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PGT 10-Q 2009 UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Commission
file number 000-52059
1070
Technology Drive
North
Venice, FL 34275
Registrant’s
telephone number:941-480-1600
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 R
No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12months (or for such shorter period that the
registrant was required to submit and post such files).
Yes £
No £*
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No
R
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, $0.01 par value – 35,673,171 shares, as of October 31, 2009.
*
Registrant is not subject to the requirements of Rule 405 of Regulation S-T at
this time.
TABLE
OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands except per share amounts)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements include the
accounts of PGT, Inc. and its wholly-owned subsidiary (collectively the
“Company”) after elimination of intercompany accounts and transactions. These
statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the information and footnotes required by United
States Generally Accepted Accounting Principles (“GAAP”) for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany accounts and transactions have been
eliminated in consolidation. Operating results for the interim period are not
necessarily indicative of the results that may be expected for the remainder of
the current year or for any future periods. Each of our Company’s
fiscal quarters ended October 3, 2009 and September 27, 2008 consisted of 13
weeks.
The
condensed consolidated balance sheet as of January 3, 2009 is derived from the
audited consolidated financial statements but does not include all disclosures
required by GAAP. This condensed consolidated balance sheet as of January 3,
2009 and the unaudited condensed consolidated financial statements included
herein should be read in conjunction with the more detailed audited consolidated
financial statements for the year ended January 3, 2009 included in the
Company’s most recent annual report on Form 10-K. Accounting
policies used in the preparation of these unaudited condensed consolidated
financial statements are consistent with the accounting policies described in
the Notes to Consolidated Financial Statements included in the Company’s
Form 10-K.
We have
evaluated the condensed consolidated financial statements for subsequent events
through November 12, 2009, the date of the filing of this Form
10-Q.
NOTE
2. RECENT DEVELOPMENTS
Acquisition
Pursuant
to an asset purchase agreement by and between Hurricane Window and Door Factory,
LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT
Industries, Inc., effective on August 14, 2009, we acquired certain operating
assets of Hurricane for approximately $1.5 million in cash. Hurricane
designed and manufactured high-end vinyl impact products for the single- and
multi-family residential markets. The products provide long-term energy and
structural benefits, while qualifying homeowners for the government’s energy tax
credits through the American Recovery and Reinvestment Act of
2009. This product line was developed specifically for the hurricane
protection market and combines some of the highest structural ratings in the
industry with excellent energy efficiency. The acquisition of this
business expands our presence in the energy efficient vinyl impact-resistant
market, increases our ability to serve the multi-story condo market, and
enhances our ability to offer a complete line of impact products to the
customer.
The
acquisition was accounted for as the purchase of a business in accordance with
GAAP. The assets acquired included Hurricane’s inventory, comprised
almost entirely of raw materials, and property and equipment, primarily
comprised of machinery and other manufacturing equipment. We also
acquired the right to use Hurricane’s design technology through the end of 2010
and the option to purchase the technology at any time through the end of 2010
and, if desired, we can extend the right to use and the option to purchase
Hurricane’s design technology for an additional one year period through the end
of 2011. The allocation of the $1.5 million cash purchase price to
the fair value of the assets acquired as of the August 14, 2009 acquisition date
is as follows:
The value
of inventory was established based on then current purchase prices of identical
materials available from Hurricane’s existing vendors. The value of
property and equipment was established based on Hurricane’s net carrying values
which we determined to approximate fair value due to, among other things, their
having been in service for less than one year. We engaged a
third-party valuation specialist to assist us in estimating the fair value of
the identifiable intangible assets consisting of the right to use Hurricane’s
design technology and the related purchase option. The fair value of
the identifiable intangible assets was estimated using an income approach based
on projections provided by management, which we consider to be Level 3 inputs.
The carrying value of the intangible assets of $0.6 million is included in other
intangible assets, net, in the accompanying condensed consolidated balance sheet
at October 3, 2009. The intangible assets are being amortized on the
straight-line basis over their estimated lives of approximately 1.3 years
through the end of 2010. Amortization expense of less than $0.1
million is included in selling, general and administrative expenses in the
accompanying condensed consolidated statement of operations for the three months
ended October 3, 2009. Acquisition costs of less than $0.1 million
are included in selling, general and administrative expenses in the accompanying
condensed consolidated statement of operations for the three months ended
October 3, 2009. Hurricane’s operating results prior to the
acquisition and in the third quarter of 2009 were insignificant.
Restructurings
On
January 13, 2009, March 11, 2009 and September 24, 2009, we announced further
restructurings of the Company as a result of continued analysis of our target
markets, internal structure, projected run-rate, and efficiency. The
restructurings resulted in an aggregate decrease in our workforce of
approximately 325 employees and included employees at both our Venice, Florida
and Salisbury, North Carolina locations. As a result of the
restructurings, we recorded restructuring charges totaling $0.9 million in the
third quarter of 2009, of which $0.5 million is classified within cost of goods
sold and $0.4 million is classified within selling, general and administrative
expenses, and $3.9 million in the first nine months of 2009, of which $1.9
million is classified within cost of sales and $2.0 million is classified within
selling, general and administrative expenses in the accompanying condensed
consolidated statement of operations for the three and nine months ended October
3, 2009. The charges related primarily to employee separation
costs.
The total
costs incurred for the restructurings in 2008 and 2007 were $2.1 million and
$2.4 million, respectively.
The
following table provides information with respect to our accrual for
restructuring costs:
NOTE
3. WARRANTY
We have
warranty obligations with respect to most of our manufactured products. Warranty
periods, which vary by product component, generally range from 1 to 10 years.
However, the majority of the products sold have warranties on components which
range from 1 to 3 years. The reserve for warranties is based on management’s
assessment of the cost per service call and the number of service calls expected
to be incurred to satisfy warranty obligations on recorded net sales. The
reserve is determined after assessing our warranty history and estimating our
future warranty obligations.
The
following table provides information with respect to our warranty
accrual:
NOTE
4. INVENTORIES
Inventories
consist principally of raw materials purchased for the manufacture of our
products. We have limited finished goods inventory since all products are
custom, made-to-order products and usually ship upon completion. 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 value. Inventories consisted of the following at:
NOTE
5. STOCK COMPENSATION EXPENSE
We record
compensation expense over an award’s vesting period based on the award’s fair
value at the date of grant. We recorded compensation expense for
stock based awards of less than $0.1 million for the third quarter of 2009
and $0.2 million for the third quarter of 2008. We recorded
compensation expense for stock based awards of $0.4 million for the first
nine months of 2009 and $0.6 million for the first nine months of
2008. As of October 3, 2009, there was $0.2 million and $0.3 million
of total unrecognized compensation cost related to non-vested stock option
agreements and non-vested restricted share awards, respectively. These costs are
expected to be recognized in earnings on a straight-line basis over the weighted
average remaining vesting period of 1.6 years.
NOTE
6. NET LOSS PER COMMON SHARE
Basic
earnings per share (“EPS”) is computed using the weighted average number of
common shares outstanding during the period. Diluted EPS is computed using the
weighted average number of common shares outstanding during the period, plus the
dilutive effect of common stock equivalents.
Due to
the net losses in all periods presented herein, the dilutive effect of
stock-based compensation plans is anti-dilutive. There were shares of
common stock of 1,357,230 for the third quarter and 1,690,184 for the first nine
months of 2009 relating to stock option agreements excluded from the computation
of diluted EPS in each period as their effect would have been
anti-dilutive.
The table
below presents the calculation of EPS and a reconciliation of weighted average
common shares used in the calculation of basic and diluted EPS for our
Company:
NOTE
7. OTHER INTANGIBLE ASSETS
Other
intangible assets are as follows:
Indefinite Lived Intangible
Asset
The
impairment evaluation for indefinite lived intangible assets, which for the
Company are its trademarks, is conducted at the end of each fiscal year, or more
frequently if events or changes in circumstances indicate that an asset might be
impaired. The determination of fair value used in the impairment
evaluation is based on discounted estimates of future projected cost savings
attributable to ownership of the trademarks. The assumptions used in
the estimate of fair value are generally consistent with past performance and
are also consistent with the projections and assumptions used in current
operating plans. Such assumptions are subject to change as a result
of changing economic and competitive conditions. The determination of
fair value is highly sensitive to changes in estimated future cash flows and
changes in the discount rate used to evaluate the fair value of the trademarks.
Estimated cash flows are sensitive to changes in the Florida housing market and
changes in the economy, among other things. The discount rate is
sensitive to changes in interest rates and, among other things, company-specific
and other risk factors.
As a
result of impairment indicators related to the weakness in the housing market we
identified during the second quarter of 2008, the Company evaluated its
trademarks for impairment and compared the estimated fair value of its
trademarks to their carrying value and preliminarily determined that there was
no impairment. During the third quarter of 2008, as part of
finalizing its second quarter impairment tests, the Company made certain changes
to its projections that affected the previous estimate of fair value and, when
compared to the carrying value of indefinite lived intangibles, resulted in a
$0.3 million impairment charge in the third quarter of 2008. We
performed our annual assessment of our trademarks as of January 3, 2009. Given a
further decline in housing starts and the overall tightening of the credit
markets, our revised forecasts indicated additional impairment was present,
resulting in an additional impairment charge of $17.8 million in the fourth
quarter of 2008. Due to the prolonged and continued challenging
economic factors impacting the housing industry and our recent actual results,
we evaluated our trademarks for impairment as of October 3, 2009 and determined
that there was no impairment. Intangible assets not subject to
amortization totalled $44.4 million at October 3, 2009. We will
continue to evaluate the recoverability of our trademarks as continued declines
in housing activity could result in additional impairment.
Amortizable Intangible
Asset
As a
result of the impairment indicators described above, during the second quarter
of 2008 and again as of January 3, 2009 and October 3, 2009, we tested our
customer relationships intangible asset for impairment by comparing the
estimated future undiscounted net cash flows expected to be generated by the
asset group containing this asset to its carrying value and determined that
there was no impairment. We will continue to evaluate the
recoverability of our customer relationships intangible asset as continued
declines in housing activity could result in additional impairment.
Effective
August 14, 2009, we acquired certain operating assets of Hurricane. In addition
to Hurricane’s inventory and property and equipment, we also acquired the right
to use Hurricane’s design technology through the end of 2010 and the option to
purchase the technology at any time through the end of 2010. See Note
2.
NOTE
8. LONG-TERM DEBT
On
February 14, 2006, we entered into a second amended and restated
$235 million senior secured credit facility and a $115 million second
lien term loan due August 14, 2012, with a syndicate of banks. The senior
secured credit facility is composed of a $30 million revolving credit
facility and, initially, a $205 million first lien term
loan. The second lien term loan was fully repaid with proceeds from
our IPO in 2006. The outstanding balance of the first lien term loan
on October 3, 2009 was $70.0 million, a decrease of $20.0 million since the
beginning of 2009 due to the prepayments as discussed below.
On April
30, 2008, we announced that we entered into an amendment to the credit
agreement. The amendment, among other things, relaxed certain
financial covenants through the first quarter of 2010, increased the applicable
rate on loans and letters of credit, and set a LIBOR floor. The
effectiveness of the amendment was conditioned, among other things, on the
repayment of at least $30 million of loans under the credit agreement no later
than August 14, 2008, of which no more than $15 million was permitted to come
from cash on hand. In June 2008, the Company used cash generated from
operations to prepay $10 million of outstanding borrowings under the credit
agreement.
On August
1, 2008, the Company filed Amendment No. 1 to the Registration Statement on Form
S-3 filed on March 28, 2008 relating to a previously announced offering of
rights to purchase 7,082,687 shares of the Company’s common stock with an
aggregate value of approximately $30 million. The registration
statement relating to the rights offering was declared effective by the United
States Securities and Exchange Commission on August 4, 2008, and the Company
distributed to each holder of record of the Company’s common stock as of close
of business on August 4, 2008, at no charge, one non-transferable subscription
right for every four shares of common stock held by such holder under the basic
subscription privilege. Each whole subscription right entitled its
holder to purchase one share of PGT’s common stock at the subscription price of
$4.20 per share. The rights offering expired on September 4,
2008.
The
rights offering was fully subscribed resulting in the Company distributing all
7,082,687 shares of its common stock available. Net proceeds of $29.3
million from the rights offering were used to repay a portion of the outstanding
indebtedness under our amended credit agreement.
Using
proceeds from the rights offering, the Company made an additional prepayment of
$20 million on August 11, 2008, bringing total prepayments of debt at that time
to $30 million as required under the amended credit agreement. Having
made the total required prepayment and having satisfied all other conditions to
bring the amendment into effect, including the payment of the fees and expenses
of the administrative agent and a consent fee to participating lenders of 25
basis points of the then outstanding balance under the credit agreement of $100
million, the amendment became effective on August 11, 2008. Fees paid
to the administrative agent and lenders totaled $0.6 million and have been
deferred, and the unamortized balance of $0.3 million is included in other
assets on the accompanying condensed consolidated balance sheet as of October 3,
2009. Such fees are being amortized on a straight-line basis, which
approximates the effective interest method, over the remaining term of the
credit agreement.
Under the
amendment, the first lien term loan bears interest at a rate equal to an
adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or
a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our
option. The margin in either case is dependent on our leverage
ratio. The loans under the revolving credit facility bear interest at
a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage
ratio ranging from 3.0% per annum to 4.75% per annum or a base rate plus a
margin ranging from 2.0% per annum to 3.75% per annum, at our
option. The amendment established a floor of 3.25% for adjusted
LIBOR.
A
commitment fee equal to 0.50% per annum accrues on the average daily unused
amount of the commitment of each lender under the revolving credit facility and
such fee is payable quarterly in arrears. We are also required to pay certain
other fees with respect to the senior secured credit facility including
(i) letter of credit fees on the aggregate undrawn amount of outstanding
letters of credit plus the aggregate principal amount of all letter of credit
reimbursement obligations, (ii) a fronting fee to the letter of credit
issuing bank and (iii) administrative fees.
The first
lien term loan is secured by a perfected first priority pledge of all of the
equity interests of our subsidiary and perfected first priority security
interests in and mortgages on substantially all of our tangible and intangible
assets subject to such exceptions as are agreed. The senior secured credit
facility contains a number of covenants that, among other things, restrict our
ability and the ability of our subsidiary to (i) dispose of assets;
(ii) change our business; (iii) engage in mergers or consolidations;
(iv) make certain acquisitions; (v) pay dividends; (vi) incur
indebtedness or guarantee obligations and issue preferred and other disqualified
stock; (vii) make investments and loans; (viii) incur liens;
(ix) engage in certain transactions with affiliates; (x) enter into
sale and leaseback transactions; (xi) issue stock or stock options under
certain conditions; (xii) amend or prepay subordinated indebtedness and
loans under the second lien secured credit facility; (xiii) modify or waive
material documents; or (xiv) change our fiscal year. In addition, under the
senior secured credit facility, we are required to comply with specified
financial ratios and tests, including a minimum interest coverage ratio, a
maximum leverage ratio, and maximum capital expenditures.
Contractual
future maturities of long-term debt and capital leases as of October 3, 2009 are
as follows (in thousands):
During
June 2009, we prepaid $8.0 million of long-term debt using cash generated
from operations during the second quarter of 2009 and cash on
hand. During September 2009, we prepaid $12.0 million of
long-term debt from cash on hand but also cash generated from operations during
the third quarter of 2009. During 2008, we prepaid $40.0 million
of long-term debt with cash generated from operations and the net proceeds of
the rights offering, which totaled $29.3 million.
Under our
credit agreement, as amended, our Company is required to maintain compliance
with certain financial covenants, one of which requires our Company to maintain
a total leverage ratio of not greater than certain predetermined
amounts. As discussed above, we made a $12.0 million prepayment of
outstanding bank debt and we were in compliance with all covenants required by
our credit agreement, as amended, as of October 3, 2009.
As of
October 3, 2009, there was $26.0 million available under our $30.0 million
revolving credit facility. However, on October 6, 2009, after the
close of the 2009 third quarter, we drew down $12.0 million under the revolving
credit facility for working capital and general corporate purposes, including
growth initiatives such as new product offerings and our expanding presence in
the vinyl impact-resistant market. Borrowings under our revolving
credit facility have a future contractual maturity in February
2011.
As a
result of the draw-down under the revolving credit facility, and based on
management’s current forecasts of profitability for the fourth quarter of 2009,
we expect to be required to make an additional debt repayment before the end of
our 2009 fiscal year, which ends on January 2, 2010. As of the date
of the filing of this Quarterly Report on Form 10-Q, we estimate that we will
have adequate cash on hand to make any required debt repayment and maintain
compliance with the maximum allowed leverage ratio for the fourth quarter of
2009 as defined in our credit agreement, as amended. However, we have
continued to experience a significant deterioration in the various markets in
which we compete. Any further deterioration in these markets may
adversely impact our ability to meet our leverage ratio in the fourth quarter of
2009. We will continue to evaluate what action, if any, might be
necessary to maintain compliance with our financial covenants, including further
cost saving actions and raising additional capital.
On an
annual basis, our Company is required to compute excess cash flow, as defined in
our credit and security agreement with the bank. In periods where there is
excess cash flow, our Company is required to make prepayments in an aggregate
principal amount determined through reference to a grid based on the leverage
ratio. No such prepayments were required for the year ended January 3, 2009 or
the nine months ended October 3, 2009.
NOTE
9. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME
The
following table shows the components of comprehensive income (loss) for the
three and nine months ended October 3, 2009 and September 27, 2008:
The
following table shows the components of accumulated other comprehensive loss for
the three and nine months periods ended October 3, 2009 and September 27,
2008:
NOTE
10. COMMITMENTS AND CONTINGENCIES
Litigation
Our
Company is a party to various legal proceedings in the ordinary course of
business. Although the ultimate disposition of those proceedings cannot be
predicted with certainty, management believes the outcome of any claim that is
pending or threatened, either individually or in the aggregate, will not have a
materially adverse effect on our operations, financial position or cash
flows.
NOTE
11. INCOME TAXES
No
liabilities for unrecognized tax benefits were recognized in conjunction with
our FIN 48 implementation, and there have been no changes to our
unrecognized tax benefits. However, should we accrue for such
liabilities if they arise in the future, we will recognize interest and
penalties associated with uncertain tax positions as part of our income tax
provision.
In 2008,
we established a valuation allowance to reduce to zero our net deferred tax
assets, excluding the $17.3 million deferred tax liability related to
trademarks. Driven by the goodwill and other intangible impairment
charges recorded in 2008 totalling $187.7 million, our cumulative losses over
the last three fiscal years, as well as the significant downturn in our primary
industry of home construction, we concluded that sufficient negative evidence
existed that it was deemed more likely than not that future taxable income will
not be sufficient to realize the related income tax benefits. Of the
$8.3 million valuation allowance at October 3, 2009, less than $0.1 million was
allocated to accumulated other comprehensive loss in the accompanying
consolidated balance sheet at that date to offset the tax benefit that is
recorded in accumulated other comprehensive loss.
We had an
effective tax rate of a benefit of 5.1% for the third quarter and a benefit of
1.8% for the nine months of 2009. The benefits result from certain
adjustments relating to the amendment of a prior year tax
return. Changes in deferred tax assets and liabilities during the
third quarter and first nine months of 2009 were offset by changes in the
valuation allowance for deferred tax assets. Excluding the change in
the valuation allowance, the effective tax rates in the third quarter and first
nine months of 2009 would have been 42.5% and 38.0%, respectively.
We had an
effective tax rate of 23.6% for the third quarter and 14.7% for the first nine
months of 2008. Excluding the deferred tax benefits totaling $0.3
million related to the $1.6 million of impairment charges recorded in the
quarter and $13.8 million related to the $93.6 million of impairment charges and
a $0.1 million valuation allowance recorded against the deferred tax assets for
North Carolina state tax credits recorded in the nine months ended September 29,
2008, we would have had an effective tax rate of 36.5% for the quarter and 36.4%
for the first nine months ended September 27, 2008.
NOTE
12. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL
INSTRUMENTS
Financial
Instruments
Our
financial instruments, not including derivative financial instruments discussed
below, include cash, accounts receivable, accounts payable and capital leases
whose carrying amounts approximate their fair values due to their short-term
nature. Our financial instruments also include long-term
debt. Based on bid prices for prices for our debt, the fair value of
our long-term debt was approximately $51 million at October 3, 2009 and $63
million at January 3, 2009.
Derivative Financial
Instruments
As of
October 3, 2009, we had $0.4 million of cash on deposit with our commodities
broker related to funding of margin calls on open forward contracts for the
purchase of aluminum in a liability position. We net cash collateral
from payments of margin calls on deposit with our commodities broker against the
liability position of open contracts for the purchase of aluminum on a first-in,
first-out basis. For statement of cash flows presentation, we present
net cash receipts from and payments to the margin account as investing
activities.
The fair
value of our aluminum hedges are classified in the accompanying condensed
consolidated balance sheets as follows (in thousands):
Our
aluminum hedges qualify as highly effective for reporting
purposes. Effectiveness of aluminum forward contracts is determined
by comparing the change in the fair value of the forward contract to the change
in the expected cash to be paid for aluminum extrusion. At October 3,
2009, these contracts were designated as effective. The effective portion of the
gain or loss on our aluminum forward contracts is reported as a component of
other comprehensive income and is reclassified into earnings in the same line
item in the income statement as the hedged item in the same period or periods
during which the transaction affects earnings. For the three and nine months
ended October 3, 2009 and September 27, 2008, there were no amounts reclassified
to earnings due to a forecasted transaction being deemed improbable of
occurring. The ending accumulated balance for the aluminum forward contracts
included in accumulated other comprehensive loss is $0.8 million ($0.6
million net of tax effects) as of October 3, 2009, of which $0.7 million is
expected to be reclassified to earnings in the next twelve months based on
scheduled settlement dates of the related contracts. The following represents
the gains (losses) on derivative financial instruments for the three and nine
months ended October 3, 2009 and September 27, 2008, and their classifications
within the accompanying condensed consolidated financial statements (in
thousands):
Aluminum
forward contracts identical to those held by the Company trade on the London
Metals Exchange (“LME”). The prices are used by the metals industry
as the basis for contracts for the movement of physical material throughout the
production cycle. We categorize these aluminum forward contracts as
being valued using Level 2 inputs as follows:
NOTE
13. RECENTLY ADOPTED AND ISSUED ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the FASB issued guidance under the Fair Value Measurements and
Disclosures topic of the Codification which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. We partially adopted the guidance on January 1,
2008, as required for our financial assets and financial liabilities. However,
the FASB deferred the effective date of the guidance for one year as it relates
to fair value measurement requirements for non-financial assets and
non-financial liabilities that are not recognized or disclosed at fair value on
a recurring basis. We adopted these remaining provisions of the guidance on
January 4, 2009. The adoption of the guidance did not have a material
impact on our consolidated financial statements.
The
guidance under the Business
Combinations topic of the Codification was issued in December 2007. The
guidance establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. It also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance was effective for us in our
fiscal year beginning January 4, 2009. We applied the provisions of the
guidance to a recent acquisition and will apply the provisions to
future acquisitions, if any. See Note 2.
In March
2008, the FASB issued guidance under the Derivatives and Hedging topic
of the Codification. The guidance requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. It also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of the guidance have been applied, and
the impact that hedges have on an entity’s financial position, financial
performance, and cash flows. The guidance was effective for fiscal
years and interim periods beginning after November 15, 2008. We
adopted the guidance effective on January 4, 2009 and have provided the required
information in Note 12.
In April
2008, the FASB issued guidance under the Intangibles – Goodwill and
Other topic of the Codification which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The guidance was effective for
fiscal years beginning after December 15, 2008. We adopted the
guidance effective on January 4, 2009 with no impact on our consolidated
financial position and results of operations.
In May
2009, the FASB issued guidance under the Subsequent Events topic of
the Codification. The guidance
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. We adopted the guidance during the second quarter of
2009 on a prospective basis. The adoption did not materially impact
our consolidated financial statements. See Note 1 for our evaluation of
subsequent events.
In April
2009, the FASB issued guidance under the Financial Instruments topic
of the Codification that is intended to provide additional application guidance
and enhance disclosures about fair value measurements and impairments of
securities. The guidance clarifies the objective and method of fair value
measurement even when there has been a significant decrease in market activity
for the asset being measured and establishes a new model for measuring
other-than-temporary impairments for debt securities, including establishing
criteria for when to recognize a write-down through earnings versus other
comprehensive income. The guidance expands the fair value disclosures required
for all financial instruments to interim periods. The adoption of the guidance
did not impact our consolidated financial statements but rather resulted in
increased interim disclosures related to our financial instruments.
In
June 2009, the FASB announced that the FASB Accounting Standards
Codification was the new source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB for nongovernmental
entities. On the effective date of this guidance, the Codification superseded
all existing non-SEC accounting and reporting standards. This guidance became
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The adoption of these provisions during the
current quarter did not have an impact on our financial position or results of
operations.
NOTE
14. COLLABORATIVE ARRANGEMENT
In view
of the risks and costs associated with developing new products and our desire to
expand our markets by providing quality unitized curtain wall solutions to the
commercial building industry, we entered into a collaborative arrangement with
another company with extensive experience in sales, marketing, engineering and
project management of unitized curtain wall solutions and in which costs,
revenues and risks are shared. During the third quarter of 2009, this
arrangement was terminated. We were not the principal participant in
this arrangement. Our obligation under this arrangement was to provide
manufacturing expertise, including providing the operating entity with labor for
assembly and fabrication of the unitized curtain wall units. We
earned revenues and incurred costs of sales and expenses from this activity
based on the number of hours of labor provided in the production of materials
used in the arrangement. We also recorded a percentage of the joint
operating activity’s profit or loss into revenue based on our percentage
interest in the arrangement, which was insignificant in the third quarter and
first nine months of 2009. Each collaborator’s interest was 50
percent.
The
following table illustrates the income statement classification and amounts
attributable to transactions arising from the collaborative arrangements between
participants for each period presented (in thousands):
In
November 2007, the EITF issued guidance under the Broad Transactions – Collaborative
Arrangements topic of the Codification. This guidance is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, and must be applied
retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. This Issue requires that
participants in a collaborative arrangement report costs incurred and revenues
generated on a gross or net basis and in the appropriate line items in each
company’s financial statements. This guidance also requires
disclosure of the nature and purpose of the participant’s collaborative
arrangements, the participant’s rights and obligations under these arrangements,
the accounting policy for collaborative arrangements, the income statement
classification and amounts attributable to transactions arising from
collaboration arrangements between participants, and the disclosure related to
individually significant collaborative arrangements. We adopted the guidance in
the second quarter of 2008.
In the
fourth quarter of 2009, we implemented a restructuring of the Company as a
result of continued analysis of our target markets, internal structure,
projected run-rate, and efficiency. The restructuring resulted in a
decrease in our workforce of approximately 150 employees and included employees
in both Florida and North Carolina. As a result of the restructuring,
we expect to record an estimated restructuring charge of approximately $1.3
million in the fourth quarter of 2009. No amounts related to this
restructuring have been accrued in the accompanying condensed consolidated
financial statements as of and for the three and nine month periods ended
October 3, 2009.
The
following discussion of our financial condition and results of operations should
be read in conjunction with the Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto for the year ended January 3, 2009 included in our
most recent annual report on Form 10-K.
Special
Note Regarding Forward-Looking Statements
This
document includes forward-looking statements regarding, among other things, our
financial condition and business strategy. Forward-looking statements provide
our current expectations and projections about future events. Forward-looking
statements include statements about our expectations, beliefs, plans,
objectives, intentions, assumptions, and other statements that are not
historical facts. As a result, all statements other than statements of
historical facts included in this discussion and analysis and located elsewhere
in this document regarding the prospects of our industry and our prospects,
plans, financial position, and business strategy may constitute forward-looking
statements within the meaning of Section 21E of the Exchange Act. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as “may,” “could,” “expect,” “intend,”
“estimate,” “anticipate,” “plan,” “foresee,” “believe,” or “continue,” or the
negatives of these terms or variations of them or similar terminology, but the
absence of these words does not necessarily mean that a statement is not
forward-looking.
Forward-looking
statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results to
differ materially from those expected or implied by the forward-looking
statements. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that these
expectations will occur as predicted. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements included
in this document. These forward-looking statements speak only as of the date of
this report. We undertake no obligation to publicly update or revise any
forward-looking statement to reflect circumstances or events after the date of
this report or to reflect the occurrence of unanticipated events, except as may
be required by applicable securities laws.
Risks
associated with our business, an investment in our securities, and with
achieving the forward-looking statements contained in this report or in our news
releases, Web sites, public filings, investor and analyst conferences or
elsewhere, include, but are not limited to, the risk factors described in our
most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Any of the risk factors described therein could cause our actual
results to differ materially from expectations and could have a material adverse
effect on our business, financial condition or results of operations. We may not
succeed in addressing these challenges and risks.
Current
Operating Conditions and Outlook
In the
third quarter of 2009, new housing permits in Florida decreased 42% compared to
the third quarter of 2008, but were up 10% from the second quarter of
2009. Recently there have been signs that there is a recovery in the
homebuilding industry taking place, but the recovery continues to be hampered by
other economic factors. In Florida, home sales increased 34% in
September compared to the prior month as a more confident home buyer moved to
take advantage of sales incentives, improved affordability and tax
breaks. However, the ongoing impact of increased foreclosures and
mortgage delinquencies, higher unemployment and tight credit standards make
predicting the timing and extent of a turn-around, or even stability,
difficult. Several of the nation’s largest home builders continued to
report increases in new home orders and decreases in cancellation rates during
the third quarter, but these improvements have not yet reversed the trend of
steadily declining sales in the homebuilding industry.
Difficult
economic conditions persisted in the United States during the third quarter of
2009, and the housing industry, most notably in the Company’s
primary market of Florida, has been in a period of prolonged deterioration.
These conditions may persist and remain depressed for the foreseeable future.
Economic conditions have been negatively impacted by slowing growth
and the mortgage crisis ultimately causing liquidity and credit concerns.
Continuing adverse economic conditions in our markets could negatively impact
our business, which could result in reduced demand for our products, increased
price competition, increased risk in the collectability of cash from our
customers potentially resulting in increased reserves for doubtful accounts and
write-offs of accounts receivable, and higher operating costs. If economic
conditions deteriorate further, we may experience adverse impacts on our
business, operating results and financial condition.
In
response to the deterioration in the housing market, we have taken a number of
steps to enhance profitability and conserve capital. As
discussed in “Recent Developments – Restructurings” below, we adjusted our
operating cost structure to more closely align with current
demand. In addition, we decreased our capital spending in 2008 and
have further restricted capital spending in the first nine months of
2009. However, we also view this market downturn as an opportunity to
gain market share from our competitors. For instance, as discussed in
“Recent Developments – Acquisition” below, we acquired certain operating assets
and the exclusive right to use the technology of Hurricane Window and Door
Factory (“Hurricane”), a former manufacturer of energy efficient vinyl impact
resistant windows and doors. We acquired Hurricane to give us an
expanded presence in the energy-efficient vinyl impact resistant marketplace and
position us for growth. We increased marketing and sales efforts in
areas outside of our dominant markets, including northern Florida, the Gulf
Coast and the Carolinas and other southeastern states resulting in incremental
sales outside of Florida compared to last year. Also, we introduced
new products in 2009 and expanded product lines to broaden our product
offering. As a result of these actions, we continue to
outperform the underlying market. However, gross margins have declined to 26.1%
in the third quarter of 2009 from 29.8% in the third quarter of 2008, and to
27.2% in the first nine months of 2009 from 31.8% in the first nine months of
2008 due, mainly, to the impact of the loss of operating leverage against fixed
costs from a decline in sales and restructuring costs.
While the
homebuilding industry is in a down cycle, we still believe the long-term outlook
for the industry is positive. At this point, it appears as though the housing
market has not yet hit bottom. Despite these unfavorable market conditions, we
still believe that, in the long-term, we can grow organically by gaining market
share and outperforming our underlying markets. However, we believe difficult
market conditions affecting our business will continue, and the recent downturn
in the economy as a result of the mortgage crisis may further negatively affect
our operating results and year-over-year comparisons.
Recent
Developments
Acquisition
Pursuant
to an asset purchase agreement by and between Hurricane Window and Door Factory,
LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT
Industries, Inc., effective on August 14, 2009, we acquired certain operating
assets of Hurricane, for approximately $1.5 million in
cash. Hurricane designed and manufactured high-end vinyl impact
products for the single- and multi-family residential markets. The products
provide long-term energy and structural benefits, while qualifying homeowners
for the government’s energy tax credits through the American Recovery and
Reinvestment Act of 2009. This product line was developed
specifically for the hurricane protection market and combines some of the
highest structural ratings in the industry with excellent energy
efficiency. The acquisition of this business expands our presence in
the energy efficient vinyl impact-resistant market, increases our ability to
serve the multi-story condo market, and enhances our ability to offer a complete
line of impact products to the customer.
The
acquisition was accounted for as the purchase of a business in accordance with
GAAP. The assets acquired included Hurricane’s inventory, comprised
almost entirely of raw materials, and property and equipment, primarily
comprised of machinery and other manufacturing equipment. We also
acquired the right to use Hurricane’s design technology through the end of 2010
and the option to purchase the technology at any time through the end of 2010
and, if desired, we can extend the right to use and the option to purchase
Hurricane’s design technology for an additional one year period through the end
of 2011. The allocation of the $1.5 million cash purchase price to
the fair value of the assets acquired as of the August 14, 2009 acquisition date
is as follows:
The value
of inventory was established based on then current purchase prices of identical
materials available from Hurricane’s existing vendors. The value of
property and equipment was established based on Hurricane’s net carrying values
which we determined to approximate fair value due to, among other things, their
having been in service for less than one year. We engaged a
third-party valuation specialist to assist us in estimating the fair value of
the identifiable intangible assets consisting of the right to use Hurricane’s
design technology and the related purchase option. The fair value of
the identifiable intangible assets was estimated using an income approach based
on projections provided by management, which we consider to be Level 3 inputs.
The carrying value of the intangible asset of $0.6 million is included in other
intangible assets, net, in the accompanying condensed consolidated balance sheet
at October 3, 2009. The intangible assets are being amortized on the
straight-line basis over their estimated lives of approximately 1.3 years
through the end of 2010. Amortization expense of less than $0.1
million is included in selling, general and administrative expenses in the
accompanying condensed consolidated statement of operations for the three months
ended October 3, 2009. Acquisition costs of less than $0.1 million
are included in selling, general and administrative expenses in the accompanying
condensed consolidated statement of operations for the three months ended
October 3, 2009. Hurricane’s operating results prior to the
acquisition and in the third quarter of 2009 were insignificant.
Restructurings
On
January 13, 2009, March 11, 2009 and September 24, 2009, we announced further
restructurings of the Company as a result of continued analysis of our target
markets, internal structure, projected run-rate, and efficiency. The
restructurings resulted in an aggregate decrease in our workforce of
approximately 325 employees and included employees at both our Venice, Florida
and Salisbury, North Carolina locations. As a result of the
restructurings, we recorded restructuring charges totaling $0.9 million in the
third quarter of 2009, of which $0.5 million is classified within cost of goods
sold and $0.4 million is classified within selling, general and administrative
expenses, and $3.9 million in the first nine months of 2009, of which $1.9
million is classified within cost of sales and $2.0 million is classified within
selling, general and administrative expenses in the accompanying condensed
consolidated statement of operations for the three and nine months ended October
3, 2009. The charges related primarily to employee separation
costs.
Other
Developments
Indefinite Lived Intangible
Asset
The
impairment evaluation for indefinite lived intangible assets, which for the
Company are its trademarks, is conducted at the end of each fiscal year, or more
frequently if events or changes in circumstances indicate that an asset might be
impaired. The determination of fair value used in the impairment
evaluation is based on discounted estimates of future projected cost savings
attributable to ownership of the trademarks. The assumptions used in
the estimate of fair value are generally consistent with past performance and
are also consistent with the projections and assumptions used in current
operating plans. Such assumptions are subject to change as a result
of changing economic and competitive conditions. The determination of
fair value is highly sensitive to changes in estimated future cash flows and
changes in the discount rate used to evaluate the fair value of the trademarks.
Estimated cash flows are sensitive to changes in the Florida housing market and
changes in the economy, among other things. The discount rate is
sensitive to changes in interest rates and, among other things, company-specific
and other risk factors.
As a
result of impairment indicators related to the weakness in the housing market we
identified during the second quarter of 2008, the Company evaluated its
trademarks for impairment and compared the estimated fair value of its
trademarks to their carrying value and preliminarily determined that there was
no impairment. During the third quarter of 2008, as part of
finalizing its second quarter impairment tests, the Company made certain changes
to its projections that affected the previous estimate of fair value and, when
compared to the carrying value of indefinite lived intangibles, resulted in a
$0.3 million impairment charge in the third quarter of 2008. We
performed our annual assessment of our trademarks as of January 3, 2009. Given a
further decline in housing starts and the overall tightening of the credit
markets, our revised forecasts indicated additional impairment was present,
resulting in an additional impairment charge of $17.8 million in the fourth
quarter of 2008. Due to the prolonged and continued challenging economic factors
impacting the housing industry and our recent actual results, we evaluated our
trademarks for impairment as of October 3, 2009 and determined that there was no
impairment. Intangible assets not subject to amortization totaled
$44.4 million at October 3, 2009. We will continue to evaluate the
recoverability of our trademarks as continued declines in housing activity could
result in additional impairment.
Amortizable Intangible
Asset
As a
result of the impairment indicators described above, during the second quarter
of 2008 and again as of January 3, 2009 and October 3, 2009, we tested our
customer relationships intangible asset for impairment by comparing the
estimated future undiscounted net cash flows expected to be generated by the
asset group containing this asset to its carrying value and determined that
there was no impairment. We will continue to evaluate the
recoverability of our customer relationships intangible asset as continued
declines in housing activity could result in additional impairment.
Effective
August 14, 2009, we acquired certain operating assets of Hurricane. In addition
to Hurricane’s inventory and property and equipment, we also acquired the right
to use Hurricane’s design technology through the end of 2010, including the
option to purchase the technology at any time through the end of
2010. We engaged a third-party valuation specialist to assist us in
estimating the fair value of the identifiable intangible assets consisting of
the right to use Hurricane’s design technology and the
related purchase option, which was determined to total $0.6 million
at the date of the acquisition. The carrying value of the intangible
assets of $0.6 million is included in other intangible assets, net, in the
accompanying condense consolidated balance sheet at October 3,
2009. The intangible assets are being amortized on the straight-line
basis over their estimated lives of approximately 1.3 years through the end of
2010. Amortization expense of less than $0.1 million is included in
selling, general and administrative expenses in the accompanying condensed
consolidated statement of operations for the three months ended October 3,
2009.
Selected
Financial Data
The
following table presents financial data derived from our unaudited statements of
operations as a percentage of total revenues for the periods
indicated.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 3, 2009 AND SEPTEMBER 27,
2008
Net
sales
Net sales
decreased $12.7 million, or 23.4%, in the third quarter of 2009, compared to the
2008 third quarter. Net sales for the third quarter of 2009 were
$41.6 million, compared with net sales of $54.3 million for the third quarter of
2008. The following table shows net sales classified by major product
category (sales in millions):
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