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PGTI > SEC Filings for PGTI > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for PGT, INC.


1-Nov-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.


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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 October 30, 2013, we issued a press release, and held a conference call on October 31, 2013, to review the results of operations for the three and nine months ended September 28, 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.

We delivered our highest quarterly sales since the first quarter of 2007 coming in at $64.9 million, up 45.0% over the third quarter of 2012. A combination of improving market conditions and marketing programs focused on both consumers and dealers targeting our WinGuard products continues to drive both sales growth and share gains.

During the quarter, impact sales grew 47% over prior year and represented 78% of total sales, compared to 77% a year ago. In addition, sales of non-impact products grew 38%. Sales increased in both our repair and remodel and new construction markets, up 40% and 58%, respectively. Net income was $6.3 million, and adjusted net income was $6.4 million compared to net income of $2.7 million a year ago.

The 45.0% sales growth during the quarter generated a 37.3% increase in gross margin dollars. As a percent, however, gross margin decreased by 1.8% due to a temporary increase in labor and material costs in connection with the training of our new employees, including the 301 hired during the quarter. Margin was also impacted by the purchase of finished glass units to support sales in excess of our current glass capacities. These two factors negatively impacted margin during the quarter by 4.8%, which more than offset the 3.0% improvement in other factors including strong leverage of fixed costs.


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Lastly, selling, general and administrative expenses as a percent of sales decreased to 20.8%, compared to 25.9% in the third quarter of 2012 due to strong leverage in this category. Cash flow generated from operations was $8.9 million during the quarter. At quarter end, our cash balance was $23.7 million.

Forward Outlook

We continue to focus our efforts on both training and retaining newly hired employees to improve our production efficiency. We are also expanding our current glass fabrication capabilities by constructing a new facility. During August, we purchased land neighboring to our existing campus for $1.7 million and expect operations to commence in our new glass facility in the third quarter of 2014. This action alone is expected to improve our margins by approximately 2%.

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 our business.

Based on our October sales and our current pipeline, which encompasses our price increase, we believe the fourth quarter's sales will range from $58 million to $60 million. We also expect lower overtime and glass purchases with these reduced sales, however, we expect to experience lower leveraging of our fixed costs.

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                                     Nine Months Ended
                                        September 28,              September 29,              September 28,               September 29,
                                             2013                      2012                        2013                        2012
                                                     (in thousands)                                         (in thousands)

Net sales                            $ 64,858       100.0 %    $ 44,743        100.0 %    $ 177,268        100.0 %    $ 129,329        100.0 %
Cost of sales                          43,938        67.7 %      29,501         65.9 %      117,759         66.4 %       85,670         66.2 %


Gross margin                           20,920        32.3 %      15,242         34.1 %       59,509         33.6 %       43,659         33.8 %

Selling, general and
administrative expenses                13,507        20.8 %      11,592         25.9 %       40,817         23.0 %       35,206         27.2 %
Gain on sale of assets held for
sale                                       -          0.0 %          -           0.0 %       (2,195 )       -1.2 %           -           0.0 %


Income from operations                  7,413        11.4 %       3,650          8.2 %       20,887         11.8 %        8,453          6.5 %

Interest expense, net                   1,055         1.6 %         878          2.0 %        2,564          1.4 %        2,675          2.1 %
Other expense (income), net                64         0.1 %         (10 )        0.0 %          741          0.4 %         (110 )       -0.1 %


Income before income taxes              6,294         9.7 %       2,782          6.2 %       17,582          9.9 %        5,888          4.6 %

Income tax (benefit) expense                5         0.0 %          60          0.1 %       (3,893 )       -2.2 %          128          0.1 %


Net income                           $  6,289         9.7 %    $  2,722          6.1 %    $  21,475         12.1 %    $   5,760          4.5 %


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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2013 AND
SEPTEMBER 29, 2012

The following table represents total sales by product category for the three
months ended September 28, 2013, and September 29, 2012:



                                                             Three Months Ended
                                            September 28, 2013                September 29, 2012
                                         Sales          % of sales         Sales          % of sales        % change
                                                               (in millions)
Product category:
Impact Window and Door Products        $    50.3               77.5 %    $    34.2               76.5 %          47.0 %
Other Window and Door Products              14.6               22.5 %         10.5               23.5 %          38.2 %


Total net sales                        $    64.9              100.0 %    $    44.7              100.0 %          45.0 %

Net sales of impact window and door products, which include our WinGuard, PremierVue and Architectural Systems product lines, were $50.3 million for the third quarter of 2013, an increase of $16.1 million, or 47.0%, from $34.2 million in net sales for the 2012 third quarter. The increase was due mainly to an increase in Aluminum and Vinyl WinGuard of $10.5 million and $4.1 million, respectively. WinGuard product sales, which grew both in new construction and repair and remodel markets, represented 73% of our net sales for the third quarter of both 2013 and 2012.

Net sales of other window and door products were $14.6 million for the third quarter of 2013, an increase of $4.1 million, or 38.2%, from $10.5 million in net sales for the 2012 third quarter. This increase was due mainly to an increase in sales of our non-impact aluminum products of $1.8 million, non-impact vinyl products, whose sales were up $1.4 million, and an increase in Eze-Breeze product sales of $0.8 million.

Gross margin

Gross margin was $20.9 million, or 32.3% of sales, compared to $15.2 million, or 34.1% for the third quarter of 2012, an increase of $5.7 million, or 37.3% from the third quarter of 2012. The 1.8% decrease in gross margin as a percent of sales in 2013 is the result of the increased labor cost and scrap commensurate with hiring 575 new employees over the past six months (2.8%), outside glass purchases (2.0%) and change in mix (0.9%). These decreases were offset by leveraging higher sales (3.6%) and reduced costs of aluminum (0.3%).

Selling, general and administrative expenses

Selling, general and administrative expenses were $13.5 million for the third quarter of 2013, an increase of $1.9 million from $11.6 million for the third quarter of 2012. This was driven by employee related expense increase of $1.5 million, $0.3 million in bank related fees, and consulting fees of $0.1 million. As a percent of sales, selling, general and administrative expenses were 20.8% for the third quarter of 2013 compared to 25.9% from the third quarter of 2012, as we were able to substantially leverage our increase in sales.

Interest expense, net

Interest expense, net was $1.1 million in the third quarter of 2013, an increase of $0.2 million from $0.9 million for the third quarter of 2012. The increase from prior year was due to a higher outstanding debt level resulting from the new debt agreement offset by the lower interest rate associated with the new credit agreement.

Other expense (income), net

Other expense, net was $0.1 million in the third quarter of 2013, compared to Other income, net of less than $0.1 million in the third quarter of 2012. The amount in 2013 relates to the changes in the fair value and settlements of our ineffective aluminum hedges. The amount in 2012 relates to the ineffective portion of aluminum hedges and the changes in the fair value of our interest rate cap.

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 a minimal tax expense for the three months ended September 28, 2013, compared to an expense of $0.1 million for the same period in 2012.


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Due to the effects 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 39.1% and 39.5%, for the three months ended September 28, 2013, and September 29, 2012, respectively.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2013 AND SEPTEMBER
29, 2012

The following table represents total sales by product category for the nine
months ended September 28, 2013, and September 29, 2012:



                                                            Nine Months Ended
                                           September 28, 2013                September 29, 2012
                                        Sales          % of sales         Sales          % of sales        % change
                                                              (in millions)
Product category:
Impact Window and Door Products       $    135.9              76.7 %    $     96.1              74.3 %          41.4 %
Other Window and Door Products              41.4              23.3 %          33.2              25.7 %          24.5 %


Total net sales                       $    177.3             100.0 %    $    129.3             100.0 %          37.1 %

Net sales of impact window and door products, which include our WinGuard, PremierVue and Architectural Systems product lines, were $135.9 million for the first nine months of 2013, an increase of $39.8 million, or 41.4%, from $96.1 million in net sales for the 2012 first nine months. The increase was due mainly to an increase in Aluminum and Vinyl WinGuard of $26.9 million and $10.7 million, respectively. Also, our Architectural System sales increased $2.0 million. WinGuard product sales, which grew in both new construction and repair and remodel markets, represented 72% and 70% of our net sales for the first nine months of 2013 and 2012, respectively.

Net sales of other window and door products were $41.4 million for the first nine months of 2013, an increase of $8.2 million, or 24.5%, from $33.2 million in net sales for the 2012 first nine months. This increase was due mainly to an increase in sales of our non-impact vinyl products, whose sales were up $3.5 million, our non-impact aluminum products of $3.1 million, and an increase in Eze-Breeze product sales of $1.6 million.

Gross margin

Gross margin was $59.5 million, or 33.6% of sales, compared to $43.7 million, or 33.8% for the first nine months of 2013, an increase of $15.8 million, or 36.3% from the first nine months of 2012. The 0.2% decrease in gross margin as a percent of sales in 2013 is the result of increased labor cost and scrap commensurate with hiring 758 new employees (2.5%) and outsourced glass purchases of (0.8%). This was offset by the leveraging of higher sales (3.1%).

Selling, general and administrative expenses

Selling, general and administrative expenses were $40.8 million for the first nine months of 2013, an increase of $5.6 million from $35.2 million for the first nine 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, $1.1 million in advertising costs to assist our efforts to capture market share, $0.5 million in selling activities, and employee related expenses of $2.8 million. As a percent of sales, selling, general and administrative expenses were 23.1% for the first nine months of 2013 compared to 27.2% from the second quarter of 2012, when adjusting for offering related costs, as we were able to substantially leverage our increase in sales.

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.


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Interest expense, net

Interest expense, net was $2.6 million in the first nine months of 2013, a decrease of $0.1 million from $2.7 million for the first nine months of 2012. The decrease from prior year was due to the effect of the lower interest rate associated with the new credit agreement. Offsetting this decrease is a higher outstanding debt level from the new debt agreement along with the 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 nine months of 2013, compared to Other income, net of $0.1 million in the first nine 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. The amount in 2012 relates to the ineffective portion of aluminum hedges and the changes in the fair value of our interest rate cap.

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 nine months ended September 28, 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 partially offset our regular tax expense and 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 41.0% and 39.5%, for the nine months ended September 28, 2013, and September 29, 2012, respectively.

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 nine months was $16.3 million, compared to $16.4 million in the first nine months of 2012. This is slightly lower despite higher sales due to increases in working capital requirements to support the growth of the business.

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

                                                  Direct Cash Flows
                                                  Nine Months Ended
                                          September 28,        September 29,
                                              2013                 2012
                                                    (in millions)
       Collections from customers        $         173.7      $         130.1
       Other collections of cash                     4.5                  1.6
       Disbursements to vendors                   (109.3 )              (74.2 )
       Personnel related disbursements             (50.5 )              (38.8 )
       Income taxes paid                            (0.1 )                 -
       Debt service costs (interest)                (2.0 )               (2.2 )
       Other activity, net                            -                  (0.1 )

       Cash provided by operations       $          16.3      $          16.4

Days sales outstanding (DSO), which we calculate as accounts receivable divided by quarterly average daily sales, was 32 days at September 28, 2013, compared to 34 days at September 29, 2012.


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Inventory on hand as of September 28, 2013, increased $3.6 million compared to September 29, 2012. Inventory turns during the first nine months of 2013 increased to 10.9 from 9.6 for the first nine 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 $2.4 million for the first nine months of 2013, compared to cash used in investing activities of $2.7 million for the first nine months of 2012. The increase of $5.1 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 offset by increased capital spending mainly related to the land purchase for the expansion of our glass processing capabilities.

Financing activities. Cash used in financing activities was $13.7 million in the first nine 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 $3.5 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 $5.0 million in the first nine months of 2012, due to $5.0 million prepayment of debt and $0.1 million of capital lease payments offset by stock options exercised.

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 September 28, 2013, we were in compliance and expect to be in the future.

Capital Resources. On May 28, 2013, we entered into a Credit Agreement (the "Credit Agreement") with the various financial institutions and other persons from time to time parties thereto as lenders (the "Lenders"), SunTrust Bank, as administrative agent (in such capacity, the "Administrative Agent"), as collateral agent, as swing line lender and as a letter of credit issuer, and the other agents and parties thereto. The Credit Agreement establishes new senior secured credit facilities in an aggregate amount of $105.0 million, consisting of an $80.0 million Tranche A term loan facility maturing in five years that will amortize on a basis of 5% annually during the five-year term, and a $25.0 million revolving credit facility maturing in five years that includes a $5.0 million swing line facility and a $10.0 million letter of credit facility. As of September 28, 2013, there were $1.1 million of letters of credit outstanding and $23.9 million available on the revolver.

Interest on all loans under the Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Borrowings under the term loans and the revolving credit facility accrue interest at a rate equal to, at our option, a base rate or LIBOR plus an applicable margin. The applicable margin is based on our leverage ratio, ranging from 300 to 350 basis points in the case of LIBOR and 200 to 250 basis points in the case of the base rate. We will pay quarterly fees on the unused portion of the revolving credit facility equal to 0.50% as well as a quarterly letter of credit fee at a rate per annum equal to the applicable margin for LIBOR loans on the face amount of any outstanding letters of credit. In connection with this refinancing, we wrote-off $0.3 million of deferred financing costs from the Old Credit Agreement, which are classified within other expense (income), net in the Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended September 28, 2013.

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

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

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