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PGEM > SEC Filings for PGEM > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for PLY GEM HOLDINGS INC

Form 10-Q for PLY GEM HOLDINGS INC


12-May-2014

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, 2013. 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 51% and 49% of our net sales, respectively, for the three months ended March 29, 2014. 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 the new construction market and the home repair and remodeling market 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.

Since Ply Gem incorporated in 2004, we have acquired eight additional businesses to complement and expand our product portfolio and geographic diversity, including two acquisitions during 2013. On April 9, 2013, we 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. On May 31, 2013, we acquired the capital stock of Mitten Inc. (now known as Mitten, "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 $76.8 million. Gienow is part of our Western Canadian windows business and is part of the Windows and Doors segment, and the majority of Mitten's operations are part of the Siding, Fencing and Stone segment.

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, which was a wholly owned subsidiary of 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. In May 2013, the Company issued 18,157,895 shares of common stock at an initial public offering price of $21.00 per share and received gross proceeds of approximately $381.3 million in an IPO of its common stock. The shares began trading on The New York Stock Exchange on May 23, 2013 under the symbol "PGEM". Immediately prior to the closing of the IPO, Ply Gem Prime merged with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the merger, all of the preferred stock of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that was converted into preferred stock in connection with the IPO) was converted into a number of shares of the Company's common stock based on the IPO price of the common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock.

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' $250.0 million ABL Facility and the credit agreement governing the terms of its $430.0 million Term Loan 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 indenture governing Ply Gem Industries' $500.0 million 6.50% 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.


Table of Contents

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 expense") 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 expense 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. In addition, favorable or unfavorable weather conditions may influence the comparability of our results from year to year or from quarter to quarter.


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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, 2013 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
(Amounts in thousands)                           March 29, 2014      March 30, 2013
                                                  (unaudited)         (unaudited)
Net sales
Siding, Fencing and Stone                       $     137,055       $      137,725
Windows and Doors                                     132,410              119,372
Operating earnings (loss)
Siding, Fencing and Stone                               6,868               17,114
Windows and Doors                                     (20,497 )            (12,096 )
Unallocated                                            (5,960 )             (5,590 )
Foreign currency loss
Windows and Doors                                         (85 )                (33 )
Siding, Fencing and Stone                                (143 )                  -
Interest income (expense), net
Siding, Fencing and Stone                                  (4 )                 (8 )
Windows and Doors                                          15                   11
Unallocated                                           (18,505 )            (23,656 )
Income tax benefit (provision)
Unallocated                                            12,470               (3,849 )
Tax Receivable Agreement liability adjustment
Unallocated                                            (4,373 )                  -
Loss on modification or
extinguishment of debt
Unallocated                                           (21,364 )                  -

Net loss                                        $     (51,578 )     $      (28,107 )

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.


Table of Contents

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.

Siding, Fencing and Stone Segment

                                             For the three months ended
(Amounts in thousands)                  March 29, 2014          March 30, 2013
                                         (unaudited)             (unaudited)
Statement of operations data:
Net sales                           $ 137,055     100.0  %   $ 137,725    100.0 %
Gross profit                           30,068      21.9  %      33,945     24.6 %
SG&A expense                           19,850      14.5  %      14,682     10.7 %
Amortization of intangible assets       3,350       2.4  %       2,149      1.6 %
Operating earnings                      6,868       5.0  %      17,114     12.4 %

Currency transaction loss (143 ) (0.1 )% - - %

Net Sales

Net sales for the three months ended March 29, 2014 decreased $0.7 million or 0.5% as compared to the three months ended March 30, 2013. Our recent Mitten acquisition, which was completed on May 31, 2013, contributed net sales of approximately $18.8 million for the three months ended March 29, 2014. Excluding Mitten, our Siding, Fencing, and Stone net sales decreased $19.5 million or 14.2% for the three months ended March 29, 2014 compared to the three months ended March 30, 2013. The net sales decrease resulted from the severe winter weather that impacted significant portions of the United States particularly the Northeast, upper Midwest, and Eastern seaboard regions where the majority of our vinyl siding is sold with higher levels of snow accumulation and extreme cold temperatures associated with the polar vortex phenomenon. This uncharacteristically severe winter weather negatively impacted our Siding, Fencing, and Stone net sales for the three months ended March 29, 2014. In fact, the Vinyl Siding Institute reported that U.S. vinyl siding industry unit shipments decreased 14.5% during the three months ended March 29, 2014. Including Mitten, our U.S. market position in vinyl siding for the three months ended March 29, 2014 was 39.1%, while our combined share of the Canadian vinyl siding market was 23.0%.

Gross Profit

Gross profit for the three months ended March 29, 2014 decreased $3.9 million or 11.4% as compared to the three months ended March 30, 2013. Our acquisition of Mitten contributed gross profit of approximately $5.0 million for the three months ended March 29, 2014. Excluding Mitten, our Siding, Fencing and Stone gross profit decreased $8.9 million or 26.1% for the three months ended March 29, 2014 compared to the three months ended March 30, 2013. The gross profit decrease was primarily caused by the $19.5 million net sales decrease caused by the severe winter weather experienced during the first quarter of 2014. This sales volume decrease created less operating leverage to cover fixed manufacturing costs contributing to lower gross profit. In addition to the negative volume impact, gross profit for the three months ended March 29, 2014 was negatively impacted by higher raw material costs, specifically PVC resin and aluminum. The Midwest Ingot price of aluminum increased 6.6% for the three months ended March 29, 2014 relative to the fourth quarter of 2013. The average market price for PVC resin was estimated to have increased approximately 7.2% during the three months ended March 29, 2014 relative to the prior quarter. As a result of these raw material cost increases, we announced selling price increases that will go into effect during the second quarter.


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Gross profit as a percentage of sales decreased from 24.6% of net sales for the three months ended March 30, 2013 to 21.9% of net sales for the three months ended March 29, 2014. The 270 basis point decrease can be attributed to the negative sales volume impact and the associated impact on our manufacturing operating leverage as well as unfavorable raw material pricing for the three months ended March 29, 2014 not yet offset by our recently announced selling price increases.

Selling, general and administrative expenses

SG&A expense for the three months ended March 29, 2014 increased $5.2 million or 35.2% as compared to the three months ended March 30, 2013. The SG&A expense increase is a direct result of the Mitten acquisition, which was completed on May 31, 2013 and resulted in higher SG&A expense of approximately $6.4 million for the three months ended March 29, 2014. Excluding Mitten, SG&A expense would have decreased $1.2 million or 8.1% for the three months ended March 29, 2014 relative to the three months ended March 30, 2013. The decrease in SG&A expense primarily related to lower sales and marketing expenses due to the $19.5 million net sales decrease.

SG&A expense as a percentage of net sales increased from 10.7% for the three months ended March 30, 2013 to 14.5% for the three months ended March 29, 2014. Excluding Mitten, SG&A expense as a percentage of net sales was 11.4% for the three months ended March 29, 2014 which is comparable to the 10.7% for the three months ended March 30, 2013. This SG&A percentage increase can be attributed to the $19.5 million net sales decrease as there is a fixed component to SG&A expense which resulted in the increase during the three months ended March 29, 2014.

Amortization of intangible assets

Amortization expense for the three months ended March 29, 2014 increased by $1.2 million or 55.9% as compared to the three months ended March 30, 2013 due to the addition of approximately $35.4 million of intangible assets for the Mitten acquisition on May 31, 2013. The Mitten intangible assets resulted in approximately $1.3 million of amortization expense for the three months ended March 29, 2014. Excluding Mitten, amortization of intangible assets as a percentage of net sales was 1.8% for the three months ended March 29, 2014 compared to 1.6% for the three months ended March 30, 2013.

Currency transaction loss

A currency transaction impact was established in May 2013 with the Mitten acquisition within the Siding, Fencing, and Stone segment. The currency transaction loss for the three months ended March 29, 2014 was $0.1 million and related to the recently acquired Mitten entity.

Windows and Doors Segment

                                              For the three months ended
(Amounts in thousands)                  March 29, 2014           March 30, 2013
                                         (unaudited)              (unaudited)
Statement of operations data:
Net sales                           $ 132,410     100.0  %   $ 119,372     100.0  %
Gross profit                            9,745       7.4  %       7,901       6.6  %
SG&A expense                           28,270      21.4  %      17,944      15.0  %
Amortization of intangible assets       1,972       1.5  %       2,053       1.7  %

Operating loss (20,497 ) (15.5 )% (12,096 ) (10.1 )% Currency transaction loss (85 ) (0.1 )% (33 ) - %


Table of Contents

Net Sales

Net sales for the three months ended March 29, 2014 increased $13.0 million or 10.9% as compared to the three months ended March 30, 2013. The net sales increase for the three months ended March 29, 2014 was predominantly related to our acquisition of Gienow, which was completed on April 9, 2013. Effective January 2014, our legacy Ply Gem Canada business and Gienow were amalgamated legally into a single entity, Gienow Canada Inc., and operationally into a single location with consolidated manufacturing and sales personnel. For the three months ended March 29, 2014, the combined Western Canadian business had net sales of $27.3 million compared to legacy Western Canadian sales of $14.4 million for the three months ended March 30, 2013 for an increase of $12.9 million reflecting the impact of the Gienow acquisition partially offset by the impact of adverse winter weather in the United States and Canada during 2014 which negatively impacted our year over year net sales.

In the U.S. market, our net sales only decreased 1.4% for the three months ended March 29, 2014 compared to the three months ended March 30, 2013 despite the severe winter weather that impacted our customers with higher levels of snow accumulation and extreme cold temperatures with the polar vortex phenomenon. The winter weather had a negative impact on the new construction market to which our Windows and Doors market is highly aligned. According to the National Association of Homebuilders ("NAHB"), 2014 single family starts were estimated to have decreased approximately 4.0% for the three months ended March 29, 2014 relative to the three months ended March 30, 2013. Despite these industry factors, we were able to maintain net sales levels in the United States as a result of improving our average selling prices and by effectively managing our new and existing customers.

Gross Profit

Gross profit for the three months ended March 29, 2014 increased $1.8 million or 23.3% as compared to the three months ended March 30, 2013. The gross profit increase for the three months ended March 29, 2014 was predominantly driven by the Gienow acquisition, which was completed on April 9, 2013, and subsequently combined operationally in January 2014 with our legacy Western Canadian business. For the three months ended March 29, 2014, the combined Western Canadian business had a gross profit of $3.9 million compared to the legacy Western Canadian gross profit of $3.0 million for the three months ended March 30, 2013 for an increase of $0.9 million which was a result of the Gienow acquisition and certain synergies realized for labor and in the procurement process offset by manufacturing inefficiencies associated with consolidating the manufacturing operations into a single facility and the cost of transitioning customers to the consolidated product line. The remaining gross profit increase of approximately $0.9 million for the three months ended March 29, 2014 can be attributed to improved average sales prices as well as the reduction of operating inefficiencies that occurred during the three months ended March 30, 2013 for the U.S. market.

Gross profit as a percentage of sales increased from 6.6% of net sales for the three months ended March 30, 2013 to 7.4% of net sales for the three months ended March 29, 2014. This 80 basis point increase can be attributed to improved pricing and the reduction of operating inefficiencies for the U.S. market offset by manufacturing inefficiencies in Western Canada associated with consolidating operations into a single manufacturing site.

Selling, general and administrative expenses

SG&A expense for the three months ended March 29, 2014 increased $10.3 million or 57.5% compared to the three months ended March 30, 2013. The SG&A expense increase was caused by two factors with the first relating to the Gienow acquisition, which was completed on April 9, 2013 and resulted in higher SG&A expense. In addition to Gienow, our SG&A expense increased due to the preliminary legal settlement of class action lawsuits on May 1, 2014 for our Windows and Doors segment which resulted in a $5.0 million expense during the three months ended March 29, 2014.

Excluding the expense associated with the class action settlement, our SG&A expense as a percentage of net sales increased from 15.0% for the three months ended March 30, 2013 to 17.6% for the three months ended March 29, 2014. The increase in SG&A as a percentage of net sales is related to the Gienow acquisition and the restructuring and integration costs associated with combining our Western Canadian businesses including severance and retention.

Amortization of intangible assets

Amortization expense for the three months ended March 29, 2014 was comparable to the three months ended March 30, 2013. Amortization expense as a percentage of sales at 1.5% for the three months ended March 29, 2014 was consistent with the three months ended March 30, 2013 at 1.7%.


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Currency transaction loss

The currency transaction loss for the three months ended March 29, 2014 increased $0.1 million as compared to the three months ended March 30, 2013 as a result of the Gienow acquisition which was completed on April 9, 2013.

Unallocated Operating Earnings, Interest, and Provision (Benefit) for Income

Taxes
                                                       For the three months ended
(Amounts in thousands)                             March 29, 2014      March 30, 2013
                                                    (unaudited)         (unaudited)
Statement of operations data:
SG&A expense                                      $      (5,960 )     $       (5,590 )
Operating loss                                           (5,960 )             (5,590 )
Interest expense                                        (18,506 )            (23,657 )
Interest income                                               1                    1
Tax receivable agreement liability adjustment            (4,373 )                  -
Loss on modification or extinguishment of debt          (21,364 )                  -
Income tax benefit (provision) for income taxes   $      12,470       $       (3,849 )

Operating loss

Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the three months ended March 29, 2014 increased by $0.4 million or 6.6% compared to the same period in 2013 due primarily to increased professional fees due to the inclusion of Mitten and Gienow in certain service programs.

Interest expense

Interest expense for the three months ended March 29, 2014 decreased by approximately $5.2 million or 21.8% compared to the same period in 2013. The decrease was due to the reduction in interest expense with holding the 9.375% Senior Notes due 2017 (the "9.375% Senior Notes") and the 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") outstanding during the three months ended March 30, 2013 compared to holding those same notes for only one month during the three months ended March 29, 2014 before being tendered predominantly on January 30, 2014. The 6.50% Senior Notes due 2022 (the "6.50% Senior Notes") and the Term Loan Facility due 2021 (the "Term Loan Facility") which were issued on January 30, 2014 to replace the 8.25% Senior Secured Notes and 9.375% Senior Notes, carry lower interest rates and consequently reduced interest expense during the three months ended March 29, 2014 compared to the same period on 2013.

Tax receivable agreement liability adjustment

The $4.4 million tax receivable agreement liability adjustment for the three months ended March 29, 2014 resulted from changes in the expected timing of NOL utilization and the timing of deferred tax liability reversals given our full valuation allowance position.

Loss on modification or extinguishment of debt

As a result of the 6.50% Senior Notes and Term Loan Facility issuance and the tender, redemption, and repurchase of the 8.25% Senior Notes and the 9.375% Senior Secured Notes as further described in the Liquidity and Capital Resources section below, we recognized a loss on modification or extinguishment of debt of . . .

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