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PGTI > SEC Filings for PGTI > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for PGT, INC.


2-Aug-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

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 substantial 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 July 31, 2013, we issued a press release, and held a conference call on August 1, 2013, to review the results of operations for the three and six months ended June 29, 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.

Sales during the quarter were $62.8 million, a 35% increase over prior year. This was driven by a 58% growth in new construction sales, which represented 30% of sales during the quarter and a 27% increase in repair and remodeling, which represented the remaining 70%. In terms of products, impact sales grew 38% over prior year and represented 76% of total sales, compared to 74% a year ago. In addition, sales of non-impact products grew 28%.

Gross margin dollars increased 27.6% or $4.5 million to $21.0 million compared to the second quarter of 2012, driven by strong revenue growth and improved operating leverage. As a percent, however, gross margin decreased by 2.0% due to an


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increase in labor costs and scrap, resulting from the hiring and training of 274 new employees to meet the demand for our products. Margin was also impacted by the purchase of finished glass units to support sales in excess of certain internal capacities.

In May of 2013, we completed a secondary offering of 12.65 million shares of common stock owned by JLL Partners. We did not receive any proceeds from the sale of these shares of common stock. In addition, 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.

We were able to leverage revenue growth during the second quarter, by reducing selling, general and administrative expenses as a percent of sales to 20.3%, after adjusting for $1.5 million in fees incurred relating to the offering, compared to 25.6% in the second quarter of 2012. The reduced selling, general and administrative expense includes the additional expenses incurred in connection with the secondary offering which was successfully completed in May of 2013.

We generated $5.6 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. At quarter end, our cash balance was $15.6 million, after considering cash used for transaction fees of $4.6 million associated with the offering of common stock as well as the debt refinancing.

Forward Outlook

The strong momentum we witnessed during our first six months of the year is continuing as we recorded a 42% increase in our sales during July, and we expect our third quarter to sustain positive momentum. From a market stand-point, we see continued strong growth in both our new construction and repair and remodeling markets. We feel that as our labor force becomes more seasoned, we will improve out leverage on incremental sales growth.

In the third quarter of 2013, we announced a price increase of approximately 3% on certain products effective for the fourth quarter of 2013 to offset the cost increases of labor, including healthcare costs, as well as increases in the cost of glass from outside vendors and other costs associated with out business.

During the second quarter of 2013, we purchased finished glass units from outside suppliers due to capacity constraints, resulting from our significant increase in sales. In order to best deliver on our value proposition and drive profit and shareholder value by improving margins, we plan to expand our in house glass processing capacity by purchasing proximately located land, constructing a building and adding additional cutting and tempering lines. The construction process will take approximately 13 months to complete, and we expect the cost of the expansion to range from $12 million to $14 million, funded with cash from operations.

Performance Summary

The following table presents financial data derived from our unaudited Condensed
Consolidated Statements of Income and Comprehensive Income as a percentage of
total net sales for the periods indicated:



                                                       (unaudited)                                            (unaudited)
                                                    Three Months Ended                                     Six Months Ended
                                           June 29,                   June 30,                    June 29,                   June 30,
                                             2013                       2012                        2013                       2012
                                                      (in thousands)                                        (in thousands)
Net sales                            $ 62,847        100.0 %    $ 46,486        100.0 %    $ 112,410        100.0 %    $ 84,586        100.0 %
Cost of sales                          41,817         66.5 %      30,005         64.5 %       73,821         65.7 %      56,170         66.4 %


Gross margin                           21,030         33.5 %      16,481         35.5 %       38,589         34.3 %      28,416         33.6 %

Selling, general and
administrative expenses                14,285         22.8 %      11,906         25.6 %       27,310         24.3 %      23,613         27.9 %
Gain on sale of assets held for
sale                                       -           0.0 %          -           0.0 %       (2,195 )       -2.0 %          -           0.0 %


Income from operations                  6,745         10.7 %       4,575          9.8 %       13,474         12.0 %       4,803          5.7 %

Interest expense, net                     697          1.1 %         939          2.2 %        1,509          1.3 %       1,797          2.1 %
Other expense (income), net               461          0.7 %        (122 )       -0.3 %          677          0.6 %        (100 )       -0.1 %


Income before income taxes              5,587          8.9 %       3,758          8.1 %       11,288         10.0 %       3,106          3.7 %

Income tax (benefit) expense           (4,335 )       -6.9 %          68          0.1 %       (3,898 )       -3.5 %          68          0.1 %


Net income                           $  9,922         15.8 %    $  3,690          7.9 %    $  15,186         13.5 %    $  3,038          3.6 %


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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 29, 2013 AND JUNE 30, 2012

The following table represents total sales by product category for the three
months ended June 29, 2013, and June 30, 2012:



                                                           Three Months Ended
                                               June 29, 2013                June 30, 2012
                                          Sales       % of sales       Sales       % of sales        % change
                                                             (in millions)
Product category:
Impact Window and Door Products           $ 47.6             75.8 %    $ 34.6             74.4 %          37.7 %
Other Window and Door Products              15.2             24.2 %      11.9             25.6 %          27.9 %


Total net sales                           $ 62.8            100.0 %    $ 46.5            100.0 %          35.2 %

Net sales of impact window and door products, which include our WinGuard, PremierVue and Architectural Systems product lines, were $47.6 million for the second quarter of 2013, an increase of $13.0 million, or 37.7%, from $34.6 million in net sales for the 2012 second quarter. The increase was due mainly to an increase in Aluminum and Vinyl WinGuard of $8.7 million and $3.8 million respectively. WinGuard product sales, which grew both in new construction and repair and remodel markets, represented 72% and 70% of our net sales for the second quarter of 2013 and 2012, respectively.

Net sales of other window and door products were $15.2 million for the second quarter of 2013, an increase of $3.3 million, or 27.9%, from $11.9 million in net sales for the 2012 second quarter. This increase was due mainly to an increase in sales of our non-impact vinyl products, whose sales were up $1.5 million, non-impact aluminum products of $1.1 million, and an increase in Eze-Breeze product sales of $0.6 million.

Gross margin

Gross margin was $21.0 million, or 33.5% of sales, compared to $16.5 million, or 35.5% for the second quarter of 2012, an increase of $4.5 million, or 27.6% from the second quarter of 2012. The 2.0% decrease in gross margin as a percent of sales in 2013 is the result of the increased labor cost and scrap commensurate with adding 274 new employees (3.1%), and outside glass purchases (1.4%). These decreases were offset by leveraging higher sales (2.0%) and reduced costs of aluminum (0.5%).

Selling, general and administrative expenses

Selling, general and administrative expenses were $14.3 million for the second quarter of 2013, an increase of $2.4 million from $11.9 million for the second quarter of 2012. This was driven by an increase of $1.5 million relating to the secondary market offering of 12.65 million shares by our majority stockholder, and debt refinancing, as well as $0.2 million in bank related fees. In addition, employee related expenses increased $0.6 million. As a percent of sales, selling, general and administrative expenses were 20.3% for the second quarter of 2013 compared to 25.6% from the second quarter of 2012, when adjusting for offering related costs.

Interest expense, net

Interest expense, net was $0.7 million in the second quarter of 2013, a decrease of $0.2 million from $0.9 million for the second quarter of 2012. The decrease from prior year was due to a lower outstanding debt level, prior to the new debt agreement, during the second quarter and the effect of the lower interest rate associated with the credit agreement resulting from improved leverage through May 27, 2013. The new debt also resulted in a further reduction of our interest rate for May 28, 2013, forward to the end of the quarter.

Other expense (income), net

Other expense, net was $0.5 million in the second quarter of 2013, compared Other income of $0.1 million in the second quarter of 2012. The amount in 2013 relates to the write off of deferred financing costs relating to the old debt agreement of $0.3 million along with the changes in the fair value and settlements of our ineffective aluminum hedges.

Income tax expense

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. We recorded an income tax benefit of $4.3 million


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for the three months ended June 29, 2013, compared to an expense of $0.1 million for the same respective period in 2012. The income tax benefit in the current year is due primarily to a $3.9 million reversal of a portion of our deferred tax asset valuation allowance in the second quarter, along with a change in our annual effective tax rate excluding the discrete item while the expense in the prior year was due primarily to a release of a portion of our deferred tax asset valuation allowance to offset our regular tax expense partially offset by our expected alternative minimum tax obligation. Due to the effect of the deferred tax asset valuation allowance release, our effective tax rates in 2013 and 2012 do not directly correlate to the amount of pretax income or loss. In the absence of such releases our tax rate would have been 39.0% and 39.5% for the three months ended June 29, 2013, and June 30, 2012, respectively.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 29, 2013 AND JUNE 30, 2012

The following table represents total sales by product category for the six
months ended June 29, 2013, and June 30, 2012:



                                                            Six Months Ended
                                               June 29, 2013                 June 30, 2012
                                           Sales       % of sales       Sales       % of sales        % change
                                                              (in millions)
Product category:
Impact Window and Door Products           $  85.6             76.2 %    $ 61.9             73.2 %          38.3 %
Other Window and Door Products               26.8             23.8 %      22.7             26.8 %          18.5 %


Total net sales                           $ 112.4            100.0 %    $ 84.6            100.0 %          32.9 %

Net sales of impact window and door products, which include our WinGuard, PremierVue and Architectural Systems product lines, were $85.6 million for the first six months of 2013, an increase of $23.7 million, or 38.3%, from $61.9 million in net sales for the 2012 first six months. The increase was due mainly to an increase in Aluminum and Vinyl WinGuard of $16.4 million and $6.5 million respectively. Also, our Architectural System sales increased $1.0 million. WinGuard product sales, which grew in both new construction and repair and remodel markets, represented 72% and 68% of our net sales for the first six months of 2013 and 2012, respectively.

Net sales of other window and door products were $26.8 million for the first six months of 2013, an increase of $4.1 million, or 18.5%, from $22.7 million in net sales for the 2012 first six months. This increase was due mainly to an increase in sales of our non-impact vinyl products, whose sales were up $2.2 million, our non-impact aluminum products of $1.3 million, and an increase in Eze-Breeze product sales of $0.8 million.

Gross margin

Gross margin was $38.6 million, or 34.3% of sales, compared to $28.4 million, or 33.6% for the first six months of 2013, an increase of $10.2 million, or 35.8% from the first six months of 2012. The 0.7% increase in gross margin as a percent of sales in 2013 is the result of leveraging higher sales (3.0%), reduced material costs (0.6%), and improved mix (0.2%). These improvements were offset by the increased labor cost and scrap commensurate with adding approximately 400 new employees (2.2%) and outsourced glass purchases of (0.9%).


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Selling, general and administrative expenses

Selling, general and administrative expenses were $27.3 million for the first six months of 2013, an increase of $3.7 million from $23.6 million for the first six months of 2012. This was driven by an increase of $1.5 million relating to the secondary market offering of 12.65 million shares by our majority stockholder and debt refinancing, $1.0 million in selling activities, $0.5 million in advertising costs to assist our efforts to capture market share, and employee related expenses of $0.9 million. As a percent of sales, selling, general and administrative expenses were 24.3% for the first six months of 2013 compared to 27.9% from the second quarter of 2012, when adjusting for offering related costs.

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 Condensed Consolidated Balance Sheets as an asset held for sale.

Interest expense, net

Interest expense, net was $1.5 million in the first six months of 2013, a decrease of $0.3 million from $1.8 million for the first six months of 2012. The decrease from prior year was due to a lower outstanding debt level, prior to the new debt agreement, during the second quarter and the effect of the lower interest rate associated with the credit agreement and our improved leverage through May 27, 2013. The new debt also resulted in a further reduction of our interest rate for May 28, 2013, forward to the end of the quarter. Offsetting this decrease is non-recurring amortization of deferred financing charges related to the $7.5 million voluntary pre-payment of debt.

Other expense (income), net

Other Expense, net was $0.7 million in the first six months of 2013, compared to Other Income of $0.1 million in the first six months of 2012. The amount in 2013 relates to the write off of $0.3 million of deferred financing costs relating to the old debt agreement along with the changes in the fair value and settlements of our ineffective aluminum hedges.

Income tax expense

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. We recorded an income tax benefit of $3.9 million for the six months ended June 29, 2013, compared to an expense of $0.1 million for the same period in 2012. The income tax benefit in the current year is due primarily to a $3.9 million reversal of a portion of our deferred tax asset valuation allowance in the second quarter, while the expense in the prior year was due primarily to a release of a portion of our deferred tax asset valuation allowance to offset our regular tax expense partially offset by our expected alternative minimum tax obligation. Due to the effect of the deferred tax asset valuation allowance release, our effective tax rates in 2013 and 2012 do not directly correlate to the amount of pretax income or loss. In the absence of such releases our tax rate would have been 39.0% and 39.5% for the six months ended June 29, 2013, and June 30, 2012, respectively.


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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. Cash provided by operating activities during the first six months was $7.4 million, compared to $8.9 million in the first six months of 2012. This is lower, despite higher sales due to an increase of $8.0 million in accounts receivable, whose aging remains strong and $2.6 million increase in inventory, offset by an increase in accounts payable and accrued liabilities of $2.8 million.

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

                                                   Direct Cash Flows
                                                   Six Months Ended
                                               June 29,        June 30,
                                                 2013            2012
                                                     (in millions)
             Collections from customers        $   107.3      $     83.0
             Other collections of cash               1.1             1.0
             Disbursements to vendors              (68.1 )         (48.5 )
             Personnel related disbursements       (31.6 )         (25.1 )
             Income taxes paid                      (0.1 )            -
             Debt service costs (interest)          (1.2 )          (1.5 )

             Cash provided by operations       $     7.4      $      8.9

Days sales outstanding (DSO), which we calculate as accounts receivable divided by quarterly average daily sales, was 33 days at June 29, 2013, compared to 34 days at June 30, 2012.

Inventory on hand as of June 29, 2013, increased $2.2 million compared to June 30, 2012. Inventory turns during the first six months of 2013 increased to 10.4 from 9.8 for the first six 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. As a result 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 investing activities was $5.3 million for the first six months of 2013, compared to cash used in investing activities of $2.1 million for the first six months of 2012. The increase of $7.4 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.

Financing activities. Cash used in financing activities was $15.9 million in the first six months of 2013, due to a $7.5 million prepayment of debt, $6.1 million for stock repurchases and $3.6 million to pay certain fees and expenses relating to the offering. This was offset by proceeds from exercises of stock options totaling $1.2 million. The repurchase of $50 million in shares was funded by a $50 million increase in debt, resulting in no change in cash. Cash used in financing activities was $2.1 million in the first six months of 2012, due to $2.0 million payment of debt and $0.1 million of capital lease payments.


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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 3.75X to 3.0X. 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 June 29, 2013, we were in compliance and expect to be in the future.

Capital Resources. On May 28, 2013, PGT, Inc. (the "Company") 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 million, consisting of an $80 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 million revolving credit facility maturing in five years that includes a $5 million swing line facility and a $10 million letter of credit facility. As of June 29, 2013, there were $1.1 million of letters of credit outstanding and $23.9 million available on the revolver.

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.

The Credit Agreement also requires us to maintain certain maximum leverage ratios and minimum fixed charge ratios, which are tested at the end of each . . .

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