the following:
|
January
2,
|
January
3,
|
||||||||
|
2010
|
2009
|
||||||||
| (in thousands) | |||||||||
|
Tranche A2
term note payable to a bank in quarterly installments of
$231,959
|
|||||||||
|
beginning
November 14, 2009 through November 14, 2011. A lump sum
payment
|
|||||||||
|
of
$87.9 million is due on February 14, 2012. Interest is payable quarterly
at
|
|||||||||
|
LIBOR
or the prime rate plus an applicable margin. At January 3, 2009,
the
|
|||||||||
|
rate
was 4.00% plus a margin of 2.25%.
|
$ | - | $ | 90,000 | |||||
|
Tranche A2
term note payable to a bank in quarterly installments of
$177,546
|
|||||||||
|
beginning
February 14, 2011 through November 14, 2011. A lump sum
payment
|
|||||||||
|
of
$67.3 million is due on February 14, 2012. Interest is payable quarterly
at
|
|||||||||
|
LIBOR
or the prime rate plus an applicable margin. At January 2, 2010,
the
|
|||||||||
|
rate
was 3.25% plus a margin of 4.00%.
|
68,000 | - | |||||||
| $ | 68,000 | $ | 90,000 | ||||||
DISCLOSURES
OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The
following summarizes the contractual obligations as of January 2, 2010 (in
thousands):
|
Payments
Due by Period
|
||||||||||||||||||||||||
|
Contractual Obligations
|
Total
|
Current
|
2-3 Years
|
4 Years
|
5 Years
|
Thereafter
|
||||||||||||||||||
|
Long-term
debt and capital leases (1)
|
$ | 79,045 | $ | 5,351 | $ | 73,694 | $ | - | $ | - | $ | - | ||||||||||||
|
Operating
leases
|
2,689 | 1,511 | 1,034 | 96 | 48 | - | ||||||||||||||||||
|
Supply
agreements
|
1,388 | 1,388 | - | - | - | - | ||||||||||||||||||
|
Equipment
purchase commitments
|
51 | 51 | - | - | - | - | ||||||||||||||||||
|
Total
contractual cash obligations
|
$ | 83,173 | $ | 8,301 | $ | 74,728 | $ | 96 | $ | 48 | $ | - | ||||||||||||
|
(1)
- Includes estimated future interest expense on our long-term debt
assuming the weighted average interest rate of 7.25% as of January 2, 2010
does not change.
|
||||||||||||||||||||||||
The amounts reflected in
the table above for operating leases represent future minimum lease payments
under non-cancelable operating leases with an initial or remaining term in
excess of one year at January 2, 2010. Purchase orders entered into in the
ordinary course of business are excluded from the above table. Amounts for which
we are liable under purchase orders are reflected on our consolidated balance
sheet as accounts payable and accrued liabilities.
We are
obligated to purchase certain raw materials used in the production of our
products from certain suppliers pursuant to stocking programs. If
these programs were cancelled by our Company, we would be required to pay $1.4
million for various materials.
At
January 2, 2010, we had $4.0 million in standby letters of credit related to its
worker’s compensation insurance coverage.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
In
preparing our consolidated financial statements, we follow U.S. generally
accepted accounting principles. These principles require us to make certain
estimates and apply judgments that affect our financial position and results of
operations. We continually review our accounting policies and financial
information disclosures. Following is a summary of our more significant
accounting policies that require the use of estimates and judgments in preparing
the financial statements.
Revenue
recognition
We
recognize sales when all of the following criteria have been met: a valid
customer order with a fixed price has been received; the product has been
delivered and accepted by the customer; and collectibility is reasonably
assured. All sales recognized are net of allowances for discounts and estimated
returns, which are estimated using historical experience. We record
provisions against gross revenues for estimated returns in the period when the
related revenue is recorded. These estimates are based on factors that include,
but are not limited to, analysis of credit memorandum activity, and customer
demand.
Allowances
for doubtful accounts and notes receivable and related reserves
We
evaluate the allowances for doubtful accounts and notes receivable based on
specific identification of troubled balances and historical collection
experience adjusted for current conditions such as the economic climate. Actual
collections can differ from our estimates, requiring adjustments to the
allowances.
Goodwill
The
impairment evaluation of goodwill is conducted annually, or more frequently, if
events or changes in circumstances indicate that an asset might be impaired. The
annual goodwill impairment test is a two-step process. First, we
determine if the carrying value of our related reporting unit exceeds fair value
determined using a discounted cash flow model, which might indicate that
goodwill may be impaired. Second, if we determine that goodwill may
be impaired, we compare the implied fair value of the goodwill determined by
allocating our reporting unit’s fair value to all of its assets and liabilities
other than goodwill (including any unrecognized intangible assets) to its
carrying amount to determine if there is an impairment loss. As of
January 2, 2010, and January 3, 2009, we had no goodwill on our consolidated
balance sheet.
Other
intangibles
The
impairment evaluation of the carrying amount of intangible assets with
indefinite lives is conducted annually, or more frequently, if events or changes
in circumstances indicate that an asset might be impaired. The evaluation is
performed by comparing the carrying amount of these assets to their estimated
fair value. If the estimated fair value is less than the carrying amount of the
intangible assets with indefinite lives, then an impairment charge is recorded
to reduce the asset to its estimated fair value. The estimated fair value is
generally determined on the basis of discounted projected cost savings
attributable to ownership of the intangible assets with indefinite lives which,
for us, are our trademarks. The fair values of trademarks are highly sensitive
to differences between estimated and actual cash flows and changes in the
related discount rate used. Estimates made by management are subject to change
and include such things as future growth assumptions and the rate of projected
estimated cost savings, and other factors, changes in which could materially
impact the results of the impairment test.
Long-lived
assets
We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of long-lived assets to future undiscounted net cash flows
expected to be generated, based on management estimates. Estimates made by
management are subject to change and include such things as future growth
assumptions, operating and capital expenditure requirements, asset useful lives
and other factors, changes in which could materially impact the results of the
impairment test. If such assets are considered to be impaired, the impairment
recognized is the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell, and depreciation is no
longer recorded.
Warranties
We have
warranty obligations with respect to most of our manufactured products.
Obligations vary by product components. The reserve for warranties is based on
our assessment of the costs that will have to be incurred to satisfy warranty
obligations on recorded net sales. The reserve is determined after assessing our
warranty history and specific identification of our estimated future warranty
obligations. Changes to actual warranty claims incurred and interest rates could
have a material impact on our estimated warranty obligations.
Self-Insurance
Reserves
We are
primarily self-insured for employee health benefits and workers’ compensation.
Our workers’ compensation reserves are accrued based on third party actuarial
valuations of the expected future liabilities. Health benefits are self-insured
by us up to pre-determined stop loss limits. These reserves, including incurred
but not reported claims, are based on internal computations. These computations
consider our historical claims experience, independent statistics, and trends.
Changes to actual workers’ compensation or health benefit claims incurred and
interest rates could have a material impact on our estimated self-insurance
reserves.
Derivative
financial instruments
We
utilize derivative financial instruments from time-to-time to hedge the exposure
to variability in expected future cash flows that is attributable to a
particular risk. The effective portion of the gain or loss on a derivative
instrument designated and qualifying as a cash flow hedge is reported as a
component of other comprehensive income and reclassified into earnings in the
same period which the transaction affects earnings. The remaining gain or loss,
if any, is recognized in earnings currently.
We enter
into aluminum forward contracts to hedge the fluctuations in the purchase price
of aluminum extrusion we use in production. These contracts were in
an asset position as of January 2, 2010 and are designated as cash flow hedges
since they are highly effective in offsetting changes in the cash flows
attributable to forecasted purchases of aluminum. We also consider
the credit risk of our counter-party in order to measure the fair value of our
financial instruments in an asset position.
As
of January 2, 2010, we did not have cash on deposit with our commodities broker
related to funding of margin calls on open forward contracts for the purchase of
aluminum in a liability position. We net cash collateral from
payments of margin calls on deposit with our commodities broker against the
liability position of open contracts for the purchase of aluminum on a first-in,
first-out basis. In 2008 and 2009 we maintained a line of credit with
our commodities broker. Beginning in 2010, we no longer maintain a
line of credit to cover the liability position of open contracts for the
purchase of aluminum in the event that the price of aluminum
falls. Should the price of aluminum fall to a level which causes us
to switch to a liability position for open aluminum contracts we would be
required to fund daily margin calls to cover the excess. We believe
this mitigates non-performance risk as it places a limit on the amount of the
liability for open contracts such that an impact, if any, on the fair value of
the liability due to consideration of non-performance risk would not be
significant. We assess our risk of non-performance when measuring the fair value
of our financial instruments in a liability position by evaluating our current
liquidity including cash on hand and availability under our revolving credit
facility as compared to the maturities of the financial
liabilities. In addition, we entered into a master netting
arrangement (MNA) with our commodities broker that provides for, among other
things, the close-out netting of exchange-traded transactions in the event of
the insolvency of either party to the MNA.
Our
aluminum hedges qualify as highly effective for reporting
purposes. Effectiveness of aluminum forward contracts is determined
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. Aluminum forward
contracts identical to those held by us trade on the London Metal Exchange
(“LME”). The prices are used by the metals industry worldwide as the
basis for contracts for the movement of physical material throughout the
production cycle.
Stock-Based
Compensation
We
utilize a fair-value based approach for measuring stock-based compensation to
recognize the cost of employee services received in exchange for our Company’s
equity instruments. We record compensation expense over an award’s vesting
period based on the award’s fair value at the date of grant. Our awards vest
based only on service conditions and compensation expense is recognized on a
straight-line basis for each separately vesting portion of an award. Share-based
compensation expense is recognized only for those awards that are ultimately
expected to vest, and we have applied an estimated forfeiture rate to unvested
awards for the purpose of calculating compensation cost. These estimates will be
revised in future periods if actual forfeitures differ from the estimates.
Changes in forfeiture estimates impact compensation cost in the period in which
the change in estimate occurs.
Income
and Other Taxes
We
account for income taxes utilizing the liability method. Deferred income taxes
are recorded to reflect consequences on future years of differences between
financial reporting and the tax basis of assets and liabilities measured using
the enacted statutory tax rates and tax laws applicable to the periods in which
differences are expected to affect taxable earnings. We have no material
liability for unrecognized tax benefits. However, should we accrue for such
liabilities when and if they arise in the future we will recognize interest and
penalties associated with uncertain tax positions as part of our income tax
provision.
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
In 2008,
we established a valuation allowance with respect to our net deferred tax
assets, excluding the deferred tax liability related to
trademarks. Driven by the goodwill and other intangible impairment
charges recorded in 2008, our cumulative losses over the last three fiscal
years, in addition to the significant downturn in our primary industry of home
construction, lead us to conclude that sufficient negative evidence exists that
it is deemed more likely than not future taxable income will not be sufficient
to realize the related income tax benefits. We also established a
valuation allowance for net deferred tax assets created in 2009.
Sales
taxes collected from customers have been recorded on a net basis.
RECENTLY ISSUED ACCOUNTING
STANDARDS
See Note
3 in the notes to the consolidated financial statements in Item 8.
FORWARD
OUTLOOK
The
following section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth in Item 1A., “Risk Factors”
and certain economic and business factors which may be beyond our control.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties.
Net
sales
During
this housing downturn which started in 2007, and the economic credit
crisis, which started in 2008, we have experienced sales decreases across most
of our product lines both in the new construction and repair and remodeling
markets we serve. However, our decrease in sales has been lower than the
decrease in single family housing starts over the same period. This
is a result of two main factors:
|
·
|
Our
historical ability to outperform the new construction market due to our
strong repair and remodel presence.
|
|
·
|
The
success of our recent initiatives to grow in vinyl products and in markets
outside the state of Florida. In 2009, our out-of-state sales
were 19% of total sales, as opposed to less than 10% in
2006. Also we expect our sales of new non-impact as well as
impact vinyl products to continue to gain traction in
2010.
|
Certain
agencies that report housing start information project that single family
housing starts in the U.S. will be up 10% or more in 2010. However we
will continue to operate with a more conservative view until a stable and
predictable growth in the marketplace is achieved.
Gross
margin
We
believe the following factors, which are not all inclusive, may impact our gross
margin in 2010:
|
|
Our
gross margin percentages are heavily influenced by total sales due to
operating leverage of fixed costs, as well as product mix, due to the fact
that our non-impact products carry a lower margin than our impact
products.
|
|
|
During
the third and fourth quarters of 2008, we entered into forward contracts
for the purchase of aluminum as prices fell to levels not seen since
2002. Some of these contracts will mature in
2010. For contracts that mature in 2010, our hedged price of
aluminum on average is $0.94 per pound, which is currently near the cash
price for aluminum. However, since we are only approximately
57% covered in 2010, the fluctuation of aluminum prices, up or down, will
impact the price we pay for our cash purchases.
|
|
|
The
savings generated from cost reduction initiatives implemented throughout
2009, most of which will benefit cost of goods, are designed to improve
profitability and lessen the negative effect on operating results of
decreasing sales.
|
Selling,
general and administrative expenses
Planned
cost reductions announced throughout 2009, are designed to improve profitability
and lessen the effect of decreasing sales. However, certain costs such as diesel
fuel can fluctuate greatly at times. If the cost of diesel fuel were
to increase again, our selling, general and administrative costs would increase.
In addition, economic and credit conditions may significantly impact our bad
debt expense. We continue to monitor our customer’s credit profiles carefully
and make changes in our terms where necessary in response to this heightened
risk.
Interest
expense
We
prepaid $22 million in outstanding borrowings during 2009. We believe
this decrease in debt levels for the full year of 2010, coupled with the $15
million repayment made on March 17, 2010 will result in our paying less interest
in 2010 than in 2009.
Liquidity
and capital resources
We had
$7.4 million of cash on hand as of January 2, 2010. While we are confident in
our ability to continue to generate cash flow in this unprecedented downturn in
the housing market and the economy, it is possible that we may use this cash to
fund margin calls related to our forward contracts for aluminum if the price of
aluminum falls to levels less than our positions. Our credit facility
includes a $25 million revolving credit facility of which $21.0 million was
available as of March 17, 2010.
Management
expects to spend nearly $4.6 million on capital expenditures in 2010,
including capital expenditures related to product line expansions targeted at
increasing sales. We expect depreciation to be approximately $9.0
million and amortization to be approximately $6.0 million in 2010. On
January 2, 2010, we had outstanding purchase commitments on capital projects of
approximately $0.1 million.
Summary
There
have been some positive signs in our industry lately, but certain statistics
such as housing starts are still at record lows. Single-Family
housing starts in Florida continue to stay around 6,000 per quarter, compared to
60,000 during the housing boom and a realistic average of 25,000 based on
Florida population. Other economic indicators such as unemployment
will hamper the rate of growth for the immediate future. We are
currently staffed appropriately for our sales levels, and accordingly, we are
cautiously optimistic about 2010.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We
experience changes in interest expense when market interest rates
change. We are exposed to changes in LIBOR or the base rate of our
credit facility’s administrative agent. We do not currently use
interest rate swaps, caps or futures contracts to mitigate this risk. Changes in
our debt could also increase these risks. Based on debt outstanding at January
2, 2010, a 1% increase in interest rates would result in approximately $0.7
million of additional interest expense annually.
We
utilize derivative financial instruments to hedge price movements in our
aluminum materials. We are exposed to changes in the price of
aluminum as set by the trades on the London Metal Exchange. We have entered into
aluminum hedging instruments that settle at various times through the end of
2010 that cover approximately 57% of our anticipated needs during 2010 at an
average price of $0.94 per pound. Short-term changes in the cost of
aluminum, which can be significant, are sometimes passed on to our customers
through price increases, however, there can be no guarantee that we will be able
to continue to pass on such price increases to our customers or that price
increases will not negatively impact sales volume, thereby adversely impacting
operating margins.
For
forward contracts for the purchase of aluminum at January 2, 2010, a 10%
decrease in the price of aluminum would decrease the fair value of our forward
contacts of aluminum by $0.6 million.
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
33
|
|||
|
|
34
|
|||
|
|
35
|
|||
|
|
36
|
|||
|
|
37
|
|||
|
|
38
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of
PGT,
Inc.
We have
audited the accompanying consolidated balance sheets of PGT, Inc. as of January
2, 2010 and January 3, 2009, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for the years ended January 2,
2010, January 3, 2009 and December 29, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PGT, Inc. at January
2, 2010 and January 3, 2009, and the consolidated results of their operations
and their cash flows for each of the three years ended January 2, 2010, January
3, 2009 and December 29, 2007, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), PGT. Inc.’s internal control over financial
reporting as of January 2, 2010, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 18, 2010 expressed an
unqualified opinion thereon.
|
|
/s/
ERNST & YOUNG LLP
|
|
|
|
|
Certified
Public Accountants
|
Tampa,
Florida
March 18,
2010
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Net
sales
|
$ | 166,000 | $ | 218,556 | $ | 278,394 | ||||||
|
Cost
of sales
|
121,622 | 150,277 | 187,389 | |||||||||
|
Gross
margin
|
44,378 | 68,279 | 91,005 | |||||||||
|
Impairment
charges
|
742 | 187,748 | 826 | |||||||||
|
Selling,
general and administrative expenses
|
51,902 | 63,109 | 77,004 | |||||||||
|
(Loss)
income from operations
|
(8,266 | ) | (182,578 | ) | 13,175 | |||||||
|
Interest
expense, net
|
6,698 | 9,283 | 11,404 | |||||||||
|
Other
expense (income), net
|
37 | (40 | ) | 692 | ||||||||
|
(Loss)
income before income taxes
|
(15,001 | ) | (191,821 | ) | 1,079 | |||||||
|
Income
tax (benefit) expense
|
(5,584 | ) | (28,789 | ) | 456 | |||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | ||||
|
Net
(loss) income per common share:
|
||||||||||||
|
Basic
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | ||||
|
Diluted
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | ||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
36,451 | 32,104 | 29,247 | |||||||||
|
Diluted
|
36,451 | 32,104 | 30,212 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,417 | $ | 19,628 | ||||
|
Accounts
receivable, net
|
14,213 | 17,321 | ||||||
|
Inventories
|
9,874 | 9,441 | ||||||
|
Deferred
income taxes, net
|
622 | 1,158 | ||||||
|
Income
tax receivable
|
3,782 | 1,074 | ||||||
|
Other
current assets
|
4,078 | 4,868 | ||||||
|
Total
current assets
|
39,986 | 53,490 | ||||||
|
Property,
plant and equipment, net
|
65,104 | 73,505 | ||||||
|
Other
intangible assets, net
|
67,522 | 72,678 | ||||||
|
Other
assets, net
|
1,018 | 944 | ||||||
|
Total
assets
|
$ | 173,630 | $ | 200,617 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 6,759 | $ | 5,730 | ||||
|
Accrued
liabilities
|
9,848 | 8,852 | ||||||
|
Current
portion of long-term debt and capital lease obligations
|
105 | 330 | ||||||
|
Total
current liabilities
|
16,712 | 14,912 | ||||||
|
Long-term
debt and capital lease obligations
|
68,163 | 90,036 | ||||||
|
Deferred
income taxes
|
17,937 | 18,473 | ||||||
|
Other
liabilities
|
2,609 | 3,011 | ||||||
|
Total
liabilities
|
105,421 | 126,432 | ||||||
|
Commitments
and contingencies (Note 13)
|
- | - | ||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock; par value $.01 per share; 10,000 shares authorized; none
outstanding
|
- | - | ||||||
|
Common
stock; par value $.01 per share; 200,000 shares authorized; 35,672
and
|
||||||||
|
35,392
shares issued and 35,303 and 35,197 shares outstanding at
|
||||||||
|
January
2, 2010 and January 3, 2009, respectively
|
353 | 352 | ||||||
|
Additional
paid-in-capital
|
241,682 | 241,177 | ||||||
|
Accumulated
other comprehensive loss
|
(1,031 | ) | (3,966 | ) | ||||
|
Accumulated
deficit
|
(172,795 | ) | (163,378 | ) | ||||
|
Total
shareholders' equity
|
68,209 | 74,185 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 173,630 | $ | 200,617 | ||||
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | ||||
|
Adjustments
to reconcile net (loss) income
|
||||||||||||
|
to
net cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
10,435 | 11,518 | 10,418 | |||||||||
|
Amortization
|
5,731 | 5,570 | 5,570 | |||||||||
|
Provision
for allowances of doubtful accounts
|
1,722 | 1,526 | (46 | ) | ||||||||
|
Stock-based
compensation
|
518 | 798 | 1,479 | |||||||||
|
Excess
tax benefits from stock-based compensation plans
|
- | - | (1,762 | ) | ||||||||
|
Amortization
and write-offs of deferred financing costs
|
561 | 724 | 724 | |||||||||
|
Derivative
financial instruments
|
- | (40 | ) | 692 | ||||||||
|
Deferred
income taxes
|
(1,813 | ) | (27,929 | ) | (1,423 | ) | ||||||
|
Impairment
charges
|
742 | 187,748 | 826 | |||||||||
|
Loss
on disposal of assets
|
98 | 22 | 226 | |||||||||
|
Change
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
3,011 | 4,304 | 4,647 | |||||||||
|
Inventories
|
(351 | ) | (218 | ) | 1,874 | |||||||
|
Prepaid
expenses and other current assets
|
(2,973 | ) | (711 | ) | 4,035 | |||||||
|
Accounts
payable and accrued liabilities
|
1,240 | (408 | ) | (3,063 | ) | |||||||
|
Net
cash provided by operating activities
|
9,504 | 19,872 | 24,820 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property, plant and equipment
|
(2,330 | ) | (4,485 | ) | (10,569 | ) | ||||||
|
Acquisition
of business
|
(1,452 | ) | - | - | ||||||||
|
Net
change in margin account for derivative financial
instruments
|
4,098 | (4,098 | ) | - | ||||||||
|
Proceeds
from sales of equipment
|
79 | 58 | 43 | |||||||||
|
Net
cash provided by/(used in) investing activities
|
395 | (8,525 | ) | (10,526 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payments
of long-term debt
|
(22,000 | ) | (40,000 | ) | (35,488 | ) | ||||||
|
Payments
of financing costs
|
- | (634 | ) | - | ||||||||
|
Payments
of capital leases
|
(98 | ) | (55 | ) | - | |||||||
|
Purchases
of treasury stock
|
(6 | ) | - | - | ||||||||
|
Adjustment
to and net proceeds from issuance of common stock
|
(6 | ) | 29,281 | - | ||||||||
|
Proceeds
from exercise of stock options
|
- | 210 | 1,930 | |||||||||
|
Excess
tax benefits from stock-based compensation plans
|
- | - | 1,762 | |||||||||
|
Net
cash used in financing activities
|
(22,110 | ) | (11,198 | ) | (31,796 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(12,211 | ) | 149 | (17,502 | ) | |||||||
|
Cash
and cash equivalents at beginning of period
|
19,628 | 19,479 | 36,981 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 7,417 | $ | 19,628 | $ | 19,479 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Interest
paid
|
$ | 6,224 | $ | 9,102 | $ | 12,034 | ||||||
|
Income
taxes (refunded) paid
|
$ | (1,062 | ) | $ | (3,270 | ) | $ | 2,798 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Additional
|
||||||||||||||||||||
|
Paid-in
|
||||||||||||||||||||
|
Capital
|
Accumulated
|
|||||||||||||||||||
|
Net
of
|
Other
|
|||||||||||||||||||
|
Common
stock
|
Treasury
|
Accumulated
|
Comprehensive
|
|||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Deficit
|
Income
(Loss)
|
Total
|
|||||||||||||||
|
Balance
at December 30, 2006
|
26,999,051 | $ | 270 | $ | 205,799 | $ | (969) | $ | 106 | $ | 205,206 | |||||||||
|
Exercise
of stock options, including
|
||||||||||||||||||||
|
tax
benefit of $1,762 from the
|
||||||||||||||||||||
|
exercise
of stock options
|
609,837 | 6 | 3,686 | 3,692 | ||||||||||||||||
|
Vesting
of restricted stock
|
11,208 | |||||||||||||||||||
|
Stock-based
compensation
|
1,479 | 1,479 | ||||||||||||||||||
|
Comprehensive
income, net of tax effect:
|
||||||||||||||||||||
|
Amortization
of ineffective
|
||||||||||||||||||||
|
interest
rate swap
|
(159 | ) | (159 | ) | ||||||||||||||||
|
Change
related to interest rate swap
|
8 | 8 | ||||||||||||||||||
|
Change
related to aluminum
|
||||||||||||||||||||
|
forward
contracts
|
(377 | ) | (377 | ) | ||||||||||||||||
|
Net
income
|
623 | 623 | ||||||||||||||||||
|
Total
comprehensive income
|
95 | |||||||||||||||||||
|
Balance
at December 29, 2007
|
27,620,096 | $ | 276 | $ | 210,964 | $ | (346) | $ | (422 | ) | $ | 210,472 | ||||||||
|
Exercise
of stock options, including
|
||||||||||||||||||||
|
tax
benefit of $0 from the
|
||||||||||||||||||||
|
exercise
of stock options
|
479,417 | 5 | 205 | 210 | ||||||||||||||||
|
Vesting
of restricted stock
|
15,149 | |||||||||||||||||||
|
Stock-based
compensation
|
798 | 798 | ||||||||||||||||||
|
Issuance
of common stock
|
7,082,687 | 71 | 29,210 | 29,281 | ||||||||||||||||
|
Comprehensive
loss, net of tax effect:
|
||||||||||||||||||||
|
Change
related to interest rate swap
|
74 | 74 | ||||||||||||||||||
|
Change
related to aluminum
|
||||||||||||||||||||
|
forward
contracts
|
(3,618 | ) | (3,618 | ) | ||||||||||||||||
|
Net
loss
|
(163,032) | (163,032 | ) | |||||||||||||||||
|
Total
comprehensive loss
|
(166,576 | ) | ||||||||||||||||||
|
Balance
at January 3, 2009
|
35,197,349 | $ | 352 | $ | 241,177 | $ | (163,378) | $ | (3,966 | ) | $ | 74,185 | ||||||||
|
Vesting
of restricted stock
|
108,694 | 1 | (1) | - | ||||||||||||||||
|
Acquisition
of treasury stock
|
(3,339) | (6) | (6 | ) | ||||||||||||||||
|
Stock-based
compensation
|
518 | 518 | ||||||||||||||||||
|
Rights
offering costs
|
(6) | (6 | ) | |||||||||||||||||
|
Comprehensive
income, net of tax effect:
|
||||||||||||||||||||
|
Change
related to aluminum
|
||||||||||||||||||||
|
forward
contracts
|
2,935 | 2,935 | ||||||||||||||||||
|
Net
loss
|
(9,417) | (9,417 | ) | |||||||||||||||||
|
Total
comprehensive loss
|
(6,482 | ) | ||||||||||||||||||
|
Balance
at January 2, 2010
|
35,302,704 | $ | 353 | $ | 241,682 | $ | (172,795) | $ | (1,031 | ) | $ | 68,209 | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
1. Description
of Business
|
PGT, Inc.
(“PGTI” or the “Company”) is a leading manufacturer of impact-resistant aluminum
and vinyl-framed windows and doors and offers a broad range of fully
customizable window and door products. The majority of our sales are to
customers in the state of Florida; however, we also sell products in over
40 states, the Caribbean and in South and Central America. Products are
sold through an authorized dealer and distributor network, which we have
approved.
We were
incorporated in the state of Delaware on December 16, 2003, as JLL Window
Holdings, Inc. On February 15, 2006, our Company was renamed PGT, Inc. On
January 29, 2004, we acquired 100% of the outstanding stock of PGT Holding
Company, based in North Venice, Florida. We have one manufacturing operation and
one glass tempering and laminating plant in North Venice, Florida with an
additional manufacturing operation located in Salisbury, North
Carolina.
All
references to PGTI or our Company apply to the consolidated financial statements
of PGT, Inc. unless otherwise noted.
|
|
2. Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the U.S.
(“GAAP”). In June 2009, the FASB announced that the FASB
Accounting Standards Codification (“Codification”) was the new source of GAAP
recognized by the FASB for nongovernmental entities.
Fiscal
period
Our
fiscal year consists of 52 or 53 weeks ending on the Saturday nearest
December 31 of the related year. The periods ended January 2, 2010 and
December 29, 2007 consisted of 52 weeks. The period ended January 3, 2009
consisted of 53 weeks.
Principles
of consolidation
The
consolidated financial statements present the results of the operations,
financial position and cash flows of PGTI and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Segment
information
We
operate as one operating segment, the manufacture and sale of windows and
doors.
Use
of estimates
The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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. Critical accounting estimates involved in applying our
accounting policies are those that require management to make assumptions about
matters that are uncertain at the time the accounting estimate is made and those
for which different estimates reasonably could have been used for the current
period. Critical accounting estimates are also those which are reasonably likely
to change from period to period and would have a material impact on the
presentation of PGTI’s financial condition, changes in financial condition or
results of operations. Actual results could materially differ from those
estimates.
- 38
-
Revenue
recognition
PGTI
recognizes revenue when a valid customer order with a fixed price has been
received, the product has been delivered and accepted by the customer and
collectibility is reasonably assured. Revenues are recognized net of allowances
for discounts and estimated returns, which are estimated using historical
experience.
Cost
of sales
Cost of
sales represents costs directly related to the production of our products.
Primary costs include raw materials, direct labor, and manufacturing overhead.
Manufacturing overhead and related expenses primarily include salaries, wages,
employee benefits, utilities, maintenance, engineering and property
taxes.
In the
first quarter of 2009, we entered into a contract to continue manufacturing
windows and doors for a large multi-story condominium project in Southeast
Florida. At the time the contract was executed, the initial project
was approximately 35% complete. We recorded an estimated loss on this
contract of $0.9 million in the first quarter of 2009 in cost of goods sold, and
the corresponding liability is shown in accrued liabilities on the accompanying
consolidated balance sheets at January 2, 2010. In connection with
this project, we received a credit against the purchase of materials in the
amount of $0.8 million from an aluminum supplier which was also recorded in cost
of goods sold in the first quarter of 2009. As of January 2, 2010,
there is $0.5 million remaining as a receivable for these credits and is shown
in other current assets on the accompanying consolidated balance
sheets.
In 2008, we recognized a business interruption insurance recovery of $0.7 million, classified as a reduction of cost of goods sold in the accompanying consolidated statement of operations for the year ended January 3, 2009, of incremental expenses we incurred relating to a November 2005 fire that idled a major laminated glass manufacturing asset and which required us to purchase laminated glass from an outside vendor at a price exceeding our cost to manufacture. Such amount is included in other current assets in the accompanying consolidated balance sheet at January 3, 2009 and was received in cash shortly thereafter.
Shipping
and handling costs
Shipping
and handling costs incurred in the purchase of materials used in the
manufacturing process are included in cost of sales. Costs relating to shipping
and handling of our finished products are included in selling, general and
administrative expenses and total $13.0 million, $17.7 million, and $17.3
million for the years ended January 2, 2010, January 3, 2009 and December 29,
2007, respectively.
Advertising
We
expense advertising costs as incurred. Advertising expense included in selling,
general and administrative expenses were $0.3 million, $0.6 million and $1.8
million for the years ended January 2, 2010, January 3, 2009 and December 29,
2007, respectively.
Research
and development costs
We
expense research and development costs as incurred. Research and development
costs included in overhead expenses were $1.4 million, $1.4 million and $2.2
million for the years ended January 2, 2010, January 3, 2009 and December 29,
2007, respectively.
Cash
and cash equivalents
Cash and
cash equivalents consist of cash on hand or highly liquid investments with an
original maturity date of three months or less.
Accounts
and notes receivable and allowance for doubtful accounts
We extend
credit to qualified dealers and distributors, generally on a non-collateralized
basis. Accounts receivable are recorded at their gross receivable amount,
reduced by an allowance for doubtful accounts that results in the receivable
being recorded at its net realizable value. The allowance for doubtful accounts
is based on management’s assessment of the amount which may become uncollectible
in the future and is determined through consideration of Company write-off
history, specific identification of uncollectible accounts based in part on the
customer’s past due balance (based on contractual terms), and consideration of
prevailing economic and industry conditions. Uncollectible accounts are written
off after repeated attempts to collect from the customer have been
unsuccessful.
Accounts
receivable consist of the following:
|
January
2,
|
January
3,
|
|||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Accounts
receivable
|
$ | 15,678 | $ | 18,545 | ||||||||||||
|
Less: Allowance
for doubtful accounts
|
(1,465 | ) | (1,224 | ) | ||||||||||||
| $ | 14,213 | $ | 17,321 | |||||||||||||
|
Balance
at
|
Balance
at
|
|||||||||||||||
|
Beginning
|
Costs
and
|
End
of
|
||||||||||||||
|
Allowance for Doubtful
Accounts
|
of
Period
|
expenses
|
Deductions(1)
|
Period
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Year
ended January 2, 2010
|
$ | 1,224 | $ | 1,332 | $ | (1,091 | ) | $ | 1,465 | |||||||
|
Year
ended January 3, 2009
|
$ | 416 | $ | 1,244 | $ | (436 | ) | $ | 1,224 | |||||||
|
Year
ended December 29, 2007
|
$ | 943 | $ | (160 | ) | $ | (367 | ) | $ | 416 | ||||||
|
(1)
|
Represents
uncollectible accounts charged against the allowance for doubtful
accounts.
|
As of
January 2, 2010 there were $1.0 million and as of January 3, 2009 there were
$1.1 million of trade notes receivable for which there was an allowance of $0.5
million and $0.2 million, respectively, included in other current assets and
other assets in the accompanying consolidated balance sheet.
Self-Insurance
Reserves
We are
primarily self-insured for employee health benefits and workers’ compensation.
Our workers’ compensation reserves are accrued based on third party actuarial
valuations of the expected future liabilities. Health benefits are self-insured
by us up to pre-determined stop loss limits. These reserves, including incurred
but not reported claims, are based on internal computations. These computations
consider our historical claims experience, independent statistics, and
trends.
Warranty
expense
We have
warranty obligations with respect to most of our manufactured products. Warranty
periods, which vary by product components, range from 1 to 10 years.
However, the majority of the products sold have warranties on components which
range from 1 to 3 years. The reserve 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 recorded net
sales. The reserve is determined after assessing Company history and specific
identification. Expected future obligations are discounted to a current value
using a risk-free rate for obligations with similar maturities which, as of
January 2, 2010 and January 3, 2009 was 3.85% and 2.50%, respectively. The
undiscounted aggregate of accrued warranty at January 2, 2010 and January 3,
2009 is $4.3 million and $4.4 million, respectively. In 2007, we
refined our warranty calculations by adding certain data inputs to better
reflect the decrease in sales. This change resulted in a decrease in our
estimated warranty obligations as of December 2, 2007 of $0.5 million, which had
an approximate $0.3 million effect on net income, or $0.01 per diluted share.
The following provides information with respect to our warranty
accrual.
|
Accrued Warranty
|
Beginning of
Period
|
Charged
to Expense
|
Adjustments
|
Settlements
|
End
of Period
|
||||||
|
(in
thousands)
|
|||||||||||
|
Year
ended January 2, 2010
|
$
4,224
|
$ |
2,490
|
$ 21
|
$ |
(2,694)
|
$
4,041
|
||||
|
Year
ended January 3, 2009
|
$ 4,986
|
$ |
3,278
|
$
(575)
|
$ |
(3,465)
|
$
4,224
|
||||
|
Year
ended December 29, 2007
|
$ 4,934
|
$ |
5,568
|
$
(409)
|
$ |
(5,107)
|
$
4,986
|
||||
Inventories
Inventories
consist principally of raw materials purchased for the manufacture of our
products. PGTI has limited finished goods inventory as all products are custom,
made-to-order products. Finished goods inventory costs include direct materials,
direct labor, and overhead. All inventories are stated at the lower of cost
(first-in, first-out method) or market. The reserve for obsolescence is based on
management’s assessment of the amount of inventory that may become obsolete in
the future and is determined through Company history, specific identification
and consideration of prevailing economic and industry conditions.
Inventories
consist of the following:
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Finished
goods
|
$ | 954 | $ | 905 | ||||
|
Work
in progress
|
259 | 342 | ||||||
|
Raw
materials
|
8,661 | 8,194 | ||||||
| $ | 9,874 | $ | 9,441 | |||||
Property,
plant and equipment
Property,
plant and equipment are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets. Depreciable assets
are assigned estimated lives as follows:
| Building and improvements | 5 to 40 years |
| Furniture and equipment | 3 to 10 years |
| Vehicles | 3 to 10 years |
| Computer software | 3 years |
Maintenance
and repair expenditures are charged to expense as incurred. During
the second quarter of 2008, the Company entered into capital leases totaling
approximately $0.4 million for the acquisition of equipment representing a
non-cash financing and investing activity. Amortization of assets under capital
leases is included in depreciation expense and was not material in 2009 or in
2008.
Long-lived
assets
We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of long-lived assets to future undiscounted net cash flows
expected to be generated. If such assets are
considered to be impaired, the impairment recognized is the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
cost to sell, and depreciation is no longer recorded.
We
recorded an impairment charge of $0.8 million in 2007 to adjust the carrying
value of the Lexington, North Carolina manufacturing facility to its estimated
fair value. In December 2009, we recorded an additional impairment charge of
$0.7 million to reflect a further decline in the market value for this
property. The cost basis for depreciation purposes is the carrying
value of $0.7 million and is classified within property, plant and equipment,
net, in the accompanying consolidated balance sheets as of January 2,
2010. Subsequent to January 2, 2010 we entered an agreement to list
the property for sale with an agent, although as a result of the current market
conditions, the expected time of disposal cannot be estimated.
We
determined the fair value of the Lexington property by obtaining recommendations
of value from various local real estate agents and by reviewing data from
comparable sales and leases executed in the recent past. We
categorize this property as being fair valued using Level 2 inputs as
follows:
|
Fair
Value Measurements at Reporting Date
of
Asset (Liability) Using:
|
||||
|
Quoted
|
Significant
|
Significant
|
||
|
Prices
in
|
Other
Observable
|
Unobservable
|
||
|
January
2,
|
Active
Markets
|
Inputs
|
Inputs
|
|
|
Description
|
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
(in
thousands)
|
||||
|
Lexington
Property
|
$ 700
|
$ -
|
$ 700
|
$ -
|
Computer
software
We
capitalize costs associated with software developed or obtained for internal use
when both the preliminary project stage is completed and it is probable that
computer software being developed will be completed and placed in service.
Capitalized costs include:
|
(i) external
direct costs of materials and services consumed in developing or obtaining
computer software,
|
|
(ii) payroll
and other related costs for employees who are directly associated with and
who devote time to the software project, and
|
|
(iii) interest
costs incurred, when material, while developing internal-use
software.
|
Capitalization
of such costs ceases no later than the point at which the project is
substantially complete and ready for its intended purpose.
Capitalized
software as of January 2, 2010 and January 3, 2009 was $11.4 million and
$10.6 million, respectively. Accumulated depreciation of capitalized
software was $10.0 million and $9.0 million as of January 2, 2010 and
January 3, 2009, respectively.
Depreciation
expense for capitalized software was $1.1 million, $1.1 million and
$1.0 million for the years ended January 2, 2010, January 3, 2009 and
December 29, 2007, respectively.
We review
the carrying value of software and development costs for impairment in
accordance with our policy pertaining to the impairment of long-lived
assets.
Goodwill
At the
present time, we do not have goodwill on our balance sheet. During
the year ended January 3, 2009, the goodwill was found to be fully impaired, and
written off accordingly. See Note 7.
Our
policy, for goodwill in the past or in the future should any be recorded, is to
evaluate impairment of goodwill annually, or more frequently, if events or
changes in circumstances indicate that an asset might be impaired. The annual
goodwill impairment test is a two-step process. First, we will
determine whether the carrying value of our related reporting unit exceeds fair
value determined using a discounted cash flow model, which might indicate that
goodwill may be impaired. Second, if we determine that goodwill may
be impaired, we will compare the implied fair value of the goodwill determined
by allocating our single reporting unit’s fair value to all of its assets and
liabilities other than goodwill (including any unrecognized intangible assets)
to its carrying amount to determine if there is an impairment loss.
Other
intangibles
Other
intangible assets consist of trademarks and customer-related intangible assets.
The useful lives of trademarks were determined to be indefinite and, therefore,
these assets are not being amortized. Customer-related intangible assets are
being amortized over their estimated useful lives of ten years. The
impairment evaluation of intangible assets with indefinite lives is conducted
annually, or more frequently, if events or changes in circumstances indicate
that an asset might be impaired. The evaluation is performed by comparing the
carrying amount of these assets to their estimated fair value. If the estimated
fair value is less than the carrying amount of the indefinite-lived intangible
assets, then an impairment charge is recorded to reduce the asset to its
estimated fair value. The estimated fair value is generally determined on the
basis of discounted future projected cost savings attributable to ownership of
the intangible assets with indefinite lives which, for us, are our
trademarks. See Note 7.
The
assumptions used in the estimate of fair value are generally consistent with
past performance and are also consistent with the projections and assumptions
that are used in our current operating plans. Such assumptions are subject to
change as a result of changing economic and competitive conditions.
The
determination of fair value used in that assessment is highly sensitive to
differences between estimated and actual cash flows and changes in the related
discount rate used to evaluate fair value. Estimated cash flows are sensitive to
changes in the Florida housing market and changes in the economy among other
things.
Deferred
financing costs
Deferred
financing costs are amortized using the effective interest method over the life
of the debt instrument to which they relate. Unamortized deferred financing
costs, included in other assets, net, on the accompanying consolidated balance
sheets, totaled $0.6 million at January 2, 2010 and $1.2 million at January 3,
2009. In the year ended January 3, 2009, an additional $0.6 million
of financing costs were deferred and are being amortized related to an amendment
of our credit facility (Note 9). Amortization of deferred financing
costs is included in interest expense in the accompanying consolidated
statements of operations. There was $0.6 million of amortization for the year
ended January 2, 2010 and $0.7 for the years ended January 3, 2009 and December
29, 2007. These amounts include write-offs of deferred financing costs related
to the prepayments of portions of our long-term debt during (Note 9) in the
amounts of $0.2 million and $0.3 million, for the years ended January 2, 2010
and January 3, 2009, respectively. There was $11.4 million and
$10.8 million in accumulated amortization related to these costs at January
2, 2010 and January 3, 2009, respectively.
Estimated
amortization of deferred financing costs is as follows for future fiscal
years:
|
(in
thousands)
|
||||
|
2010
|
$ | 280 | ||
|
2011
|
279 | |||
|
2012
|
33 | |||
|
Total
|
$ | 592 | ||
Derivative
financial instruments
We
utilize certain derivative instruments, from time to time, including forward
contracts and interest rate swaps to manage variability in cash flow associated
with commodity market price risk exposure in the aluminum market and interest
rates. We do not enter into derivatives for speculative
purposes. Additional information with regard to derivative
instruments is contained in Note 11.
We
account for derivative instruments in accordance with the guidance under the
Derivatives and Hedging
topic of the Codification which requires us to recognize all of its
derivative instruments as either assets or liabilities in the consolidated
balance sheet at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship based on its
effectiveness in hedging against the exposure and further, on the type of
hedging relationship. For those derivative instruments that are designated and
qualify as hedging instruments, we must designate the hedging instrument, based
upon the exposure being hedged, as a fair value hedge or a cash flow
hedge.
Our
forward contracts are designated and accounted for as cash flow hedges (i.e.,
hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk). The Derivatives and Hedging topic
of the Codification provides that the effective portion of the gain or loss on a
derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of other comprehensive income and be
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 ineffective portion of the gain or loss on these derivative
instruments, if any, is recognized in other income/expense in current earnings
during the period of change.
For
derivative instruments not designated as hedging instruments, the gain or loss
is recognized in other income/expense in current earnings during the period of
change. When a cash flow hedge is terminated, if the forecasted hedged
transaction is still probable of occurrence, amounts previously recorded in
other comprehensive income remain in other comprehensive income and are
recognized in earnings in the period in which the hedged transaction affects
earnings.
As of
January 2, 2010, we did not have cash on deposit with our commodities broker
related to funding of margin calls on open forward contracts for the purchase of
aluminum since we were in a net asset position. The net asset
position of $0.5 million on January 2, 2010 is included in other current assets
in the accompanying consolidated balance sheet as of that date as it relates to
open contracts with scheduled prompt dates in 2010.
As of
January 3, 2009, we had $4.1 million of cash on deposit with our commodities
broker related to funding of margin calls on open forward contracts for the
purchase of aluminum in a liability position. We net cash collateral
from payments of margin calls on deposit with our commodities broker against the
liability position of open contracts for the purchase of aluminum on a first-in,
first-out basis. The net liability position of $0.1 million on January 3, 2009
is included in other liabilities in the accompanying consolidated balance sheet
as of that date as it relates to open contracts with scheduled prompt dates in
November and December 2010. For statement of cash flows presentation,
we present net cash receipts from and payments to the
margin account as investing
activities.
Financial
instruments
Our
financial instruments, not including derivative financial instruments discussed
in Note 11, include cash, accounts and notes receivable, and accounts payable
whose carrying amounts approximate their fair values due to their short-term
nature. Our financial instruments also include long-term
debt. Based on bid prices for prices for our debt, the fair value of
our long-term debt was approximately $51 million at January 2, 2010 and $63
million at January 3, 2009, compared to a carrying value of $68 million and
$90 million at January 2, 2010 and January 3, 2009, respectively.
Concentrations
of credit risk
Financial
instruments, which potentially subject us to concentrations of credit risk,
consist principally of cash and cash equivalents and trade accounts receivable.
Accounts receivable are due primarily from companies in the construction
industry located in Florida and the eastern half of the United States. Credit is
extended based on an evaluation of the customer’s financial condition and credit
history, and generally collateral is not required.
We
maintain our cash with a single financial institution. The balance exceeds
federally insured limits. At January 2, 2010 and January 3, 2009, such balance
exceeded the insured limit by $7.2 million and $19.3 million,
respectively.
Comprehensive
income (loss)
Comprehensive
income (loss) is reported on the consolidated statements of shareholders’ equity
and accumulated other comprehensive income (loss) is reported on the
consolidated balance sheets and the statement of shareholders’
equity.
Gains and
losses on cash flow hedges, to the extent effective, are included in other
comprehensive income (loss). Reclassification adjustments reflecting such gains
and losses are ratably recorded in income in the same period as the hedged items
affect earnings. Additional information with regard to accounting policies
associated with derivative instruments is contained in
Note 11.
Stock
compensation
We use a
fair-value based approach for measuring stock-based compensation and, therefore,
record compensation expense over an award’s vesting period based on the award’s
fair value at the date of grant. Our Company’s awards vest based only on service
conditions and compensation expense is recognized on a straight-line basis for
each separately vesting portion of an award. We recorded compensation
expense for stock based awards of $0.5 million before income tax, or $0.01 per
diluted share after-tax effect, $0.8 million before tax, or $0.03 per
diluted share after-tax effect and $1.5 million before income tax, or $0.03
per diluted share after-tax effect, in the years ended January 2, 2010, January
3, 2009 and December 29, 2007, respectively.
Income
and other taxes
We
account for income taxes utilizing the liability method. Deferred income taxes
are recorded to reflect consequences on future years of differences between
financial reporting and the tax basis of assets and liabilities measured using
the enacted statutory tax rates and tax laws applicable to the periods in which
differences are expected to affect taxable earnings. We have no material
liability for unrecognized tax benefits. However, should we accrue for such
liabilities when and if they arise in the future we will recognize interest and
penalties associated with uncertain tax positions as part of our income tax
provision.
Sales
taxes collected from customers have been recorded on a net basis.
Net
income (loss) per common share
We
present basic and diluted earnings per share. Basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive effect
of common stock equivalents. In June 2008, new accounting guidance
was issued related to share-based awards that qualify as participating
securities. In accordance with this guidance, unvested share-based payment
awards that include non-forfeitable rights to dividends, whether paid or unpaid,
are considered participating securities. As a result, such awards are
required to be included in the calculation of basic earnings per common share
pursuant to the “two-class” method. Participating securities are comprised
of unvested restricted stock awards, and prior to the application of this
guidance, they were excluded from weighted average common shares outstanding in
the calculation of basic earnings per share.
In accordance with the new guidance,
the basic and diluted earnings per share amounts have been retroactively
adjusted for all periods presented to include outstanding unvested restricted
stock in the calculation of basic weighted average shares outstanding.
Our
weighted average shares outstanding excludes underlying options
of 1.2 million, 1.6 million and 2.0 million for the years ended
January 2, 2010, January 3, 2009 and December 29, 2007, respectively, because
their effects were anti-dilutive. Weighted average shares in all periods shown
below have been restated to give effect to the bonus element in the 2010
rights offering. Additionally, periods prior to fiscal 2008 have been restated
to give effect to the bonus element in the 2008 rights offering. The table below
presents the calculation of basic and diluted earnings per share, including a
reconciliation of weighted average common shares:
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032 | ) | $ | 623 | ||||
|
Denominator:
|
||||||||||||
|
Weighted-average
common shares - Basic
|
36,451 | 32,104 | 29,247 | |||||||||
|
Add: Dilutive
effect of stock compensation plans
|
- | - | 965 | |||||||||
|
Weighted-average
common shares - Diluted
|
36,451 | 32,104 | 30,212 | |||||||||
|
Net
(loss) income per common share:
|
||||||||||||
|
Basic
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | ||||
|
Diluted
|
$ | (0.26 | ) | $ | (5.08 | ) | $ | 0.02 | ||||
Reclassification
A
restructuring charge of $1.7 million, which in our Annual Report on Form 10-K
for the year ended December 29, 2007 was reported as a separate line item in the
consolidated statement of operations for that year, has been reclassified to
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the same period because a discussion of the
classification of the 2007 restructuring charge is included in Note
4.
Certain
other immaterial amounts have been reclassified in prior years to conform to
current year presentation.
|
3. Recently
Issued Accounting Pronouncements
|
The
guidance under the Business
Combinations topic of the Codification was issued in December 2007. The
guidance establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. It also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance was effective for us in our
fiscal year beginning January 4, 2009. We applied the provisions of the
guidance to a recent acquisition and will apply the provisions to future
acquisitions, if any.
In March
2008, the FASB issued guidance under the Derivatives and Hedging topic
of the Codification. The guidance requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. It also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of the guidance have been applied, and
the impact that hedges have on an entity’s financial position, financial
performance, and cash flows. The guidance was effective for fiscal
years and interim periods beginning after November 15, 2008. We
adopted the guidance effective on January 4, 2009 and have provided the required
information in Note 11.
In April
2008, the FASB issued guidance under the Intangibles – Goodwill and
Other topic of the Codification which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The guidance was effective for
fiscal years beginning after December 15, 2008. We adopted the
guidance effective on January 4, 2009 with no impact on our consolidated
financial position and results of operations.
In April
2009, the FASB issued guidance under the Financial Instruments topic
of the Codification that is intended to provide additional application guidance
and enhance disclosures about fair value measurements and impairments of
securities. The guidance clarifies the objective and method of fair value
measurement even when there has been a significant decrease in market activity
for the asset being measured and establishes a new model for measuring
other-than-temporary impairments for debt securities, including establishing
criteria for when to recognize a write-down through earnings versus other
comprehensive income. The guidance expands the fair value disclosures required
for all financial instruments to interim periods. The adoption of the guidance
did not impact our consolidated financial statements but rather resulted in
increased interim disclosures related to our financial instruments.
|
4. Restructurings
|
On
October 25, 2007, we announced a restructuring as a result of an in-depth
analysis of our target markets, internal structure, projected run-rate, and
efficiency. The restructuring resulted in a decrease in our workforce
of approximately 150 employees and included employees in both Florida and North
Carolina. As a result of the restructuring, we recorded a
restructuring charge of $2.4 million in 2007, of which $0.7 million was
classified within cost of goods sold and $1.7 million was classified within
selling, general and administrative expenses. The charge related
primarily to employee separation costs. Of the $2.4 million charge,
$1.5 million was disbursed in 2007 and $0.9 million was disbursed in
2008.
On March
4, 2008, we announced a second restructuring as a result of continued analysis
of our target markets, internal structure, projected run-rate, and
efficiency. The restructuring resulted in a decrease in our workforce
of approximately 300 employees and included employees in both Florida and North
Carolina. As a result of the restructuring, we recorded a
restructuring charge of $2.1 million in 2008, of which $1.1 million is
classified within cost of goods sold and $1.0 million is classified within
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the year ended January 3, 2009. The
charge related primarily to employee separation costs. Of the $2.1
million, $1.8 million was disbursed in the first quarter of 2008. The
remaining $0.3 million is classified within accrued liabilities in the
accompanying consolidated balance sheet as of January 3, 2009 (Note 8) and was
disbursed in 2009.
On
January 13, 2009, March 10, 2009, September 24, 2009 and November 12, 2009, we
announced restructurings as a result of continued analysis of our
target markets, internal structure, projected run-rate, and
efficiency. The restructuring resulted in a decrease in our workforce
of approximately 260 in the first quarter, 80 in the second quarter and 140 in
the fourth quarter for a total of 480 employees and included employees in both
Florida and North Carolina. As a result of the restructurings, we
recorded restructuring charges of $5.4 million in the accompanying consolidated
statement of operations for the year ended January 2, 2010, of which $3.1
million is classified within cost of goods sold with $1.4 million charged in the
first quarter, $0.5 million in the third quarter and $1.2 million in the fourth.
The remaining $2.3 million is classified within selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended January 2, 2010 of which $1.6 million is charged in the first
quarter, $0.4 million in the second quarter and $0.3 million in the fourth
quarter. The charges related primarily to employee separation
costs. Of the $5.4 million, $2.6 million was disbursed in the first
quarter of 2009, $0.3 million in the second quarter, $0.4 million in the third
quarter and $1.2 million in the fourth quarter. The remaining $0.9
million is classified within accrued liabilities in the accompanying
consolidated balance sheet as of January 2, 2010 (Note 8) and is expected to be
disbursed in 2010.
The
following table provides information with respect to the accrual for
restructuring costs:
|
Beginning
of Year
|
Charged
to Expense
|
Disbursed
in Cash
|
End
of Year
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Year
ended January 2, 2010:
|
||||||||||||||||
|
2008
Restructuring
|
$ | 332 | $ | - | $ | (332 | ) | $ | - | |||||||
|
2009
Restructuring
|
- | 5,395 | (4,497 | ) | 898 | |||||||||||
|
For
the year ended January 2, 2010
|
$ | 332 | $ | 5,395 | $ | (4,829 | ) | $ | 898 | |||||||
|
Year
ended January 3, 2009:
|
||||||||||||||||
|
2007
Restructuring
|
$ | 850 | $ | - | $ | (850 | ) | $ | - | |||||||
|
2008
Restructuring
|
- | 2,131 | (1,799 | ) | 332 | |||||||||||
|
For
the year ended January 3, 2009
|
$ | 850 | $ | 2,131 | $ | (2,649 | ) | $ | 332 | |||||||
|
Year
ended December 29, 2007:
|
||||||||||||||||
|
2007
Restructuring
|
$ | - | $ | 2,375 | $ | (1,525 | ) | $ | 850 | |||||||
|
5. Property,
Plant and Equipment
|
The
following table presents the composition of property, plant and equipment as
of:
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 3,804 | $ | 4,029 | ||||
|
Buildings
and improvements
|
47,700 | 48,243 | ||||||
|
Machinery
and equipment
|
49,063 | 45,644 | ||||||
|
Vehicles
|
5,915 | 6,310 | ||||||
|
Software
|
11,367 | 10,635 | ||||||
|
Construction
in progress
|
511 | 1,989 | ||||||
| 118,360 | 116,850 | |||||||
|
Less
accumulated depreciation
|
(53,256 | ) | (43,345 | ) | ||||
| $ | 65,104 | $ | 73,505 | |||||
6. Acquisition
Pursuant
to an asset purchase agreement by and between Hurricane Window and Door Factory,
LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT
Industries, Inc., effective on August 14, 2009, we acquired certain operating
assets of Hurricane for approximately $1.5 million in cash. Hurricane
designs and manufactures high-end vinyl impact products for the single- and
multi-family residential markets. The products provide long-term energy and
structural benefits, while qualifying homeowners for the government’s energy tax
credits through the American Recovery and Reinvestment Act of
2009. This product line was developed specifically for the hurricane
protection market and combines some of the highest structural ratings in the
industry with excellent energy efficiency. The acquisition of this
business expands our presence in the energy efficient vinyl impact-resistant
market, increases our ability to serve the multi-story condominium market, and
enhances our ability to offer a complete line of impact products to the
customer.
The
purchase price paid was allocated to the assets acquired based on their
estimated fair value on August 14, 2009. The assets acquired included
Hurricane’s inventory, comprised almost entirely of raw materials, and property
and equipment, primarily comprised of machinery and other manufacturing
equipment. We also acquired the right to use Hurricane’s design
technology through the end of 2010, the option to purchase the technology at any
time through the end of 2010 and, if desired, the right to extend the usage of
and the option to purchase Hurricane’s design technology for an additional one
year period through the end of 2011. The allocation of the $1.5
million cash purchase price to the fair value of the assets acquired as of the
August 14, 2009 acquisition date is as follows:
|
(in
thousands)
|
Fair Values
|
|||
|
Inventory
|
$ | 254 | ||
|
Property
and equipment
|
623 | |||
|
Identifiable
intangibles
|
575 | |||
|
Net
assets acquired
|
1,452 | |||
|
Purchase
price
|
1,452 | |||
|
Goodwill
|
$ | - | ||
The value
of inventory was established based on then current purchase prices of identical
materials available from Hurricane’s existing vendors. The value of
property and equipment was established based on Hurricane’s net carrying values
which we determined to approximate fair value due to, among other things, the
assets having been in service for less than one year. We engaged a
third-party valuation specialist to assist us in estimating the fair value of
the identifiable intangible assets consisting of the right to use Hurricane’s
design technology and the related purchase option. The fair value of
the identifiable intangible assets was estimated using an income approach based
on projections provided by management, which we consider to be Level 3 inputs.
The carrying value of the intangible assets of $0.4 million is included in other
intangible assets, net, in the accompanying condensed consolidated balance sheet
at January 2, 2010. The intangible assets are being amortized on the
straight-line basis over their estimated lives, which are based on their
contractual lives (approximately 1.4 years through the end of
2010). Amortization expense of $0.2 million is included in selling,
general and administrative expenses in the accompanying condensed consolidated
statement of operations for the year ended January 2,
2010. Acquisition costs of less than $0.1 million are included in
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the year ended January 2,
2010. Hurricane’s operating results prior to the acquisition were
insignificant.
|
7. Goodwill
and Other Intangible Assets
|
Goodwill
and other intangible assets are as follows as of:
|
January
2,
|
January
3,
|
Useful
Life
|
|||||||||||
|
2010
|
2009
|
(in
years)
|
|||||||||||
| (in thousands) | |||||||||||||
|
Goodwill
|
$ | - | $ | - |
indefinite
|
||||||||
|
Other
intangible assets:
|
|||||||||||||
|
Trademarks
|
$ | 44,400 | $ | 44,400 |
indefinite
|
||||||||
|
Customer
relationships
|
55,700 | 55,700 | 10 | ||||||||||
|
Less: Accumulated
amortization
|
(32,992 | ) | (27,422 | ) | |||||||||
|
Subtotal
|
22,708 | 28,278 | |||||||||||
|
Hurricane
technology
|
575 | - | 1.4 | ||||||||||
|
Less: Accumulated
amortization
|
(161 | ) | - | ||||||||||
|
Subtotal
|
414 | - | |||||||||||
|
Other
intangible assets, net
|
$ | 67,522 | $ | 72,678 | 9.9 | ||||||||
|
Goodwill
at December 29, 2007
|
$ | 169,648 | |||||||||||
|
Impairment
charges - year ended January 3, 2009
|
(169,648 | ) | |||||||||||
|
Goodwill
at January 3, 2009
|
$ | - | |||||||||||
|
Trademarks
at December 29, 2007
|
$ | 62,500 | |||||||||||
|
Impairment
charges - year ended January 3, 2009
|
(18,100 | ) | |||||||||||
|
Trademarks
at January 3, 2009
|
$ | 44,400 | |||||||||||
Goodwill
As a
result of the impairment indicators related to the weakness in the housing
market, which we concluded has resulted in the prolonged decline in our market
capitalization as compared to our book value, during the second quarter of 2008,
we updated the first step of our goodwill impairment test and determined that
its carrying value exceeded its fair value, indicating that goodwill was
impaired. Having determined that goodwill was impaired, we then began
performing the second step of the goodwill impairment test which involves
calculating the implied fair value of our goodwill by allocating the fair value
of the Company to all of our assets and liabilities, other than goodwill
(including both recognized and unrecognized intangible assets), and comparing it
to the carrying amount of goodwill. As a result of this process, we
recorded a $92.0 million estimated goodwill impairment charge in the second
quarter of 2008. During the third quarter of 2008, we completed the second step
of the goodwill impairment test and, as a result, recorded an additional $1.3
million goodwill impairment charge.
We
performed our annual assessment of goodwill impairment as of January 3, 2009.
Given a further decline in housing starts and the overall tightening of the
credit markets, our revised forecasts indicated additional impairment of
goodwill. After allocating our fair value to our assets and
liabilities other than goodwill, we concluded that goodwill had no implied fair
value and the remaining carrying value was written-off. After
impairment charges totaling $169.6 million in 2008, goodwill has no carrying
value as of January 3, 2009.
We
utilized the discounted cash flow method to determine the Company’s fair value
for both the second quarter 2008 and fourth quarter 2008 goodwill impairment
tests.
The
amount of goodwill deductible for tax purposes was $63.8 million at the
time of the 2004 acquisition, of which, $32.1 million and $37.5 million was
unamortized as of January 2, 2010 and January 3, 2009,
respectively.
Indefinite Lived Intangible
Asset
As a
result of the impairment indicators described above, during the second quarter
of 2008, we evaluated our trademarks for impairment and compared their estimated
fair value to their carrying value and preliminarily determined that there was
no impairment. During the third quarter of 2008, as part of
finalizing our goodwill impairment test discussed above, we made certain changes
to our assumptions that affected the previous estimate of fair value and, when
compared to the carrying value of our trademarks, resulted in a $0.3 million
impairment charge in the third quarter of 2008. We performed our
annual assessment of our trademarks as of January 3, 2009. Given a further
decline in housing starts and the overall tightening of the credit markets, our
revised forecasts indicated additional impairment was present, resulting in an
additional impairment charge of $17.8 million in the fourth quarter of
2008. We utilized the royalty relief discounted cash flow method to
determine the Company’s fair value for both the third quarter 2008 and fourth
quarter 2008 trademark impairment tests.
After
impairment charges totaling $18.1 million in 2008, intangible assets not subject
to amortization totaled $44.4 million at January 3, 2009. No additional
impairment was recorded during the year ended January 2, 2010.
Amortizable Intangible
Assets
As a
result of the impairment indicators described above, during the second quarter
of 2008 and again as of January 3, 2009, October 3, 2009 and January 2, 2010, we
tested our amortizable intangible assets, which are our customer relationships
and Hurricane technology intangible assets, for impairment by comparing the
estimated future undiscounted net cash flows expected to be generated by the
asset group containing these assets to their carrying values and determined that
there was no impairment.
Estimated
amortization of our customer relationships and Hurricane technology intangible
assets is as follows for future fiscal years:
|
(in
thousands)
|
||||
|
2010
|
$ | 5,984 | ||
|
2011
|
5,570 | |||
|
2012
|
5,570 | |||
|
2013
|
5,570 | |||
|
Thereafter
|
428 | |||
|
Total
|
$ | 23,122 | ||
|
8. Accrued
Liabilities
|
Accrued
liabilities consisted of the following:
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Accrued
payroll and benefits
|
$ | 2,950 | $ | 3,905 | ||||
|
Accrued
warranty
|
2,550 | 2,734 | ||||||
|
Accrued
restructuring costs
|
898 | 332 | ||||||
|
Provision
for loss contract
|
875 | - | ||||||
|
Accrued
health claims insurance payable
|
846 | 779 | ||||||
|
Accrued
property tax
|
801 | - | ||||||
|
Other
|
928 | 1,102 | ||||||
| $ | 9,848 | $ | 8,852 | |||||
Other
accrued liabilities are comprised primarily of unearned revenue related to
customer deposits and customer rebates.
|
9. Long-Term
Debt
|
Long-term
debt consists of the following:
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Tranche
A2 term note payable to a bank in quarterly installments
|
||||||||
|
of
$231,959 beginning November 14, 2009 through November 14,
|
||||||||
|
2011. A
lump sum payment of $87.9 million is due on February
|
||||||||
|
14,
2012. Interest is payable quarterly at LIBOR or the prime
rate
|
||||||||
|
plus
an applicable margin. At January 3, 2009, the
average
|
||||||||
|
rate
was 4.00% plus a margin of 2.25%.
|
$ | - | $ | 90,000 | ||||
|
Tranche
A2 term note payable to a bank in quarterly installments
|
||||||||
|
of
$177,546 beginning February 14, 2011 through November 14,
|
||||||||
|
2011. A
lump sum payment of $67.3 million is due on February
|
||||||||
|
14,
2012. Interest is payable quarterly at LIBOR or the prime
rate
|
||||||||
|
plus
an applicable margin. At January 3, 2010, the
average
|
||||||||
|
rate
was 3.25% plus a margin of 4.00%.
|
68,000 | - | ||||||
|
Obligations
under capital leases
|
268 | 366 | ||||||
| 68,268 | 90,366 | |||||||
|
Less
current portion of long-term debt and capital leases
|
(105 | ) | (330 | ) | ||||
| $ | 68,163 | $ | 90,036 | |||||
On
February 14, 2006, we entered into a second amended and restated
$235 million senior secured credit facility and a $115 million second
lien term loan due August 14, 2012, with a syndicate of banks. The senior
secured credit facility is composed of a $30 million revolving credit
facility and, initially, a $205 million first lien term loan. As of January
2, 2010, there was $26.0 million available under the revolving credit
facility.
On
December 24, 2009, we announced that we entered into a third amendment to the
credit agreement. The amendment, among other things, provides a
leverage covenant holiday for 2010, increases the maximum leverage amount for
the first quarter of 2011 to 6.25 times (then dropping 0.25X per quarter from
the second quarter until the end of the term), extends the due date on the
revolver loan until the end of 2011, increases the applicable rate on any
outstanding revolver loan by 25 basis points, and sets a base rate floor of
4.25%. The effectiveness of the amendment was conditioned, among
other things, on the repayment of at least $17 million of term loan under the
credit agreement no later than March 31, 2010, of which no more than $2 million
was permitted to come from cash on hand. In December 2009, the
Company used cash generated from operations to prepay $2 million of outstanding
borrowings under the credit agreement. Using proceeds from the 2010
rights offering, the Company made an additional prepayment of $15 million on
March 17, 2010, bringing total prepayments of debt at that time to $17 million
as required under the amended credit agreement. See Note 16 for a discussion of
the second rights offering. Having made the total required prepayment and having
satisfied all other conditions to bring the amendment into effect, including the
payment of the fees and expenses of the administrative agent and a consent fee
to participating lenders of 50 basis points of the then outstanding balance of
the term loan and the revolving commitment under the credit agreement of $100
million, the amendment became effective on March 17, 2010. Fees
paid to the administrative agent and lenders totaled $1.0
million. Such fees are being amortized using the effective
interest method over the remaining term of the credit agreement.
Under the
third amendment, the first lien term loan bears interest at a rate equal to an
adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or
a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our
option, which is equivalent to the rates in the second amendment. The
margin in either case is dependent on our leverage ratio. The loans
under the revolving credit facility bear interest at a rate equal to an adjusted
LIBOR rate plus a margin depending on our leverage ratio ranging from 3.00% per
annum to 5.00% per annum or a base rate plus a margin ranging from 2.00% per
annum to 4.00% per annum, at our option. The amendment established a
floor of 4.25% for base rate loans, and continued the 3.25% floor for adjusted
LIBOR established in the previous amendment.
On April
30, 2008, we announced that we entered into a second amendment to the credit
agreement. The amendment, among other things, relaxed certain
financial covenants through the first quarter of 2010, increased the applicable
rate on loans and letters of credit, and set a LIBOR floor. The
effectiveness of the amendment was conditioned, among other things, on the
repayment of at least $30 million of loans under the credit agreement no later
than August 14, 2008, of which no more than $15 million was permitted to come
from cash on hand. In June 2008, the Company used cash generated from
operations to prepay $10 million of outstanding borrowings under the credit
agreement. Using proceeds from the rights offering, the Company made
an additional prepayment of $20 million on August 11, 2008, bringing total
prepayments of debt at that time to $30 million as required under the amended
credit agreement. See Note 16 for a discussion of the rights offering. Having
made the total required prepayment and having satisfied all other conditions to
bring the amendment into effect, including the payment of the fees and expenses
of the administrative agent and a consent fee to participating lenders of 25
basis points of the then outstanding balance under the credit agreement of $100
million, the amendment became effective on August 11, 2008. Fees paid
to the administrative agent and lenders totaling $0.6 million and were deferred
and the unamortized balance of $0.3 million and $0.5 million is included in
other assets on the accompanying condensed consolidated balance sheet as of
January 2, 2010 and January 3, 2009, respectively. Such fees are
being amortized on an effective interest method basis over the remaining term of
the credit agreement.
Under the
second amendment, the first lien term loan bears interest at a rate equal to an
adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or
a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our
option. The margin in either case is dependent on our leverage
ratio. The loans under the revolving credit facility bear interest at
a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage
ratio ranging from 3.0% per annum to 4.75% per annum or a base rate plus a
margin ranging from 2.0% per annum to 3.75% per annum, at our
option. The amendment established a floor of 3.25% for adjusted
LIBOR. Prior to the effectiveness of the amendment, the first lien
term loan bore interest at a rate equal to an adjusted LIBOR rate plus
3.0% per annum or a base rate plus 2.0% per annum, at our option. The
loans under the revolving credit facility bore interest initially, at our
option, at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a
base rate plus 1.75% per annum, and the margins above LIBOR and base rate
could have declined to 2.00% for LIBOR loans and 1.00% for base rate loans if
certain leverage ratios were met.
A
commitment fee equal to 0.50% per annum accrues on the average daily unused
amount of the commitment of each lender under the revolving credit facility and
such fee is payable quarterly in arrears. We are also required to pay certain
other fees with respect to the senior secured credit facility including
(i) letter of credit fees on the aggregate undrawn amount of outstanding
letters of credit plus the aggregate principal amount of all letter of credit
reimbursement obligations, (ii) a fronting fee to the letter of credit
issuing bank and (iii) administrative fees.
The first
lien term loan is secured by a perfected first priority pledge of all of the
equity interests of our subsidiary and perfected first priority security
interests in and mortgages on substantially all of our tangible and intangible
assets and those of the guarantors, except, in the case of the stock of a
foreign subsidiary, to the extent such pledge would be prohibited by applicable
law or would result in materially adverse tax consequences, and subject to such
other exceptions as are agreed. The senior secured credit facility contains a
number of covenants that, among other things, restrict our ability and the
ability of our subsidiaries to (i) dispose of assets; (ii) change our
business; (iii) engage in mergers or consolidations; (iv) make certain
acquisitions; (v) pay dividends or repurchase or redeem stock;
(vi) incur indebtedness or guarantee obligations and issue preferred and
other disqualified stock; (vii) make investments and loans;
(viii) incur liens; (ix) engage in certain transactions with
affiliates; (x) enter into sale and leaseback transactions; (xi) issue
stock or stock options under certain conditions; (xii) amend or prepay
subordinated indebtedness and loans under the second lien secured credit
facility; (xiii) modify or waive material documents; or (xiv) change
our fiscal year. In addition, under the senior secured credit facility, we are
required to comply with specified financial ratios and tests, including a
minimum interest coverage ratio, a maximum leverage ratio, and maximum capital
expenditures.
Contractual
future maturities of long-term debt and capital leases outstanding as of January
2, 2010 are as follows (in thousands):
|
2010
|
$ | 105 | ||
|
2011
|
823 | |||
|
2012
|
67,340 | |||
|
2013
|
- | |||
|
Total
|
$ | 68,268 |
During
2009, we prepaid $22.0 million of long term debt with cash from operations and
cash on hand. During 2008, we prepaid $40.0 million of long-term debt with
cash generated from operations and from the net proceeds of the rights offering,
which totaled $29.3 million. See Note 16.
On an
annual basis, we are required to compute excess cash flow, as defined in our
credit and security agreement with the bank. In periods where there is excess
cash flow, we are required to make prepayments in an aggregate principal amount
determined through reference to a grid based on the leverage ratio. No such
prepayments were required for the year ended January 2, 2010. The term note and
line of credit require that we also maintain compliance with certain restrictive
financial covenants, the most restrictive of which requires us to maintain a
total leverage ratio, as defined in the credit agreement, as amended, of not
greater than certain predetermined amounts. We believe that we were in
compliance with all restrictive financial covenants as of January 2,
2010.
|
10. Interest
Expense
|
Interest
expense, net consisted of the following (in thousands):
| Year Ended | ||||||||||||
| January 2, | January 3, | December 29, | ||||||||||
|
2010
|
2009 | 2007 | ||||||||||
| Long-term debt | $ | 5,780 | $ | 8,394 | $ | 11,291 | ||||||
| Debt fees | 475 | 444 | 425 | |||||||||
| Amortization of deferred financing costs | 561 | 724 | 724 | |||||||||
| Interest income | (53 | ) | (165 | ) | (807 | ) | ||||||
| Interest expense | 6,763 | 9,397 | 11,633 | |||||||||
| Capitalized interest | (65 | ) | (114 | ) | (229 | ) | ||||||
| Interest expense, net | $ | 6,698 | $ | 9,283 | $ | 11,404 | ||||||
|
11. Derivatives
|
Aluminum
Forward Contracts
We enter
into aluminum forward contracts to hedge the fluctuations in the purchase price
of aluminum extrusion we use in production. Our contracts are designated as cash
flow hedges since they are highly effective in offsetting changes in the cash
flows attributable to forecasted purchases of aluminum.
Guidance
under the Financial
Instruments topic 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. In addition, we entered into a master netting
arrangement (MNA) with our commodities broker that provides for, among other
things, the close-out netting of exchange-traded transactions in the event of
the insolvency of either party to the MNA.
In 2008
and 2009 we maintained a line of credit with our commodities
broker. Beginning in 2010, we no longer maintain a line of credit to
cover the liability position of open contracts for the purchase of aluminum in
the event that the price of aluminum falls. Should the price of
aluminum fall to a level which causes us to switch to a liability position for
open aluminum contracts we would be required to fund daily margin calls to cover
the excess.
At
January 2, 2010, the fair value of our aluminum forward contracts was in an
asset position of $0.5 million. We had 33 outstanding forward
contracts for the purchase of 6.4 million pounds of aluminum at an average price
of $0.94 per pound with maturity dates of between less than one month and 12
months through December 2010. We assessed the risk of non-performance
of the counter-party to these contracts and recorded an immaterial adjustment to
fair value as of January 2, 2010.
At
January 3, 2009, the fair value of our aluminum forward contracts was in a
liability position of $4.2 million. We had 71 outstanding forward
contracts for the purchase of 16.1 million pounds of aluminum at an average
price of $1.01 per pound with maturity date of between less than one month and
24 months through December 2010. We also had $4.1 million of cash on
deposit with our counter-party related to the funding of margin
calls. We net cash collateral from payments of margin calls on
deposit with our commodities broker against the liability position of open
contracts for the purchase of aluminum on a first-in, first-out
basis. For statement of cash flows presentation, we present net cash
receipts from and payments to the margin account as investing
activities.
The fair
value of our aluminum hedges are classified in the accompanying consolidated
balance sheets as follows (in thousands):
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
Derivatives in a net asset (liability)
position
|
Balance Sheet Location
|
|||||||
|
Hedging
instruments:
|
||||||||
|
Aluminum
forward contracts
|
Other
Current Assets
|
$ | 512 | $ | - | |||
|
Aluminum
forward contracts
|
Accrued
liabilities
|
- | (3,251 | ) | ||||
|
Aluminum
forward contracts
|
Other
liabilities
|
- | (985 | ) | ||||
|
Cash
on deposit related to payments of margin calls
|
Accrued
liabilities
|
- | 3,251 | |||||
|
Cash
on deposit related to payments of margin calls
|
Other liabilities
|
- | 847 | |||||
|
Total
hedging instruments
|
$ | 512 | $ | (138 | ) | |||
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 and plastics. 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, 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 we believe represents a contract's exit price to be
used for purposes of determining fair value. We categorize these
aluminum forward contracts as being valued using Level 2 inputs as
follows:
|
Fair
Value Measurements at Reporting Date
|
||||||||||||||||
|
of
Asset (Liability) Using:
|
||||||||||||||||
|
Quoted
|
Significant
|
Significant
|
||||||||||||||
|
Prices
in
|
Other
Observable
|
Unobservable
|
||||||||||||||
|
January
2,
|
Active
Markets
|
Inputs
|
Inputs
|
|||||||||||||
|
Description
|
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Forward
contracts for aluminum
|
$ | 512 | $ | - | $ | 512 | $ | - | ||||||||
|
Cash
on deposit related to payments of margin calls
|
- | |||||||||||||||
|
Forward
contracts for aluminum, net asset
|
$ | 512 | ||||||||||||||
|
Quoted
|
Significant
|
Significant
|
||||||||||||||
|
Prices
in
|
Other
Observable
|
Unobservable
|
||||||||||||||
|
January
3,
|
Active
Markets
|
Inputs
|
Inputs
|
|||||||||||||
|
Description
|
2009 |
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Forward
contracts for aluminum
|
$ | (4,236 | ) | $ | - | $ | (4,236 | ) | $ | - | ||||||
|
Cash
on deposit related to payments of margin calls
|
4,098 | |||||||||||||||
|
Forward
contracts for aluminum, net liability
|
$ | (138 | ) | |||||||||||||
Our
aluminum hedges qualify as highly effective for reporting
purposes. For the years ended January 2, 2010, January 3, 2009, and
December 29, 2007, the ineffective portion of the hedging instruments was not
significant. Effectiveness of aluminum forward contracts is determined 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. At January 2, 2010,
these contracts were designated as effective. The effective portion of the gain
or loss on our aluminum forward contracts is reported as a component of other
comprehensive income 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. For the years ended January 2, 2010,
January 3, 2009, and December 29, 2007, no amounts were reclassified to earnings
because it was probable that the original forecasted transaction would not
occur. The ending accumulated balance for the aluminum forward contracts
included in accumulated other comprehensive income, net of tax, is
$0.5 million as of January 2, 2010, all of which is expected to be
reclassified into earnings in 2010.
Interest Rate Swap
Agreements
On
October 29, 2004, our Company entered into a three-year interest rate swap
agreement with a notional amount of $33.5 million that was designated as a
cash flow hedge and effectively converted a portion of the floating rate debt to
a fixed rate of 3.53%. Also on October 29, 2004, our Company entered into a
three-year interest rate cap agreement with a notional amount of
$33.5 million that protected an additional portion of the variable rate
debt from an increase in the floating rate to greater than 4.5%.
On
September 19, 2005, the hedging relationships involving the interest rate
swap and cap agreements were terminated as a result of changes made to the terms
of our then existing credit agreement. Accordingly, the changes in fair value of
the swap and cap from that point were recorded in other (income) expense, net,
and the accumulated balance for the interest rate swap agreement included in
other comprehensive income at the time of ineffectiveness of $0.7 million
was being amortized into earnings over the remaining life of the agreement.
Changes in the intrinsic value of the swap and cap totaled $0.1 million in 2006
and are recorded as other expenses in the accompanying consolidated statement of
operations for the year ended December 30, 2006. The fair value of the interest
rate swap agreement of $0.6 million and the fair value of the interest rate cap
of $0.3 million as of December 30, 2006, recorded in other assets in the
accompanying consolidated balance sheet as of December 30, 2006, was recognized
as other expense in the accompanying consolidated statement of operations in
2007. Amortization of the accumulated balance for the interest rate swap
agreement included in other comprehensive income at the time of ineffectiveness
totaled $0.3 million in 2006 and is recorded as other income in the accompanying
consolidated statement of operations for the year ended December 30, 2006. At
December 30, 2006, there was $0.2 million remaining to be amortized,
in accumulated other comprehensive income, which was recognized as other income
in the accompanying consolidated statement of operations in 2007.
These
interest rate swap and cap agreements expired in October 2007.
On April
14, 2006, we entered into a two-year interest rate swap agreement with a
notional amount of $61.0 million that was designated as a cash flow hedge
and effectively converted a portion of the floating rate debt to a fixed rate of
5.345%. Since all of the critical terms of the swap exactly matched those of the
hedged debt, no ineffectiveness was identified in the hedging relationship.
Consequently, all changes in fair value are recorded as a component of other
comprehensive income. We periodically determined the effectiveness of the swap
by determining that the critical terms still match, determining that the future
interest payments are still probable of occurrence, and evaluating the
likelihood of the counterparty’s compliance with the terms of the swap. The fair
value of the interest rate swap agreement of $0.1 million as of December 29,
2007, is recorded in accrued liabilities in the accompanying consolidated
balance sheet. This interest rate swap expired in February 2008.
The
following represents the gains (losses) on derivative financial instruments for
the years ended January 2, 2010, January 3, 2009 and December 29,
2007, and their classifications within the accompanying consolidated
financial statements (in thousands):
|
Derivatives
in Cash Flow Hedging Relationships
|
|||||||||||||||||||||||||
|
Amount
of Gain or (Loss) Recognized in OCI on Derivatives (Effective
Portion)
|
Location
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
January
2,
|
January
3,
|
December
29,
|
||||||||||||||||||||
|
2010
|
2009
|
2007
|
2010
|
2009
|
2007
|
||||||||||||||||||||
|
Aluminum
contracts
|
$ | 1,373 | $ | (3,938 | ) | $ | (1,059 | ) |
Cost
of sales
|
$ | (3,338 | ) | $ | (320 | ) | $ | (401 | ) | |||||||
|
Interest
rate swap
|
- | 74 | 13 | - | - | - | |||||||||||||||||||
| $ | 1,373 | $ | (3,864 | ) | $ | (1,046 | ) | $ | (3,338 | ) | $ | (320 | ) | $ | (401 | ) | |||||||||
|
Derivatives
in Cash Flow Hedging Relationships
|
|||||||||||||||||||||||||
|
Location
of Gain or (Loss) Recognized in Income on Derivatives (Ineffective
Portion)
|
Amount
of Gain or (Loss) Recognized in Income on Derivatives (Ineffective
Portion)
|
||||||||||||||||||||||||
|
Year
Ended
|
|||||||||||||||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
|||||||||||||||||||||||
| 2010 | 2009 | 2007 | |||||||||||||||||||||||
|
Aluminum
contracts
|
Other
income or other expense
|
$ | (37 | ) | $ | - | $ | (40 | ) | ||||||||||||||||
|
Interest
rate swap
|
Other
income or other expense
|
- | - | 261 | |||||||||||||||||||||
| $ | (37 | ) | $ | - | $ | 221 | |||||||||||||||||||
|
12. Income
Taxes
|
We
consider all income sources, including other comprehensive income, in
determining the amount of tax benefit allocated to continuing operations (the
“Income Tax Allocation”). Accordingly, for the year ended January 2, 2010, we
recorded an income tax benefit of $5.6 million, including a non-cash income tax
benefit of $1.8 million on the loss from continuing operations, with an
offsetting non-cash income tax expense of $1.8 million on other
comprehensive income. Our overall tax provision is not impacted by this tax
allocation.
The
components of income tax expense (benefit) are as follows (in
thousands):
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (3,739 | ) | $ | (897 | ) | $ | 1,729 | ||||
|
State
|
(32 | ) | 37 | 150 | ||||||||
| (3,771 | ) | (860 | ) | 1,879 | ||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(1,527 | ) | (24,064 | ) | (1,337 | ) | ||||||
|
State
|
(286 | ) | (3,865 | ) | (86 | ) | ||||||
| (1,813 | ) | (27,929 | ) | (1,423 | ) | |||||||
|
Income
tax (benefit) expense
|
$ | (5,584 | ) | $ | (28,789 | ) | $ | 456 | ||||
A
reconciliation of the statutory federal income tax rate to our effective rate is
provided below:
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Statutory
federal income tax rate
|
35.0% | 35.0% | 35.0% | |||||||||
|
State
income taxes, net of federal income tax benefit
|
4.0% | 4.0% | 4.0% | |||||||||
|
Impairment
of non-deductible goodwill
|
- | (21.5%) | - | |||||||||
|
Income
Tax Allocation
|
12.1% | - | - | |||||||||
|
Other
|
(2.7%) | (0.2%) | 2.6% | |||||||||
|
Non-deductible
expenses
|
(2.0%) | - | 7.1% | |||||||||
|
Manufacturing
deduction
|
- | - | (1.5%) | |||||||||
|
State
tax credits
|
0.3% | 0.1% | (4.9%) | |||||||||
|
Valuation
allowance on deferred tax assets
|
(9.5%) | (2.4%) | - | |||||||||
| 37.2% | 15.0% | 42.3% | ||||||||||
Our
effective combined federal and state tax rate was 37.2%, 15.0% and 42.3% for the
years ended January 2, 2010, January 3, 2009 and December 29, 2007,
respectively. The 37.2% tax rate in 2009 relates primarily to a loss
carry-back receivable of approximately $3.7 million related to the recently
passed legislation allowing companies to carry-back 2009 or 2008 losses up to 5
years, as well as an income tax allocation of $1.8 million between current
operations and other comprehensive income. All other deferred tax assets created
in 2009 were fully reserved with additional valuation allowances. The
15.0% effective tax rate in 2008 resulted from the tax effects
totaling $41.3 million related to the write-off of the non-deductible portion of
goodwill and $4.6 million related to the valuation allowance on deferred tax
assets recorded in the fourth quarter of 2008. Excluding the effects of these
items, our 2009 and 2008 effective tax rates would have been 34.6%, 39.0%,
respectively. Our 2007 effective tax rate was 42.3%.
Deferred
income taxes reflect the net tax effects of temporary difference between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our net
deferred tax liability are as follows as of:
| January 2, | January 3, | |||||||
| 2010 | 2009 | |||||||
| Deferred tax assets: | ||||||||
| Goodwill | $ | 12,529 | $ | 14,617 | ||||
| State and federal net operating loss carryforwards | 2,778 | 1,620 | ||||||
| Accrued warranty | 1,576 | 1,647 | ||||||
| Compensation expense | 800 | 978 | ||||||
| Allowance for doubtful accounts | 680 | 723 | ||||||
| Obsolete inventory | 543 | 622 | ||||||
| State tax credits | 381 | 330 | ||||||
| AMT tax credits | 244 | - | ||||||
| Derivative financial instruments | - | 1,652 | ||||||
| Other accruals | 1,357 | 1,210 | ||||||
| Valuation allowance | (5,651 | ) | (6,040 | ) | ||||
| Total deferred tax assets | $ | 15,237 | $ | 17,359 | ||||
| Deferred tax liabilities: | ||||||||
| Other indefinite lived intangible assets | $ | 17,315 | $ | 17,315 | ||||
| Amortizable intangible assets | 8,783 | 11,010 | ||||||
| Property, plant and equipment | 6,254 | 6,349 | ||||||
| Derivative financial instruments | 200 | - | ||||||
| Total deferred tax liabilities | $ | 32,552 | $ | 34,674 | ||||
The
following table shows the current and noncurrent deferred tax assets
(liabilities), recorded on our consolidated balance sheets at January 2, 2010
and January 3, 2009:
|
January
2,
|
January
3,
|
|||||||
|
2010
|
2009
|
|||||||
|
(in
thousands)
|
||||||||
|
Current
deferred tax assets, net
|
$ | 622 | $ | 1,158 | ||||
|
Noncurrent
deferred tax liabilities, net
|
(17,937 | ) | (18,473 | ) | ||||
|
Total
deferred tax liabilities, net
|
$ | (17,315 | ) | $ | (17,315 | ) | ||
In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. After consideration of all the evidence,
both positive and negative, our Company determined in 2007 that a valuation
allowance was not necessary.
In 2008,
we established a valuation allowance with respect to the net deferred tax
assets, excluding the $17.3 million deferred tax liability related to
trademarks, totaling $6.0 million at January 3, 2009. Driven by the
goodwill and other intangible impairment charges recorded in 2008 totaling
$187.7 million, our cumulative losses over the last three fiscal years, in
addition to the significant downturn in our primary industry of home
construction, led us to conclude that sufficient negative evidence exists that
it is deemed more likely than not future taxable income will not be sufficient
to realize the related income tax benefits. Of the $6.0 million
valuation allowance at January 3, 2009, $1.4 million has been allocated to other
comprehensive loss in the accompanying consolidated balance sheet at that date
to offset the tax benefit that was recorded in other comprehensive loss for
fiscal 2008. The remaining $4.6 million of the valuation allowance at
January 3, 2009 was recorded as deferred tax expense in the accompanying
consolidated statement of operations for the year ended January 3,
2009.
We
estimate that we have $5.9 million of federal net operating loss carryforwards
and $29.7 million of state operating loss carryforwards expiring at various
dates through 2029.
We
adopted the standards related to the Income Tax topic of the
Codification, specifically, as it relates to uncertain tax position on January
1, 2007. We did not recognize any material liability for unrecognized
tax benefits in conjunction with our implementation and there were no changes to
our unrecognized tax benefits during 2007, 2008, or 2009. However, should we
accrue for such liabilities when and if they arise in the future we will
recognize interest and penalties associated with uncertain tax positions as part
of our income tax provision.
|
13. Commitments
and Contingencies
|
We lease
production equipment, vehicles, computer equipment, storage units and office
equipment under operating leases expiring at various times through 2014. Lease
expense was $2.5 million, $2.6 million and $3.3 million for the years ended
January 2, 2010, January 3, 2009 and December 29, 2007, respectively. Future
minimum lease commitments for non-cancelable operating leases are as follows at
January 2, 2010 (in thousands):
|
2010
|
$ | 1,511 | ||
|
2011
|
821 | |||
|
2012
|
213 | |||
|
2013
|
96 | |||
|
Thereafter
|
48 | |||
|
Total
|
$ | 2,689 |
Through
the terms of certain of our leases, we have the option to purchase the leased
equipment for cash in an amount equal to its then fair market value plus all
applicable taxes.
We are
obligated to purchase certain raw materials used in the production of our
products from certain suppliers pursuant to stocking programs. If
these programs were cancelled by us, we would be required to pay $1.4 million
for various materials. During the years ended January 2, 2010,
January 3, 2009 and December 29, 2007, we made purchases under these programs
totaling $55.6 million, $76.3 million and $92.1 million,
respectively.
At
January 2, 2010, we had $4.0 million in standby letters of credit related
to our worker’s compensation insurance coverage and commitments to purchase
equipment of $0.1 million.
We are 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 on a combined basis, will not have a
materially adverse effect on our operations, financial position or cash
flows.
|
14. Employee
Benefit Plans
|
We have a
401(k) plan covering substantially all employees 18 years of age or older
who have at least three months of service. Employees may contribute up to 100%
of their annual compensation subject to Internal Revenue Code maximum
limitations. Through the end of 2007, we agreed to make matching contributions
of 100% of the employee’s contribution up to 3% of the employee’s salary.
Effective the first day of our 2008 fiscal year, we suspended the matching
contributions portion of the 401(k) plan until such time that management of the
Company having the authority to do so determined to reinstate some or all of the
matching contribution. For the year ended January 2, 2010 there was no company
matching contribution. For the year ended January 3, 2009, based on
certain performance metrics of our Company evaluated by management, the
Company’s management determined to match employee contributions made in 2008 at
a rate of up to 0.5% of the employee’s salary. Company contributions and
earnings thereon vest at the rate of 20% per year of service with us when
at least 1,000 hours are worked within the Plan year. We recognized no
expense for the year ended January 2, 2010, expense of $0.2 million for the year
ended January 3, 2009 and $1.9 million for the year ended December 29,
2007.
As a
result of the March 2008 restructuring and its combined effect on employee
levels due to both restructurings as discussed in Note 4, the Company’s 401(k)
plan was deemed to have been partially terminated according to IRS rules. These
rules require 100% vesting of terminated participants who are no longer eligible
to participate in the plan. In 2008, we recorded an adjustment of $0.1 million
to reestablish amounts related to Company matching previously considered to be
forfeited upon termination. This amount is included in the total expense of $0.2
million for the year ended January 3, 2009 discussed above.
|
15. Related
Parties
|
In the
ordinary course of business, we sell windows to Builders FirstSource, Inc., a
company controlled by affiliates of JLL Partners, Inc. One of our directors,
Floyd F. Sherman, is the president, chief executive officer, and a director of
Builders FirstSource, Inc. In addition, Paul S. Levy, Ramsey A. Frank, and
Brett N. Milgrim, are directors of Builders FirstSource, Inc. Total net
sales to Builders FirstSource, Inc. were $3.1 million, $2.7 million and $2.7
million for the years ended January 2, 2010, January 3, 2009, and December 29,
2007, respectively. As of January 2, 2010, January 3, 2009 and
December 29, 2007 there was $0.4 million, $0.2 million and $0.3 million due from
Builders FirstSource, Inc. included in accounts receivable in the accompanying
consolidated balance sheets.
|
16. Shareholders’
Equity
|
Rights
Offering
2010
Rights Offering
On
January 29, 2010, the Company filed Amendment No. 1 to the Registration
Statement on Form S-1 filed on December 24, 2009 relating to a previously
announced offering of rights to purchase 20,382,326 shares of the Company’s
common stock with an aggregate value of approximately $30.6
million. The registration statement relating to the rights offering
was declared effective by the United States Securities and Exchange Commission
on February 10, 2010, and the Company distributed to each holder of record of
the Company’s common stock as of close of business on February 8, 2010, at no
charge, one (1) non-transferable subscription right for every one and
three-quarters (1.75) shares of common stock held by such holder under the basic
subscription privilege. Each whole subscription right entitled its
holder to purchase one share of PGT’s common stock at the subscription price of
$1.50 per share. The rights offering also contained an
over-subscription privilege that permitted all basic subscribers to purchase
additional shares of the Company’s common stock up to an amount equal to the
amount available to each such holder under the basic subscription
privilege. Shares issued to each participant in the over-subscription
were determined by calculating each subscriber’s percentage of the total shares
over-subscribed, multiplied by the number of shares available in the
over-subscription privilege. The rights offering expired on March 12,
2010.
The
rights offering was 90.0% subscribed resulting in the Company distributing
18,336,368 shares of its common stock, including 15,210,184 shares under the
basic subscription privilege and 3,126,184 under the over-subscription
privilege, representing a 74.6% basic subscription participation
rate. There were requests for 3,126,184 shares under the
over-subscription privilege representing an allocation rate of 100% to each
over-subscriber. Of the 18,336,368 shares issued, 13,333,332 shares
were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder,
including 10,719,389 shares issued under the basic subscription privilege and
2,613,943 shares issued under the over-subscription privilege. Prior
to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s
outstanding common stock. With the completion of the rights offering,
the Company has 54,005,439 total shares of common stock outstanding of which JLL
holds 59.4%.
Net
proceeds of $27.5 million from the rights offering were used to repay a portion
of the outstanding indebtedness under our amended credit agreement in the amount
of $15.0 million, and for general corporate purposes in the amount of $12.5
million.
2008
Rights Offering
On August
1, 2008, we filed Amendment No. 1 to the Registration Statement on Form S-3
filed on March 28, 2008 relating to a previously announced offering of rights to
purchase 7,082,687 shares of the Company’s common stock with an aggregate value
of approximately $30 million. The registration statement relating to
the rights offering was declared effective by the United States Securities and
Exchange Commission on August 4, 2008 and we distributed to each holder of
record of the Company’s common stock as of close of business on August 4, 2008,
at no charge, one non-transferable subscription right for every four shares of
common stock held by such holder under the basic subscription
privilege. Each whole subscription right entitled its holder to
purchase one share of PGT’s common stock at the subscription price of $4.20 per
share. The rights offering also contained an over-subscription
privilege that permitted all basic subscribers to purchase additional shares of
the Company’s common stock up to an amount equal to the amount available to each
under the basic subscription privilege. Shares issued to each
participant in the over-subscription were determined by calculating each
subscriber’s percentage of the total shares over-subscribed, multiplied by the
number of shares available in the over-subscription privilege. The
rights offering expired on September 4, 2008.
The
rights offering was fully subscribed resulting in the Company distributing all
7,082,687 shares of its common stock available, including 6,157,586 shares under
the basic subscription privilege and 925,101 under the over-subscription
privilege, representing an 86.9% basic subscription participation
rate. There were requests for 4,721,763 shares under the
over-subscription privilege representing an allocation rate of 19.6% to each
over-subscriber for the 925,101 shares available in the over
subscription. Of the 7,082,687 shares issued, 4,295,158 shares were
issued to JLL, the Company’s majority shareholder, including 3,615,944 shares
issued under the basic subscription privilege and 679,214 shares issued under
the over-subscription privilege. Prior to the rights offering, JLL
held 14,463,776 shares, or 51.1%, of the Company’s outstanding common
stock. With the completion of the rights offering, we have 35,413,438
total shares of common stock outstanding of which JLL holds 53.0%.
Net
proceeds of $29.3 million from the rights offering were used to repay a portion
of the outstanding indebtedness under our amended credit
agreement. See Note 9, Long-Term Debt.
|
17. Employee
Stock Based Compensation
|
Rollover
Plan
In
conjunction with the acquisition of PGT Holding Company, we rolled over 2.9
million option shares belonging to option holders of the acquired entity. These
options have a ten year term and are fully vested, and include exercise prices
of either $0.38 or $1.51 per share.
2004
Plan
On
January 29, 2004, we adopted the JLL Window Holdings, Inc. 2004 Stock Incentive
Plan (the “2004 Plan”), whereby stock-based awards may be granted by the Board
of Directors (the Board) to officers, key employees, consultants and advisers of
ours.
In
conjunction with the 2004 Plan we have granted option shares at various times in
2004 and 2005 at an exercise price of $8.64 per share. These options
have a ten-year life and fully vest after five years. No options or
restricted share awards were granted under the 2004 Plan during 2007, 2008 or
2009. There were 332,275, 838,887, and 1,064,389 shares available for
grant under the 2004 Plan at December 29, 2007, January 3, 2009, and January 2,
2010, respectively.
2006
Plan
On June
5, 2006, we adopted the 2006 Equity Incentive Plan (the “2006 Plan”) whereby
equity-based awards may be granted by the Board to eligible non-employee
directors, selected officers and other employees, advisors and consultants of
ours. In conjunction with the 2006 Plan we issued option shares at
various exercise prices per share including $3.09, $3.10, $4.00, and $0.92, as
well as restricted stock awards. There were 2,622,125, 2,423,294, and
1,989,774 shares available for grant under the 2006 Plan at December 29, 2007,
January 3, 2009, and January 2, 2010, respectively.
The
compensation cost that was charged against income for stock compensation plans
was $0.5 million, $0.8 million and $1.5 million for the years ended January 2,
2010, January 3, 2009 and December 29, 2007 and is included in selling, general
and administrative expenses in the accompanying consolidated statements of
operations. There was no income tax benefit recognized for share-based
compensation for the years ended January 2, 2010 and January 3, 2009 as a result
of the valuation allowance on deferred taxes. The total income tax benefit
recognized for share-based compensation arrangements was $0.6 million for the
year ended December 29, 2007. We currently expect to satisfy share-based awards
with registered shares available to be issued.
The fair
value of each stock option grant was estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants under the 2006 Plan in the following
years:
2009:
dividend yield of 0%, expected volatility of 73.2%, risk-free interest rate of
1.7%, and expected life of 5 years.
2008:
dividend yield of 0%, expected volatility of 49.9%, risk-free interest rate of
2.6%, and expected life of 5 years.
2007:
dividend yield of 0%, expected volatility of 36.0%, risk-free interest rate of
4.7%, and expected life of 5 years.
The
expected life of options granted represents the period of time that options
granted are expected to be outstanding and was determined based on historical
experience. Prior to 2008, expected volatility was based on the average
historical volatility of a peer group of nine public companies over the past
seven years, which were selected on the basis of operational and economic
similarity with the principal business operations of ours. In 2008, we changed
our measure of expected volatility to be based solely on the Company’s common
stock as we believe due to current market conditions implied volatility is no
longer a reasonable indicator of future volatility of our common stock. The
risk-free rate for periods within the contractual term of the options is based
on the U.S. Treasury yield curve with a maturity equal to the life of the
option in effect at the time of grant.
Stock
Options
A summary
of the status of our stock options as of January 2, 2010, and the changes during
fiscal 2009 is presented below:
|
Number
of Shares
|
Weighted
Average Exercise
Price
|
Weighted
Average Remaining
Life
|
||||
|
Outstanding
at January 3, 2009
|
2,437,298
|
$5.18
|
||||
|
Granted
|
327,915
|
$0.92
|
||||
|
Exercised
|
-
|
$0.00
|
||||
|
Forfeited/Expired
|
(429,644)
|
$6.18
|
||||
|
Outstanding
at January 2, 2010
|
2,335,569
|
$4.40
|
4.6
Yrs
|
|||
|
Exercisable
at January 2, 2010
|
1,834,681
|
$4.97
|
4.3
Yrs
|
|||
Options
granted in 2009 have a seven-year contractual life and vest on a straight-line
basis over three years.
The
following table summarizes information about employee stock options outstanding
at January 2, 2010 (dollars in thousands, except per share
amounts):
| Outstanding | Exercisable | ||||||||||||||||||
| Exercise Price | Remaining Contractual Life | Outstanding | Intrinsic Value | Exercisable | Intrinsic Value | ||||||||||||||
| $ | 0.38 | 4.1 Years | 75,596 | $ | 130 | 75,596 | $ | 130 | |||||||||||
| $ | 1.51 | 4.1 Years | 790,742 | 467 | 790,742 | 467 | |||||||||||||
| $ | 8.64 | 4.4 Years | 924,010 | - | 881,502 | - | |||||||||||||
| $ | 3.09 | 5.3 Years | 250,496 | - | 83,503 | - | |||||||||||||
| $ | 4.00 | 5.3 Years | 10,014 | - | 3,338 | - | |||||||||||||
| $ | 0.92 | 6.1 Years | 284,711 | 336 | - | - | |||||||||||||
| 2,335,569 | $ | 933 | 1,834,681 | $ | 597 | ||||||||||||||
The
weighted-average fair value of options granted during the fiscal years ended
January 2, 2010, January 3, 2009 and December 29, 2007 was $0.56, $1.35 and
$5.00, respectively. The aggregate intrinsic value of options
outstanding and of options exercisable as of January 2, 2010 was $0.9 million
and $0.6 million, respectively. The aggregate intrinsic value of
options outstanding and of options exercisable as of January 3, 2009 was $0.1
million and $0.1 million, respectively. The aggregate intrinsic value
of options outstanding and of options exercisable as of December 29, 2007 was
$5.1 million and $5.1 million, respectively. The total fair value of options
vested during the fiscal years ended January 2, 2010, January 3, 2009 and
December 29, 2007 was $0.5 million, $0.2 million and $0.4 million,
respectively.
For the
fiscal year ended January 2, 2010, there were no exercises of stock options and
therefore no proceeds received or tax benefits recognized. For the
fiscal years ended January 3, 2009 and December 27, 2007, we received $0.2
million and $1.9 million, respectively, in proceeds from the exercise of 479,417
and 609,837, respectively, stock options for which there was no tax benefit and
$1.8 million realized, respectively. The aggregate intrinsic value of
stock options exercised during the fiscal year ended January 3, 2009 and
December 27, 2007 was $1.2 million and $4.5 million, respectively.
As of January 2, 2010, there was $0.1 million of total unrecognized compensation cost related to non-vested stock option compensation arrangements granted which is expected to be recognized in earnings straight-line over a weighted-average period of 1.3 years.
The
Repricing
On March
6, 2008, the board of directors of the Company approved the cancellation and
termination of the option agreements of certain employees of the Company,
including Jeffrey T. Jackson, Executive Vice President and Chief Financial
Officer of the Company, and Mario Ferrucci III, Vice President and General
Counsel of the Company and the grant of replacement options under our 2006
Equity Incentive Plan.
The board
of directors of the Company determined that, as a result of economic conditions
that have adversely affected us and the industry in which we compete, the
options held by the Designated Employees had exercise prices that were
significantly above the current market price of our common stock and that the
grants of replacement options would help us to retain and provide additional
incentive to certain employees and align their interests with those of our
stockholders.
The
replacement options have an exercise price of $3.09 per share, which was the
closing price on the NASDAQ Global Market of the Company’s common stock on March
5, 2008, the day before the date on which the board of directors of the Company
granted the replacement options and the designated employees executed the
replacement option agreements. The replacement options are
exercisable with respect to one third of the shares (rounded to the nearest
whole share) on each of the first, second, and third anniversaries of March 6,
2008. The replacement options expire on March 6, 2015.
During 2009 and 2008, incremental compensation cost totaling $0.1
million and $0.2 million was recognized related to the repriced options,
respectively.
Mr.
Jackson was granted options to purchase an aggregate of 152,675 shares of the
Company’s common stock at an exercise price of $3.09 per share. In
connection therewith, Mr. Jackson’s option to purchase 115,863 shares of the
Company’s common stock at an exercise price of $12.84 per share and his option
to purchase 36,812 shares of the Company’s common stock at an exercise price of
$12.77 per share were cancelled and terminated.
Mr.
Ferrucci was granted options to purchase an aggregate of 53,984 shares of the
Company’s common stock at an exercise price of $3.09 per share. In
connection therewith, Mr. Ferrucci’s option to purchase 36,414 shares of the
Company’s common stock at an exercise price of $14.00 per share and his option
to purchase 17,570 shares of the Company’s common stock at an exercise price of
$12.77 per share were cancelled and terminated.
Non-Vested
(Restricted) Share Awards
During
the year ended January 2, 2010, we granted 340,057 non-vested share awards at a
weighted average fair value of $1.03 per share.
A summary
of the status of non-vested share awards as of January 2, 2010 and changes
during the year then ended are presented below:
|
Number
of Shares
|
Weighted
Average Fair
Value
|
|||||||
|
Outstanding
at January 3, 2009
|
194,445 | $ | 7.25 | |||||
|
Granted
|
340,057 | $ | 1.03 | |||||
|
Vested
|
(108,694 | ) | $ | 8.96 | ||||
|
Forfeited/Expired
|
(59,441 | ) | $ | 2.43 | ||||
|
Outstanding
at January 2, 2010
|
366,367 | $ | 1.75 | |||||
All of
the non-vested share awards granted in 2009 vest at the end of three years. As
of January 2, 2010, there was $0.2 million of total unrecodgnized compensation
cost related to non-vested share awards. That cost is expected to be recognized
in earnings straight-line over a weighted average period of 1.9
years.
|
18. Accumulated
Other Comprehensive (Loss) Income
|
The
following table shows the components of accumulated other comprehensive (loss)
income for 2009, 2008 and 2007:
|
Ineffective
|
Aluminum
|
|||||||||||||||||||
|
Interest
Rate
|
Interest
Rate
|
Forward
|
Valuation
|
|||||||||||||||||
|
(in
thousands)
|
Swap
|
Swap
|
Contracts
|
Allowance
|
Total
|
|||||||||||||||
|
Balance
at December 30, 2006
|
$ | 159 | $ | (53 | ) | $ | - | $ | - | $ | 106 | |||||||||
|
Changes
in fair value
|
- | 13 | (1,059 | ) | - | (1,046 | ) | |||||||||||||
|
Reclassification
to earnings
|
(261 | ) | - | 441 | - | 180 | ||||||||||||||
|
Tax
effect
|
102 | (6 | ) | 242 | - | 338 | ||||||||||||||
|
Balance
at December 29, 2007
|
- | (46 | ) | (376 | ) | - | (422 | ) | ||||||||||||
|
Changes
in fair value
|
- | 74 | (3,938 | ) | - | (3,864 | ) | |||||||||||||
|
Reclassification
to earnings
|
- | - | 320 | - | 320 | |||||||||||||||
|
Tax
effect
|
- | (28 | ) | 1,410 | (1,382 | ) | - | |||||||||||||
|
Balance
at January 3, 2009
|
- | - | (2,584 | ) | (1,382 | ) | (3,966 | ) | ||||||||||||
|
Changes
in fair value
|
- | - | 1,373 | - | 1,373 | |||||||||||||||
|
Reclassification
to earnings
|
- | - | 3,375 | - | 3,375 | |||||||||||||||
|
Tax
effect
|
(1,852 | ) | 1,852 | - | ||||||||||||||||
|
Income
tax allocation
|
- | - | (1,813 | ) | - | (1,813 | ) | |||||||||||||
|
Balance
at January 2, 2010
|
$ | - | $ | - | $ | (1,501 | ) | $ | 470 | $ | (1,031 | ) | ||||||||
|
19. Sales by Product
Group
|
The FASB
has issued guidance under the Segment Reporting topic of
the Codification which requires us to disclose certain information about our
operating segments. Operating segments are defined as components of an
enterprise with separate financial information which are evaluated regularly by
the chief operating decision maker and are used in resource allocation and
performance assessments.
We
operate as a single business that manufactures windows and doors. Our chief
operating decision maker evaluates performance by reviewing a few major
categories of product sales and then considering costs on a total company
basis.
Sales by
product group are as follows:
|
Year
Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December 29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Product
category:
|
||||||||||||
|
WinGuard
Windows and Doors
|
$ | 108.2 | $ | 151.8 | $ | 189.7 | ||||||
|
Other
Window and Door Products
|
57.8 | 66.8 | 88.7 | |||||||||
|
Total
net sales
|
$ | 166.0 | $ | 218.6 | $ | 278.4 | ||||||
20. Unaudited
Quarterly Financial Data
The
following tables summarize the consolidated quarterly results of operations for
2009 and 2008 (in thousands, except per share amounts):
|
2009
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
sales
|
$ | 41,514 | $ | 46,867 | $ | 41,615 | $ | 36,004 | ||||||||
|
Gross
profit
|
9,895 | 14,620 | 10,863 | 9,000 | ||||||||||||
|
Net
(loss) income
|
(6,700 | ) | 342 | (3,360 | ) | 301 | ||||||||||
|
Net
(loss) income per share – basic
|
$ | (0.19 | ) | $ | 0.01 | $ | (0.09 | ) | $ | 0.01 | ||||||
|
Net
(loss) income per share – diluted
|
$ | (0.19 | ) | $ | 0.01 | $ | (0.09 | ) | $ | 0.01 | ||||||
|
Items included in the determination of net income
(loss)
|
||||||||||||||||
|
that may affect comparability, before tax
effect:
|
||||||||||||||||
|
Impairment
charge
|
$ | - | $ | - | $ | - | $ | (742 | ) | |||||||
|
Restructuring
charge
|
(3,002 | ) | - | (903 | ) | (1,490 | ) | |||||||||
| 2008 | ||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
sales
|
$ | 54,836 | $ | 60,100 | $ | 54,330 | $ | 49,290 | ||||||||
|
Gross
profit
|
16,071 | 21,491 | 16,198 | 14,519 | ||||||||||||
|
Net
loss
|
(1,787 | ) | (76,649 | ) | (1,629 | ) | (82,967 | ) | ||||||||
|
Net
loss per share – basic
|
$ | (0.06 | ) | $ | (2.58 | ) | $ | (0.05 | ) | $ | (2.29 | ) | ||||
|
Net
loss per share – diluted
|
$ | (0.06 | ) | $ | (2.58 | ) | $ | (0.05 | ) | $ | (2.29 | ) | ||||
|
Items included in the determination of net
loss
|
||||||||||||||||
|
that may affect comparability, before tax
effect:
|
||||||||||||||||
|
Impairment
charges
|
$ | - | $ | (92,000 | ) | $ | (1,600 | ) | $ | (94,148 | ) | |||||
|
Restructuring
charge
|
(1,752 | ) | - | - | (379 | ) | ||||||||||
Earnings
per share is computed independently for each of the quarters presented;
therefore, the sum of the quarterly earnings per share may not equal the annual
earnings per share. Except for the fourth quarter of 2008, which
consisted of 14 weeks and ended on the last Saturday of the period, each of our
fiscal quarters above consists of 13 weeks and ended on the last Saturday of the
period.
21. Collaborative
Arrangement
In view
of the risks and costs associated with developing new products and our desire to
expand our markets by providing quality unitized curtain wall solutions to the
commercial building industry, we entered into a collaborative arrangement with
another company with extensive experience in sales, marketing, engineering and
project management of unitized curtain wall solutions and in which costs,
revenues and risks are shared. During the third quarter of 2009, this
arrangement was terminated. We were not the principal participant in
this arrangement. Our obligation under this arrangement was to provide
manufacturing expertise, including providing the operating entity with labor for
assembly and fabrication of the unitized curtain wall units. We
earned revenues and incurred costs of sales and expenses from this activity
based on the number of hours of labor provided in the production of materials
used in the arrangement. We also recorded a percentage of the joint
operating activity’s profit or loss into revenue based on our percentage
interest in the arrangement, which was insignificant in 2009. Each
collaborator’s interest was 50 percent.
The
following table illustrates the income statement classification and amounts
attributable to transactions arising from the collaborative arrangements between
participants for each period presented (in thousands):
|
Twelve
Months Ended
|
||||||||||||
|
January
2,
|
January
3,
|
December
29,
|
||||||||||
|
2010
|
2009
|
2007
|
||||||||||
|
Net
sales
|
$ | 1,449 | $ | 1,531 | $ | - | ||||||
|
Cost
of sales
|
(1,093 | ) | (1,464 | ) | - | |||||||
|
Selling,
general and administrative
|
(215 | ) | (130 | ) | - | |||||||
In
November 2007, the EITF issued guidance under the Broad Transactions – Collaborative
Arrangements topic of the Codification. This guidance is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, and must be applied
retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. This Issue requires that
participants in a collaborative arrangement report costs incurred and revenues
generated on a gross or net basis and in the appropriate line items in each
company’s financial statements. This guidance also requires disclosure of the
nature and purpose of the participant’s collaborative arrangements, the
participant’s rights and obligations under these arrangements, the accounting
policy for collaborative arrangements, the income statement classification and
amounts attributable to transactions arising from collaboration arrangements
between participants, and the disclosure related to individually significant
collaborative arrangements. We adopted the guidance in the first quarter of
2009.
22. Subsequent Events
In the first quarter of 2010,
we entered into an agreement with a broker to list our Lexington, NC, plant
facility. We do not currently operate out of that facility, and
accordingly do not expect a potential sale to have a material impact on our
operations in the future. See Note 2 (Long-Lived Assets) for
additional information regarding this facility.
On March
18, 2010 our Board of Directors approved the Amended and Restated 2006 Equity
Incentive Plan, and authorized an Equity Exchange. Also, on March 8,
2010, our Board of Directors authorized a stock option exchange to eligible
employees. These three items are subject to approval at our annual
stockholders' meeting. Additional information appears in our
definitive proxy statement for our annual meeting of stockholders under the
captions “Amended and Restated 2006 Equity Incentive Plan”, “Issuer Tender
Offer”, and “Equity Exchange”.
2010
Rights Offering
On
January 29, 2010, the Company filed Amendment No. 1 to the Registration
Statement on Form S-1 filed on December 24, 2009 relating to a previously
announced offering of rights to purchase 20,382,326 shares of the Company’s
common stock with an aggregate value of approximately $30.6
million. The registration statement relating to the rights offering
was declared effective by the United States Securities and Exchange Commission
on February 10, 2010, and the Company distributed to each holder of record of
the Company’s common stock as of close of business on February 8, 2010, at no
charge, one (1) non-transferable subscription right for every one and
three-quarters (1.75) shares of common stock held by such holder under the basic
subscription privilege. Each whole subscription right entitled its
holder to purchase one share of PGT’s common stock at the subscription price of
$1.50 per share. The rights offering also contained an
over-subscription privilege that permitted all basic subscribers to purchase
additional shares of the Company’s common stock up to an amount equal to the
amount available to each such holder under the basic subscription
privilege. Shares issued to each participant in the over-subscription
were determined by calculating each subscriber’s percentage of the total shares
over-subscribed, multiplied by the number of shares available in the
over-subscription privilege. The rights offering expired on March 12,
2010.
The
rights offering was 90.0% subscribed resulting in the Company distributing
18,336,368 shares of its common stock, including 15,210,184 shares under the
basic subscription privilege and 3,126,184 under the over-subscription
privilege, representing a 74.6% basic subscription participation
rate. There were requests for 3,126,184 shares under the
over-subscription privilege representing an allocation rate of 100% to each
over-subscriber. Of the 18,336,368 shares issued, 13,333,332 shares
were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder,
including 10,719,389 shares issued under the basic subscription privilege and
2,613,943 shares issued under the over-subscription privilege. Prior
to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s
outstanding common stock. With the completion of the rights offering,
the Company has 54,005,439 total shares of common stock outstanding of which JLL
holds 59.4%.
Net
proceeds of $27.5 million from the rights offering were used to repay a portion
of the outstanding indebtedness under our amended credit agreement in the amount
of $15.0 million, and for general corporate purposes in the amount of $12.5
million.
|
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND FINANCIAL
DISCLOSURE
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Our
principal executive officer and principal financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
January 2, 2010, including controls and procedures to timely alert management to
material information relating to the Company and its subsidiaries required to be
included in our periodic SEC filings. Based on such evaluation, they have
concluded that, as of such date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in applicable SEC rules and forms.
Internal
Control over Financial Reporting
|
a.
|
Management's
annual report on internal control over financial
reporting.
|
Internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) refers to the process designed by, or
under the supervision of, our Chief Executive Officer and Chief Financial
Officer, and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Management is responsible for
establishing and maintaining adequate internal control over our financial
reporting.
We have
evaluated the effectiveness of our internal control over financial reporting as
of January 2, 2010. The evaluation was performed using the internal control
evaluation framework developed by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on such evaluation, management concluded that, as
of such date, our internal control over financial reporting was
effective.
|
b.
|
Attestation
report of the registered public accounting
firm.
|
Ernst
& Young LLP has issued an attestation report on our internal control over
financial reporting. Their report follows this Item 9A.
|
c.
|
Changes
in internal control over financial
reporting
|
There has
been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of
PGT,
Inc.
We have
audited PGT, Inc.’s internal control over financial reporting as of January 2,
2010, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). PGT, Inc.’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, PGT, Inc. maintained, in all material respects, effective internal
control over financial reporting as of January 2, 2010, based on the COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of PGT, Inc. as of January 2, 2010 and
January 3, 2009, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three years ended January
2, 2010, January 3, 2009 and December 29, 2007 and our report dated March 18,
2010 expressed an unqualified opinion thereon.
|
|
/s/
ERNST & YOUNG LLP
|
|
|
|
Certified
Public Accountants
Tampa, FloridaMarch 18,
2010
Item 9B. OTHER
INFORMATION
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Executive Officers and Significant
Employees of the Registrant
|
Name
|
Age
|
Position
|
|||
|
Rodney
Hershberger
|
53 |
President,
Chief Executive Officer, and Director
|
|||
|
Jeffrey
T. Jackson
|
44 |
Executive
Vice President and Chief Financial Officer
|
|||
|
Mario
Ferrucci III
|
46 |
Vice
President and General Counsel
|
|||
|
David
McCutcheon
|
44 |
Vice
President - Operations
|
|||
|
Deborah
L. LaPinska
|
48 |
Vice
President - Sales and Marketing
|
|||
|
Ron
Stanek
|
54 |
Vice
President - Vinyl Products
|
|||
|
Mark
Davis
|
53 |
Vice
President - Vinyl Products
|
|||
|
Monte
Burns
|
50 |
Vice
President - NC Operations
|
|||
Rodney Hershberger, President,
Chief Executive Officer, and Director. Mr. Hershberger, a co-founder of PGT
Industries, Inc., has served our Company for nearly 30 years.
Mr. Hershberger was named President and Director in 2004 and became our
Chief Executive Officer in March 2005. Mr. Hershberger also became
President of PGT Industries, Inc. in 2004 and was named Chief Executive Officer
of PGT Industries, Inc. in 2005. In 2003 Mr. Hershberger became executive
vice president and chief operating officer and oversaw our Company’s Florida and
North Carolina operations, sales, marketing, and engineering groups. Previously,
Mr. Hershberger led the manufacturing, transportation, and logistics
operations in Florida and served as vice president of customer
service.
Jeffrey T. Jackson, Executive
Vice President and Chief Financial Officer. Mr. Jackson joined our Company
as Chief Financial Officer and Treasurer in November 2005, and his current
responsibilities include all aspects of financial reporting, accounting, and
internal controls, cash management, human resources, our Company’s Florida and
North Carolina operations, and the business planning process. Before joining our
Company, Mr. Jackson spent two years as Vice President, Corporate
Controller for The Hershey Company. From 1999 to 2004 Mr. Jackson was
Senior Vice President, Chief Financial Officer for Mrs. Smith’s Bakeries,
LLC, a division of Flowers Foods, Inc. Mr. Jackson has over seventeen years
of increasing responsibility in various executive management roles with various
companies, including Division Chief Financial Officer, Vice President Corporate
Controller, and Senior Vice President of Operations. Mr. Jackson holds a
B.B.A. from the University of West Georgia and is a Certified Public Accountant
in the State of Georgia and the State of California.
Mario Ferrucci III, Vice
President – General Counsel. Mr. Ferrucci joined our Company in April 2006 as
Vice President and Corporate Counsel, and his current responsibilities include
all aspects of the Company’s legal and compliance affairs, information systems
and engineering. From 2001 to 2006, Mr. Ferrucci practiced law with the law firm
of Skadden, Arps, Slate, Meagher & Flom LLP.
David McCutcheon, Vice
President — Florida Operations. Mr. McCutcheon joined our Company in 1997 and
was appointed Vice President in 2001. His current responsibilities include all
aspects of our Florida operations and manufacturing. Previously,
Mr. McCutcheon worked for ten years for General Motors in management
positions in manufacturing operations and manufacturing engineering.
Mr. McCutcheon holds a B.S.E.E. from Purdue University and an M.B.A. from
The Ohio State University.
Deborah L. LaPinska, Vice
President — Sales and Marketing. Ms. LaPinska joined our Company in
1991. Ms. LaPinska is responsible for sales and marketing, and field and
customer service, as well as incorporating new tools and resources to improve
order processing cycle times and sales forecasting. Before she was appointed
Vice President in 2003, Ms. LaPinska held the position of Director,
National and International Sales. Ms. LaPinska holds a B.A. in business
management from Eckerd College.
Ronald Stanek, Vice President
– Vinyl Products. Mr. Stanek joined our Company in 2009 and is responsible for
the PremierVue sales training program. Mr. Stanek has over 30 years
experience in sales and marketing of premium fenestration products. Prior
to joining PGT, Mr. Stanek was Managing Member of The Hurricane Window and Door
Factory LLC., and a co-founder of Stanek Vinyl Windows Corp.
Mark Davis, Vice President –
Vinyl Products. Mr. Davis joined our Company in 2009. He has over 25
years of experience in the construction industry, including 18 years of
management in the window and door industry. Before joining PGT, Mr. Davis was a
founding partner in The Hurricane Window & Door Factory, LLC., and served on
the board of directors and as the senior executive for Stanek Vinyl Windows
Corp. He earned a B.A. from The University of Kansas in
Lawrence.
Monte Burns, Vice President –
NC Operations. Mr. Burns joined our Company in August 1981 and was
appointed Vice President in 2009. His current responsibilities
include all aspects of our North Carolina operations.
Additional
information required by this item appears in our definitive proxy statement for
our annual meeting of stockholders under the captions
“Proposal 1 — Election of Directors,” “Information Regarding the
Board and its Committees,” “Corporate Governance — Director Nomination
Process,” “Corporate Governance — Code of Business Conduct and
Ethics,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and
“Executive Officers of the Registrant,” which information is incorporated herein
by reference to Item 10 of this Annual Report on Form 10-K.
Code
of Business Conduct and Ethics
PGT, Inc.
and its subsidiary endeavor to do business according to the highest ethical and
legal standards, complying with both the letter and spirit of the law. Our board
of directors has approved a Code of Business Conduct and Ethics that applies to
our directors, officers (including our principal executive officer, principal
financial officer and controller) and employees. Our Code of Business Conduct
and Ethics is administered by a Compliance Committee made up of representatives
from our legal, human resources and accounting departments.
Our employees
are encouraged to report any suspected violations of laws, regulations and the
Code of Business Conduct and Ethics, and all unethical business practices. We
provide continuously monitored hotlines for anonymous reporting by
employees.
Our board of
directors has also approved a Supplemental Code of Ethics for the chief
executive office, president, and senior financial officers of PGT, Inc., which
is administered by our general counsel.
Both of these
policies can be found on the governance section of our corporate website at:
http://pgtinc.com.
Stockholders
may request a free copy of these policies by contacting the Corporate Secretary,
PGT, Inc., 1070 Technology Drive, North Venice, Florida, 34275, United States of
America.
In addition,
within five business days of:
|
•
|
Any
amendment to a provision of our Code of Business Conduct and Ethics or our
Supplemental Code of Ethics that applies to our chief executive officer,
our chief financial officer; or
|
|
|
•
|
The
grant of any waiver, including an implicit waiver, from a provision of one
of these policies to one of these officers that relates to one or more of
the items set forth in Item 406(b) of
Regulation S-K
|
|
We will
provide information regarding any such amendment or waiver (including the nature
of any waiver, the name of the person to whom the waiver was granted and the
date of the waiver) on our Web site at the Internet address above, and such
information will be available on our Web site for at least a 12-month period. In
addition, we will disclose any amendments and waivers to our Code of Business
Conduct and Ethics or our Supplemental Code of Ethics as required by the listing
standards of the NASDAQ Global Market.
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item appears in our definitive proxy statement for
our annual meeting of stockholders under the captions “Executive Compensation,”
“Employment Agreements”, and “Change in Control Agreements,” “Information
Regarding the Board and its Committees — Information on the
Compensation of Directors,” “Compensation Committee Report,” and “Compensation
Committee Interlocks and Insider Participation,” which information is
incorporated herein by reference.
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this item appears in our definitive proxy statement for
our annual meeting of stockholders under the caption “Security Ownership of
Certain Beneficial Owners and Management” and “Equity Compensation Plan
Information,” which information is incorporated herein by reference.
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
|
Item 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
(1) See the index to consolidated financial statements and schedule
provided in Item 8 for a list of the financial statements filed as part of
this report.
(2) Financial statement
schedules are omitted because they are either not applicable or not
material.
(3) The following documents are filed, furnished or incorporated by
reference as exhibits to this report as required by Item 601 of
Regulation S-K.
Exhibit
Number Description
|
3.1*
|
Amended
and Restated Certificate of Incorporation of PGT, Inc.
|
|
3.2*
|
Amended
and Restated By-Laws of PGT, Inc.
|
|
4.1
|
Form
of Specimen Certificate (incorporated herein by reference to Exhibit 4.1
to Amendment No. 2 to the Registration Statement of the Company on Form
S-1, filed with the Securities and Exchange Commission on May 26, 2006,
Registration No. 333-132365)
|
|
4.2
|
Amended
and Restated Security Holders’ Agreement, by and among PGT, Inc., JLL
Partners Fund IV, L.P., and the stockholders named therein, dated as of
June 27, 2006 (incorporated herein by reference to Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 11, 2006, Registration No.
000-52059)
|
|
4.3
|
PGT
Savings Plan (incorporated herein by reference to Exhibit 4.5 to the
Company’s Form S-8 Registration Statement, filed with the Securities and
Exchange Commission on October 15, 2007, Registration No.
000-52059)
|
|
10.1
|
Second
Amended and Restated Credit Agreement dated as of February 14, 2006 among
PGT Industries, Inc., as Borrower, JLL Window Holdings, Inc. and the other
Guarantors party thereto, as Guarantors, the lenders party thereto, UBS
Securities LLC, as Arranger, Bookmanager, Co-Documentation Agent and
Syndication Agent, UBS AG, Stamford Branch, as Issuing Bank,
Administrative Agent and Collateral Agent, UBS Loan Finance LLC, as
Swingline Lender and General Electric Capital Corporation, as
Co-Documentation Agent (incorporated herein by reference to Exhibit 10.1
to Amendment No. 1 to the Registration Statement of the Company on Form
S-1, filed with the Securities and Exchange Commission on April 21, 2006,
Registration No. 333-132365)
|
|
10.2
|
Amendment
No. 2 to Second Amended and Restated Credit Agreement dated as of April
30, 2008 among PGT Industries, Inc., UBS AG, Stamford Branch, as
administrative agent and the Lenders, as defined therein, amending the
Second Amended and Restated Credit Agreement dated as of February 14, 2006
(incorporated herein by reference to Exhibit 10.1 to Current Report on
Form 8-K dated May 1, 2008 filed with the Securities and Exchange
Commission on May I, 2008, Registration No. 000-52059)
|
|
10.3
|
Amended
and Restated Pledge and Security Agreement dated as of February 14, 2006,
by PGT Industries, Inc., JLL Window Holdings, Inc. and the other
Guarantors party thereto in favor of UBS AG, Stamford Branch, as First
Lien Collateral Agent (incorporated herein by reference to Exhibit 10.3 to
Amendment No. 1 to the Registration Statement of the Company on Form S-1,
filed with the Securities and Exchange Commission on April 21, 2006,
Registration No. 333-132365)
|
|
10.5
|
PGT,
Inc. 2004 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.5 to Amendment No. 1 to the Registration Statement
of the Company on Form S-1, filed with the Securities and Exchange
Commission on April 21, 2006, Registration No.
333-132365)
|
|
10.6
|
Form
of PGT, Inc. 2004 Stock Incentive Plan Stock Option Agreement
(incorporated herein by reference to Exhibit 10.6 to Amendment No. 1 to
the Registration Statement of the Company on Form S-1, filed with the
Securities and Exchange Commission on April 21, 2006, Registration No.
333-132365)
|
|
10.7*
|
PGT,
Inc. 2006 Amended and Restated Equity Incentive Plan
|
|
10.8
|
Form
of PGT, Inc. 2006 Equity Incentive Plan Non-qualified Stock Option
Agreement (incorporated herein by reference to Exhibit 10.8 to Amendment
No. 3 to the Registration Statement of the Company on Form S-1, filed with
the Securities and Exchange Commission on June 8, 2006, Registration No.
333-132365)
|
|
10.9
|
Form
of Employment Agreement, dated February 20, 2009, between PGT Industries,
Inc. and, individually, Rodney Hershberger, Jeffery T. Jackson, C. Douglas
Cross, Mario Ferrucci III, Deborah L. LaPinska and David B. McCutcheon
(incorporated herein by reference to Exhibit 10.1 to Current Report on
Form 8-K dated February 20, 2009, filed with the Securities and Exchange
Commission on February 26, 2009, Registration No.
000-52059)
|
|
10.10
|
Form
of Director Indemnification Agreement (incorporated herein by reference to
Exhibit 10.17 to Amendment No. 3 to the Registration Statement of the
Company on Form S-1, filed with the Securities and Exchange Commission on
June 8, 2006, Registration No. 333-132365)
|
|
10.11
|
Form
of PGT, Inc. Rollover Stock Option Agreement (incorporated herein by
reference to Exhibit 10.18 to Amendment No. 1 to the Registration
Statement of the Company on Form S-1, filed with the Securities and
Exchange Commission on April 21, 2006, Registration No.
333-132365)
|
|
10.12
|
Market
Alliance Agreement between PGT Industries, Inc. and E.I. du Pont de
Nemours and Company, dated February 27, 2009, with portions omitted
pursuant to a request for confidential treatment (incorporated herein by
reference to Exhibit 10.1 to Current Report on Form 8-K dated February 27,
2009, filed with the Securities and Exchange Commission on March 5, 2009,
Registration No. 000-52059)
|
|
10.13
|
Form
of PGT, Inc. 2006 Management Incentive Plan (incorporated herein by
reference to Exhibit 10.23 to Amendment No. 3 to the Registration
Statement of the Company on Form S-1, filed with the Securities and
Exchange Commission on June 8, 2006, Registration No.
333-132365)
|
|
10.14
|
Form
of PGT, Inc. 2006 Equity Incentive Plan Restricted Stock Award Agreement
(incorporated herein by reference to Exhibit 10.24 to Amendment No. 3 to
the Registration Statement of the Company on Form S-1, filed with the
Securities and Exchange Commission on June 8, 2006, Registration No.
333-132365)
|
|
10.15
|
Form
of PGT, Inc. 2006 Equity Incentive Plan Restricted Stock Unit Award
Agreement (incorporated herein by reference to Exhibit 10.25 to Amendment
No. 3 to the Registration Statement of the Company on Form S-1, filed with
the Securities and Exchange Commission on June 8, 2006, Registration No.
333-132365)
|
|
10.16
|
Form
of PGT, Inc. 2006 Equity Incentive Plan Incentive Stock Option Agreement
(incorporated herein by reference to Exhibit 10.26 to Amendment No. 3 to
the Registration Statement of the Company on Form S-1, filed with the
Securities and Exchange Commission on June 8, 2006, Registration No.
333-132365)
|
| 10.17* | Form of PGT, Inc. 2006 Equity Incentive Plan Replacement Non-Qualified Stock Option Agreement |
|
21.1*
|
Subsidiaries
of the Registrant
|
|
23.1*
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
|
31.1*
|
Certification
of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
Certification
of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1**
|
Certification
of chief executive officer and chief financial officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
____________
* Filed
herewith.
** Furnished
herewith.
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
PGT, INC.
|
|
|
(Registrant)
|
|
|
Date:
March 18, 2010
|
/s/ RODNEY HERSHBERGER
|
|
Rodney
Hershberger
|
|
|
President
and Chief Executive Officer
|
|
|
Date:
March 18, 2010
|
/s/ JEFFERY T.
JACKSON
|
|
Jeffery
T. Jackson
|
|
|
Executive
Vice President and Chief Financial
Officer
|
The
undersigned hereby constitute and appoint Mario Ferrucci, III and his
substitutes our true and lawful attorneys-in-fact with full power to execute in
our name and behalf in the capacities indicated below any and all amendments to
this report and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, and hereby
ratify and confirm all that such attorney-in-fact or his substitutes shall
lawfully do or cause to be done by virtue thereof. Pursuant to the
requirements of the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|||
|
/s/
RODNEY HERSHBERGER
Rodney
Hershberger
|
President
and Chief Executive Officer (Principal Executive Officer and
Director)
|
March 18,
2010
|
|||
|
/s/
JEFFREY T. JACKSON
Jeffrey
T. Jackson
|
Executive
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
March 18,
2010
|
|||
|
/s/
PAUL S.
LEVY
Paul
S. Levy
|
Chairman
and Director
|
March 18,
2010
|
|||
|
/s/
ALEXANDER R. CASTALDI
Alexander
R. Castaldi
|
Director
|
March 18,
2010
|
|||
|
/s/
RICHARD D. FEINTUCH
Richard
D. Feintuch
|
Director
|
March 18,
2010
|
|||
|
/s/
RAMSEY A.
FRANK
Ramsey
A. Frank
|
Director
|
March 18,
2010
|
|||
|
/s/
M. JOSEPH MCHUGH
M.
Joseph McHugh
|
Director
|
March 18,
2010
|
|||
|
/s/
FLOYD F. SHERMAN
Floyd
F. Sherman
|
Director
|
March 18, 2010
|
|||
|
/s/
RANDY L. WHITE
Randy
L. White
|
Director
|
March 18, 2010
|
|||
|
/s/
BRETT N.
MILGRIM
Brett
N. Milgrim
|
Director
|
March 18, 2010
|
|||
|
/s/
WILLIAM J. MORGAN
William
J. Morgan
|
Director
|
March 18, 2010
|
|||
|
/s/
DANIEL AGROSKIN
Daniel
Agroskin
|
Director
|
March 18, 2010
|
|||
|
APPENDIX
|
|||||||||||
|
RECONCILIATION
OF NON-GAAP FINANCIAL MEASURES TO THEIR GAAP EQUIVALENTS
|
|||||||||||
|
(unaudited
- in thousands, except per share amounts)
|
|||||||||||
|
Year
Ended
|
|||||||||||
|
January
2,
|
January
3,
|
December
29,
|
|||||||||
|
2010
|
2009
|
2007
|
|||||||||
|
Reconciliation
to Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per pro forma
share (1):
|
|||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032) | $ | 623 | ||||
|
Reconciling
items:
|
|||||||||||
|
Goodwill
and intangible impairment charges (2)
|
- | 187,748 | - | ||||||||
|
Asset
impairment charges (3)
|
742 | - | 826 | ||||||||
|
Restructuring
charges (4)
|
5,395 | 2,131 | 2,375 | ||||||||
|
Tax
effect of reconciling items
|
- | (28,313) | (1,248 | ) | |||||||
|
Adjusted
net (loss) income
|
$ | (3,280 | ) | $ | (1,466) | $ | 2,576 | ||||
|
Weighted
average shares outstanding:
|
|||||||||||
|
Diluted
shares (5)
|
36,451 | 32,104 | 30,212 | ||||||||
|
Pro
forma diluted shares
|
36,451 | 32,104 | 30,212 | ||||||||
|
Adjusted
net (loss) income per pro forma share - diluted
|
$ | (0.09 | ) | $ | (0.05) | $ | 0.09 | ||||
|
Reconciliation
to EBITDA and Adjusted EBITDA:
|
|||||||||||
|
Net
(loss) income
|
$ | (9,417 | ) | $ | (163,032) | $ | 623 | ||||
|
Reconciling
items:
|
|||||||||||
|
Depreciation
and amortization expense
|
16,166 | 17,088 | 15,988 | ||||||||
|
Interest
expense
|
6,698 | 9,283 | 11,404 | ||||||||
|
Income
tax (benefit) expense
|
(5,584 | ) | (28,789) | 456 | |||||||
|
EBITDA
|
7,863 | (165,450) | 28,471 | ||||||||
|
Add:
|
Goodwill
and intangible impairment charges (2)
|
187,748 | - | ||||||||
|
Asset
impairment charges (3)
|
742 | - | 826 | ||||||||
|
Restructuring
charges (4)
|
5,395 | 2,131 | 2,375 | ||||||||
|
Adjusted
EBITDA
|
$ | 14,000 | $ | 24,429 | $ | 31,672 | |||||
|
Adjusted
EBITDA as percentage of sales
|
8.4 | % | 11.2 | % | 11.4 | % | |||||
|
(1)
|
The
Company’s non-GAAP financial measures were explained in its Form 8-K filed
February 11, 2010.
|
|
(2)
|
The
Company completed its annual impairment tests in the fourth quarter of
2008, which resulted in additional impairment charges totaling $94.1
million, of which $76.3 million related to goodwill and $178 million
related to trademarks. As of the end of 2008, the Company’s goodwill had
zero carrying value for financial reporting purposes. The non-cash
impairment charges taken in the fourth quarter 2008, coupled with prior
non-cash impairments, bring total non-cash impairment charges taken in
2008 to $187.7 million.
|
|
(3)
|
Represents
the write-downs of the value of the Lexington, North Carolina
property.
|
|
(4)
|
Represents
charges related to restructuring actions in 2009, 2008 and 2007. These
charges relate primarily to employee separation costs. Of the $5.4 million
restructuring charge in 2009, $3.1 million is included in cost of goods
sold and $2.3 million is included in selling, general and administrative
expenses. Of the $2.1 million restructuring charge in 2008, $1.1 million
was included in cost of goods sold and $1.0 million was included in
selling, general and administrative expenses. Of the $2.4 million
restructuring charge in 2007, $0.7 million was included in cost of goods
sold and $1.7 million was included in selling, general and administrative
expenses.
|
|
(5)
|
Weighted
average common shares outstanding for all periods presented have been
restated to give effect to the bonus element of the 2010 rights
offering.
|