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PGTI > SEC Filings for PGTI > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PGT, INC.


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 29, 2012, included in our most recent Form 10-K annual report as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.

Special Note Regarding Forward-Looking Statements

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


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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

The controlling interest of JLL Partners Fund IV, L.P.

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

EXECUTIVE OVERVIEW

Sales and Operations

On May 1, 2013, we issued a press release, and held a conference call on May 2, 2013, to review the results of operations for the three months ended March 30, 2013. During the call, we also discussed current market conditions and progress made regarding certain business initiatives. The overview and estimates contained in this report are consistent with those given in our press release and our conference call remarks. We are neither updating nor confirming that information.

In the first quarter of 2013, we posted net income of $5.3 million, which was a substantial improvement compared to a year ago in which we recorded a net loss of $652 thousand. This was achieved through revenue growth of 30%, driven by a 42% increase in new construction sales and marketing programs focused on our WinGuard products. In addition, we recorded a gain of $2.2 million on the sale of the Salisbury, North Carolina facility.

During the quarter, impact sales grew 39% over prior year, and represented 77% of the total sales compared to 72% a year ago. This growth was the result of targeted WinGuard marketing programs which helped drive our mix improvement and market share gain in certain markets. In addition, vinyl and aluminum non-impact products grew 17.1% and 3.1% respectively. In January of 2013, we launched the Storefront product line which gives us a presence in a new market. In the first three months of 2013, single family housing starts increased 50% over the first quarter of 2012.

Selling, general and administrative expenses were $13.0 million for the first quarter of 2013, an increase of $1.3 million from $11.7 million for the first quarter of 2012. This was driven by an increase of $0.7 million in selling activities, and $0.5 million in advertising costs to assist our efforts to capture market share. In addition, employee related expenses increased $0.4 million. These increases were offset by reduced warranty related expenses of $0.3 million.

During the first quarter of 2013 we sold the Salisbury, North Carolina facility for approximately $8.0 million in cash (approximately $7.5 million net of selling costs), resulting in a gain of $2.2 million. The facility's carrying value was $5.3 million at December 29, 2012, and at the time of the sale was recorded in the consolidated balance sheet as an asset held for sale.

Our quarter end cash balance was $14.3 million, and we prepaid an additional $7.5 million of outstanding bank debt during the quarter with proceeds from the sale of the North Carolina, Salisbury facility, bringing our gross debt to $30 million. In addition, we purchased 1.1 million shares of our stock for $6.1 million. During the quarter, the increase in sales resulted in an increase in working capital of $4.4 million, mainly in accounts receivable whose aging remains strong. Despite this, we generated $1.9 million in cash from operations. This shows our financial condition is strong, and we will continue to take advantage of opportunities to drive our brand awareness and drive market share gains. We expect our improved operating leverage to continue the momentum we have achieved as we grow sales.

During the first quarter, we continued marketing programs targeting our WinGuard product lines, particularly in the Southeast and Southwest Florida markets. We plan to leverage this activity to carry our momentum of sales growth.

As we look forward, our expectation is with improving market conditions and our investments in both television and radio advertising, we will see solid year over year growth in the second quarter. April sales, in fact, were up 37% over prior year. As a result, we have hired 125 additional employees since quarter end. We do expect some inefficiencies in the second quarter as we get these new employees up to speed. We are now operating at approximately 60% capacity in our manufacturing lines. We are, however, approaching full capacity within certain parts of our glass operations. We will utilize outside glass suppliers to fill any gaps and have already begun to consider and implement glass capacity expansion strategies.


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Performance Summary

The following table presents financial data derived from our unaudited condensed
consolidated statements of comprehensive income (loss) as a percentage of total
net sales for the periods indicated:



                                                                      (unaudited)
                                                                  Three Months Ended
                                                        March 30,                    March 31,
                                                           2013                         2012
                                                                    (in thousands)
Net sales                                         $ 49,563         100.0 %     $ 38,100         100.0 %
Cost of sales                                       32,004          64.6 %       26,164          68.7 %


Gross margin                                        17,559          35.4 %       11,936          31.3 %

Selling, general and administrative expenses        13,024          26.3 %       11,708          30.7 %
Gain on sale of assets held for sale                (2,195 )        -4.4 %           -            0.0 %


Income from operations                               6,730          13.6 %          228           0.6 %

Interest expense, net                                  813           1.6 %          858           2.2 %
Other expense, net                                     216           0.4 %           22           0.1 %


Income (loss) before income taxes                    5,701          11.5 %         (652 )        -1.7 %

Income tax expense                                     437           0.9 %           -            0.0 %


Net income (loss)                                 $  5,264          10.6 %     $   (652 )        -1.7 %

The following table represents total sales by product category for the three months ended March 30, 2013, and March 31, 2012:

                                                            Three Months Ended
                                               March 30, 2013                March 31, 2012
                                           Sales       % of sales        Sales       % of sales        % change
                                                                      (in millions)
Product category:
Impact Window and Door Products           $  38.0             76.6 %    $  27.4             71.9 %          38.7 %
Other Window and Door Products               11.6             23.4 %       10.7             28.1 %           8.4 %


Total net sales                           $  49.6            100.0 %    $  38.1            100.0 %          30.1 %

Net sales of impact window and door products, which include our WinGuard, PremierVue and Architectural Systems product lines, were $38.0 million for the first quarter of 2013, an increase of $10.6 million, or 38.7%, from $27.4 million in net sales for the 2012 first quarter. The increase was due mainly to an increase in Aluminum and Vinyl WinGuard of $7.8 million and $2.7 million respectively. WinGuard product sales, which grew both in new construction and repair and remodel markets, represented 71% and 66% of our net sales for the first quarter of 2013 and 2012, respectively.

Net sales of other window and door products were $11.6 million for the first quarter of 2013, an increase of $0.9 million, or 8.4%, from $10.7 million in net sales for the 2012 first quarter. This increase was due mainly to an increase in sales of our non-impact aluminum products of $0.2 million, non-impact vinyl products, whose sales were up $0.6 million, and an increase in Eze-Breeze product sales of $0.1 million.


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Gross margin

Gross margin was $17.6 million, or 35.4% of sales, for the first quarter of 2013, an increase of $5.6 million, or 47.1% from the first quarter of 2012. The 4.1% increase in gross margin as a percent of sales in 2013 is the result of leveraging higher sales (3.9%) and improved mix (1.7%), mainly aluminum. These improvements were offset by the increased labor cost and scrap commensurate with adding 159 new employees which typically take approximately 90 days to become fully efficient (1.5%).

Selling, general and administrative expenses

Selling, general and administrative expenses were $13.0 million for the first quarter of 2013, an increase of $1.3 million from $11.7 million for the first quarter of 2012. This was driven by an increase of $0.7 million in selling activities, and $0.5 million in advertising costs to assist our efforts to capture market share. In addition, employee related expenses increased $0.4 million. These increases were offset by reduced warranty related expenses of $0.3 million.

Gain on assets held for sale

During the first quarter of 2013 we sold the Salisbury, North Carolina facility for approximately $8.0 million in cash (approximately $7.5 million net of selling costs), resulting in a gain of $2.2 million. The facility's carrying value was $5.3 million at December 29, 2012, and at the time of the sale was recorded in the consolidated balance sheet as an asset held for sale.

Interest expense, net

Interest expense, net was $0.8 million in the first quarter of 2013, a decrease of $0.1 million from $0.9 million for the first quarter of 2012. The first quarter of 2013's interest expense included $0.3 million non-recurring amortization of deferred financing charges related to the $7.5 million voluntary pre-payment of debt. The remaining decrease from prior year was due to a lower outstanding debt level during the first quarter and the effect of the lower interest rate associated with the credit agreement and our improved leverage.

Other expense, net

Other Expense, net was $0.2 million in the first quarter of 2013, compared to less than $0.1 million in the first quarter of 2012. The amount in 2013 relates to the changes in the fair value and settlements of our ineffective aluminum hedges.

Income tax expense

Our tax rate of 7.7% is lower than the statutory rate in the three months ended March 30, 2013, as we released a portion of our deferred tax asset valuation allowance to offset a portion of our regular tax expense. The rate is based on an estimated annual rate excluding the potential impact of discrete events. While there were no discrete events during the three months ended March 30, 2013, a future release of a valuation allowance on deferred tax assets in excess of our regular tax expense would be considered a discrete event.

Liquidity and Capital Resources

Our principal source of liquidity is cash flow generated by operations, supplemented by borrowings under our credit facilities. 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, meet required debt service payments on our credit facilities and fund capital expenditures.

Consolidated Cash Flows

Operating activities. The increase in sales resulted in an increase in working capital of $4.4 million, mainly in accounts receivable whose aging remains strong. As a result, cash provided by operating activities during the quarter was $1.9 million, compared to $4.0 million in the first three months of 2012. Disbursements to vendors were higher in the first quarter of 2013 compared to 2012, due to higher sales. Personnel related expenses were higher in the first quarter of 2013 compared to 2012, due to higher sales and incentive compensation.


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Direct cash flows from operations for the first three months of 2013 and 2012 are as follows:

                                                   Direct Cash Flows
                                                  Three Months Ended
                                              March 30,        March 31,
                                                 2013            2012
                                                     (in millions)
            Collections from customers        $     46.3      $      38.5
            Other collections of cash                0.4              0.4
            Disbursements to vendors               (29.9 )          (22.4 )
            Personnel related disbursements        (14.0 )          (11.8 )
            Income taxes paid                       (0.1 )             -
            Debt service costs (interest)           (0.8 )           (0.7 )

            Cash provided by operations       $      1.9      $       4.0

Days sales outstanding (DSO), which we calculate as accounts receivable divided by quarterly average daily sales, was 31.8 days at March 30, 2013, compared to 32.9 days at March 31, 2012.

Inventory on hand as of March 30, 2013, increased $1.2 million compared to March 31, 2012. Inventory turns during the first three months of 2013 decreased to 10.0 from 10.3 for the first three months of 2012.

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

Investing activities. Cash provided by for investing activities was $6.8 million for the first three months of 2013, compared to cash used for investing activities of $0.9 million for the first three months of 2012. The increase of $7.7 million in cash provided by investing activities was due to proceeds from the sale of the Salisbury, North Carolina facility, of $7.5 million, during the first quarter of 2013, along with lower capital additions.

Financing activities. Cash used in financing activities was $13.1 million in the first three months of 2013, due to a $7.5 million prepayment of debt and $6.1 million for stock repurchases. This was offset by exercises of stock options totaling $0.5 million. Cash used in financing activities was less than $0.1 million in the first three months of 2012, from payments of capital leases.

Debt Covenant. In accordance with the Credit Agreement (defined below) we are required to meet certain financial covenants, the most restrictive of which is a maximum ratio of Total Funded Debt to Consolidated EBITDA for the trailing four quarters. This maximum ratio decreases during the term of the agreement from 4.5X to 2.0X. Consolidated EBITDA as defined in the agreement is determined as follows: Consolidated net income/(loss) plus interest expense (net of interest income), income taxes, depreciation, amortization, as well as other non-recurring items such as restructuring charges, plant consolidation costs, manufacturing inefficiencies incurred with plant consolidations, and non-cash stock compensation. We closely monitor compliance with our various debt covenants. As of March 30, 2013, we were in compliance and expect to be in the future.

Capital Resources. On June 23, 2011, PGT Industries, Inc. entered into a credit agreement (the "Credit Agreement") with three lenders; General Electric Capital Corporation, GE Capital Financial, Inc., and SunTrust Bank. The Credit Agreement provides for a $15.0 million revolving credit facility, a $48.0 million term loan facility, of which $30 million was outstanding as of March 30, 2013, and an uncommitted incremental facility in an amount of up to $25.0 million. The revolving credit facility commitment and the term loans under the Credit Agreement will mature five years from the date of the execution of the Credit Agreement. As of March 30, 2013, there were $1.1 million of letters of credit outstanding and $13.9 million available on the revolver.

The Credit Agreement imposes certain restrictions on us, including restrictions on our ability to: incur debt or provide guarantees; grant or suffer to exist liens; sell certain material assets; pay dividends or make other distributions in respect of capital stock; prepay certain indebtedness, make loans, advances, investments and acquisitions; change our line of business; engage in affiliate transactions; consummate mergers, consolidations or other fundamental transactions; and enter into agreements with negative pledge clauses. The Credit Agreement also requires us to maintain certain minimum interest coverage ratios and maximum leverage ratios, which are tested at the end of each fiscal quarter. We were in compliance with all covenants as of March 30, 2013.


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PGT, Inc. has unconditionally guaranteed all loans and other obligations under the Credit Agreement and related documents, and such guarantee is secured by a lien on substantially all of the assets of our wholly owned subsidiary, PGT Industries, Inc., subject to certain limitations. PGT, Inc. has no operations or assets independent of its subsidiary.

During 2013, an optional prepayment of $7.5 million was made in January of 2013, which reduced our gross debt to $30.0 million at that time. Accordingly, no mandatory payments are required until April 2016. Contractual future maturities of long-term debt as of March 30, 2013, are as follows:

                                            (in millions)
                       Remainder of 2013   $            -
                       2014                             -
                       2015                             -
                       2016                           30.0


                       Total               $          30.0

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the first three months of 2013, capital expenditures were $0.6 million, compared to $0.9 million for the first three months of 2012. We expect to spend nearly $7.3 million on capital expenditures in 2013, including continuing capital expenditures related to the new enterprise resource planning ("ERP") system and new product and manufacturing initiatives. We anticipate that cash flows from operations and liquidity from the revolving credit facility, if needed, will be sufficient to execute our business plans.

Hedging. We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. We enter into these contracts by trading on the London Metal Exchange ("LME"). We trade on the LME using an international commodities broker that offers global access to all major markets. 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.

Contractual Obligations

There have been no material changes, with the exception of the $7.5 million voluntary debt prepayment of our outstanding balance during the first quarter of 2013, to the "Disclosures of Contractual Obligations and Commercial Commitments" table in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K annual report for year ended December 29, 2012, as filed with the Securities and Exchange Commission on March 1, 2013.

Significant Accounting Policies and Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Significant accounting policies are those that are both important to the accurate portrayal of a Company's financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We identified our significant accounting policies in our Form 10-K annual report for the year ended December 29, 2012, as filed with the Securities and Exchange Commission on March 1, 2013. There have been no changes to our critical accounting policies during the first three months of 2013.

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