PGT Innovations
PGT, Inc. (Form: 10-K, Received: 02/28/2014 11:44:56)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

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

For the fiscal year ended December 28, 2013

OR

 

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

For the transition period from              to            

Commission File Number: 000-52059

 

 

PGT, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-0634715

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1070 Technology Drive

North Venice, Florida

  34275
(Address of principal executive offices)   (Zip Code)

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:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common stock, par value $0.01 per share   NASDAQ Global Market

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   ¨     No   x

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   ¨     No   x

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   x     No   ¨

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.   ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    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   ¨     No   x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2013 was approximately $267,138,557 based on the closing price per share on that date of $8.67 as reported on the NASDAQ Global Market.

The number of shares of the registrant’s common stock, par value $0.01, outstanding as of February 26, 2014, was 47,160,308.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Company’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

PGT, INC.

Table of Contents to Form 10-K

 

         Page  
PART I   
Item 1.  

Business

     3   
Item 1A.  

Risk Factors

     6   
Item 1B.  

Unresolved Staff Comments

     9   
Item 2.  

Properties

     10   
Item 3.  

Legal Proceedings

     10   
Item 4.  

Mine Safety Disclosures

     10   
PART II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     11   
Item 6.  

Selected Financial Data

     13   
Item 7.  

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

     14   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     27   
Item 8.  

Financial Statements and Supplementary Data

     28   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     58   
Item 9A.  

Controls and Procedures

     58   
Item 9B.  

Other Information

     59   
PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     59   
Item 11.  

Executive Compensation

     61   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     61   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     61   
Item 14.  

Principal Accountant Fees and Services

     61   
PART IV   
Item 15.  

Exhibits, Financial Statement Schedules

     62   

Subsidiaries

  

Consent of Ernst & Young LLP

  

Written Statement Pursuant to Section 302

  

Written Statement Pursuant to Section 302

  

Written Statement Pursuant to Section 906

  

 

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PART I

 

Item 1. BUSINESS

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 ™, PGT Architectural Systems and PGT Commercial Storefront System 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 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, PremierVue ™ , PGT Architectural Systems, and PGT Commercial Storefront System 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 SpectraGuard ™ line of products. 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 conduct business include the Southeastern U.S., Gulf Coast, Coastal mid-Atlantic, the Caribbean, Central America, and Canada. We distribute our products through multiple channels, including approximately 1,100 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.

Our manufacturing facility in North Venice, Florida, produces fully-customized windows and doors. We are vertically integrated with glass, insulating, tempering and laminating facilities, which provide us with a consistent source of impact-resistant laminated and insulating glass, shorter lead times, and lower costs relative to third-party sourcing.

History

Our subsidiary, PGT Industries, Inc., a Florida Corporation, was founded in 1980 as Vinyl Tech, 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, and on June 27, 2006, we became a publicly listed company on the NASDAQ Global Market under the symbol “PGTI”.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

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 PremierVue.

 

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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.

PremierVue . PremierVue is a complete line of impact-resistant vinyl window and door 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 which are Energy Star rated. PremierVue’s large test sizes and high design pressures, combined with vinyl’s inherent thermal efficiency, make these products truly unique in the window and door industry.

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 structural loads. 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 where the energy-efficient characteristics of vinyl frames are critical. It includes a line of energy efficient vinyl windows for new construction with wood-like aesthetics, such as brick-mould frames, wood-like trim detail and simulated divided lights. Also, part of this line is vinyl replacement windows with the same superior energy performance and wood-like detail and branded the product lines as SpectraGuard. All of our vinyl product lines possess options to meet the needs of the Florida market and are Energy Star rated.

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.

Eze-Breeze. Eze-Breeze non-glass vertical and horizontal sliding panels for porch enclosures are vinyl-glazed, aluminum-framed products used for enclosing screened-in porches that provide protection from inclement weather. This line was completed with the addition of a cabana door.

PGT Commercial Storefront System. PGT’s Commercial Storefront window system and entry doors, launched in 2013, are engineered to provide a flexible yet economical solution for a variety of applications. Our system provides easy fabrication and assembly, while also reducing installation time and challenges.

Sales and Marketing

Our sales strategy primarily focuses on attracting and retaining distributors and dealers by consistently providing exceptional customer service, leading product designs and quality, and competitive pricing all 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, dealer, and builder promotions, and selling and collateral materials. We also work with our dealers and distributors to educate architects, building officials, 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 approximately 1,100 window distributors, building supply distributors, window replacement dealers and enclosure contractors. Our largest customer accounts for approximately 3.2% of net sales and our top ten customers account for approximately 19.5% of net sales. Our sales are comprised of residential new construction and home repair and remodeling end markets, which represented approximately 32% and 68% of our sales, respectively, during 2013. This compares to 28% and 72% in 2012.

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.

 

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Materials and Supplier Relationships

Our primary manufacturing materials include aluminum and vinyl extrusions, glass, ionoplast, 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 31% of our material purchases during fiscal year 2013. Sheet glass, which is sourced from two major national suppliers, accounted for approximately 17% of our material purchases during fiscal year 2013. Sheet glass that we purchase comes in various sizes, tints, and thermal properties. From the sheet glass purchased, we produce most of our own laminated glass needs. However, in 2013 due to some temporary capacity constraints, we did purchase the remaining amounts of our laminated glass needs from one major national supplier. This finished laminated glass make up approximately 7% of our material purchases in fiscal year 2013. Polyvinyl butyral and ionoplast, which are both used as inner layer in laminated glass, accounted for approximately 15% of our material purchases during fiscal year 2013.

Backlog

As of December 28, 2013, our backlog was $17.6 million compared to $10.6 million at December 29, 2012. 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 2014, due in part to our lead times which range from one to three weeks.

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 facility is located in Florida where we produce fully-customized products. The manufacturing process typically begins in our glass plant where we cut, temper, laminate, and insulate 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. We start with a piece of extruded material which is cut and shaped into a frame that fits the customers’ specifications. Once complete, product is immediately staged for delivery and generally shipped on our trucking fleet within 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 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.

Active Protection: This group of competitors consists of manufactures who produce shutters and plywood, both of which are used to actively protect openings. Our impact windows and doors represent passive protection, meaning, once installed, no activity is required to protect a home from storm related hazards.

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 award winning designs and high quality of our products, position us well to meet the needs of our customers.

 

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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 facilities are in material compliance with such laws and regulations.

Employees

As of February 20, 2014, we employed approximately 1,400 people, none of whom were represented by a union. We believe we have good relations with our employees.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Our domestic and international net sales for each of the three years ended December 28, 2013, December 29, 2012, and December 31, 2011, are as follows (in millions):

 

     Year Ended  
     December 28,
2013
     December 29,
2012
     December 31,
2011
 

Domestic

   $ 232.7       $ 166.9       $ 160.0   

International

     6.6         7.6         7.3   
  

 

 

    

 

 

    

 

 

 
   $ 239.3       $ 174.5       $ 167.3   
  

 

 

    

 

 

    

 

 

 

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 are our Code of Business Conduct and Ethics and our supplemental Code of Ethics for Senior 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 economy in Florida and throughout the United States could negatively impact demand for our products as it has in the past, and macroeconomic forces such as employment rates and the availability of credit could have an adverse effect on our sales and results of operations.

New home construction while improving, remains below average. Also repair and remodeling markets are subject to many economic factors. Accordingly, either market could decline and lower the demand for, and the pricing of, our products, which could adversely affect our results. The window and door industry is subject to the cyclical market pressures of the larger new construction and repair and remodeling markets. In turn, these changes may be affected by adverse changes in economic conditions such as demographic trends, employment levels, and consumer confidence. Such market pressures negatively impacted operations during several recent years, and while macro-economic forces improved throughout 2013, declines in the economic environment or a decline in construction could negatively impact our sales and earnings.

Economic and credit market conditions impact our ability to collect receivables. Economic and credit conditions negatively impacted our bad debt expense in the years 2007-2011, which adversely impacted our results of operations. If these conditions return, our results of operations may again be adversely impacted by bad debts.

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 which 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 one-year supply agreement through December 2014 with a major producer of ionoplast inter layer that we believe provides us with a reliable, single

 

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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. 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. Fuel prices have increased in the past, and remain volatile. A 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 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 certain national producers. 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, or (iv) adapt more quickly to new technologies or evolving customer requirements than do we. Additionally, new competitors may enter our industry, and larger existing competitors may increase their efforts and devote substantially more resources to expand their presence in the impact-resistant market. If we are unable to compete effectively, demand for our products may decline. 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 for us to compete effectively. If we are unable to compete effectively, demand for our products and our profitability may decline.

 

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Our business is currently concentrated in one state. Our business is concentrated geographically in Florida. In fiscal year 2013, approximately 89% of our sales were generated in Florida, a state in which new single family housing permits remain below average. Focusing operations into a single manufacturing location optimizes manufacturing efficiencies and logistics, and we believe that a focused approach to growing our share within our core wind-borne debris markets in Florida, from the Gulf Coast to the mid-Atlantic, and certain international markets, will maximize value and return. However, such a focus further concentrates our business, and another prolonged decline in the economy of the state of Florida or of certain coastal regions, a change in state and local building code requirements for hurricane protection, or any other adverse condition in the state or certain coastal regions, could cause a decline in the demand for our products, which could have an adverse impact on our sales and results of operations.

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. In addition, we and our subsidiary may incur additional indebtedness in the future. If new debt is added to our current debt levels, certain risks which we currently do not consider significant 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, 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.

During the second quarter of fiscal year 2012, we started the implementation of our new Enterprise Resource Planning (“ERP”) System. In order to maintain our leadership position in the market and efficiently process increased business volume, we are making a significant upgrade to our computer hardware, software and our ERP System. Though we expect the ERP implementation to be substantially completed by third quarter of 2014, should the ERP System upgrade be unsuccessful or take longer to implement than anticipated, our ability to maintain and grow the business could be hindered, and our operations and financial results could be adversely impacted.

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, from time to time, 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.

 

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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 December 28, 2013, 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 Global 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.

We are exposed to risks relating to building of our new glass facility. We are currently expanding our glass processing capacity by building a new multi-million dollar facility. While the plant development is progressing with no anticipated issues, there is always the potential risk of a delay in completion and of costs over-runs. Should a serious delay in the construction take place, this would impact the cost savings we expect to achieve by the fourth quarter of 2014 and negatively effect our future results.

We may be adversely impacted by the loss of sales or market share from being unable to keep up with demand. We are currently experiencing significant growth through higher sales volume and growth in market share. To meet the increased demand, we have been hiring and training new employees for direct and indirect support, and we are building a new glass facility. However, should we be unable to find and retain quality employees to meet demand, or should there be delays in bringing the new glass facility fully operational, we may be unable to keep up with our higher sales demand. If our lag time on delivery falls behind, or we are unable to meet customer timing demands, we could lose market share to competitors.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Table of Contents
Item 2. PROPERTIES

We have the following properties as of December 28, 2013:

 

     Manufacturing      Support      Storage  
     (in square feet)  

Owned:

        

Main Plant and Corporate Office, North Venice, FL

     348,000         15,000         —     

Glass tempering and laminating, North Venice, FL

     80,000         —          —    

Insulated Glass, North Venice, FL

     42,000         —          —    

PGT Wellness Center, North Venice, FL

     —          3,600         —    

Leased:

        

James Street Storage, Venice, FL

     15,000         —          —    

Endeavor Court, Nokomis, FL

     —          2,300         —    

Endeavor Court, Nokomis, FL

     —          6,100         —    

Fleet Maintenance Building, North Venice, FL

     —          16,000         —    

Sarasota Warehouse, Bradenton, FL

     —          —          48,000   
  

 

 

    

 

 

    

 

 

 
     485,000         43,000         48,000   
  

 

 

    

 

 

    

 

 

 

On August 16, 2013, we purchased land to build our new glass operations plant. We officially broke ground on January 9, 2014, which when completed will add 96,000 square foot to our current glass cutting, tempering and laminating process. Our expected date of completion for the facility is in third quarter of 2014. We currently own five parcels of land, with two parcels designated for the new glass plant, and three parcels available for future growth, with a combined total of over 523,000 square feet.

On December 3, 2010, we announced that our former Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida manufacturing facilities. This consolidation was completed during the second quarter of 2011. In October 2012, we accepted an offer to sell our former Salisbury, North Carolina facility, and on January 23, 2013, the sale closed for approximately $8.0 million in cash (approximately $7.5 million net of selling costs).

Our leases listed above expire between May 2014 and January 2016. 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 credit agreement. We believe all of these operating facilities are adequate in capacity and condition to service existing customer needs.

 

Item 3. 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.

 

Item 4. MINE SAFETY DISCLOSURES

Not Applicable

 

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Table of Contents

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the NASDAQ Global Market ® under the symbol “PGTI”. On February 24, 2014, the closing price of our Common Stock as reported on the NASDAQ Global Market was $12.07. The approximate number of stockholders of record of our Common Stock on that date was 50, 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  

2013

     

1st Quarter

   $ 8.22       $ 4.22   

2nd Quarter

   $ 9.25       $ 6.23   

3rd Quarter

   $ 11.69       $ 8.58   

4th Quarter

   $ 11.00       $ 8.84   
     High      Low  

2012

     

1st Quarter

   $ 1.96       $ 1.03   

2nd Quarter

   $ 3.05       $ 1.73   

3rd Quarter

   $ 3.40       $ 2.63   

4th Quarter

   $ 4.74       $ 3.17   

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 terms of our credit facility currently restrict our ability to pay dividends.

Securities Authorized for Issuance under Equity Compensation Plans

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.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

On November 15, 2012, the Board of Directors authorized and approved a share repurchase program of up to $20 million. All share repurchases were made in accordance with Rule 10b5-1 and Rule 10b-18, as applicable, of the Securities Exchange Act of 1934 as to the timing, pricing, and volume of such transactions. In connection with this share repurchase program, during 2013, we acquired 1,074,078 shares of our common stock at a cost of approximately $6.1 million, bringing our total shares acquired to 1,996,772 at a total cost of $10.0 million. These shares were placed in treasury. During the second quarter of fiscal 2013, we repurchased 6,791,171 shares of our common stock from JLL Partners Fund IV, L.P. We purchased these shares at a price per share of $7.36, which represented the offering price to the public in a concurrent secondary offering, less the underwriting discounts and commissions. These shares were cancelled and retired.

 

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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 January 3, 2009, to December 28, 2013.

COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN*

AMONG PGT, INC., THE NASDAQ COMPOSITE INDEX,

AND THE S&P BUILDING PRODUCTS INDEX

 

LOGO

 

* $100 invested on January 3, 2009 in stock or in index-including reinvestment of dividends for 60 months ending December 28, 2013.

 

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Table of Contents
Item 6. 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 presented consisted of 52 weeks.

 

Selected Consolidated Financial Data

(in thousands except per share data)

   Year Ended
December 28,
2013
    Year Ended
December 29,
2012
     Year Ended
December 31,
2011
    Year Ended
January 1,
2011
    Year Ended
January 2,
2010
 

Net sales

   $ 239,303      $ 174,540       $ 167,276      $ 175,741      $ 166,000   

Cost of sales

     159,169        114,872         128,171        125,615        121,821   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross margin

     80,134        59,668         39,105        50,126        44,179   

Impairment charges (1)

     —         —          5,959        5,561        742   

Gain on sale of assets held (2)

     (2,195     —          —         —         —    

Selling, general and administrative expenses

     54,594        47,094         48,619        53,879        51,703   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     27,735        12,574         (15,473     (9,314     (8,266

Interest expense

     3,520        3,437         4,168        5,123        6,698   

Other expense (income), net (3)

     770        72         (419     (19     37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     23,445        9,065         (19,222     (14,418     (15,001

Income tax (benefit) expense

     (3,374     110         (2,324     77        (5,584
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 26,819      $ 8,955       $ (16,898   $ (14,495   $ (9,417
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

           

Basic

   $ 0.55      $ 0.17       $ (0.31   $ (0.29   $ (0.26

Diluted

   $ 0.51      $ 0.16       $ (0.31   $ (0.29   $ (0.26

Weighted average shares outstanding:

           

Basic

     48,881        53,620         53,659        50,174        36,241   

Diluted

     52,211        55,262         53,659        50,174        36,241   

Other financial data:

           

Depreciation

   $ 4,622      $ 5,731       $ 7,590      $ 9,180      $ 10,435   

Amortization

   $ 6,458      $ 6,502       $ 6,502      $ 6,028      $ 5,731   
     As Of
December 28,
2013
    As Of
December 29,
2012
     As Of
December 31,
2011
    As Of
January 1,
2011
    As Of
January 2,
2010
 

Balance Sheet data:

           

Cash and cash equivalents

   $ 30,204      $ 18,743       $ 10,940      $ 22,012      $ 7,417   

Total assets

   $ 156,632      $ 141,317       $ 142,835      $ 169,119      $ 173,630   

Total debt, including current portion

   $ 77,255      $ 37,500       $ 45,550      $ 50,163      $ 68,268   

Shareholders’ equity

   $ 49,075      $ 74,210       $ 67,362      $ 83,042      $ 68,209   

 

(1) In 2011, amounts relate to intangible asset impairment charges. In 2010 and 2009, amounts relate to write-down of the value of our Salisbury, North Carolina and Lexington, North Carolina properties, and certain other equipment of the Company. See Notes 2 and 7 in Item 8.
(2) Relates to the sale of the Salisbury, NC facility. The net selling price of the facility was approximately $7.5 million an the asset’s carrying value at the time sale was approximately $5.3 million.
(3) In 2013, this relates to a combination of derivative financial instruments and deferred financing costs.

 

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Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. We also advise you read the risk factors in Item 1A. Our MD&A is presented in seven sections:

 

    Executive Overview;

 

    Results of Operations;

 

    Liquidity and Capital Resources;

 

    Disclosures of Contractual Obligations and Commercial Commitments;

 

    Critical Accounting Estimates;

 

    Recently Issued Accounting Standards; and

 

    Forward Outlook

EXECUTIVE OVERVIEW

Sales and Operations

On February 19, 2014, we issued a press release and held a conference call on February 20, 2014, to review the results of operations for our fourth quarter and fiscal year ended December 28, 2013. During the call, we also discussed current market conditions and progress made regarding certain of our initiatives. The overview and estimates contained in this report are consistent with those given in our press release and discussed on the call. We are neither updating nor confirming that information.

Resulting from the improvement in the housing market as well our marketing programs focused on taking market share with our WinGuard products, our sales grew 37.1% to $239.3 million, our highest net sales since 2007. We generated net income of $26.8 million, an increase of $17.9 million when compared to 2012’s net income of $9.0 million. The improvement in net income was driven by revenue growth, as gross margin dollars increased 34.3% and leveraging selling, general and administrative expenses as a percent of sales decreased to 22.8%, compared to 27.0% in 2012.

In terms of sales strategies, we continued our strategic focus of concentrating our resources in our core market, Florida, and implemented promotional activities to gain market share. We also established programs and partnerships with national accounts to increase our sales presence. As a result of our efforts and the improving macro-economic conditions, specifically in Florida, sales during 2013 increased $64.8 million, or 37.1%, compared to 2012. New construction sales increased $26.6 million, or 54.1%, while repair and remodel sales increased by $38.2 million, or 30.4%. By region, our sales in Florida increased $62.6 million, or 41.3%, and sales in the out of state markets increased $3.2 million, or 20.6%. These increases were slightly offset by decreases in the international markets of $1.0 million, or 13.2%.

By product category, sales in our impact lines increased $53.3 million, or 41.0%. This increase was driven by our WinGuard products which increased $49.3 million, or 40.4%. Within WinGuard, Vinyl WinGuard products increased $14.1 million, or 60.8%, and Aluminum WinGuard products increased $35.4 million, or 35.8%. Sales in our Architectural System line increased by $2.3 million, while sales in our new Storefront product added $0.7 million. During 2013 we realized the affect of our marketing programs as our Eze-Breeze sales increased by $2.4 million. Sales of our non-impact products increased by $11.5 million overall.

Looking at 2014 and beyond, due to customer demand, we recently broke ground on our new glass facility to increase our internal capacities for glass processing and reduce our reliance on outsourced finished glass products. Moody’s forecast for 2014 suggests a 44% increase in new single family home construction, while the repair and remodeling market is expected to record a slow but steady improvement. While we expect continued sales growth driven by the improving new construction market, we will continue to make investments to gain market share in both the new construction and repair and remodeling markets.

Liquidity and Cash Flow

During 2013, we generated $25.7 million in cash flow from operations, which was used to fund working capital needs, service our long term debt, repurchase common stock, and capital expenditures. In the second quarter of 2013, we entered into a new debt agreement that increased our outstanding debt to $80 million at that time. We used the proceeds from that debt to fund our stock repurchase from JLL Partners.

 

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Consolidation and Restructurings

On December 3, 2010, we announced that our Salisbury, North Carolina operations would be transferred to Venice, Florida to consolidate our window and door production at our Florida manufacturing facility. During 2011, we recorded consolidation charges of $4.1 million, which included $1.3 million of severance expense and $2.8 million of moving expenses. The classification of charges were $3.4 million within cost of goods sold, and the remaining $0.7 million within selling, general and administrative expenses in the accompanying consolidated statement of operations.

RESULTS OF OPERATIONS

Analysis of Selected Items from our Consolidated Statements of Operations

 

     Year Ended     Percent Change  
     December 28,
2013
    December 29,
2012
    December 31,
2011
    Increase/(Decrease)  
           2013-2012     2012-2011  
(in thousands, except per share amounts and percentages)                               

Net sales

   $ 239,303      $ 174,540      $ 167,276        37.1     4.3

Cost of sales

     159,169        114,872        128,171        38.6     (10.4 %) 
  

 

 

   

 

 

   

 

 

     

Gross margin

     80,134        59,668        39,105        34.3     52.6

As a percentage of sales

     33.5     34.2     23.4    

Impairment charges

     —         —         5,959       

Gain on sales of assets held

     (2,195     —         —        

SG&A expenses

     54,594        47,094        48,619        15.9     (3.1 %) 
  

 

 

   

 

 

   

 

 

     

SG&A expenses as a percentage of sales

     22.8     27.0     29.1    

Income (loss) from operations

     27,735        12,574        (15,473    

Interest expense, net

     3,520        3,437        4,168       

Other expense (income), net

     770        72        (419    

Income tax (benefit) expense

     (3,374     110        (2,324    
  

 

 

   

 

 

   

 

 

     

Net income/(loss)

   $ 26,819      $ 8,955      $ (16,898    
  

 

 

   

 

 

   

 

 

     

Net income/(loss) per common share:

          

Basic

   $ 0.55      $ 0.17      $ (0.31    
  

 

 

   

 

 

   

 

 

     

Diluted

   $ 0.51      $ 0.16      $ (0.31    
  

 

 

   

 

 

   

 

 

     

2013 Compared with 2012

Net sales

Net sales for 2013 were $239.3 million, a $64.8 million, or 37.1%, increase in sales from $174.5 million in the prior year.

The following table shows net sales classified by major product category (in millions, except percentages):

 

     Year Ended        
     December 28, 2013     December 29, 2012        
     Sales      % of sales     Sales      % of sales     % change  

Product category:

            

Impact Window and Door Products

   $ 183.4         76.6   $ 130.1         74.5     41.0

Other Window and Door Products

     55.9         23.4     44.4         25.5     25.9
  

 

 

    

 

 

   

 

 

    

 

 

   

Total net sales

   $ 239.3         100.0   $ 174.5         100.0     37.1
  

 

 

    

 

 

   

 

 

    

 

 

   

Net sales of our impact window and door products, which include our WinGuard, Architectural Systems, Storefront and PremierVue products were $183.4 million in 2013, an increase of $53.3 million, or 41.0%, from $130.1 million in the prior year. This increase was driven mainly by our WinGuard products, which increased $49.5 million, or 40.4%, due to the improved new construction housing market, and our promotional and marketing activities. Within our WinGuard products, Vinyl WinGuard grew $14.1 million, or 60.8 %, and Aluminum WinGuard grew $35.4 million, or 35.8%. Also contributing to our overall increased sales was an increase in our Architectural System products, up $2.3 million, and our new product Storefront with sales of $0.7 million.

 

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Table of Contents

Net sales of other window and door products, which includes aluminum and vinyl non-impact, and Eze-Breeze, were $55.9 million in 2013, an increase of $11.5 million, or 25.9%, from $44.4 million for the prior year. Sales of our aluminum products increased $4.7 million, or 24.2 %, and sales of our Vinyl products increased $5.1 million, or 41.5%, due in large part to the increased new construction activity and our ability to provide customer with one stop shopping for all window and door needs. The Eze-Breeze line increased sales by $2.4 million due to improvement in market conditions and a new agreement with a large mid-western retailer.

Gross margin

Gross margin was $80.1 million in 2013, an increase of $20.5 million, or 34.3%, from $59.7 million in the prior year. The gross margin percentage was 33.5% in 2013 compared to 34.2% in the prior year. Cost of goods sold was negatively impacted by $4.2 million, or 1.7%, in excess material and labor costs resulting from the hiring and training of over 300 new manufacturing employees to meet the increased demand for our products. In addition, due to certain internal capacity constraints, cost of goods sold was negatively impacted as a result of purchasing finished glass and other material from outside suppliers by $2.6 million, or 1.1%. Lastly, we were negatively impacted by a mix change resulting in a decrease of $1.5 million, or 0.6%. These items were offset by leverage on higher sales volume of 2.5%, and a product price increase effective in the fourth quarter which impacted margins 0.2%.

Gain on sale of assets held

In 2013, we sold the North Carolina plant for a gain of $2.2 million. The $2.2 million represents the net selling price of approximately $7.5 million less the asset’s carrying value at the time of the sale of approximately $5.3 million.

Selling, general and administrative expenses

Selling, general and administrative expenses were $54.6 million, an increase of $7.5 million, or 15.9%, from $47.1 million in the prior year. As a percentage, we leveraged these costs to 22.8%, a decrease of 4.2% from 27.0% from fiscal year 2012. In terms of dollars, selling, general, and administrative expenses includes increased charges related to employee compensation and insurance costs of $4.4 million. Also contributing to the increase was additional charges for trade promotions and marketing materials of $1.7 million, and credit card fees of $0.7 million resulting from increased sales. Offsetting these increased costs was a $0.7 million decrease due to improved quality control of finished products and enhanced quality control procedures before shipping.

Interest expense

Interest expense was $3.5 million in 2013, a slight increase of $0.1 million from $3.4 million in the prior year. During 2013, we entered into a new debt agreement which increased our balance to $80 million in the second quarter of 2013, up from a $37.5 million debt balance at the end of 2012. Our interest expense increased slightly from prior year due to the increased debt balance, while offset by decreased interest rates from the new agreement, and decreased deferred financing costs.

Other expenses, net

Other expenses, net were $0.8 million and $0.1 million in 2013 and 2012, respectively. In 2013, the expense relates to the write-off of deferred financing costs resulting from the new credit agreement, as well as expenses related to the ineffective portion of our aluminum hedging activity. In 2012, the expense related to the ineffective portion of our aluminum hedging activity.

Income tax (benefit) expense

Our income tax benefit was $3.4 million for the year ended December 28, 2013. As we released our valuation allowances on deferred tax assets, we released our valuation allowance as we are no longer in a cumulative loss position and it is more likely than not, that our deferred tax assets will be realized.

Excluding the impact of the 2013 reversal of the valuation allowance, as well as the impact of the valuation allowance in 2012, our 2013 and 2012 effective tax rates would have been 40.7% and 40.3% for each year, respectively.

 

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2012 Compared with 2011

Net sales

Net sales for 2012 were $174.5 million, a $7.3 million, or 4.3%, increase in sales from $167.3 million in the prior year.

The following table shows net sales classified by major product category (in millions, except percentages):

 

     Year Ended        
     December 29, 2012     December 31, 2011        
     Sales      % of sales     Sales      % of sales     % change  

Product category:

            

Impact Window and Door Products

   $ 130.1         74.5   $ 120.9         72.3     7.6

Other Window and Door Products

     44.4         25.5     46.4         27.7     (4.2 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total net sales

   $ 174.5         100.0   $ 167.3         100.0     4.3
  

 

 

    

 

 

   

 

 

    

 

 

   

Net sales of our impact window and door products, which include our WinGuard, Architectural Systems and PremierVue products were $130.1 million in 2012, an increase of $9.2 million, or 7.6%, from $120.9 million in the prior year. This increase was driven mainly by our WinGuard products, which increased $12.9 million, or 11.8%, due to the improved new construction housing market, and our promotional and marketing activities. Offsetting this increase were decreases in our Architectural System products, down $2.5 million in part due to the completion of a large condo retrofit project completed in 2011, and our PremierVue line, down $1.3 million primarily driven by the reduction of low margin sales to a particular customer. Our impact window and door products, especially in our repair and remodeling market, continue to be impacted by the lack of storm activity during the six most recent hurricane seasons in Florida.

Net sales of other window and door products, which includes aluminum and vinyl non-impact, and Eze-Breeze, were $44.4 million in 2012, a decrease of $2.0 million, or 4.2%, from $46.4 million for the prior year. Sales of our aluminum products decreased $1.3 million, due in part to the shift from aluminum to vinyl impact in the Florida market and our Vinyl products decreased $1.4 million driven by our decision to reduce our effort in the out of state market where these products were sold. However, our Eze-Breeze line increased sales by $0.8 million due to our increased focus on this line.

Gross margin

Gross margin was $59.7 million in 2012, an increase of $20.6 million, or 52.7%, from $39.1 million in the prior year. The gross margin percentage was 34.2% in 2012 compared to 23.4% in the prior year. Gross margin included charges of $3.4 million in 2011 related to the consolidation of all North Carolina operations into our Florida facilities. Cost of goods sold in 2011 was also negatively impacted by temporary excess labor and scrap expense of $4.0 million as a result of the consolidation actions taken. This amount was determined by comparing the manufacturing results during consolidation with normalized pre-consolidation results. We returned to pre-consolidation levels during the third quarter of 2011. Adjusting for these charges gross margin was 27.8% in 2011. The 6.4% increase in adjusted gross margin as a percent of sales was mainly due to a reduction of excess material and scrap of $4.7 million, or 2.7%, higher sales volume, price increases and improved mix of $4.1 million, or 1.2%, depreciation savings of $1.6 million, or 1.0%, material price savings of $1.2 million, or 0.7%, consolidation savings of $1.1 million, or 0.6%, and savings in labor and other miscellaneous expenses of $0.4 million, or 0.2%.

Impairment charges

We performed our annual assessment of our trade names as of December 29, 2012, and December 31, 2011, which indicated that no impairment was present for the year ended 2012, and that an impairment was present for year ended 2011, which resulted in a non-cash charge of $6.0 million.

Selling, general and administrative expenses

Selling, general and administrative expenses were $47.1 million, a decrease of $1.5 million, or 3.1%, from $48.6 million in the prior year. Selling, general, and administrative expenses includes charges of $0.3 million in 2011 related to the consolidation actions taken in 2010. Excluding these charges, selling, general and administrative expenses decreased $1.2 million and as a percentage of sales were 28.9% in 2011. This decrease was due mainly to consolidation savings of $2.1 million, reduced bad debt expense of $0.8 million, decreased advertising and selling materials of $0.6 million, decreased distribution costs of $0.5 million, decreased depreciation and lease expense of $0.7 million. Offsetting these decreases was a $3.6 million increase in employee related compensation cost.

 

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We recognized reduced bad debt expense of $0.8 million as a result of improved collection efforts and market conditions. In 2011, we experienced approximately $0.8 million in bad debt from several accounts (none individually material) in connection with the economic situation at the time. We did not incur any material write-offs in 2012, as the economy improved. This can be supported by our change in DSO’s (Days Sales Outstanding) which were 32 days and 39 days for December 29, 2012, and December 31, 2011, respectively.

Interest expense

Interest expense was $3.4 million in 2012, a decrease of $0.8 million from $4.2 million in the prior year. During 2012, we prepaid $8.0 million of debt resulting in a lower average level of debt when compared to 2011. The interest rate on our debt decreased from 5.75% at the end of 2011 to 4.75% at the end of 2012 due to the refinancing of debt which decreased our interest rates in accordance with our tiered interest rate structure.

Other expenses (income), net

Other expenses (income), net were $0.1 million and income of $0.4 million in 2012 and 2011, respectively. In 2012, the expense related to the ineffective portion of our aluminum hedging activity, which was partially offset by the sales of non-essential assets from our North Carolina operations for a gain of $0.2 million. In 2011, we sold non-essential assets from our North Carolina operations for a gain of $0.9 million, which was partially offset by the expense related to the write-off of the deferred financing costs from our prior debt.

Income tax (benefit) expense

Our effective combined federal and state tax rate is lower than the statutory rate for the year ended December 29, 2012, as we released a portion of our deferred tax asset valuation allowance to offset our regular tax expense. The $0.1 million of tax expense included in the statement of operations represents our expected alternative minimum tax obligation.

Our effective combined federal and state tax rate was a benefit of 12.1%, or $2.3 million for the year ended December 31, 2011, which relates to the impairment charge on our trade names and was a deferred benefit.

All deferred tax assets created in 2012 and 2011 were fully reserved with additional valuation allowances. Excluding the effects of these items, our 2012 and 2011 effective tax rates would have been 40.3% and 38.8% for each year, respectively.

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.

C onsolidated Cash Flows

Operating activities . Cash provided by operating activities was $25.7 million for 2013 compared to cash provided by operating activities of $23.2 million for 2012, and cash used in operations of $1.7 million in 2011. The increase in cash flow from operations in 2013 was primarily due to the higher sales volume experienced in 2013, which after the impact of increased working capital to support the higher sales contributed approximately $13.1 million Decreasing our cash flow was $2.9 million in increased costs from the outside purchase of finished glass and $7.7 million due to the hiring of new employees, both direct and indirect, to keep up with increased sales demand. In 2012 the increase was due mainly to a reduction in the cash paid for consolidation of approximately $4.1 million and a reduction of cash paid for 2011 manufacturing inefficiencies of $4.0 million. Also contributing to the increase in cash was savings from consolidation of $3.0 million, savings from reduced excess material and scrap of $4.7 million, and increased cash related to increased sales and net profit in 2012.

 

     Direct Operating Cash Flows  
(in millions)    2013     2012     2011  

Collections from customers

   $ 238.5      $ 178.1      $ 169.8   

Other cash collections

     5.3        2.3        3.4   

Disbursements to vendors

     (147.0     (98.1     (107.8

Personnel related disbursements

     (68.2     (56.0     (64.4

Debt service costs (interest)

     (2.8     (2.8     (2.7

Other cash activity, net

     (0.1     (0.3     —    
  

 

 

   

 

 

   

 

 

 

Cash provided (used in) by operations

   $ 25.7      $ 23.2      $ (1.7
  

 

 

   

 

 

   

 

 

 

 

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The majority of other cash collections are from scrap aluminum sales.

Day’s sales outstanding (DSO), which we calculate as accounts receivable divided by average daily sales, was 35 days on December 28, 2013, compared to 32 days on December 29, 2012, and 39 days on December 31, 2011. The increase in DSO from 2013 to 2012 was primarily due to an increase in larger commercial customers with longer payment terms and some customers changing payment plans from cash on delivery (“COD”) to longer payment terms. The decrease in DSO from 2011 to 2012 is the result of improved collection efforts and improved market conditions.

Inventory on hand as of December 28, 2013, was $12.9 million, an increase of $1.4 million as compared to December 29, 2012, while sales increased 37.1%. Our inventory consists principally of raw materials purchased for the manufacture of our products and limited finished goods inventory as all products are customer, made-to-order products. Our inventory levels are more closely aligned with our number of product offerings rather than our level of sales. We have maintained our inventory level to have (i) raw materials required to support new product launches; (ii) a sufficient level of safety stock on certain items to ensure an adequate supply of material given a sudden increase in demand and our short lead-times; and (iii) adequate lead times for raw materials purchased from overseas suppliers in bulk supply. Inventory turns for the year ended December 28, 2013, increased to 11.4 from 9.7 as compared to the year ended December 29, 2012. Inventory turns for the year ended December 29, 2012, decreased to 9.7 from 10.9 as compared to the year ended December 31, 2011

Management monitors and evaluates raw material inventory levels based on the need for each discrete item to fulfill short-term requirements calculated from current order patterns and to provide appropriate safety stock. Because all our products are made-to-order, we have only a small amount of finished goods and work in progress inventory. Because of these factors, our inventories are not excessive, and we believe the value of such inventories will be realized.

Investing activities. Cash used in investing activities was $0.1 million for 2013 compared to cash used in investing activities of $3.3 million for 2012. The decrease in cash used in investing activities was due to capital spending of $7.6 million offset by cash from the proceeds of sales of assets for $7.5 million.

Cash used in investing activities was $3.3 million for 2012 compared to cash used in investing activities of $1.8 million for 2011. The increase in cash used in investing activities was due to an increase in capital spending of $0.3 million along with a decrease in proceeds from sale of assets for $1.2 million.

Financing activities. Cash used in financing activities was $14.2 million in 2013. We received proceeds from the exercise of stock options of $3.6 million, the tax benefit received for stock options exercised of $0.4 million, as well as $80.0 million from the issuance of new debt. These proceeds were offset by paying off the outstanding debt under the old credit agreement of $38.5 million, deferred financing cost of $3.6 million related to the issuance of the new debt, and the payment of $56.1 million for the purchase of treasury stock.

Cash used in financing activities was $12.1 million in 2012. We prepaid an additional $8.0 million of our long term debt, paid $3.9 million for stock repurchases, and paid $0.1 million of deferred financing cost related to an amendment to our credit agreement.

Cash used in financing activities was $7.6 million in 2011. During 2011, we refinanced our debt and reduced the interest rate by 100 basis points. We also prepaid an additional $4.5 million of our long term debt and paid $3.0 million of deferred financing cost related to the refinancing.

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For 2013, capital expenditures were $7.6 million, compared to $3.8 million for 2012. We anticipate that cash flows from operations and liquidity from the revolving credit facility will be sufficient to execute our business plans. We anticipate spending substantially more in 2014. Management expects to spend nearly $23.4 million on capital expenditures in 2014, including capital expenditures related to the new glass plant and related equipment, the new ERP system and product investments in lines targeted at increasing both gross sales and margins.

Capital Resources. On May 28, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with various financial institutions and other persons from time to time parties thereto as lenders (the “Lenders”), SunTrust Bank, as administrative agent (in such capacity, the “Administrative Agent”), as collateral agent, as swing line lender and as a letter of credit issuer, and the other agents and parties thereto. The Credit Agreement establishes new senior secured credit facilities in an aggregate amount of $105.0 million, consisting of an $80.0 million Tranche A term loan facility maturing in five years that will amortize on a basis of 5% annually during the five-year term, and a $25.0 million revolving credit facility maturing in five years that includes a $5.0 million swing line facility and a $10.0 million letter of credit facility.

Interest on all loans under the Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Borrowings under the term loans and the revolving credit facility accrue interest at a rate equal to, at our option, a base rate or LIBOR plus an applicable margin. The applicable margin is based on our leverage ratio, ranging from 300 to 350 basis

 

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points in the case of LIBOR and 200 to 250 basis points in the case of the base rate. We will pay quarterly fees on the unused portion of the revolving credit facility equal to 0.50% as well as a quarterly letter of credit fee at a rate per annum equal to the applicable margin for LIBOR loans on the face amount of any outstanding letters of credit. In connection with this refinancing, we wrote-off $0.3 million of deferred financing costs from the Old Credit Agreement, which are classified within other expense (income), net in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 28, 2013.

On September 16, 2013, we entered into two interest rate caps and an interest rate swap to hedge a portion of our debt against volatility in future interest rates. The two interest rate caps are designated as cash flow hedges totaling a notional amount of $60.0 million, that protects the variable rate debt from increases of one month LIBOR of greater than 0.50%. The interest rate swap totals a notional amount of $40.0 million, and effectively converted a portion of the floating rate debt to a fixed rate of 2.15% starting on September 28, 2014. The first interest rate cap terminates on September 18, 2014, and the second on September 28, 2015, with the interest rate swap terminating on May 28, 2018.

The Credit Agreement will require us to maintain a maximum leverage ratio (based on the ratio of total funded debt to consolidated EBITDA, each as defined in the Credit Agreement) and a minimum fixed charge coverage ratio (based on the ratio of consolidated EBITDA minus net cash taxes minus capital expenditures to cash interest expense plus scheduled principal payments of term loans, each as defined in the Credit Agreement), which will be tested quarterly based on the last four fiscal quarters and is set at levels as described in the Credit Agreement. As of December 28, 2013, we were in compliance with all debt covenants.

The Credit Agreement also contains a number of affirmative and restrictive covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of our capital stock, prepayments of certain debt and transactions with affiliates. The Credit Agreement also contains customary events of default.

In connection with entering into the Credit Agreement, on May 28, 2013, we terminated the Credit Agreement, dated as of June 23, 2011, among PGT Industries, Inc., as the borrower, the Company, as guarantor, the lenders from time to time party thereto and General Electric Capital Corporation, as administrative agent and collateral agent (the “Old Credit Agreement”). Proceeds from the term loan facility under the Credit Agreement were used to repay amounts outstanding under the Old Credit Agreement, repurchase shares of our common stock having an aggregate value of approximately $50 million, and pay certain fees and expenses.

On August 5, 2013, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement dated May 28, 2013. The Amendment permits us to make capital expenditures (as defined in the Credit Agreement) in an amount up to but not exceeding $14.0 million in connection with the expansion and operation of our glass processing business and activities without reducing the amount of capital expenditures otherwise permitted.

The face value of the debt as of December 28, 2013, was $79.0 million. The Company incurred issuance costs of $3.6 million, of which $2.0 million of the costs were classified as a discount and presented in the current and long-term portion of debt on the Consolidated Balance Sheets. Approximately $1.3 million was reported as debt issuance costs in current assets and other assets on the Consolidated Balance Sheets, while the remaining $0.3 million was expensed in selling, general and administrative expense on the Consolidated Statements of Operations. The debt issuance costs and discount are being amortized to interest expense, net on the Consolidated Statements of Operations and Comprehensive Income over the term of the debt.

 

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Long-term debt consists of the following:

 

     December 28,
2013
    December 29,
2012
 
     (in thousands)  

Term note payable with a payment of $1.0 million due quarterly. A lump sum payment of $63.0 million is due on May 28, 2018. Interest is payable monthly, or quarterly at LIBOR or the prime rate plus an applicable margin. At December 28, 2013, the average rate was 0.16% plus a margin of 3.00%.

   $ 79,000        —    

Term note payable with a payment of $0.6 million due on April 2, 2016. A lump sum payment of $36.9 million is due on June 23, 2016. Interest is payable quarterly at LIBOR or the prime rate plus an applicable margin. At December 29, 2012, the average rate was 1.25% plus a margin of 3.50%.

     —       $ 37,500   

Debt discount (1)

     (1,745     —    
  

 

 

   

 

 

 
   $ 77,255      $ 37,500   

Less current portion of long-term debt

     (4,890     —    
  

 

 

   

 

 

 

Total

   $ 72,365      $ 37,500   
  

 

 

   

 

 

 

 

  (1) Debt discount – represents fees paid to the lender at time the debt was issued, and is accounted for as a reduction in the debt proceeds and is amortized over the life of the debt instrument.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations as of December 28, 2013 (in thousands):

 

     Payments Due by Period  

Contractual Obligations

   Total      Current      2-3 Years      4 Years      5 Years      Thereafter  

Long-term debt (1)

   $ 89,517       $ 7,644       $ 12,802       $ 5,210       $ 63,861       $ —    

Operating leases

     4,194         1,145         1,907         597         545         —    

Supply agreements

     2,493         2,493         —          —          —          —    

Capital purchase commitments

     1,876         1,876         —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 98,080       $ 13,158       $ 14,709       $ 5,807       $ 64,406       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes estimated future interest expense on our long-term debt assuming the weighted average interest rate of 3.16% as of December 28, 2013, does not change. We entered into LIBOR hedges on September 16, 2013, to offset the changes in cash flows of the debt interest rate payments that are attributed to the fluctuations of LIBOR rates.

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 December 28, 2013. Purchase orders entered into in the ordinary course of business are excluded from the above table. Amounts for which we are liable 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 all of these programs were cancelled by us, we would be required to pay $2.5 million for various materials.

At December 28, 2013, we had $0.6 million in standby letters of credit related to our worker’s compensation insurance coverage.

CRITICAL ACCOUNTING 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.

On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in Item 8, Note 2. The following is a summary of our more significant accounting estimates that require the use of judgment in preparing the financial statements.

 

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Description

 

Judgments and

Uncertainties

 

Effect if Actual Results Differ from

Assumptions

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.

 

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.

  Estimates made by management are subject to change and include such things as how future growth assumptions, operating and capital expenditure requirements, asset useful lives and other factors, affect forecasted cash flows associated with the long lived assets. Additionally, fair value estimates, if required, can be affected by discount rates and/or estimates of the value of similar assets.   We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
Allowances for doubtful accounts and notes receivable and related reserves    
Losses for allowances for doubtful accounts and notes receivable and related reserves are recognized when they are probable, which requires us to make our best estimate of probable losses inherent in our receivables.   We evaluate the allowance 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. A 10% difference between actual losses and estimated losses derived from the estimated reserve for accounts and notes receivable would impact net income by approximately $0.1 million.

 

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Indefinite lived Intangibles         
The impairment evaluation of the carrying amount of intangible assets with indefinite lives (which for us is our trade names) 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 values. If the estimated fair value is less than the carrying amount of the intangible asset, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is determined using the relief from royalty method that is based upon the discounted projected cost savings (value) attributable to ownership of our trade names, our only indefinite lived intangible assets.  

In estimating fair value, the method we use requires us to make assumptions, the most material of which are net sales projections attributable to products sold with these trade names, the anticipated royalty rate we would pay if the trade names were not owned (as a percent of net sales), and a weighted average discount rate. These assumptions are subject to change based on changes in the markets in which these products are sold, which impact our projections of future net sales and the assumed royalty rate. Factors affecting the weighted average discount rate include assumed debt to equity ratios, risk-free interest rates and equity returns, each for market participants in our industry.

 

Our year-end test of trade names, performed as of December 28, 2013, utilized a weighted average royalty rate of 4.0% and a discount rate of 16.1%. Net sales used in the analysis were based on historical experience and a modest growth over the next six years. We believe our projected sales are reasonable based on the available information regarding our industry and the core markets that we serve. We also believe the royalty rate is appropriate and could improve over time based on the market trends and information, including that which is set forth above. The discount rate was based on the current financial market trends and will remain dependent on such trends in the future.

 

Actual results can differ from our estimates, requiring adjustments to our assumptions. The result of these changes could result in a material change in our calculation and an impairment of our trade names.

 

As of December 28, 2013, the estimated fair value of the trade names exceeded book value by approximately 79% or $30.3 million. We believe our projected sales are reasonable based on, among other things, available information regarding our industry. We also believe the royalty rate is appropriate. The weighted average discount rate is impacted by current financial market trends and will remain dependent on such trends in the future. Absent offsetting changes in other factors, a 1% increase in the discount rate would decrease the estimated fair value of our trademarks by approximately $4.9 million but would not result in impairment.

Income Taxes – Valuation Allowance    

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient positive evidence from the sources listed below:

 

The four sources of taxable income to be considered in determining whether a valuation allowance is required include:

 

•    future reversals of existing taxable temporary differences;

 

•    taxable income in prior carryback years;

 

•    tax planning strategies; and

 

•    future taxable income exclusive of reversing temporary differences and carryforwards.

 

Determining whether a valuation allowance for deferred tax assets is necessary requires an analysis of both positive and negative evidence regarding realization of the deferred tax assets. Examples of positive evidence may include:

 

•    a strong earnings history exclusive of the loss that created the deductible temporary differences, coupled with evidence indicating that the loss is the result of an aberration rather than a continuing condition;

 

•    an excess of appreciated asset value over the tax basis of a company’s net assets in an amount sufficient to realize the deferred tax asset; and

 

•    existing backlog that will produce sufficient taxable income to realize the deferred tax asset based on existing sales prices and cost structures.

  As of December 28, 2013, we no longer have a valuation allowance against our deferred tax assets, due to the fact that we are no longer in a cumulative loss position. For 2012, we had a full valuation allowance of $12.9 million recorded against our net deferred assets, primarily due to our experiencing a three-year cumulative operating loss as of December 29, 2012, and December 31, 2011. The release of the valuation allowance was a result of recent earnings and forecasted income which provide sufficient positive evidence that our deferred tax assets will more likely than not be realized. In the future, changes in our valuation allowance may result from, among other things, additional pre-tax operating losses resulting in the establishment of a valuation allowance.

 

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Examples of negative evidence may include:

 

•    the existence of “cumulative losses” (generally defined as a pretax cumulative loss for the current and previous two years);

 

•    an expectation of being in a cumulative loss position in a future reporting period;

 

•    a carryback or carryforward period that is so brief that it would limit the realization of tax benefits;

 

•    a history of operating loss or tax credit carryforwards expiring unused; and

 

•    unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis.

 

The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. A company must use judgment in considering the relative impact of positive and negative evidence.

 
Warranty    
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, lag time between order ship date and warranty service date, current and expected warranty costs per claim, and specific identification of our estimated future warranty obligations.   Changes to actual warranty claims incurred could have a material impact on our estimated warranty obligations.

Self Insurance Reserves

   
We are primarily self-insured for employee health benefits and for years prior to 2010 for workers’ compensation. For 2010-2013 we are fully insured with respect to workers’ compensation.   Our workers’ compensation reserves, for the self-insured periods 2009 and prior 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 health benefit claims on workers’ compensation incurred and interest rates could have a material impact on our estimated self-insurance reserves.

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 determine the fair value of our stock option awards at the date of grant using the Black-Sholes model.   Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected  

We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense.

 

However, if actual results are not

 

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We record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. As of December 28, 2013, 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.  

dividend yield, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.

 

Stock-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, based mostly on historical experience, 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.

 

consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.

 

A 10% change in our stock-based compensation expense for the year ended December 28, 2013, would have affected net income by approximately $0.1 million.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-11, Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward Exists,” which requires tax benefits to be presented in the financial statement as a reduction to deferred tax asset for a net operating loss carryforward or a tax credit carryforward. The provisions of the guidance will be effective for us beginning in first quarter of 2014. We do not expect the adoption of this accounting pronouncement to have a material impact on our disclosures.

FORWARD OUTLOOK

From time to time, we have made or will make forward-looking statements within the meaning of Section 21E of the Exchange Act. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal”, “objective”, “plan”, “expect”, “anticipate”, “intend”, “project”, “believe”, “estimate”, “may”, “could”, or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, results, circumstances or aspirations. Our disclosures in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed or furnished with the Securities and Exchange Commission and in oral presentations. Forward-looking statements are based on assumptions and by their nature are subject to risks and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those described in our forward-looking statements include, but are not limited to:

 

    Changes in new home starts and home remodeling trends

 

    The economy in the U.S. generally or in Florida where the substantial portion of our sales are generated

 

    Raw material prices, especially aluminum

 

    Transportation costs

 

    Level of indebtedness

 

    Dependence on our WinGuard branded product lines

 

    Product liability and warranty claims

 

    Federal and state regulations

 

    Dependence on our manufacturing facilities

Any forward-looking statements made by us or on our behalf speak only as of the date they are made and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making any investment decision, you should carefully consider all risks and uncertainties disclosed in all our SEC filings, including our reports on Forms 8-K, 10-Q and 10-K and our registration statements under the Securities Act of 1933, as amended, all of which are accessible on the SEC’s website at www.sec.gov and at http://ir.pgtindustries.com/sec.cfm

 

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Net sales

We recorded increased sales of $64.8 million, or 37.1% in 2013, which was up over 2012. This growth was driven by an increase in our WinGuard products which were up $49.3 million, or 40.4% versus 2012. This increase was driven by our promotional and marketing activities along with the continued strengthening of the new construction market. Moody’s is forecasting an increase in new single family home construction market of 44% for 2014. However, the repair and remodel market is forecasted to have a slow but steady improvement into 2014. At this time, we expect sales for the first quarter to be approximately $62 to $65 million.

Gross margin

We believe the following factors, which are not all inclusive, may impact our gross margin in 2014:

 

    Our gross margin percentages are heavily influenced by total sales due to operating leverage of fixed costs as well as product mix of impact and non-impact products and vinyl frame versus aluminum frame products.

 

    Our margin is also influenced by costs of material and labor. As our labor force becomes more tenured, material and labor costs will normalize as efficiencies are achieved. Our future rate of hiring will be impacted by the rate of sales growth.

 

    Due to sales above certain internal glass capacities, we are currently purchasing finished laminated glass. We expect to finish construction of our new glass plant by the end of third quarter 2014, which will favorably impact our gross margins on sales currently serviced with purchased finished glass units.

 

    We also announced a 3% price increase in third quarter of 2013 on substantially all our products. This will have a favorable impact on margins in 2014.

Selling, general and administrative expenses

An increase in selling and marketing costs aimed at gaining market share and increased brand awareness would result in increased selling, general, and administrative costs. In addition, economic and credit conditions may negatively impact our bad debt expense. We continue to monitor our customers’ credit profiles carefully and make changes in our terms where necessary in response to this heightened risk. Favorably impacting our selling, general, and administrative expenses, will be the reduction of amortization expense. After the first quarter of 2014, we will have fully amortized our amortizable intangible asset.

Interest expense

On May 28, 2013, we entered into a Credit Agreement, which establishes new senior secured credit facilities in an aggregate amount of $105.0 million, consisting of an $80.0 million Tranche A term loan facility maturing in five years that will amortize on a basis of 5% annually during the five-year term, and a $25.0 million revolving credit facility maturing in five years that includes a $5.0 million swing line facility and a $10.0 million letter of credit facility. Interest expense will increase in 2014, as a result of the increased debt. Also, our interest will be impacted by our forward starting forty two month interest rate swap agreement with a notional value of $40.0 million that effectively converts the LIBOR portion of the floating rate debt to a fixed rate of 2.15%, beginning on September 28, 2014.

Income tax expense

As we became more profitable in 2013, we fully released our valuation allowance on deferred tax assets. As we continue to be profitable, we will incur income tax expense, which will impact our results.

Liquidity and capital resources

We had $30.2 million of cash on hand as of December 28, 2013. Management expects to spend nearly $23.4 million on capital expenditures in 2014, including capital expenditures related to the new glass plant and related equipment, the new ERP system and product investments in lines targeted at increasing sales. We intend to use cash generated from operations to fund such capital expenditures, however no assurance can be given in this regard. We expect depreciation to be approximately $4.8 million and amortization to be approximately $0.4 million in 2014. On December 28, 2013, we had outstanding purchase commitments on capital projects of approximately $1.9 million.

Summary

In 2013, new home construction in the nation and Florida in particular improved, but is still below historic norms. We continue to gain market share in the repair and remodel market, and as consumers transition to a more energy efficient home, our products position us to take advantage of this transition and continue to gain share in this market. However, as a percentage of top-line sales, we expect EBITDA, a non-GAAP internal metric used for measurement, to remain in the mid-teens, until our new glass facility is fully functional at the end of third quarter 2014, and our material and labor costs normalize.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 currently have entered into 35 forward aluminum contracts. These settle at various times throughout 2014 and 2015 for 10.5 million pounds at an average price of $0.88 per pound. The fair value of our aluminum forward contracts is less than $0.5 million and is included in other current liabilities in the accompanying consolidated balance sheets as of December 28, 2013.

For forward contracts for the purchase of aluminum at December 28, 2013, a 10% decrease in the price of aluminum would decrease the fair value of our forward contracts of aluminum by $0.8 million. This calculation utilizes our actual commitment of 9.5 million pounds under contract (to be settled throughout 2014-2015) and the market price of aluminum as of December 28, 2013, which was approximately $0.89 per pound.

On September 16, 2013, we entered into two interest rate caps and one interest rate swap. The first is a one year interest rate cap agreement with a notional amount of $40.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. The second is a two year interest rate cap agreement with a notional amount of $20.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. Effectiveness for the interest rate caps will be measured by comparing the changes in the intrinsic value of the cap with the change in the fair value of the forecasted interest payments due to changes in the LIBOR interest rate when LIBOR is greater than 0.5%. The intrinsic value portion of the interest rate caps are expected to be highly effective due to the critical terms of the cap exactly matching those of the hedge debt. The time value portion of the caps are deemed ineffective and will be marked to market in the reporting period.

The swap is a forward starting forty two months interest rate agreement with a notional amount of $40.0 million that effectively converted a portion of the floating rate debt to a fixed rate of 2.15% that starts September 28, 2014, with a termination date of May 18, 2018. Since all of the critical terms of the swap and cap 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 Accumulated other comprehensive income. Hedge effectiveness for the interest rate swap will be evaluated in accordance with ASC 815 on a quarterly basis by comparing changes in the cumulative gain or loss from the forward-starting interest rate swap with the cumulative changes in the discounted expected cash flows of future monthly interest related to changes of the swap rate.

Based on our debt outstanding at December 28, 2013, of $79.0 million, of which $60.0 million is covered by our interest rate cap, a 1% increase in interest rates above our interest rate floor established in the Credit Agreement would result in approximately $0.6 million of additional interest expense annually, including impact of interest rate swaps entered into in 2013.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

     29   

Consolidated Statements of Operations for the years ended December 28, 2013, December  29, 2012, and December 31, 2011

     30   

Consolidated Statement of Comprehensive Income (Loss) for the years ended December 28, 2013,  December 29, 2012, and December 31, 2011

     31   

Consolidated Balance Sheets as of December 28, 2013, and December 29, 2012

     32   

Consolidated Statements of Cash Flows for the years ended December 28, 2013, December  29, 2012, and December 31, 2011

     33   

Consolidated Statements of Shareholders’ Equity for the years ended December 28, 2013,  December 29, 2012, and December 31, 2011

     34   

Notes to Consolidated Financial Statements

     35   

 

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Table of Contents

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. and subsidiary as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. and subsidiary at December 28, 2013 and December 29, 2012, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PGT Inc. and subsidiary’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 28, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Certified Public Accountants

Tampa, Florida

February 28, 2014

 

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Table of Contents

PGT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year Ended  
     December 28,
2013
    December 29,
2012
     December 31,
2011
 

Net sales

   $ 239,303      $ 174,540       $ 167,276   

Cost of sales

     159,169        114,872         128,171   
  

 

 

   

 

 

    

 

 

 

Gross margin

     80,134        59,668         39,105   

Impairment charges

     —          —           5,959   

Gain on sale of assets held

     (2,195     —           —     

Selling, general and administrative expenses

     54,594        47,094         48,619   
  

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     27,735        12,574         (15,473

Interest expense, net

     3,520        3,437         4,168   

Other expense (income), net

     770        72         (419
  

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     23,445        9,065         (19,222

Income tax (benefit) expense

     (3,374     110         (2,324
  

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ 26,819      $ 8,955       $ (16,898
  

 

 

   

 

 

    

 

 

 

Net income (loss) per common share:

       

Basic

   $ 0.55      $ 0.17       $ (0.31
  

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.51      $ 0.16       $ (0.31
  

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding:

       

Basic

     48,881        53,620         53,659   
  

 

 

   

 

 

    

 

 

 

Diluted

     52,211        55,262         53,659   
  

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

PGT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Net income (loss)

   $ 26,819      $ 8,955      $ (16,898

Other comprehensive (loss) income before tax

      

Change in fair value of derivatives

     (1,391     (24     (220

Reclassification to earnings

     145        408        (335
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income before tax

     (1,246     384        (555

Income tax expense related to components of other comprehensive income

     437       —          —     
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (809     384        (555
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 26,010      $ 9,339      $ (17,453
  

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

PGT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands )

 

     December 28,
2013
    December 29,
2012
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 30,204      $ 18,743   

Accounts receivable, net

     20,821        13,997   

Inventories

     12,908        11,529   

Prepaid expenses

     1,538        916   

Other current assets

     3,166        2,886   

Assets held for sale

     —          5,259   

Deferred income taxes, net

     2,763        —     
  

 

 

   

 

 

 

Total current assets

     71,400        53,330   

Property, plant and equipment, net

     44,123        41,220   

Trade name and other intangible assets, net

     38,869        45,327   

Other assets, net

     2,240        1,440   
  

 

 

   

 

 

 

Total assets

   $ 156,632      $ 141,317   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 3,834      $ 5,405   

Accrued liabilities

     11,688        7,874   

Deferred income taxes

     —          46   

Current portion of long-term debt

     4,890       —     
  

 

 

   

 

 

 

Total current liabilities

     20,412        13,325   

Long-term debt

     72,365        37,500   

Deferred income taxes

     13,380        14,858   

Other liabilities

     1,400        1,424   
  

 

 

   

 

 

 

Total liabilities

     107,557        67,107   
  

 

 

   

 

 

 

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; 48,868 and 53,737 shares issued and 46,871 and 52,814 shares outstanding at December 28, 2013, and December 29, 2012, respectively

     489        537   

Additional paid-in-capital

     229,269        274,275   

Accumulated other comprehensive loss

     (2,223     (1,414

Accumulated deficit

     (168,414     (195,233
  

 

 

   

 

 

 

Subtotal shareholders’ equity

     59,121        78,165   

Less Treasury stock at cost

     (10,046     (3,955
  

 

 

   

 

 

 

Total shareholders’ equity

     49,075        74,210   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 156,632      $ 141,317   
  

 

 

   

 

 

 

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

 

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PGT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Cash flows from operating activities:

      

Net income (loss)

   $ 26,819      $ 8,955      $ (16,898

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation

     4,622        5,731        7,590   

Amortization

     6,458        6,502        6,502   

Provision for allowances for doubtful accounts

     29        37        880   

Stock-based compensation

     970        1,363        1,773   

Amortization and write-offs of deferred financing costs

     1,660        857        1,233   

Derivative financial instruments

     (16     136        37   

Deferred income taxes

     (3,460     (82     (2,324

Tax benefit for stock options exercised

     (396     —          —     

Impairment charges

     —          —          5,959   

Gain on disposal of assets

     (2,186     (266     (996

Change in operating assets and liabilities:

      

Accounts receivable

     (8,234     (667     (1,560

Inventories

     (1,379     73        (1,068

Prepaid expenses and other current assets

     (1,267     87        367   

Accounts payable and accrued liabilities

     2,111        462        (3,167
  

 

 

   

 

 

   

 

 

 

Net cash provided by/(used in) operating activities

     25,731        23,188        (1,672
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (7,550     (3,792     (3,496

Acquisition of intangible assets

     —          —          (200

Net change in margin account for derivative financial instruments

     —          —          250   

Proceeds from disposal of asset

     7,478        454        1,672   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (72     (3,338     (1,774
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Payments of long-term debt

     (38,500     (8,000     (52,500

Proceeds from issuance of long-term debt

     80,000       —          48,000   

Payments of financing costs

     (3,583     (143     (3,013

Payments of capital leases

     —          (50     (113

Purchases of treasury stock

     (56,091     (3,946     —     

Tax benefit for stock options exercised

     396        —          —     

Issuance of common stock

     3,580        92        —     
  

 

 

   

 

 

   

 

 

 

Net cash (used in) financing activities

     (14,198     (12,047     (7,626
  

 

 

   

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     11,461        7,803        (11,072

Cash and cash equivalents at beginning of period

     18,743        10,940        22,012   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 30,204      $ 18,743      $ 10,940   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 2,662      $ 2,767      $ 2,411   
  

 

 

   

 

 

   

 

 

 

Income tax payments

   $ 135      $ 200      $  —     
  

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

PGT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands except share amounts)

 

     Common stock     Additional
Paid-in

Capital
    Treasury
Stock
    Accumulated
Deficit
    Accumulated
Other
Comprehensive

Loss
    Total  
     Shares
Outstanding
    Amount            

Balance at January 1, 2011

     53,654,496      $ 537      $ 271,047      $ (9   $ (187,290   $ (1,243   $ 83,042   

Vesting of restricted stock

     5,000        —          —          —          —          —          —     

Stock-based compensation

     —          —          1,773        —          —          —          1,773   

Comprehensive loss, net of tax effect

     —          —          —          —          —          (555     (555

Net loss

     —          —          —          —          (16,898     —          (16,898
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     53,659,496      $ 537      $ 272,820      $ (9   $ (204,188   $ (1,798   $ 67,362   

Vesting of restricted stock

     10,639        —          —          —          —          —          —     

Acquisition of treasury stock

     (922,694     —          —          (3,946     —          —          (3,946

Stock-based compensation

     —          —          1,363        —          —          —          1,363   

Exercise of stock options, including tax benefit of $0

     66,838        —          92        —          —          —          92   

Comprehensive income, net of tax effect

     —          —          —          —          —          384        384   

Net income

     —          —          —          —          8,955        —          8,955   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 29, 2012

     52,814,279      $ 537      $ 274,275      $ (3,955   $ (195,233   $ (1,414   $ 74,210   

Acquisition of treasury stock

     (7,865,249 )     —          —          (56,091     —          —          (56,091

Retirement of treasury stock

     —          (68     (49,932     50,000        —          —          —     

Stock-based compensation

     —          —          970        —          —          —          970   

Exercise of stock options

     1,922,167        20        3,560        —          —          —          3,580   

Excess tax benefit on stock-based compensation

     —          —          396       —          —          —          396   

Comprehensive (loss), net of tax effect

     —          —          —          —          —          (809     (809

Net income

     —          —          —          —          26,819        —          26,819   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 28, 2013

     46,871,197      $ 489      $ 229,269      $ (10,046   $ (168,414   $ (2,223   $ 49,075   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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PGT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

PGT, Inc. (“PGTI”, “we,” 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 (89%) of our sales, are to customers in the state of Florida; however, we also sell products in over 48 states, the Caribbean, Canada, Australia, and in South and Central America. Products are sold through an authorized dealer and distributor network.

We were incorporated in the state of Delaware on December 16, 2003, as JLL Window Holdings, Inc., in North Venice, Florida. On February 15, 2006, our Company was renamed PGT, Inc. We have one manufacturing operation, one glass tempering and laminating plant, one insulation glass plant, and broke ground in 2014 on a second glass tempering and laminating plant, all in North Venice.

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”).

Reclassifications

Certain prior year amounts have been reclassified in the accompanying financial statements to conform with current year classifications.

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 December 28, 2013, December 29, 2012, and December 31, 2011, consisted of 52 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 could 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.

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 collectability is reasonably assured. All sales recognized are net of allowances for discounts and estimated credits, which are estimated using historical experience. We record provisions against gross revenues for estimated credits 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.

 

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Table of Contents

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.

Cost of sales was impacted negatively by $4.1 million by consolidation and restructuring charges recorded for the year ending December 31, 2011, related to plant consolidation.

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 $10.6 million, $9.0 million, and $11.6 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

Advertising

We expense advertising costs as incurred. Advertising expense included in selling, general and administrative expenses was $0.7 million, $0.7 million and $0.7 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

Research and development costs

We expense research and development costs as incurred. Research and development costs included in cost of sales were $1.3 million, $1.4 million and $1.4 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, 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 and notes 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 assessments of the amount which may become uncollectable in the future and is determined through consideration of our write-off history, specific identification of uncollectable accounts based in part on the customer’s past due balance (based on contractual terms), and consideration of prevailing economic and industry conditions. Uncollectable accounts are written off after repeated attempts to collect from the customer have been unsuccessful.

     December 28,
2013
    December 29,
2012
 
     (in thousands)  

Accounts receivable

   $ 21,334      $ 14,513   

Less: Allowance for doubtful accounts

     (513     (516
  

 

 

   

 

 

 
   $ 20,821      $ 13,997   
  

 

 

   

 

 

 

As of December 28, 2013, December 29, 2012, and December 31, 2011, there were $0.6 million, $0.2 million, and $0.9 million of trade notes receivable, respectively, for which there was an allowance of $0.3 million, $0.2 million, and $0.8 million, respectively, included in other current assets and other assets in the accompanying consolidated balance sheets.

Self-insurance reserves

We are primarily self-insured for employee health benefits and for years prior to 2010 for workers’ compensation claims. 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. For 2013, 2012, and 2011 we are fully insured with respect to workers’ compensation.

 

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Warranty expense

We have warranty obligations with respect to most of our manufactured products. Warranty periods, which vary by product components, generally range from 1 to 10 years, although the warranty period for a limited number of specifically identified components in certain applications is a lifetime. However, the majority of the products sold have warranties on components which range from 1 to 3 years. The reserve for warranties is based on management’s assessment of the cost per service call, the lag time between order ship dates and warranty service dates, 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 through specific identification. Expected future obligations are discounted to a current value using a risk-free rate for obligations with similar maturities. The following provides information with respect to our warranty accrual.

During the year, we recorded warranty expense at an average rate of 1.30% of sales. This rate is lower than the average rate of 1.81% of sales accrued in fiscal year 2012, due to improved quality and lower costs of service claims experienced in the recent past few years. We assess the adequacy of our warranty accrual on a quarterly, and yearly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims yet to be serviced.

 

Accrued Warranty

   Beginning
of Period
     Charged to
Expense
     Adjustments     Settlements     End of
Period
 
     (in thousands)  

Year ended December 28, 2013

   $ 3,858       $ 2,992       $ (419   $ (3,765   $ 2,666   

Year ended December 29, 2012

   $ 4,406       $ 3,157       $ (512   $ (3,193   $ 3,858   

Year ended December 31, 2011

   $ 4,326       $ 3,346       $ 188      $ (3,454   $ 4,406   

The accrual for warranty is included in accrued liabilities and other liabilities on the consolidated balance sheets as of December 28, 2013, and December 29, 2012. The portion of warranty expense related to the issuance of product is $1.6 million, $0.7 million, and $1.1 million and is included in cost of sales on the consolidated statements of operations for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. The portion related to servicing warranty claims including costs of the service department personnel is included in selling, general and administrative expenses on the consolidated statements of operations, and is $2.2 million, $2.3 million, and $2.5 million, respectively, for the years ended December 28, 2013, December 29, 2012, and December 31, 2011.

Inventories

Inventories consist principally of raw materials purchased for the manufacture of our products. We have 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:

 

     December 28,
2013
     December 29,
2012
 
     (in thousands)  

Raw materials

   $ 11,305       $ 10,477   

Work in progress

     329         256   

Finished goods

     1,274         796   
  

 

 

    

 

 

 

Total Inventories

   $ 12,908       $ 11,529   
  

 

 

    

 

 

 

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

     5 to 10 years   

Computer Software

     3 years   

Maintenance and repair expenditures are charged to expense as incurred.

 

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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.

In January 2011, as part of the North Carolina consolidation, we reviewed the fair value of the Salisbury property based on an appraisal of the value of the property which we consider, Level 2 inputs, and the value of furniture and fixtures and machinery and equipment for impairment. As a result, we recorded an impairment charge of $4.6 million to adjust the carrying value of the property and an impairment charge of $0.9 million to write-off the value of certain personal property that was abandoned. Also, in 2011, we sold the Lexington, North Carolina facility and the selling price less the closing costs resulted in an additional impairment of less than $0.1 million.

In the second quarter of 2012, we entered into an agreement to list the Salisbury, North Carolina facility for sale with an agent, at which time the asset was moved to assets held for sale in the accompanying balance sheet. We closed on the sale of the property in the first quarter of 2013. In that the purchase price less closing costs was in excess of the current carrying cost, no change to the carrying cost was necessary.

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 December 28, 2013, and December 29, 2012, was $13.7 million and $13.0 million, respectively. Accumulated depreciation of capitalized software was $12.9 million and $12.1 million as of December 28, 2013, and December 29, 2012, respectively.

Depreciation expense for capitalized software was $0.8 million, $1.0 million, and $0.9 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

We review the carrying value of capitalized software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets.

Other intangibles

Other intangible assets consist of trade names, customer-related and intellectual intangible assets. The useful lives of trade names 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. Intellectual intangible assets are being amortized over their estimated useful lives of three 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 trade names. (See Note 5)

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.

 

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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 totaled $2.1 million and $1.9 million at December 28, 2013, and December 29, 2012, respectively.

On May 28, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with the various financial institutions and other persons from time to time parties thereto as lenders (the “Lenders”), SunTrust Bank, as administrative agent (in such capacity, the “Administrative Agent”), as collateral agent, as swing line lender and as a letter of credit issuer, and the other agents and parties thereto. The Credit Agreement establishes new senior secured credit facilities in an aggregate amount of $105.0 million, consisting of an $80.0 million Tranche A term loan facility maturing in five years that will amortize on a basis of 5% annually during the five-year term, and a $25.0 million revolving credit facility maturing in five years that includes a $5.0 million swing line facility and a $10.0 million letter of credit facility. (See Note 7)

As part of the new debt agreement, we incurred $3.6 million in total issue costs. Of the total costs, $2.0 million was capitalized as debt discount, $1.3 million was included in our deferred financing costs, and $0.3 million was expensed in selling, general, and administrative expenses. As we incurred the new debt, we reviewed the amount of unamortized deferred financing costs from the previous debt. Of the remaining unamortized balance, we expensed in other expense, net $0.3 million, and the remaining amount of the unamortized balance will continue to be amortized over the term of the new debt.

Amortization of deferred financing costs is included in interest expense in the accompanying consolidated statements of operations. There was $1.0 million of amortization for the year ended December 28, 2013, $0.9 million for the year ended December 29, 2012, and $0.8 million for the year ended December 31, 2011.

Estimated amortization of deferred financing costs is as follows for future fiscal years:

 

     (in thousands)  

2014

   $ 501   

2015

     477   

2016

     463   

2017

     449   

2018

     179   
  

 

 

 

Total

   $ 2,069   
  

 

 

 

Derivative financial instruments

We utilize certain derivative instruments, from time to time, including forward contracts and interest rate swaps and caps 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 8.

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 our 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.

 

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On occasion, cash flow hedges may no longer qualify to be designated as hedging instruments; at that time future changes in fair value are recognized in earnings. 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 December 28, 2013, 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. The net liability position of $479 thousand on December 28, 2013, is included in accrued liabilities and other liabilities in the accompanying consolidated balance sheet as it relates to open contracts with scheduled prompt dates in 2014 and 2015.

For statement of cash flows presentation, we present net cash receipts from and payments to the margin account as investing activities.

On September 16, 2013, we entered into two interest rate caps and one interest rate swap. The first is a one year interest rate cap agreement with a notional amount of $40.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. The second is a two year interest rate cap agreement with a notional amount of $20.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. The swap is a forward starting forty two months interest rate swap agreement with a notional amount of $40.0 million that effectively converted a portion of the floating rate debt to a fixed rate of 2.15% that starts September 28, 2014, with a termination date of May 18, 2018. At December 28, 2013, the fair value of our interest rate caps was in an asset position of $34 thousand and our interest rate swap was a liability position of $0.6 million. (See Note 8)

Financial instruments

Our financial instruments, not including derivative financial instruments discussed in Note 9, 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. The fair value of our long-term debt is based on debt with similar terms and characteristics and was approximately $77.3 million as of December 28, 2013, and approximately $37.5 million as of December 29, 2012, both of which approximate carrying value as of those dates.

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 several financial institutions. The balance exceeds federally insured limits. At December 28, 2013, and December 29, 2012, such balance exceeded the insured limit by $29.7 million and $18.7 million, respectively.

Comprehensive income (loss)

Comprehensive income (loss) is reported on the consolidated statements of comprehensive income (loss). Accumulated other comprehensive loss is reported on the consolidated balance sheets and the consolidated statements 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 recorded as 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 8.

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. Stock-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. We recorded compensation expense for stock based awards of $1.0 million before tax, or $0.01 per diluted share after-tax effect, $1.4 million before income tax, or $0.02 per diluted share after-tax effect, and $1.8 million before income tax, or $0.03 per diluted share after-tax effect, in the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

 

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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. We follow the “two class” method of accounting for earnings per share due to the fact that our unvested restricted stock awards, which are immaterial as of December 28, 2013, are participating securities.

Our weighted average shares outstanding excludes underlying options of 0.5 million and 5.5 million for the years ended December 29, 2012, and December 31, 2011, respectively, because their effects were anti-dilutive.

The table below presents the calculation of basic and diluted earnings per share, including a reconciliation of weighted average common shares:

 

     Year Ended  
     December 28,
2013
     December 29,
2012
     December 31,
2011
 
(in thousands, except per share amounts)                     

Numerator:

        

Net income (loss)

   $ 26,819       $ 8,955       $ (16,898
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Weighted-average common shares – Basic

     48,881         53,620         53,659   

Add: Dilutive effect of stock compensation plans

     3,330         1,642          
  

 

 

    

 

 

    

 

 

 

Weighted-average common shares – Diluted

     52,211         55,262         53,659   
  

 

 

    

 

 

    

 

 

 

Net income (loss) per common share:

        

Basic

   $ 0.55       $ 0.17       $ (0.31
  

 

 

    

 

 

    

 

 

 

Dilutive

   $ 0.51       $ 0.16       $ (0.31
  

 

 

    

 

 

    

 

 

 

3. Recently Adopted Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-11 Disclosures about Offsetting Assets and Liabilities . Subsequently, in February 2013, the FASB issued ASU 2013-1, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. These updates amended the guidance related to disclosures about offsetting assets and liabilities, including recognized financial instruments and derivatives. We have adopted the guidance effective on December 29, 2012, and have provided the required information in Note 8.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . The guidance amends the requirements of ASC 220, Comprehensive Income . The goal behind the amendments is to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. It does not change current requirements for reporting net income or other comprehensive income in the financial statements. We have adopted the guidance effective December 29, 2012, and have provided the required information in Note 16.

 

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4. Property, Plant and Equipment and Asset Held for Sale

The following table presents the composition of property, plant and equipment as of:

 

     December 28,
2013
    December 29,
2012
 
     (in thousands)  

Land

   $ 5,641      $ 3,802   

Buildings and improvements

     36,686        36,572   

Machinery and equipment

     45,058        44,337   

Vehicles

     6,453        6,006   

Software

     13,730        12,965   

Construction in progress

     3,552        1,087   
  

 

 

   

 

 

 
     111,120        104,769   

Less accumulated depreciation

     (66,997     (63,549
  

 

 

   

 

 

 
   $ 44,123      $ 41,220   
  

 

 

   

 

 

 

In the second quarter of 2012, we entered into an agreement to list the Salisbury, North Carolina facility for sale with an agent, at which time the asset was moved to assets held for sale in the accompanying consolidated balance sheets. During the fourth quarter we accepted an offer to sell the property and the sale closed in the first quarter of 2013. The purchase price less closing costs is in excess of the current carrying costs. The facility’s carrying value was $5.3 million as of December 29, 2012. On January 23, 2013, the sale closed for approximately $8.0 million in cash (approximately $7.5 million net of selling costs), and as such we recognized a gain of $2.2 million related to the sale in 2013.

5. Trade Names and Other Intangible Assets

Trade names and other intangible assets are as follows as of:

 

     December 28,
2013
    December 29,
2012
    Useful Life
(in years)
 
     (in thousands)        

Other Intangible Assets

      

Trade names

   $ 38,441      $ 38,441        indefinite   
  

 

 

   

 

 

   

Customer relationships

     55,700        55,700        10   

Less: Accumulated amortization

     (55,272     (49,701  
  

 

 

   

 

 

   

Subtotal

     428        5,999     
  

 

 

   

 

 

   

Other intellectual assets

     2,797        2,797        3   

Less: Accumulated amortization

     (2,797     (1,910  
  

 

 

   

 

 

   
     —          887     
  

 

 

   

 

 

   

Other intangible assets, net

   $ 38,869      $ 45,327     
  

 

 

   

 

 

   

Indefinite Lived Intangible Asset

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. Although a qualitative assessment is permitted, we will continue to perform a quantitative test given recent fluctuations in the markets we serve. This test 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, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is determined using the relief from royalty method that is based upon the discounted projected cost savings (value) attributable to ownership of our trade names, our only indefinite lived intangible assets. We categorize these trade names as being valued using Level 3 inputs.

Given the decline in housing starts in 2011, the overall tightening of the credit markets, and our revised forecasts in 2011, all of which are impairment indicators, we performed the assessment of our trade names and an impairment was present. The assessment resulted in an impairment charge of $6.0 million for 2011. After this charge, intangible assets not subject to amortization totaled $38.4 million at December 31, 2011. No additional impairment has been recorded through year end December 28, 2013.

In estimating fair value, the method we use requires us to make assumptions, the most material of which are net sales projections attributable to products sold with these trade names, the anticipated royalty rate we would pay if the trade names were not owned (as a percent of net sales), and a weighted average discount rate. These assumptions are subject to change based on changes in

 

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the markets in which these products are sold, which impact our projections of future net sales and the assumed royalty rate. Factors affecting the weighted average discount rate include assumed debt to equity ratios, risk-free interest rates and equity returns, each for market participants in our industry.

Our year-end test of trade names performed as of December 28, 2013, utilized net sales, which reflected the current market conditions and include modest growth in future years, a weighted average royalty rate of 4.0% and a discount rate of 16.1%. As of December 28, 2013, the estimated fair value of the trade names exceeded book value by approximately 79%, or $30.3 million. We believe our projected sales are reasonable based on available information regarding our industry. We also believe the royalty rate is appropriate and could improve over time based on market trends and information, including that which is set forth above. The discount rate was based on current financial market trends and will remain dependent on such trends in the future.

Amortizable Intangible Assets

As a result of the impairment indicators in 2011 described above, we tested our amortizable intangible assets, which are our customer relationships and Hurricane intellectual 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 for the year ended December 31, 2011. No impairment testing was performed during the years ended December 28, 2013, and December 29, 2012, due to the fact that there were no impairment indicators.

Estimated amortization of our customer relationships assets is as follows for future fiscal year:

 

     (in thousands)  

2014

   $ 428   
  

 

 

 

Total

   $ 428   
  

 

 

 

6. Accrued liabilities consisted of the following :

 

     December 28,
2013
     December 29,
2012
 
     (in thousands)  

Accrued payroll and benefits

   $ 6,019       $ 2,521   

Accrued warranty

     1,923         2,802   

Unearned revenue

     1,451         408   

Accrued health claims insurance payable

     743         388   

Aluminum forward contracts

     441         —    

Accrued interest

     246         475   

Accrued property tax

     4         814   

Other

     861         466   
  

 

 

    

 

 

 

Total

   $ 11,688       $ 7,874   
  

 

 

    

 

 

 

Other accrued liabilities are comprised primarily of state sales taxes, credit memos and customer rebates.

 

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7. Long-Term Debt

Long-term debt consists of the following:

 

     December 28,
2013
    December 29,
2012
 
     (in thousands)  

Term note payable with a payment of $1.0 million due quarterly. A lump sum payment of $63.0 million is due on May 28, 2018. Interest is payable monthly, or quarterly at LIBOR or the prime rate plus an applicable margin. At December 28, 2013, the average rate was 0.16% plus a margin of 3.00%.

   $ 79,000        —     

Term note payable with a payment of $0.6 million due on April 2, 2016. A lump sum payment of $36.9 million is due on June 23, 2016. Interest is payable quarterly at LIBOR or the prime rate plus an applicable margin. At December 29, 2012, the average rate was 1.25% plus a margin of 3.50%.

     —        $ 37,500   

Debt discount (1)

     (1,745     —     
  

 

 

   

 

 

 
   $ 77,255      $ 37,500   

Less current portion of long-term debt

     (4,890     —     
  

 

 

   

 

 

 

Total

   $ 72,365      $ 37,500   
  

 

 

   

 

 

 

 

(1) Debt discount – represents fees paid to the lender at time the debt was issued, and is accounted for as a reduction in the debt proceeds and is amortized over the life of the debt instrument.

On May 28, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with the various financial institutions and other persons from time to time parties thereto as lenders (the “Lenders”), SunTrust Bank, as administrative agent (in such capacity, the “Administrative Agent”), as collateral agent, as swing line lender and as a letter of credit issuer, and the other agents and parties thereto. The Credit Agreement establishes new senior secured credit facilities in an aggregate amount of $105.0 million, consisting of an $80.0 million Tranche A term loan facility maturing in five years that will amortize on a basis of 5% annually during the five-year term, and a $25.0 million revolving credit facility maturing in five years that includes a $5.0 million swing line facility and a $10.0 million letter of credit facility.

Interest on all loans under the Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Borrowings under the term loans and the revolving credit facility accrue interest at a rate equal to, at our option, a base rate or LIBOR plus an applicable margin. The applicable margin is based on our leverage ratio, ranging from 300 to 350 basis points in the case of LIBOR and 200 to 250 basis points in the case of the base rate. We will pay quarterly fees on the unused portion of the revolving credit facility equal to 0.50% as well as a quarterly letter of credit fee at a rate per annum equal to the applicable margin for LIBOR loans on the face amount of any outstanding letters of credit. In connection with this refinancing, we wrote-off $0.3 million of deferred financing costs from the Old Credit Agreement, which are classified within other expense (income), net in the Consolidated Statements of Operations.

On September 16, 2013, we entered into two interest rate caps and one interest rate swap to hedge a portion of our debt against volatility in future interest rates. (See Note 8)

The Credit Agreement will require us to maintain a maximum leverage ratio (based on the ratio of total funded debt to consolidated EBITDA, each as defined in the Credit Agreement) and a minimum fixed charge coverage ratio (based on the ratio of consolidated EBITDA minus net cash taxes minus capital expenditures to cash interest expense plus scheduled principal payments of term loans, each as defined in the Credit Agreement), which will be tested quarterly based on the last four fiscal quarters and is set at levels as described in the Credit Agreement. As of December 28, 2013, we were in compliance with all debt covenants.

The Credit Agreement also contains a number of affirmative and restrictive covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of our capital stock, prepayments of certain debt and transactions with affiliates. The Credit Agreement also contains customary events of default.

 

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In connection with entering into the Credit Agreement, on May 28, 2013, we terminated the Credit Agreement, dated as of June 23, 2011, among PGT Industries, Inc., as the borrower, the Company, as guarantor, the lenders from time to time party thereto and General Electric Capital Corporation, as administrative agent and collateral agent (the “Old Credit Agreement”). Proceeds from the term loan facility under the Credit Agreement were used to repay amounts outstanding under the Old Credit Agreement, repurchase shares of our common stock having an aggregate value of approximately $50 million, and pay certain fees and expenses.

All borrowings under the Old Credit Agreement bore interest, at our option, at either: (a) a “base rate” equal to the highest of: (i) 0.50% per year above the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, (ii) the annual rate of interest in effect for that day as publicly announced as the “prime rate” and (iii) the one-month “eurodollar rate” (not to be less than 1.25%) or (b) a “eurodollar base rate” equal to the higher of (i) 1.25% and (ii) (adjusted for reserve requirements, deposit insurance assessment rates and other regulatory costs for eurodollar liabilities) the rate at which eurodollar deposits in dollars for the relevant interest period (which will be one, two, three or six months or, subject to availability, nine or twelve months, as selected by us) are offered in the interbank eurodollar market plus, in each case, a rate dependent on the ratio of our funded debt as compared to our adjusted consolidated EBITDA, ranging from 3.5% to 2.0% per year for borrowings bearing interest at the “base rate” and from 4.5% to 3.0% per year for borrowings bearing interest at the “eurodollar rate” (such rate added to the “eurodollar rate,” the “Eurodollar Margin”).

On August 5, 2013, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement dated May 28, 2013. The Amendment permits us to make capital expenditures (as defined in the Credit Agreement) in an amount up to but not exceeding $14.0 million in connection with the expansion and operation of our glass processing business and activities without reducing the amount of capital expenditures otherwise permitted.

The face value of the debt as of December 28, 2013, was $79.0 million. The Company incurred issuance costs of $3.6 million, of which $2.0 million of the costs were classified as a discount and presented in the current and long-term portion of debt on the Consolidated Balance Sheets. Approximately $1.3 million was reported as debt issuance costs in current assets and other assets on the Consolidated Balance Sheets, while the remaining $0.3 million was expensed in selling, general and administrative expense on the Consolidated Statements of Income and Comprehensive Income. The debt issuance costs and discount are being amortized to interest expense, net on the Consolidated Statements of Income and Comprehensive Income over the term of the debt.

In connection with the cash proceeds from the sale of our Salisbury facility on January 23, 2013, we voluntarily prepaid $7.5 million of debt on January 31, 2013.

The contractual future maturities of long-term debt outstanding of December 28, 2013, are as follows (excluding unamortized debt discount and issuance costs):

 

     (in thousands)  

2014

   $ 5,000  

2015

     4,000  

2016

     4,000  

2017

     3,000   

2018

     63,000   
  

 

 

 

Total

   $ 79,000   
  

 

 

 

Interest expense, net consisted of the following (in thousands):

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Long-term debt

   $ 2,295      $ 2,396      $ 3,040   

Debt fees

     235        213        410   

Amortization of deferred financing costs

     1,021        857        813   

Interest income

     (25     (20     (59
  

 

 

   

 

 

   

 

 

 

Interest expense

     3,526        3,446        4,204   

Capitalized interest

     (6     (9     (36
  

 

 

   

 

 

   

 

 

 

Interest expense, net

   $ 3,520      $ 3,437      $ 4,168   
  

 

 

   

 

 

   

 

 

 

 

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8. 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 initially designated as cash flow hedges since they are believed to be 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.

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.

We maintain a $2.0 million line of credit with our commodities broker 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 our liability for open aluminum contracts to exceed $2.0 million, we are required to fund daily margin calls to cover the excess.

As of December 28, 2013, the fair value of our aluminum forward contracts was in a net liability position of approximately $479 thousand. We had 33 outstanding forward contracts for the purchase of 9.5 million pounds of aluminum at an average price of $0.89 per pound with maturity dates of between less than one month and 18 months through June 2015. We assessed our risk of non-performance of the Company on these contracts and recorded an immaterial adjustment to fair value as of December 28, 2013.

As of December 29, 2012, the fair value of our aluminum forward contracts was in a net asset position of approximately $20 thousand. We had 24 outstanding forward contracts for the purchase of 3.9 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 2013. We assessed the risk of non-performance of the counter-party on these contracts and recorded an immaterial adjustment to fair value as of December 29, 2012.

Interest Rate Contracts

On September 16, 2013, we entered into two interest rate caps and one interest rate swap. The first is a one year interest rate cap agreement with a notional amount of $40.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. The second is a two year interest rate cap agreement with a notional amount of $20.0 million that was designated as a cash flow hedge that protects the variable rate debt from an increase in the floating one month LIBOR rate of greater than 0.50%. Effectiveness for the interest rate caps will be measured by comparing the changes in the intrinsic value of the cap with the change in the fair value of the forecasted interest payments due to changes in the LIBOR interest rate when LIBOR is greater than 0.5%. The intrinsic value portion of the interest rate caps are expected to be highly effective due to the critical terms of the cap exactly matching those of the hedge debt. The time value portion of the caps are deemed ineffective and will be marked to market in the reporting period.

The swap is a forward starting three year six months interest rate swap agreement with a notional amount of $40.0 million that effectively converted a portion of the floating rate debt to a fixed rate of 2.15% that starts September 28, 2014, with a termination date of May 18, 2018. Since all of the critical terms of the swap and cap 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 accumulated other comprehensive income. Hedge effectiveness for the interest rate swap will be evaluated in accordance with ASC 815 on a quarterly basis by comparing changes in the cumulative gain or loss from the forward-starting interest rate swap with the cumulative changes in the discounted expected cash flows of future monthly interest related to changes of the swap rate.

 

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The fair value of our aluminum hedges and interest rate cap are classified in the accompanying consolidated balance sheets as follows (in thousands):

 

          December 28,
2013
    December 29,
2012
 
Derivatives in a net asset (liability) position    Balance Sheet Location             

Hedging instruments:

       

Aluminum forward contracts

   Other Current Asset    $  —        $ 20   

Aluminum forward contracts

   Accrued Liabilities      (441 )     —     

Aluminum forward contracts

   Other Liabilities      (38 )     —     

Interest rate cap

   Other Current Asset      21        —     

Interest rate cap

   Other Asset      13        —     

Interest rate swap

   Other Liabilities      (630     —     
     

 

 

   

 

 

 

Total hedging instruments

      $ (1,075   $ 20   
     

 

 

   

 

 

 

Although it is our intent to have our aluminum hedges qualify as highly effective for reporting purposes, for the year ended December 29, 2012, they did not qualify as effective. 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. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. During the third and fourth quarter of 2012, these contracts became ineffective and no longer qualified for hedge accounting. When a cashflow hedge becomes ineffective, and 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. The change in value of the aluminum forward contracts occurring after termination is recognized in other expense (income), net on the consolidated statements of operations.

The ending accumulated balance for the aluminum forward contracts and interest rate swaps included in accumulated other comprehensive expense, net of tax, is $0.7 million as of December 28, 2013. In December 29, 2012, the ending accumulated balance for the aluminum forward contracts included in accumulated other comprehensive income, net of tax, was $0.1 million.

 

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The impact of the offsetting derivative instruments are depicted below:

 

As of December 28, 2013                                         
(in thousands)                        Gross Amounts not offset in Balance Sheet  
Description    Gross Amounts of
Recognized Assets
     Gross Amounts offset
in Balance Sheet
    Net amounts of
Assets Presented in
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net
Amount
 

Aluminum Forward Contract

   $  —         $ —        $ —         $ —         $ —         $ —     

Interest Rate Caps

   $ 34       $ —        $ 34       $ —         $ —         $ 34   
As of December 28, 2013                                         
(in thousands)                        Gross Amounts not offset in Balance Sheet  
Description    Gross Amounts of
Recognized
Liabilities
     Gross Amounts offset
in Balance Sheet
    Net amounts of
Liabilities
Presented in
Balance Sheet
     Financial
Instruments
     Cash Collateral
Pledged
     Net
Amount
 

Aluminum Forward Contract

   $ 479       $ —        $ 479       $ —         $ —         $ 479   

Interest Rate Swap

   $ 630       $ —        $ 630       $ —         $ —         $ 630   
As of December 29, 2012                                         
(in thousands)                        Gross Amounts not offset in Balance Sheet  
Description    Gross Amounts of
Recognized Assets
     Gross Amounts offset
in Balance Sheet
    Net amounts of
Assets Presented in
Balance Sheet
     Financial
Instruments
     Cash Collateral
Received
     Net
Amount
 

Aluminum Forward Contract

   $ 53       $ (33   $ 20       $ —         $ —         $ 20   
As of December 29, 2012                                         
(in thousands)                        Gross Amounts not offset in Balance Sheet  
Description    Gross Amounts of
Recognized
Liabilities
     Gross Amounts offset
in Balance Sheet
    Net amounts of
Liabilities
Presented in
Balance Sheet
     Financial
Instruments
     Cash Collateral
Pledged
     Net
Amount
 

Aluminum Forward Contract

   $ 33       $ (33   $ —         $ —         $ —         $ —     

 

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The following represents the gains (losses) on derivative financial instruments for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, and their classifications within the accompanying consolidated financial statements (in thousands):

 

    Derivatives in Cash Flow Hedging Relationships  
    Amount of (loss) Recognized in
OCI on Derivatives

(Effective Portion)
    Location of Gain or (Loss)
Reclassified from

Accumulated OCI into
Income
(Effective Portion)
    Amount of Gain Reclassified from
Accumulated OCI into Income

(Effective Portion)
 
    Year Ended           Year Ended  
    December 28,
2013
    December 29,
2012
    December 31,
2011
          December 28,
2013
    December 29,
2012
    December 31,
2011
 

Aluminum contracts

  $ (761   $ (24   $ (220     Cost of sales      $ 145      $ 408      $ (335

Interest Rate Swap

  $ (630   $ —        $ —          Interest Expense      $ —        $ —        $  —     
    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  
                December 28,
2013
    December 29,
2012
    December 31,
2011
 

Aluminum contracts

      Other income or other expense      $ (358   $ 208      $  —     

Interest rate swap

      Other income or other expense      $ —        $ —        $  —     

9. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The accounting guidance concerning fair value allows us to elect to measure financial instruments at fair value and report the changes in fair value through earnings. This election can only be made at certain specified dates and is irrevocable once made. We do not have a policy regarding specific assets or liabilities to elect to measure at fair value, but rather we make the election on an instrument-by-instrument basis as they are acquired or incurred.

During fiscal 2013, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, during fiscal 2012 and 2011, we did not have any Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

 

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Items Measured at Fair Value on a Recurring Basis

The following assets and liabilities are measured in the consolidated financial statements at fair value on a recurring basis and are categorized in the table below based upon the lowest level of significant input to the valuation:

 

     Fair Value Measurements at Reporting Date of Net Asset (Liabilities) Using:  
Description    December 28,
2013
    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
 
(in thousands)                          

Aluminum forward contracts

   $ (479   $ —        $ (479   $ —    

Interest rate cap

     34        —           34        —     

Interest rate swap

     (630 )     —           (630 )     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Derivative financial instruments, net liability

   $ (1,075   $ —        $ (1,075   $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 
Description    December 29,
2012
    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
 
(in thousands)                          

Aluminum forward contracts

   $ 20      $ —        $ 20      $ —    

Interest rate cap

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Derivative financial instruments, net asset

   $ 20      $ —        $ 20      $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 

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

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

Interest rate cap and swap contracts identical to that held by us are sold by financial institutions. The valuation price at any measurement date for a contract with identical terms, exercise price, the expiration date, the settlement date, and notional quantities, as the one we hold, is used for determining the fair value.

Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of financial assets and liabilities that are required to be recorded or disclosed at fair value at December 28, 2013, and December 29, 2012, respectively (in thousands):

 

     December 28, 2013      December 29, 2012  
     Carrying
Amount
     Estimated
Fair
Value
     Carrying
Amount
     Estimated
Fair
Value
 

Financial assets and liabilities

           

Cash and cash equivalents

   $ 30,204       $ 30,204       $ 18,743       $ 18,743   

Accounts receivable, net

   $ 20,821       $ 20,821       $ 13,997       $ 13,997   

Accounts payable and accrued liabilities

   $ 15,522       $ 15,522       $ 13,279       $ 13,279   

Long-term debt (including current portion)

   $ 77,255       $ 77,255       $ 37,500       $ 37,500   

The following provides a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring basis.

Cash and cash equivalents — The estimated fair value of these financial instruments approximates their carrying amounts due to their highly liquid or short-term nature.

 

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Accounts receivable, net — The estimated fair value of these financial instruments approximates their carrying amounts due to their short-term nature.

Accounts payable and accrued liabilities — The estimated fair value of these financial instruments approximates their carrying amounts due to their short-term nature.

Debt — The estimated fair value of this debt is based on Level 2 inputs of debt with similar terms and characteristics.

10. Income Taxes

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit (expense) allocated to continuing operations (the “Income Tax Allocation”).

The components of income tax (benefit) expense are as follows (in thousands):

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Current:

      

Federal

   $ 86      $ 192      $  —     

State

     —          —          —     
  

 

 

   

 

 

   

 

 

 
     86        192        —     
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal

     (2,265     —          (2,086

State

     (1,195     (82     (238
  

 

 

   

 

 

   

 

 

 
     (3,460     (82     (2,324
  

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense

   $ (3,374   $ 110      $ (2,324
  

 

 

   

 

 

   

 

 

 

A reconciliation of the statutory federal income tax rate to our effective rate is provided below:

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Statutory federal income tax rate

     35.0     35.0     35.0

State income taxes, net of federal income tax benefit

     3.8     3.8     4.0

Alternative minimum tax

     —          2.1     —     

Non-deductible secondary offering related expenses

     1.8     —          —     

Other

     (0.1 %)      (0.9 %)      (0.2 %) 

Non-deductible expenses

     0.2     0.3     —     

Valuation allowance on deferred tax assets

     (55.1 %)      (39.1 %)      (26.7 %) 
  

 

 

   

 

 

   

 

 

 
     (14.4 %)      1.2     12.1
  

 

 

   

 

 

   

 

 

 

Our effective combined federal and state tax rate was (14.4%), 1.2% and 12.1%, for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

Our income tax benefit was $3.4 million for the year ended December 28, 2013. As we released our valuation allowances on deferred tax assets, we released our valuation allowance as we are no longer in a cumulative loss position and it is more likely than not, that our deferred tax assets will be realized.

Our tax rate is lower than the statutory rate for 2012, as we released a portion of our deferred tax asset valuation allowance to offset our regular tax expense. The $0.1 million of tax expense included in the consolidated statements of operations represents our alternative minimum tax obligation offset with the state tax impact for a change in our state tax rate.

The 12.1% tax rate for the year ended December 31, 2011, relates to the deferred tax impact on the impairment charge related to our trade names. Deferred tax liabilities related to our trade names are not available to be used to offset deferred tax assets when estimating the valuation allowance. All deferred tax assets created in 2011 were fully reserved with additional valuation allowances. Excluding the effects of these items, our 2013, 2012, and 2011 effective tax rates would have been 40.7%, 40.3% and 38.8%, respectively.

 

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Deferred income taxes reflect the net tax effects of temporary differences 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:

 

     December 28,
2013
     December 29,
2012
 
     (in thousands)  

Deferred tax assets:

     

Federal and State net operating loss carry-forwards

   $ 970       $ 7,332   

Goodwill

     4,152         6,228   

Compensation expense

     2,606         2,819   

Accrued warranty

     890         1,381   

Obsolete inventory

     435         508   

Other accruals

     260         149   

Allowance for doubtful accounts

     289         288   

AMT tax credits

     574         479   

Derivative financial instruments

     475         —     

Amortizable intangible assets

     865         —     

Valuation allowance

     —           (12,902
  

 

 

    

 

 

 

Total deferred tax assets

   $ 11,516       $ 6,282   
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Other indefinite lived intangible assets

   $ 14,904       $ 14,904   

Amortizable intangible assets

     —           1,551   

Property, plant and equipment

     6,349         4,724   

Derivative financial instruments

     —           7   

Deferred finance costs

     370         —     

Prepaid expenses

     510         —     
  

 

 

    

 

 

 

Total deferred tax liabilities

   $ 22,133       $ 21,186   
  

 

 

    

 

 

 

The amount of goodwill deductible for tax purposes was $63.8 million at the time of the 2004 acquisition, of which, $10.7 million and $16.1 million was unamortized as of December 28, 2013, and December 29, 2012, respectively.

The following table shows the current and noncurrent deferred tax (liabilities) assets, recorded on our consolidated balance sheets:

 

     December 28,
2013
    December 29,
2012
 
     (in thousands)  

Current deferred tax asset, (liabilities), net

   $ 2,763      $ (46

Noncurrent deferred tax liabilities, net

     (13,380     (14,858
  

 

 

   

 

 

 

Total deferred tax liabilities, net

   $ (10,617   $ (14,904
  

 

 

   

 

 

 

We estimate that we have $4.4 million of tax affected federal net operating loss carryforwards and $1.5 million of state operating loss carryforwards, expiring at various dates through 2031.

We have not recognized any 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.

 

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11. Commitments and Contingencies

We lease production equipment, vehicles, computer equipment, storage units and office equipment under operating leases expiring at various times through 2016. Lease expense was $1.3 million, $1.2 million, and $1.7 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. Future minimum lease commitments for non-cancelable operating leases are as follows at December 28, 2013 (in thousands):

 

2014

   $ 1,145   

2015

     982   

2016

     925   

2017

     597   

2018

     545   
  

 

 

 

Total

   $ 4,194   
  

 

 

 

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 $2.5 million for various materials. During the years ended December 28, 2013, December 29, 2012, and December 31, 2011, we made purchases under these programs totaling $72.7 million, $57.0 million, and $62.9 million, respectively.

At December 28, 2013, we had $0.6 million in standby letters of credit related to our worker’s compensation insurance coverage, and commitments to purchase equipment and land of $1.9 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.

12. 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. We currently make matching contributions based on our operating results. During the years ended December 28, 2013, and December 29, 2012, there was an average matching contribution of 3% and 1% made at various times during the years, respectively. For the year ended December 31, 2011, there was no company matching contribution. 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 expenses of $1.2 million and $0.5 million for the years ended December 28, 2013, and December 29, 2012, and no expense for the year ended December 31, 2011.

13. 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., and another, Brett Milgrim, is also a director. In addition, Paul S. Levy who is affiliated with JLL Partners, Inc. is a director of Builders FirstSource, Inc. Total net sales to Builders FirstSource, Inc. were $5.1 million, $4.5 million and $3.7 million for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively. As of December 28, 2013, and December 29, 2012, there was $0.6 million and $0.6 million due from Builders FirstSource, Inc. included in accounts receivable in the accompanying consolidated balance sheets.

14. Shareholders’ Equity

On November 15, 2012, the Board of Directors authorized and approved a share repurchase program of up to $20 million. Repurchases were funded from existing cash resources and cash generated by the Company’s operating activities. All share repurchases were made in accordance with Rule 10b5-1 and Rule 10b-18, as applicable, of the Securities Exchange Act of 1934 as to the timing, pricing, and volume of such transactions. In 2012 and 2013, the Company acquired 1,996,772 shares of the Company’s common stock at a cost of $10.0 million. These reacquired shares were placed in treasury. There were 46.9 million shares and 52.8 million shares of common stock outstanding, net of common stock held in treasury, at December 28, 2013, and December 29, 2012, respectively.

In May of 2013, we completed a secondary offering of 12.65 million shares of common stock owned by JLL Partners. Concurrently with the secondary offering, we repurchased, cancelled and retired 6.8 million shares from JLL, which were funded by refinancing our debt and bringing the outstanding gross balance to $80 million.

 

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15. Employee Stock Based Compensation

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.

On April 6, 2010, our stockholders approved the PGT, Inc. Amended and Restated 2006 Equity Incentive Plan (the “Amended and Restated 2006 Equity Incentive Plan”).

Amended and Restated 2006 Equity Incentive Plan

 

    total number of shares of common stock available for grant thereunder, 7,000,000, and

 

    set forth 1,500,000 as the maximum number of shares that may be made subject to awards in any calendar year to any “covered employee” (within the meaning of Section 162(m) of the Internal Revenue Code).

There were 541,863, 472,035, and 1,092,310 shares available for grant under the 2006 Plan at December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

New Issuances

During 2013, we issued 22,581 shares of restricted stock awards to certain board members and non-executive employees of the Company. The restrictions on these awards lapse at various time periods through 2016 and have a weighted average fair value on date of grant of $6.76 based on the NASDAQ market price of the common stock on the close of business on the day the awards were granted.

During 2012, we issued 673,390 options to certain directors, executives and non-executive employees of the Company. These options vest at various time periods through 2017 and have a weighted average exercise price of $2.42 based on the NASDAQ market price of the underlying common stock on the close of business on the day the options were granted.

During 2011, we issued 35,000 options to certain non-executive employees of the Company. These options vest at various time periods through 2016 and have a weighted average exercise price of $2.21 based on the NASDAQ market price of the underlying common stock on the close of business on the day the options were granted.

The compensation cost that was charged against income for stock compensation plans was $1.0 million, $1.4 million, and $1.8 million, respectively, for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. We recognized $0.4 million in income tax benefits for share-based compensation in the year ended December 28, 2013. There was no income tax benefit recognized for share-based compensation for the years ended December 29, 2012, December 31, 2011, as a result of the valuation allowance on deferred taxes. 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:

2013: no options granted.

2012: dividend yield of 0%, expected volatility of 70.38%, risk-free interest rate 0.8 %, and expected life of 5 years.

2011: dividend yield of 0%, expected volatility of 70.74%, risk-free interest rate of 2.2%, 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. The expected volatility is based on the Company’s common stock. The risk-free rate for periods within the contractual term of the options is based on U.S. Treasury yield for instruments with a maturity equal to the life of the option in effect at the time of grant.

 

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Stock Options

A summary of the status of our stock options as of December 28, 2013, is presented below:

 

     Number of
Shares
    Weighted Average
Exercise Price
     Weighted Average
Remaining Life
 

Outstanding at December 29, 2012

     7,219,145      $ 1.95      

Granted

     —          —        

Exercised

     (1,922,167   $ 1.86      

Forfeited/Expired

     (92,409   $ 2.02      
  

 

 

      

Outstanding at December 28, 2013

     5,204,569      $ 1.97         6.0 Years   
  

 

 

      

Exercisable at December 28, 2013

     2,970,640      $ 1.90         5.5 Years   

The following table summarizes information about employee stock options outstanding at December 28, 2013, (dollars in thousands, except per share amounts):

 

Exercise
Price

   Remaining
Contractual
Life
     Outstanding      Outstanding
Intrinsic
Value
     Exercisable      Exercisable
Intrinsic
Value
 
$1.51      0.1 Years       $ 391,167       $ 3,325         391,167       $ 3,325   
$0.92      2.1 Years         117,063         1,064         117,063         1,064   
$1.60-$2.31      6.2 Years         4,346,339         34,809         2,403,076         19,252   
$2.59-$3.25      8.4 Years         350,000         2,578         59,334        436  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
        5,204,569       $ 41,776         2,970,640       $ 24,077   
     

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average fair value of options granted during the fiscal years ended December 29, 2012, and December 31, 2011, were $2.42 and $2.21, respectively. The aggregate intrinsic value of options outstanding and of options exercisable as of December 29, 2012, was $18.9 million and $10.0 million, respectively. The aggregate intrinsic value of options outstanding and of options exercisable as of December 31, 2011, was $0.1 million and $0.1 million, respectively. The total grant date fair value of options vested during the fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011, was $1.4 million, $1.4 million and $1.8 million, respectively.

For the fiscal years ended December 28, 2013, we received $3.6 million in proceeds from the exercise of 1,922,167 options for which we recognized $0.4 million in excess tax benefits through additional paid in capital. The aggregate intrinsic value of stock options exercised during the fiscal year ended December 28, 2013, was $14.1 million. For the fiscal years ended December 29, 2012, we received $0.1 million in proceeds from the exercise of 66,838 options for which there was no tax benefit realized. The aggregate intrinsic value of stock options exercised during the fiscal year ended December 29, 2012, was $0.1 million. For the fiscal year December 31, 2011, there were no exercises of stock options and therefore no proceeds received or tax benefits recognized.

As of December 28, 2013, there was $0.5 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 1.2 years.

Non-Vested (Restricted) Share Awards

There were 22,581 restricted shares awards granted in the year ended December 28, 2013, which will vest during 2014. There were no share awards granted in the year ended December 29, 2012.

 

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A summary of the status of non-vested share awards as of December 28, 2013, and changes during the year then ended are presented below:

 

     Number of
Shares
     Weighted
Average
Fair Value
 

Outstanding at December 29, 2012

     —           —     

Granted

     22,581      $ 6.76  

Vested

     —           —     

Forfeited/Expired

     —           —     
  

 

 

    

 

 

 

Outstanding at December 28, 2013

     22,581      $ 6.76  
  

 

 

    

 

 

 

As of December 28, 2013, the remaining compensation cost related to non-vested share awards was immaterial.

16. Accumulated Other Comprehensive Loss

The following table shows the components of accumulated other comprehensive loss for fiscal 2013, 2012 and 2011:

 

(in thousands)    Aluminum
Forward
Contracts
    Interest
Swap
    Total  

Balance at January 1, 2011

   $ (1,243   $ —        $ (1,243

Changes in fair value

     (220     —          (220

Reclassification to earnings

     (335     —          (335
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ (1,798   $ —        $ (1,798

Changes in fair value

     (24     —          (24

Reclassification to earnings

     408        —          408   
  

 

 

   

 

 

   

 

 

 

Balance at December 29, 2012

   $ (1,414   $ —        $ (1,414

Changes in fair value

     (761     (630 )     (1,391

Reclassification to earnings

     145        —          145   

Tax effect

     193        244        437  
  

 

 

   

 

 

   

 

 

 

Balance at December 28, 2013

   $ (1,837   $ (386   $ (2,223
  

 

 

   

 

 

   

 

 

 

Reclassification out of accumulated other comprehensive loss for fiscal 2013, 2012, and 2011:

 

     Amount reclassified from Accumulated
Other Comprehensive Loss
            
     Twelve months ended             

Detail about accumulated other comprehensive loss components

   December 28,
2013
    December 29,
2012
     December
31, 2011
    Affected line item in 
statement where Net
Income is presented
     (in thousands)             

Aluminum Forward Contracts

         

Effective portion of aluminum forward contracts

   $ 145      $  408       $ (335   Cost of Sales

Tax effect

     (56     —           —        Tax expense

Interest Swap

         

Effective portion of interest hedge contracts

     —          —           —        Interest

17. Sales by Product Group

The FASB has issued guidance under ASC 280, 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.

 

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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:

 

     Years Ended  
(in millions)    December 28,
2013
     December 29,
2012
     December 31,
2011
 

Product category:

        

Impact Window and Door Products

   $ 183.4       $ 130.1       $ 120.9   

Other Window and Door Products

     55.9         44.4         46.4   
  

 

 

    

 

 

    

 

 

 

Total net sales

   $ 239.3       $ 174.5       $ 167.3   
  

 

 

    

 

 

    

 

 

 

18. Unaudited Quarterly Financial Data

The following tables summarize the consolidated quarterly results of operations for 2013 and 2012 (in thousands, except per share amounts):

 

     2013  
     First
Quarter
    Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net sales

   $ 49,563      $ 62,847       $ 64,858       $ 62,035   

Gross profit

   $ 17,559      $ 21,030       $ 20,920       $ 20,625   

Net income

   $ 5,264      $ 9,922       $ 6,289       $ 5,343   

Net income per share – basic

   $ 0.10      $ 0.20       $ 0.14       $ 0.11   

Net income per share – diluted

   $ 0.09      $ 0.19       $ 0.13       $ 0.11   
     2012  
     First
Quarter
    Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net sales

   $ 38,100      $ 46,486       $ 44,743       $ 45,211   

Gross profit

   $ 11,936      $ 16,481       $ 15,242       $ 16,009   

Net (loss) income

   $ (652   $ 3,690       $ 2,722       $ 3,194   

Net (loss) income per share – basic

   $ (0.01   $ 0.07       $ 0.05       $ 0.06   

Net (loss) income per share – diluted

   $ (0.01   $ 0.07       $ 0.05       $ 0.06   

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. Each of our fiscal quarters above consists of 13 weeks and ended on the last Saturday of the period.

During the first quarter of 2013, we increased net income by $2.2 million from the gain on sale of the Salisbury, NC facility. In the second quarter, we reversed the deferred tax asset valuation allowance by $3.9 million, and in the fourth quarter we recorded $0.5 million of tax expense in excess of the release of the net operating loss valuation allowance.

During the fourth quarter of 2012, we increased revenues by $0.5 million for the reversal of estimated revenues associated with a customer promotion program that ended with rebate redemptions below our estimate. The promotional activity and associated estimated revenue reserves impacted the second, third and fourth quarters of 2012.

 

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act as of December 28, 2013. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. These disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.

Based on management’s evaluation, our principal executive officer and principal financial officer concluded that, as of December 28, 2013, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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.

During the second quarter of fiscal year 2012, we started the implementation of our new Enterprise Resource Planning System (“ERP System”). We expect to continue this implementation in phases over the course of the next six to nine months. The implementation of this ERP System has affected and will continue to affect our internal controls over financial reporting by, among other things, improving user access security and automating a number of accounting, back office and reporting processes and activities. Management will continue to evaluate the operating effectiveness of related key controls during subsequent periods.

We have evaluated the effectiveness of our internal control over financial reporting as of December 28, 2013. The evaluation was performed based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). 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.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

PGT, Inc.

We have audited PGT, Inc. and subsidiary’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). PGT, Inc. and subsidiary’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.

 

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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. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 28, 2013, 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. and subsidiary as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2013 of PGT, Inc. and subsidiary and our report dated February 28, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Certified Public Accountants

Tampa, Florida

February 28, 2014

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.

 

Item 9B. OTHER INFORMATION

None.

PART III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Significant Employees of the Registrant

 

Name

   Age     

Position

Rodney Hershberger

     57       President, Chief Executive Officer, and Director

Jeffrey T. Jackson

     48       Executive Vice President of Operations and Chief Financial Officer

Mario Ferrucci III

     50       Vice President and General Counsel

Todd Antonelli

     40       Vice President – Sales and Marketing

David McCutcheon

     48       Vice President – Supply Chain

Deborah L. LaPinska

     52       Vice President – Customer Relations

Monte Burns

     54       Vice President – Operations

Brad West

     44       Vice President – Controller

 

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Rodney Hershberger, President, Chief Executive Officer, and Director. Mr. Hershberger, a co-founder of PGT Industries, Inc., has served the Company for over 33 years. Mr. Hershberger was named President and Director in 2004 and became our Chief Executive Officer in March 2005. In 2003, Mr. Hershberger became Executive Vice President and Chief Operating Officer and oversaw the 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. The Board recognizes Mr. Hershberger’s over 30 years of experience with the Company in the Florida market and the position of respect he has earned throughout the industry through his thoughtful and honest leadership as well as his knowledge, skill and reputation as driving great value to the Company and its stockholders.

Jeffrey T. Jackson, Executive Vice President and Chief Financial Officer. Mr. Jackson joined PGT in November 2005 and helped lead the Company’s IPO in 2006. Mr. Jackson is responsible for all aspects of our Company’s operations from Supply Chain to Manufacturing and our Chief Financial Officer. Prior to joining us he served in various Executive Management roles, including Division Chief Financial Officer, Vice President Corporate Controller, and Senior Vice President of Operations. Mr. Jackson earned a B.B.A. from the University of West Georgia and is a Certified Public Accountant in both Georgia and California. Mr. Jackson currently serves on the Board of Directors of Loar Group and is also Chairman of its Audit Committee.

Mario Ferrucci III, Vice President and General Counsel. Mr. Ferrucci joined PGT in April 2006 and is responsible for PGT’s Corporate Governance and Compliance as well as our Engineering, Information Systems and Code Compliance departments and our Strategic Planning process. Previously a member of Skadden, Arps, Slate, Meagher & Flom LLP, and Walker Digital, LLC. Mr. Ferrucci graduated magna cum laude from the Widener University School of Law, earning an M.A.A.B.T. from the University of Connecticut and B.A. from Colby College. He is a member of the Delaware Bar Association.

Todd Antonelli, Vice President of Sales and Marketing. Mr. Antonelli joined PGT in 2012 as Vice President of Sales and Marketing. He has over 16 years of Sales and Marketing experience in the building construction industry. Prior to joining PGT, Mr. Antonelli held increasing sales responsibilities with the Masco Corporation, which he joined in 2001. Mr. Antonelli earned a B.A. from California State University and an M.B.A. from California Lutheran University.

David McCutcheon, Vice President of Supply Chain. Mr. McCutcheon joined PGT in 1997. He directs Strategic Purchasing, Materials Management, and Transportation Logistics. Mr. McCutcheon has over fifteen years of management experience in Manufacturing Operations and Engineering. Mr. McCutcheon earned a B.S. in Electrical Engineering from Purdue University and an M.B.A. from The Ohio State University.

Deborah LaPinska, Vice President of Customer Relations. Ms. LaPinska joined PGT in 1991 and has held increasing responsibilities during her career, currently serving as Vice President of Customer Relations. She has led Customer Service, Transportation, Sales, Marketing and our Field Service departments. Ms. LaPinska earned a B.A. in Business Management from Eckerd College.

Monte Burns, Vice President of Operations. Mr. Burns joined PGT in 1987 and has held increasing responsibilities within the Company, most recently as Vice President of Glass Operations, which includes the tempering, insulating and laminating process. During his tenure Mr. Burns has been responsible for operations in PGT’s Salisbury, NC plant, Area Leader of Manufacturing in our Florida facility, and Business Unit Manager.

Bradley West, Vice President and Controller. Mr. West joined PGT in 2006 and is responsible for PGT’s Accounting and Finance Departments, as well as its Risk Management function. Mr. West has over 16 years of management experience in manufacturing organizations, earned a B.B.A. degree from the University of Michigan, and is a Certified Public Accountant in Georgia.

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.

 

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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 officer, 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

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders under the caption “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders under the caption “Audit Committee Report — Fees Paid to the Principal Accountant,” which information is incorporated herein by reference.

 

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PART IV

 

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) Schedule II – Valuation and Qualifying Accounts

 

Allowance for Doubtful Accounts

   Balance at
Beginning
of Period
     Costs and
expenses
     Deductions
(1)
    Balance at
End of
Period
 
     (in thousands)  

Year ended December 28, 2013

   $ 516       $ 29       $ (32   $ 513   

Year ended December 29, 2012

   $ 683       $ 59       $ (226   $ 516   

Year ended December 31, 2011

   $ 1,445       $ 728       $ (1,490   $ 683   

 

  (1) Represents uncollectible accounts charged against the allowance for doubtful accounts, net of recoveries.

 

Allowance for Deferred Tax Assets

   Balance at
Beginning
of Period
     Costs and
expenses
(1)
     Deductions
(2)
    Balance at
End of
Period
 
     (in thousands)  

Year ended December 28, 2013

   $ 12,902       $ —         $ (12,902   $ —     

Year ended December 29, 2012

   $ 16,289       $ —         $ (3,387   $ 12,902   

Year ended December 31, 2011

   $ 10,968       $ 5,321       $ —        $ 16,289   

 

  (1) Recognition of additional valuation allowances.
  (2) Reduction related to reversal of valuation allowance.

(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. (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2010, Registration No. 000-52059)
  3.2    Amended and Restated By-Laws of PGT, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2010, Registration No. 000-52059)
  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)
  4.3    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    Credit Agreement, dated as of May 28, 2013, among PGT, Inc., PGT Industries, Inc., the lenders party thereto, certain other financial institutions, and SunTrust Bank, as Administrative Agent and Collateral Agent, (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 28, 2013, filed with the Securities and Exchange Commission on June 3, 2013, Registration No. 000-52059)

 

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Exhibit

Number

 

Description

  10.2   Supply Agreement, executed on January 24, 2014, by and between Keymark Corporation and PGT Industries, Inc. (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 24, 2014, filed with the Securities and Exchange Commission on January 28, 2014, Registration No. 000-52059)
  10.3   Supply Agreement, executed on December 16, 2013, by and between PPG Industries, Inc. and PGT Industries, Inc. (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 16, 2013, filed with the Securities and Exchange Commission on December 20, 2013, Registration No. 000-52059)
  10.4   Sales Contract, executed on November 12, 2013, by and between E. I. du Pont de Nemours and Company, through its Packaging and Industrial Polymers business, and PGT Industries, Inc. (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated November 12, 2013, filed with the Securities and Exchange Commission on November 12, 2013, Registration No. 000-52059)
  10.5   Supply Agreement, executed on January 24, 2014, by and between, PGT Industries, Inc. and SAPA Extruder, Inc. (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 24, 2014, filed with the Securities and Exchange Commission on January 28, 2014, Registration No. 000-52059)
  10.6   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)
  10.7   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)
  10.8   PGT, Inc. Amended and Restated 2006 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2010, Registration No. 000-52059)
  10.9   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)
  10.10   Form of Employment Agreement, between PGT Industries, Inc. and, individually, Rodney Hershberger, Jeffery T. Jackson, Mario Ferrucci III, Deborah L. LaPinska, Monte Burns, David B. McCutcheon, Bradley West and Todd Antonelli (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)
  10.11   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)
  10.13   Form of PGT, Inc. 2006 Equity Incentive Plan Replacement Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2010, Registration No. 000-52059)
  21.1*   List of Subsidiaries
  23.1*   Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
  24.1*   Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
  31.1*   Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2*   Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1**   Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2**   Certification of chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document**

 

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101.SCH    XBRL Taxonomy Extension Schema**
101.CAL    XBRL Taxonomy Extension Calculation Linkbase**
101.DEF    XBRL Taxonomy Extension Definition**
101.LAB    XBRL Taxonomy Extension Label Linkbase**
101.PRE    XBRL Taxonomy Extension Presentation Linkbase**

 

* Filed herewith.
** Furnished herewith.

 

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SIGNATURES

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: February 28, 2014      

/s/ RODNEY HERSHBERGER

      Rodney Hershberger
      President and Chief Executive Officer
Date: February 28, 2014      

/s/ JEFFREY T. JACKSON

      Jeffrey 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

   President and Chief Executive Officer (Principal Executive Officer and Director)   February 28, 2014

Rodney Hershberger

    

/s/ JEFFREY T. JACKSON

   Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   February 28, 2014

Jeffrey T. Jackson

    

/s/ ALEXANDER R. CASTALDI

   Director   February 28, 2014

Alexander R. Castaldi

    

/s/ RICHARD D. FEINTUCH

   Director   February 28, 2014

Richard D. Feintuch

    

/s/ M. JOSEPH MCHUGH

   Director   February 28, 2014

M. Joseph McHugh

    

/s/ FLOYD F. SHERMAN

   Director   February 28, 2014

Floyd F. Sherman

    

/s/ BRETT N. MILGRIM

   Director   February 28, 2014

Brett N. Milgrim

    

/s/ WILLIAM J. MORGAN

   Director   February 28, 2014

William J. Morgan

    

 

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO THEIR GAAP EQUIVALENTS

(unaudited - in thousands, except per share amounts)

 

     Year Ended  
     December 28,
2013
    December 29,
2012
    December 31,
2011
 

Reconciliation to EBITDA and Adjusted EBITDA: (1)

      

Net income/(loss)

   $ 26,819      $ 8,955      $ (16,898

Reconciling items:

      

Depreciation and amortization expense

     11,080        12,233        14,092   

Interest expense

     3,520        3,437        4,168   

Income tax (benefit) expense

     (3,374     110        (2,324
  

 

 

   

 

 

   

 

 

 

EBITDA

     38,045        24,735        (962

Intangible impairment charges (2)

     —          —          5,959   

Consolidation charge (3)

     —          —          4,106   

Gain on sale of Salisbury Facility (4)

     (2,195     —          —     

Gain on Equipment Sales (5)

     —          —          (875

Manufacturing inefficiencies (6)

     —          —          4,005   

Write off financing costs (7)

     1,918       —          420   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 37,768      $ 24,735      $ 12,653   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as percentage of net sales

     15.8     14.2     7.6
  

 

 

   

 

 

   

 

 

 

 

(1) This Appendix above includes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States (GAAP). We believe that presentation of non-GAAP measures such as EBITDA and adjusted EBITDA provides investors and analysts with an alternative method for assessing our operating results in a manner that enables investors and analysts to more thoroughly evaluate our current performance compared to past performance. We also believe these non-GAAP measures provide investors with a better baseline for assessing our future earnings potential. The non-GAAP measures included in this appendix are provided to give investors access to types of measures that we use in analyzing our results.

EBITDA consists of GAAP net income (loss) adjusted for the items included in the accompanying reconciliation. Adjusted EBITDA consists of EBITDA adjusted for the items included in the accompanying reconciliation. We believe that EBITDA and adjusted EBITDA provide useful information to investors and analysts about the Company’s performance because they eliminate the effects of period to period changes in taxes, costs associated with capital investments and interest expense. EBITDA and adjusted EBITDA do not give effect to the cash the company must use to service its debt or pay its income taxes and thus do not reflect the funds generated from operations or actually available for capital investments.

Our calculations of EBITDA and adjusted EBITDA are not necessarily comparable to calculations performed by other companies and reported as similarly titled measures. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP measures.

(2) The Company completed its annual impairment tests in the fourth quarter of 2011, which resulted in additional impairment charges totaling $6.0 million related to trade names.
(3) Represents charges and credits related to consolidation actions taken in 2011. These charges relate primarily to employee separation costs and move related expenses. Of the $4.1 million in consolidation charges in the year ended December 31, 2011, $3.4 million is included in cost of goods sold and $0.7 million is included in selling, general and administrative expenses.
(4) Gain on sale of Salisbury, NC facility of $2.2 million represents the net selling price of approximately $7.5 million less the asset’s carrying value at the time of the sale of approximately $5.3 million.
(5) Represents gains related to the sale of equipment previously used in North Carolina operations.
(6) Represents temporary excess labor and scrap expense incurred as a result of the consolidation actions taken in 2011. The amounts were determined by comparing the manufacturing results with normalized pre-consolidation results. These charges are included in cost of goods sold for the year ended December 31, 2011.
(7) The expenses in 2013 relate to the offering of 12.65 million shares of common stock of PGT by JLL Partners, and the unamortized costs that were written off as a result of the debt refinancing. Approximately $1.6 million of these charges are included in selling, general and administrative expenses, while the remaining $0.3 million are included in other expense. In fiscal year ended 2011, this expense represents the write-off of the remaining unamortized fees associated with our previous financing agreement. These charges are included in other expense for the year ended December 31, 2011.

Exhibit 21.1

PGT, Inc.

Subsidiaries

Name State of Incorporation

PGT Industries, Inc. Florida

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

 

(1) Registration Statement (Form S-8 No. 333-166075) pertaining to the PGT, Inc. Amended and Restated 2006 Equity Incentive Plan,

 

(2) Registration Statement (Form S-8 No. 333-146719) pertaining to the PGT Savings Plan, and

 

(3) Registration Statement (Form S-8 No. 333-135616) pertaining to the PGT, Inc. 2004 Stock Incentive Plan and the PGT, Inc. 2006 Equity Incentive Plan;

of our report dated February 28, 2014, with respect to the consolidated financial statements of PGT, Inc. included in this Annual Report (Form 10-K) of PGT, Inc. for the year ended December 28, 2013.

/s/ Ernst & Young LLP

Certified Public Accountants

Tampa, Florida

February 28, 2014

Exhibit 31.1

Certification

I, Rodney Hershberger, certify that:

 

  1. I have reviewed this report on Form 10-K for the year ended December 28, 2013 of PGT, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2014      

/s/ RODNEY HERSHBERGER

     

Rodney Hershberger

President and Chief Executive Officer

Exhibit 31.2

Certification

I, Jeffrey T. Jackson, certify that:

 

  1. I have reviewed this report on Form 10-K for the year ended December 28, 2013 of PGT, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2014      

/s/ JEFFREY T. JACKSON

      Jeffery T. Jackson
      Executive Vice President and Chief Financial Officer

Exhibit 32.1

Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350

(Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the annual report on Form 10-K of PGT, Inc. (the “registrant”) for the annual period ended December 28, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “report”), Rodney Hershberger and Jeffrey T. Jackson, as President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, of the registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

  (1) The report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Dated: February 28, 2014

 

/s/ RODNEY HERSHBERGER

Rodney Hershberger
President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be considered filed as part of the Form 10-K.

Exhibit 32.2

Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350

(Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the annual report on Form 10-K of PGT, Inc. (the “registrant”) for the annual period ended December 28, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “report”), Rodney Hershberger and Jeffrey T. Jackson, as President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, of the registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

  (1) The report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Dated: February 28, 2014

 

/s/ JEFFREY T. JACKSON

Jeffery T. Jackson
Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be considered filed as part of the Form 10-K.