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PGEM > SEC Filings for PGEM > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for PLY GEM HOLDINGS INC

Form 10-Q for PLY GEM HOLDINGS INC


6-Nov-2013

Quarterly Report


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

The information contained in this discussion and in the unaudited condensed consolidated financial statements and accompanying notes presented in this Quarterly Report on Form 10-Q should be read in conjunction with information set forth in Ply Gem Holdings' Annual Report on Form 10-K for the year ended December 31, 2012. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are "forward-looking statements". See "Special Note Regarding Forward-Looking Statements." As used in this Quarterly Report on Form 10-Q, the "Company", "we", "us", and "our" refer to Ply Gem Holdings and its subsidiaries, except where the context otherwise requires or as otherwise indicated.

Overview

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and
(ii) Windows and Doors, which comprised approximately 55% and 45% of our sales, respectively, for the nine months ended September 28, 2013. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both new construction and home repair and remodeling in the United States and Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers. Since Ply Gem incorporated in 2004, we have acquired eight additional businesses to complement and expand our product portfolio and geographical diversity.

The following is a summary of Ply Gem's acquisition history:

On August 27, 2004, Ply Gem acquired MWM Holding, Inc. ("MWM Holding"), a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows for a purchase price, net of cash acquired, of $330.9 million.

On February 24, 2006, Ply Gem acquired AWC Holding Company and its subsidiaries (collectively, "Alenco"), a manufacturer of aluminum and vinyl windows products for a purchase price, net of cash acquired, of $126.8 million. This acquisition supported our national window strategy and today operates under common leadership with our other U.S. window businesses.

On October 31, 2006, Ply Gem completed the acquisition of Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) ("MHE"), a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories for a purchase price, net of cash acquired, of $295.9 million. MHE is part of our Siding, Fencing and Stone segment and operates under common leadership with our siding business.

On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation's vinyl window and patio door business, which we have named Ply Gem Pacific Windows, a leading manufacturer of premium vinyl windows and patio doors for a purchase price, net of cash acquired, of $36.5 million.

On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products for a purchase price, net of cash acquired, of $3.6 million.

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck Products, LLC, a composite products development company for a purchase price of $1.0 million, subject to certain purchase price adjustments.

On April 9, 2013, Ply Gem acquired the capital stock of Gienow WinDoor Ltd. (which was amalgamated into Gienow Canada Inc.) ("Gienow"), a manufacturer of windows and doors in Western Canada for a purchase price of $20.4 million. Gienow is part of our Western Canadian windows business and is part of the Windows and Doors segment.

On May 31, 2013, Ply Gem completed the acquisition of Mitten Inc. ("Mitten"), a manufacturer of vinyl siding and distributor of various other exterior building products in Canada for a purchase price, net of cash acquired, of $78.9 million, subject to certain purchase price adjustments. Mitten has minimal sales of windows so the majority of Mitten's operations are part of the Siding, Fencing and Stone segment.


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Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. ("Ply Gem Investment Holdings") which was a wholly owned subsidiary of Ply Gem Prime Holdings, Inc. ("Ply Gem Prime"). On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Prime.

On May 23, 2013, we issued 18,157,895 shares of common stock at an initial public offering price of $21.00 per share and received net proceeds of approximately $353.4 million in an initial public offering ("IPO") of our common stock. Prior to the IPO, the Company issued a total of 48,962,494 shares of common stock in connection with the merger of Ply Gem Prime into Ply Gem Holdings with Ply Gem Holdings being the surviving entity.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries' $212.5 million senior secured asset-based revolving credit facility (the "ABL Facility") place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us. Further, the terms of the indentures governing Ply Gem Industries 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") and 9.375% Senior Notes due 2017 (the "9.375% Senior Notes") place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.

Financial statement presentation

Net Sales. Net sales represent the fixed selling price of our products plus certain shipping charges less applicable provisions for discounts and allowances. Allowances include cash discounts, volume rebates and returns.

Cost of products sold. Cost of products sold includes direct material and manufacturing costs, manufacturing depreciation, third-party and in-house delivery costs and product warranty expense.

Selling, general and administrative expenses. Selling, general and administrative expenses ("SG&A expenses") includes all non-product related operating expenses, including selling, marketing, research and development costs, information technology, and other general and administrative expenses.

Operating earnings (loss). Operating earnings (loss) represents net sales less cost of products sold, SG&A expenses and amortization of intangible assets.

Impact of commodity pricing

PVC resin and aluminum are major components in the production of our products and changes in PVC resin and aluminum prices have a direct impact on our cost of products sold. Historically, we have been able to pass on a substantial portion of significant price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.

Impact of weather

Since our building products are intended for exterior use, our sales and operating earnings tend to be lower during periods of inclement weather. Weather conditions in the first and fourth quarters of each calendar year historically result in these quarters producing significantly less sales revenue than in any other period of the year. As a result, we have historically had lower profits or higher losses in the first quarter, and reduced profits in the fourth quarter of each calendar year due to the weather. Our results of operations for individual quarters in the future may be impacted by adverse weather conditions.


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Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies contained in our Annual Report on Form 10-K for the year ended December 31, 2012 and Note 1 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.

 Results of Operations

The following table summarizes net sales and operating earnings (loss) by
segment and is derived from the accompanying condensed consolidated statements
of operations and comprehensive income (loss) included in this report.

                                           For the three months ended                      For the nine months ended
(Amounts in thousands)             September 28, 2013      September 29, 2012      September 28, 2013      September 29, 2012
                                      (unaudited)             (unaudited)             (unaudited)             (unaudited)
Net sales
Siding, Fencing and Stone         $         228,214       $          179,852      $         565,010       $         511,157
Windows and Doors                           179,212                  126,341                467,653                 341,501
Operating earnings (loss)
Siding, Fencing and Stone                    39,476                   34,403                 92,998                  88,487
Windows and Doors                            (4,489 )                 (2,370 )              (22,549 )               (15,622 )
Unallocated                                  (4,067 )                 (4,762 )              (39,439 )               (13,506 )
Foreign currency (loss) gain
Windows and Doors                              (476 )                    100                   (788 )                   264
Siding, Fencing and Stone                       100                        -                     33                       -
Interest income (expense), net
Siding, Fencing and Stone                       153                        1                    148                      47
Windows and Doors                               156                        5                    183                       9
Unallocated                                 (22,069 )                (27,532 )              (70,577 )               (78,542 )
Income tax benefit (provision)
Unallocated                                   1,442                       89                 (1,676 )                (1,579 )
Tax Receivable Agreement
liability adjustment
Unallocated                                   6,669                        -                 (1,474 )                     -
Loss on modification or
extinguishment of debt
Unallocated                                       -                   (3,607 )              (18,948 )                (3,607 )

Net income (loss)                 $          16,895       $           (3,673 )    $         (62,089 )     $         (24,049 )

Our business is seasonal and the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year or any future period.


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This review of performance is organized by business segment, reflecting the way we manage our business. Each business group leader is responsible for operating results down to operating earnings. We use operating earnings as a performance measure as it captures the income and expenses within the management control of our business leaders. Corporate management is responsible for making all financing decisions. Therefore, each segment discussion focuses on the factors affecting operating earnings, while interest expense and income taxes and certain other unallocated expenses are separately discussed at the corporate level.

The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated. However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.

Recent Developments

On April 9, 2013, we acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada, for cash consideration of approximately $20.4 million. We used borrowings under the ABL Facility to pay the aggregate purchase price.

On May 31, 2013, we acquired all of the capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada, for cash consideration of approximately $78.9 million, subject to certain purchase price adjustments. We used proceeds from the IPO to pay the aggregate purchase price.

Our historical results of operations and financial statements do not reflect the results of operations for Gienow or Mitten.

Siding, Fencing and Stone Segment

                                               For the three months ended
(Amounts in thousands)                September 28, 2013        September 29, 2012
                                          (unaudited)               (unaudited)
Statement of operations data:
Net sales                           $    228,214    100.0 %   $    179,852    100.0 %
Gross profit                              63,255     27.7 %         52,277     29.1 %
SG&A expenses                             20,235      8.9 %         15,801      8.8 %
Amortization of intangible assets          3,544      1.6 %          2,073      1.2 %
Operating earnings                        39,476     17.3 %         34,403     19.1 %
Currency transaction gain                    100        - %              -        - %

Net Sales

Net sales for the three months ended September 28, 2013 increased $48.4 million or 26.9% compared to the three months ended September 29, 2012. The net sales increase is primarily a result of the Mitten acquisition which was completed on May 31, 2013 and contributed net sales of approximately $38.9 million for the three months ended September 28, 2013. Excluding the Mitten acquisition, our Siding, Fencing, and Stone net sales increased $9.4 million or 5.2% for the three months ended September 28, 2013 compared to the three months ended September 29, 2012. The net sales increase is primarily attributed to higher sales volumes across all product categories reflecting an improving U.S. new construction housing market partially offset by lower selling prices for our aluminum metal accessory products that were reduced in response to lower market cost for aluminum raw materials.


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End user markets for the third quarter of 2013 continue to show improvement. According to the U.S. Census Bureau, single family housing starts are estimated to increase approximately 15.1% for the third quarter of 2013, while according to the Leading Indicator of Remodeling Activity ("LIRA") the repair and remodeling market for the trailing twelve months is expected to increase 10.4% for the third quarter of 2013. Despite the 10.4% increase, we believe that big ticket remodeling expenditures, which would include our core products, have been delayed as a result of subdued consumer confidence and limited financing alternatives. Combining the end user markets of new construction and repair and remodeling, the vinyl siding industry reported an increase in demand of 4.3%, according to the Vinyl Siding Institute ("VSI"), while our vinyl siding unit sales, excluding Mitten, increased 5.7% for the three months ended September 28, 2013 compared to the three months ended September 29, 2012.

While we experienced modest growth in our U.S. sales, the outlook for long-term demand drivers, such as single family housing starts, existing home sales and the age of the existing housing stock within the U.S. remains positive. According to the National Association of Home Builders' September 2013 report single family housing starts (SFHS) for 2013 and 2014 are estimated to increase to 629,000 and 826,000, respectively compared to 2012 SFHS of 537,000.

Gross Profit

Gross profit for the three months ended September 28, 2013 increased compared to the three months ended September 29, 2012 by approximately $11.0 million or 21.0%. The gross profit increase is primarily a result of the Mitten acquisition; contributing gross profit of approximately $10.8 million net of a $1.1 million expense related to the write-up of inventory in conjunction with the acquisition for the three months ended September 28, 2013. Excluding the Mitten acquisition, our gross profit was essentially flat increasing approximately $0.2 million or 0.3% for the three months ended September 28, 2013 compared to the three months ended September 29, 2012. The 5.2% net sales increase in our base business was largely offset by reduced margins on our metal accessory products due to lower selling prices that resulted from decreases in aluminum commodity costs within the quarter. According to the London Metal Exchange, the price of aluminum decreased approximately 6.4% for the three months ended September 28, 2013 as compared to the three months ended September 29, 2012.

Gross profit as a percentage of sales decreased from 29.1% for the three months ended September 29, 2012 to 27.7% for the three months ended September 28, 2013. Excluding the Mitten acquisition, our gross profit as a percentage of sales would have been the same 27.7%. The lower gross profit percentage was driven by a decrease in gross profit related to our metal accessory products, driven by commodity costs fluctuations in aluminum as previously discussed.

Selling, general and administrative expenses

SG&A expenses for the three months ended September 28, 2013 increased from the three months ended September 29, 2012 by approximately $4.4 million, or 28.1%. The increase in SG&A expenses is a result of the Mitten acquisition, which increased SG&A expenses by approximately $7.5 million for the three months ended September 28, 2013. Excluding Mitten, SG&A expenses decreased approximately $3.1 million or 19.3% for the three months ended September 28, 2013 relative to the three months ended September 29, 2012. The SG&A expense decrease resulted primarily from lower management incentive compensation expense and lower medical expense for the three months ended September 28, 2013 relative to the three months ended September 29, 2012. Excluding Mitten, SG&A expense as a percentage of sales would have decreased to 6.7% for the three months ended September 28, 2013 relative to the 8.8% for the three months ended September 29, 2012.

Amortization of intangible assets

Amortization expense for the three months ended September 28, 2013 increased approximately $1.5 million or 71.0% as compared to the three months ended September 29, 2012. The Mitten acquisition and the associated amortization of its intangible assets accounted for the increase in amortization expense. Mitten's amortization expense for the three months ended September 29, 2013 was approximately $1.4 million. Amortization expense as a percentage of net sales increased for the three months ended September 29, 2013 from 1.2% to 1.6% as a result of the Mitten acquisition. Excluding the Mitten acquisition, amortization expense would have been consistent at 1.1%.


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Currency transaction gain

The currency transaction gain for the three months ended September 28, 2013 was $0.1 million related to the newly acquired Mitten entity.

                                                For the nine months ended
(Amounts in thousands)                September 28, 2013        September 29, 2012
                                          (unaudited)               (unaudited)
Statement of operations data:
Net sales                           $    565,010    100.0 %   $    511,157    100.0 %
Gross profit                             152,471     27.0 %        139,764     27.3 %
SG&A expenses                             51,163      9.1 %         45,062      8.8 %
Amortization of intangible assets          8,310      1.5 %          6,215      1.2 %
Operating earnings                        92,998     16.5 %         88,487     17.3 %
Currency transaction gain                     33        - %              -        - %

Net Sales

Net sales for the nine months ended September 28, 2013 increased $53.9 million or 10.5% compared to the same period in 2012. The net sales increase is primarily a result of the Mitten acquisition which was completed on May 31, 2013 and contributed net sales of approximately $52.2 million for the nine months ended September 28, 2013 as compared to the nine months ended September 29, 2012. Excluding the Mitten acquisition, our Siding, Fencing, and Stone net sales increased $1.7 million or 0.3% compared to the nine months ended September 29, 2012. The modest increase in net sales resulted from higher sales volume related to the improving U.S. new construction housing market offset by lower unit volume shipments of our metal accessory products that primarily resulted from the loss of sales to a large retail home center and lower selling price of these products which were reduced in response to lower market costs for aluminum raw materials. According to the London Metal Exchange, the price of aluminum decreased approximately 5.1% for the nine months ended September 28, 2013 as compared to the nine months ended September 29, 2012. The sales decrease of our metal accessory products of approximately $13.1 million was partially offset by a $10.4 million sales increase of our vinyl siding products excluding Mitten.

While new construction industry trends continue to be favorable with single family housing starts for the nine months ended September 2013 estimated to increase 18.7% according to the U.S. Census Bureau, we believe that big ticket remodeling expenditures have been delayed as a result of subdued consumer confidence and limited financing alternatives. In addition, our sales during the first nine months of 2013 were negatively impacted by severe weather conditions that adversely affected the upper Midwest, Northeast and Eastern seaboard regions of the U.S. where the majority of our vinyl siding is sold. The Vinyl Siding Institute reported that vinyl siding industry unit shipments decreased 1.4%, while our own vinyl siding unit shipments increased 3.4% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012. Excluding Mitten, our U.S. market position in vinyl siding increased 170 basis points during the nine months ended September 28, 2013 to 37.3% from 35.6% for the comparable period in 2012. Mitten's percentage of U.S. vinyl siding shipments at September 28, 2013 was approximately 2.0% and approximately 25% of the Canadian siding market.

Gross Profit

Gross profit for the nine months ended September 28, 2013 increased compared to the nine months ended September 29, 2012 by approximately $12.7 million or 9.1%. The gross profit increase is a result of the Mitten acquisition which was completed on May 31, 2013 and contributed gross profit of approximately $14.0 million net of a $2.0 million expense related to the write-up of inventory in conjunction with the acquisition for the nine months ended September 28, 2013 as compared to the nine months ended September 29, 2012. Excluding the Mitten acquisition, our gross profit decreased approximately $1.3 million or 1.0% for the nine months ended September 28, 2013 relative to the nine months ended September 29, 2012. The gross profit decrease was caused by less favorable product mix within our metal accessory products as a result of the loss of sales to a large retail home center which decreased margins as well as approximately $0.6 million of negative gross profit associated with manufacturing start-up costs for our new cellular PVC trim board product which was launched in January 2013.


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Gross profit as a percentage of sales decreased from 27.3% for the nine months ended September 29, 2012 to 27.0% for the nine months ended September 28, 2013. Excluding Mitten, our gross profit as a percentage of sales would have been consistent with the nine months ended September 29, 2012.

Selling, general and administrative expenses

SG&A expenses for the nine months ended September 28, 2013 increased from the nine months ended September 29, 2012 by approximately $6.1 million, or 13.5%. The SG&A expense increase is a result of the Mitten acquisition which was completed on May 31, 2013 and resulted in higher SG&A expenses of approximately $10.0 million for the nine months ended September 28, 2013. Excluding Mitten, SG&A expenses would have decreased approximately $3.9 million or 8.6% for the nine months ended September 28, 2013 relative to the nine months ended September 29, 2012. The decrease related primarily to lower management incentive compensation expense relative to the prior year. Excluding $10.0 million of SG&A expenses attributable to Mitten, our SG&A expenses as a percentage of sales were 8.0% for the nine months ended September 28, 2013 lower than the 8.8% for the nine months ended September 29, 2012.

Amortization of intangible assets

Amortization expense for the nine months ended September 28, 2013 increased approximately $2.1 million or 33.7% as compared to the nine months ended September 29, 2012. The Mitten acquisition and the associated amortization with . . .

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