PGT INNOVATIONS, INC.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with our Consolidated
Financial Statements and related Notes included in Item 8. Management's
Discussion and Analysis comparing the results for the year ended December 29,
2018 to the results for the year ended December 30, 2017 can be found in Item 7
of our Annual Report on Form 10-K for the year ended December 29, 2018 , filed
with the SEC on February 27, 2019 , which is hereby incorporated by reference.
Our MD&A is presented in seven sections:
• Executive Overview; • Results of Operations; • Liquidity and Capital Resources; • Disclosures of Contractual Obligations and Commercial Commitments; • Critical Accounting Estimates; • Recently Issued Accounting Standards; and • Forward Outlook EXECUTIVE OVERVIEW Sales and Operations Our sales grew to$745.0 million in our 2019 fiscal year, an increase of 7%, compared to 2018. Sales in 2019 includes$138.3 million from WWS, compared with WWS sales of$49.7 million in the post-acquisition period in 2018 fromAugust 13, 2018 , an increase of$88.6 million . We believe WWS experienced organic growth of approximately 10% for 2019, with sales growth in its emerging markets more than offsetting decreases in sales to its core market ofCalifornia . The benefit to the Company of the sales growth at WWS was more than offset by a decrease in sales in our legacy products. In 2018, we saw record-setting growth as sales of our impact-resistant products benefitted from the rebuilding and repair activity, and the heightened awareness of the benefits of impact products, resulting from two major hurricanes in 2017. Our sales to the repair and remodel market were$376.6 million in 2019, a decrease of 9%, compared to 2018. Our sales into the new construction market were$368.4 million in 2019, an increase of 30%, as compared to 2018, driven primarily by a full year of WWS sales in 2019. Our impact-resistant product sales were$516.1 million in 2019, a decrease of 8%, as compared to 2018. Sales of non-impact products were$228.9 million in 2019, an increase of 67%, compared to 2018, also driven by a full year of WWS sales in 2019. Gross profit was$260.4 million for our 2019 fiscal year, which increased 7% when compared to 2018. Our gross profit increased primarily due to higher sales volume. Gross margin was 35.0% in 2019, compared to 34.9% in 2018. Selling, general and administrative expenses ("SG&A") were$176.3 million for 2019, an increase of$25.4 million compared to 2018. SG&A in 2019 includes the SG&A of WWS of$50.6 million for the full year of 2019, which includes$9.4 million in non-cash amortization expense, compared with$19.5 million of SG&A in the 2018 post-acquisition period measured fromAugust 13, 2018 , and$3.6 million in non-cash amortization. Excluding the effects of the inclusion of WWS for the entire year of 2019, and the post-acquisition period in 2018, SG&A for 2019 decreased 4% due to lower personnel-related costs, including lower incentive compensation costs and a decrease in administrative headcount. In addition, acquisition costs in 2019 relating to the NewSouth Acquisition were lower than 2018 acquisition costs of theWWS Acquisition by approximately$2.3 million . In total, non-cash intangible amortization was$15.9 million in 2019, increasing$5.6 million due to the inclusion of a full year of amortization of the intangibles acquired in theWWS Acquisition . Interest expense was$26.4 million in 2019, which was flat compared with 2018. Interest expense in 2018 includes a higher level of non-cash amortization of deferred financing costs from the significant amount of prepayments under our 2016 Credit Agreement due 2022. Excluding the accelerated non-cash amortization in 2018, interest expense increased by 26%, primarily due to the higher level of outstanding debt during 2019 associated with the 2018 Senior Notes due 2026, which were issued inAugust 2018 , but outstanding for the entire year during 2019. - 22 -
-------------------------------------------------------------------------------- Our net income in 2019 was$43.7 million , a decrease of$10.2 million when compared to 2018. Although our net income benefitted from the higher level of sales, which drove an increase in gross profit, the increase in our SG&A expense from the inclusion of WWS for the full year of 2019 more than offset the higher gross profit. Net income in 2019 was also impacted by a lower level of excess tax benefits from option exercises and vesting in restricted equity, which was$2.1 million in 2019, compared with$5.2 million in 2018.
Liquidity and Cash Flow
During 2019, we generated$81.2 million in cash flow from operations, a decrease of$19.1 million , compared to 2018. In 2018, operating cash flows included$19.0 million in cash received from Cardinal, one of our glass suppliers, in connection with our sales of certain door glass manufacturing equipment to Cardinal and a related supply agreement. Cash generated from operations was generally used to fund operations and investing cash flows, which was primarily composed of capital expenditures in 2019. However, in 2020, we consummated the NewSouth Acquisition, which was funded with proceeds from the Additional Senior Notes and cash on hand. OnMay 22, 2019 , our Board of Directors authorized and approved a share repurchase program of up to$30 million . During 2019, we made opportunistic repurchases of 393,819 shares of our common stock at a cost of$5.5 million , representing capital returned to our shareholders. See "Liquidity and Capital Resources" for a more detailed discussion of this event.
RESULTS OF OPERATIONS
Analysis of Selected Items from our Consolidated Statements of Operations
Year Ended
December 28, December 29, Percent Change
2019 2018 2019-2018
(in thousands, except per share amounts)
Net sales $ 744,956 $ 698,493 6.7%
Cost of sales 484,588 455,025 6.5%
Gross profit 260,368 243,468 6.9%
Gross margin 35.0 % 34.9 %
SG&A expenses 176,312 150,910 16.8%
SG&A expenses as a percentage of net sales 23.7 % 21.6 %
Gains on sales of assets - (2,551 )
Income from operations 84,056 95,109
Interest expense, net 26,417 26,529
Debt extinguishment costs 1,512 3,375
Income tax expense 12,439 11,272
Net income $ 43,688 $ 53,933
Net income per common share:
Basic $ 0.75 $ 1.03
Diluted $ 0.74 $ 1.00
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Full Year 2019 Compared with Full Year 2018
Net sales
Net sales for 2019 were
The following table shows net sales by segment (in millions, except
percentages):
Year Ended
December 28, 2019 December 29, 2018
Sales % of sales Sales % of sales % change
Product category:
Southeast segment $ 595.1 79.9 % $ 636.4 91.1 % (6.5 %)
Western segment 149.9 20.1 % 62.1 8.9 % 141.4 %
Total net sales $ 745.0 100.0 % $ 698.5 100.0 % 6.7 %
Net sales of our Southeast segment were $595.1 million in 2019, compared with
$636.4 million in 2018, a decrease of $41.3 million . Net sales of our Western
segment were $149.9 million in 2019, compared with $62.1 million in 2018, an
increase of $87.8 million . Sales of our Western segment are primarily composed
of sales of WWS, which were $138.3 million in the 2019, compared with $49.7
million in 2018, measured from the date of the WWS acquisition on August 13,
2018 .
The increase in net sales in 2019 of $46.5 million was driven by the net
increase in sales of $88.6 million from WWS, partially offset by the $41.3
million decline in sales of our Southeast segment, which includes a $38.8
million decrease in sales into the repair and remodel market, primarily due to
strong 2018 repair and remodel sales driven by an active hurricane season in
2017. Sales in 2019 were also negatively affected by the disruptions to many of
our customers' operations caused by Hurricane Dorian in late August 2019 , which
resulted in a decrease in orders and shipments for us.
Gross profit and gross margin
Gross profit was$260.4 million in 2019, an increase of$16.9 million , or 6.9%, from$243.5 million in the prior year. Gross profit increased on the higher level of sales in 2019, compared with 2018, due to the inclusion of WWS for the entire year of 2019, compared with only the post-acquisition period in 2018. The increase in gross profit from the inclusion of WWS for the entire year was partially offset by a decrease in sales of our PGT legacy products in 2019, after a record-setting year in 2018, which was driven by a significant increase in rebuilding and repair activity in 2018, and heightened awareness of the benefits of impact-resistant products, resulting from an active hurricane season in 2017, including the impact of Hurricane Irma inFlorida . Gross margin was 35.0% in 2019, compared to 34.9% in the prior year, a percentage-point increase of 0.1%. This slight improvement in gross margin in 2019 was due primarily to the addition of WWS, which benefitted gross margin by 2.2%. Gross margin also benefitted from increases in our product prices in early 2019, and improvements in operating efficiencies. These margin improvements were offset by the unfavorable effects of a shift in the mix of sales to lower margin products, the decrease in volume in our PGT legacy products, which unfavorably impacted our operating leverage, and slightly increased material costs.
Selling, general and administrative expenses
SG&A expenses for 2019 were$176.3 million , an increase of$25.4 million , or 16.8%, from$150.9 million in the prior year. The increase in SG&A is primarily the result of the inclusion of the SG&A expenses of WWS for the entire year in 2019, compared with only the post-acquisition-period in 2018, which resulted in an increase in SG&A of$31.1 million , including an increase of$5.8 million in amortization of the amortizable intangible asset acquired in the WWS acquisition. Excluding the increase in SG&A from the inclusion of WWS, SG&A decreased$5.7 million in 2019, compared to 2018. The decrease in SG&A was primarily driven by a decrease of personnel-related costs, and a net decrease in acquisition costs of$2.3 million . These decreases were partially offset by an increase in selling and distribution costs for our non-WWS businesses in 2019 compared to 2018, and by an unusually high level of bad debt expense recorded in the second quarter of 2019, an increase in marketing costs, and higher professional fees in 2019.
Gains on sales of assets under APA
OnSeptember 22, 2017 , we entered into an agreement with Cardinal, one of our glass suppliers, for the sale to Cardinal of certain manufacturing equipment we used in processing glass components for PGT-branded doors. Certain of that equipment was transferred to Cardinal in 2017, and substantially all of the remaining machinery and equipment was transferred to Cardinal during the second quarter of 2018. The equipment and machinery transferred in 2018 had a net book value of$3.2 million and fair value of$5.8 million . We recognized gains on disposals for the difference totaling$2.6 million during 2018, classified as a separate line item in the accompanying consolidated statement of operations for year endedDecember 29, 2018 . - 24 -
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Interest expense
Interest expense was$26.4 million in 2019, a decrease of$0.1 million from$26.5 million in the prior year. Interest expense in 2018 includes$5.6 million of accelerated amortization of lenders fees and discount relating to the prepayment of$152.0 million of borrowings under the term loan portion of the 2016 Credit Agreement due 2022 that we made onSeptember 18, 2018 and the voluntary prepayment of$8.0 million we made onDecember 19, 2018 . There were no prepayments of term loan borrowings during 2019. Excluding the$5.6 million of accelerated amortization, interest expense increased$5.4 million in 2019, compared to 2018. The increase in interest expense is due primarily to the issuance of the 2018 Senior Notes due 2026, composed of$315.0 million aggregate principal amount of 6.75% unsecured senior notes due 2026. The 2018 Senior Notes due 2026 carry a higher per-annum interest rate and have a higher principal amount outstanding than borrowings under the term loan portion of the 2016 Credit Agreement due 2022. This increase in interest expense was partially offset by the interest-reducing effects of the prepayment of$152.0 million in borrowings under the 2016 Credit Agreement due 2022 from the proceeds of the equity issuance we completed inSeptember 2018 , and the voluntary prepayment of$8.0 million we made onDecember 19, 2018 .
Debt extinguishment costs
Debt extinguishment costs were$1.5 million in 2019. In connection with the Third Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling$1.5 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year endedDecember 29, 2018 . Debt extinguishment costs were$3.4 million in 2018. In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling$3.4 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year endedDecember 29, 2018 . Income from operations Income from operations was$84.1 million in 2019, a decrease of$11.0 million , from$95.1 million in 2018. Income from operations in 2019 includes$73.5 million from our Southeast segment and$10.6 million from our Western segment, compared to$90.1 million and$5.0 million from our Southeast and Western segments, respectively, in 2018, all after allocation of corporate operating costs in both periods. The decrease in income from operations in 2019 compared to 2018 is a result of the increase in SG&A, including higher amortization. Income from operations also includes the gains on sales of assets under the asset purchase agreement with Cardinal of$2.6 million in 2018.
Income tax expense
Income tax expense was$12.4 million for 2019, representing an effective tax rate of 22.2%. This compares to income tax expense of$11.3 million for 2018, representing an effective tax rate of 17.3%. Income tax expense in 2019, and 2018, includes excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards, treated as a discrete item of income tax, totaling$2.1 million and$5.2 million , respectively. Also, income tax expense in 2018 includes an adjustment of$231 thousand in tax expense relating to the Tax Cuts and Jobs Act of 2017 ("TCJA"). Excluding the effects of these discrete items in income tax expense, and certain tax credits received in each period, our effective tax rate in 2019 would have been 25.9%, compared to 25.3% in 2018.
As a result of a reduction in the corporate income tax rate in the state of
We expect to continue to be profitable in 2020, and thus, that we will incur income tax expense at a combined Federal and state effective rate of between approximately 25% to 26%. This rate is based on the corporate income tax rate of 21% under the TCJA, plus a blended statutory state rate, taking into consideration the temporary reduction in rate in the state ofFlorida . - 25 - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash flow generated by operations, supplemented by borrowing capacity under our revolving credit facility, if ever needed. Our cash generating capability provides us with financial flexibility in meeting operating and investing needs. Our primary capital requirements are to fund working capital needs, and to meet required debt payments, including debt service payments on borrowings and fund capital expenditures.
Consolidated Cash Flows
The following table summarizes our cash flow results for 2019 and 2018:
Components of Cash Flows
(in millions) 2019
2018
Cash provided by operating activities$ 81.2 $
100.3
Cash used in investing activities (31.2 ) (378.4 ) Cash (used in) provided by financing activities (5.4 )
296.7
Increase in cash and cash equivalents$ 44.6 $
18.6
Operating activities. Cash provided by operating activities was
The decrease in cash flows from operations of$19.1 million in 2019 compared to 2018 was primarily due to the cash received in 2018 under the Cardinal equipment purchase agreement, of which$19.0 million was classified as operating cash flow, which did not recur in 2019. Other changes in operating cash flows include an increase of$71.4 million in collections from customers in 2019 compared to 2018, as the result of increased sales, which was partially offset by an increase in payments to suppliers of$44.9 million as the result of higher procurements of inventory, an increase in personnel related disbursements of$21.3 million due to a larger number of employees during 2019, compared to 2018, and an increase in debt service costs of$13.4 million in 2019, compared to 2018, primarily as a result of the issuance of the 2018 Senior Notes due 2026. Also, in 2019, net tax payments decreased$7.6 million in 2019, compared to 2018, due to a federal tax payment of$9.0 million inJanuary 2018 as the result of our ability to defer our fourth quarter 2017 estimated federal tax payment due to the extension of time toJanuary 2018 to make that payment for companies affected by Hurricane Irma. Other collections of cash and other cash activity, net, increased by$0.5 million , primarily related to sales of scrap aluminum.
Direct cash flows from operations for 2019 and 2018 are presented below:
Direct Operating Cash Flows
(in millions) 2019 2018
Collections from customers $ 765.8 $ 694.4
Other collections of cash 8.1 7.6
Disbursements to suppliers (475.6 ) (430.7 )
Personnel related disbursements (180.8 ) (159.5 )
Debt service costs (24.5 ) (11.1 )
Income tax payments, net (11.9 ) (19.5 )
Cash received from Cardinal under purchase agreement - 19.0
Other cash activity, net 0.1 0.1
Cash from operations $ 81.2 $ 100.3
Day's sales outstanding (DSO), which we calculate as accounts receivable divided
by average daily sales, was 42 days on December 28, 2019 , compared to 40 days on
December 29, 2018 .
Inventory on hand as of
Our inventory consists principally of raw materials purchased for the manufacture of our products and limited finished goods inventory as the majority of our products are custom, made-to-order products. Our inventory levels are more closely aligned with our number of product offerings rather than our level of sales. We have maintained our inventory level to have (i) raw materials required to support new product launches; (ii) a sufficient level of safety stock on certain items to ensure an adequate supply of material in the event of a sudden increase in demand and given our short lead-times; and (iii) adequate lead times for raw materials purchased from overseas suppliers in bulk supply. Inventory turns for the year endedDecember 28, 2019 , was 10.9 times, on par with 11.0 times for the year endedDecember 29, 2018 . - 26 - -------------------------------------------------------------------------------- Management monitors and evaluates 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 the majority of our products are made-to-order, we have only a small amount of finished goods and work in progress inventory. Due to these factors, we believe our inventories are not excessive, and we expect the value of such inventories will be realized. Investing activities. Cash used in investing activities was$31.2 million in 2019, compared to$378.4 million in 2018, a decrease in cash used of$347.2 million . We used$354.6 million of cash to acquire businesses in 2018, whereas in 2019 we had no acquisitions. Also, in 2019, we used cash of$31.3 million for capital expenditures, compared to$29.8 million in 2018, an increase of$1.5 million in cash used. Finally, in 2019, we received proceeds of$71 thousand from the sales of property, plant and equipment, compared to$6.0 million in 2018, a decrease of$5.9 million in cash proceeds received from sales of property, plant and equipment, primarily due to cash received in 2018 from Cardinal under the terms of the purchase agreement, pursuant to which we sold certain door glass manufacturing assets to Cardinal. Financing activities. Cash used in financing activities was$5.4 million in 2019, compared with cash provided of$296.7 million in 2018, a decrease in cash provided of$302.1 million . In 2019, we entered into the Third Amendment of the 2016 Credit Agreement due 2022, which resulted in the repayment of the then existing term loan with proceeds under a new term loan in the amount of$64.0 million , with the exception of a net increase in borrowings of$25 thousand . This compares to 2018, in which we issued the 2018 Senior Notes due 2026, which provided proceeds of$315.0 million . Also, in 2018, we issued Company common stock in the 2018 Equity Issuance, which provided net proceeds of$152.5 million . Using primarily the proceeds from the 2018 Equity Issuance, along with cash on hand, in 2018 we made repayments of long-term debt of nearly$160.3 million . We recorded payments of financing costs totaling$0.9 million in 2019, related to the Third Amendment, compared to$12.1 million in 2018, related to both the Second Amendment and the 2018 Senior Notes due 2026. In 2019, we also used$5.5 million in cash to make purchases of our common stock in open market transactions. See "Share Repurchase Program" below for more information. Taxes paid relating to common stock withheld from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards were$0.5 million in 2019, compared to$0.7 million in 2018, a decrease in cash used of$0.2 million . Proceeds from the exercises of stock options were$1.6 million in 2019, compared to$2.2 million in 2018, a decrease in cash provided of$0.6 million . Share Repurchase Program. OnMay 22, 2019 , our Board of Directors authorized and approved a share repurchase program of up to$30 million . The repurchases may be made in open market or private transactions from time to time. Repurchases of shares may be made under a Rule 10b5-1 plan, which would permit repurchases when the Company might otherwise be precluded from doing so under applicable laws. The Company bases repurchase decisions, including the timing of repurchases, on factors such as the Company's stock price, general economic and market conditions, the potential impact on the Company's capital structure, the expected return on competing uses of capital such as strategic acquisitions and capital investments, and other corporate considerations, as determined by management. From the inception of the program onMay 22, 2019 , throughDecember 28 , 2019,we made repurchases of 393,819 shares of our common stock at a total cost of$5.5 million . The repurchase program may be suspended or discontinued at any time. Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. In 2019 and 2018, we spent$31.3 million and$29.8 million , respectively, for capital expenditures, primarily representing equipment purchases and facility improvements expected to support growth. Management expects to spend between$28 million and$34 million for capital expenditures in 2020, excluding our NewSouth Acquisition. Our capital expenditure program is geared towards making investments in capital assets targeted at increasing both gross sales and margins, but also includes capital expenditures for maintenance capital.
Capital Resources and Debt Covenants
2018 Equity Issuance
On
The offering resulted in gross proceeds to the Company of$161.0 million . Net of an underwriting fee of$1.15 per share, net cash proceeds to the Company approximated$153.0 million . We used$152.0 million of these proceeds to prepay borrowings outstanding under the term loan portion of the 2016 Credit Agreement due 2022. The remainder of the proceeds were used for working capital or general corporate purposes, including payment of offering expenses of approximately$447 thousand , classified as a reduction of additional paid-in capital in the accompanying consolidated balance sheet as ofDecember 29, 2018 .
2018 Senior Notes Due 2026
OnAugust 10, 2018 , we completed the issuance of$315.0 million aggregate principal amount of 6.75% senior notes ("2018 Senior Notes Due 2026"), issued at 100% of their principal amount. The 2018 Senior Notes due 2026 are jointly and severally and - 27 -
-------------------------------------------------------------------------------- fully and unconditionally guaranteed on a senior unsecured basis by each of the Company's existing and future restricted subsidiaries, other than any restricted subsidiary of the Company that does not guarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2018 Senior Notes due 2026 are senior unsecured obligations of the Company and the guarantors, respectively, and rank pari passu in right of payment with all existing and future senior debt and senior to all existing and future subordinated debt of the Company and the guarantors. The 2018 Senior Notes due 2026 were offered under Rule 144A of the Securities Act, and in transactions outsidethe United States under Regulation S of the Securities Act, and have not been, and will not be, registered under the Securities Act. The 2018 Senior Notes due 2026 mature onAugust 10, 2026 . Interest on the 2018 Senior Notes due 2026 is payable semi-annually, in arrears, beginning onFebruary 16, 2019 , with interest accruing at a rate of 6.75% per annum fromAugust 10, 2018 . We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2018 Senior Notes due 2026 totaling$10.4 million , which is being amortized under the effective interest method. See "Deferred Financing Costs" below. As ofDecember 28, 2019 , the face value of debt outstanding under the 2018 Senior Notes due 2026 was$315.0 million , and accrued interest totaled$8.7 million . The indenture for the 2018 Senior Notes due 2026 gives us the ability to optionally redeem some or all of the 2018 Senior Notes due 2026 at the redemption prices and on the terms specified in the indenture governing the 2018 Senior Notes due 2026. The indenture governing the 2018 Senior Notes due 2026 does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a change of control, as defined in the indenture, the Company is required to offer to repurchase the notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The indenture for the 2018 Senior Notes due 2026 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) enter into agreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with affiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the Company's assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; and (viii) designate the Company's subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications. OnJanuary 24, 2020 , we completed the add-on issuance of$50.0 million aggregate principal amount of 6.75% senior notes ("Additional Senior Notes"), issued at 106.375% of their principal amount, resulting in a premium to us of$3.2 million . The Additional Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the Additional Senior Notes, including premium, were used, together with cash on hand, to pay the$92 million purchase price in the NewSouth Acquisition.
2016 Credit Agreement Due 2022
OnFebruary 16, 2016 , we entered into the 2016 Credit Agreement due 2022, among us, the lending institutions identified in the 2016 Credit Agreement due 2022, andSunTrust Bank , as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 established new senior secured credit facilities in an aggregate amount of$310.0 million , consisting of a$270.0 million Term B term loan facility maturing inFebruary 2022 that amortized on a basis of 1% annually during its six-year term, and a$40.0 million revolving credit facility that was to mature inFebruary 2021 that included a swing line facility and a letter of credit facility. OnOctober 31, 2019 , we entered into an amendment of our 2016 Credit Agreement due 2022 ("Third Amendment"). The Third Amendment provides for, among other things, (i) a new three-year Term A loan in the aggregate principal amount of$64.0 million (the "Initial Term A Loan"), which refinances in full our existing Term B term loan facility under the 2016 Credit Agreement, and has no regularly scheduled amortization, and (ii) a new five-year revolving credit facility due 2024 in an aggregate principal amount of up to$80.0 million (the "New Revolving Facility"), which replaces our existing$40.0 million revolving credit facility under the 2016 Credit Agreement, and includes a swing-line facility and letter of credit facility. Our obligations under the 2016 Credit Agreement continue to be secured by substantially all of our assets, as well as our direct and indirect subsidiaries' assets. Pursuant to the Third Amendment, interest on all loans under the 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. The Third Amendment decreases the applicable interest rate margins for the Initial Term Loan A from (i) 2.50% to a spread of 1.00% to 1.75% based on our first lien net leverage ratio, in the case of the Base Rate Loans (with a floor of 100 basis points), and (ii) 3.50% to a spread ranging from 2.00% to 2.75% based on our first lien leverage ratio, in the case of the Eurodollar Loans (with a floor of zero basis points). Also, in connection with the Third Amendment, we will pay quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Third Amendment also modifies the springing financial covenant under the 2016 Credit Agreement to provide that such financial covenant will not be tested until the Initial Term A Loan is paid in full. As ofDecember 28, 2019 , there were$2.0 million of letters of credit outstanding and$78.0 million available under the revolver. - 28 -
-------------------------------------------------------------------------------- Fees and costs relating to the Third Amendment were$0.9 million , which are deferred and being amortized. In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. Deferred financing costs and original issue discount allocated to these lenders of$1.5 million were written-off and classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year endedDecember 28, 2019 . As ofDecember 28, 2019 , the principal amount of debt outstanding under the 2016 Credit Agreement due 2022 was$64.0 million , and accrued interest was$280 thousand . OnMarch 16, 2018 , we entered into a second amendment of our 2016 Credit Agreement due 2022. The Second Amendment, among other things, decreases the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2022) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2022), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2022). In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling$3.4 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year endedDecember 29, 2018 . Interest on all loans under the 2016 Credit Agreement due 2022 is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement due 2022 onMarch 16, 2018 , as described above, borrowings under the term loans and the revolving credit facility accrued interest at a rate equal to, at our option, LIBOR (with a floor of 100 basis points in respect of the term loan), or a base rate (with a floor of 200 basis points in respect of the term loan) plus an applicable margin. The applicable margin was 475 basis points in the case of LIBOR and 375 basis points in the case of the base rate. The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 3.77% as ofDecember 28, 2019 and was 5.84% atDecember 29, 2018 . Pursuant to the Third Amendment, the 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of thirty-five percent (35%) of the revolving facility commitment (excluding$7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 103% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us from exceeding a maximum first lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt to EBITDA) as of the last day of each applicable fiscal quarter. To the extent the springing financial covenant is in effect, the first lien net leverage ratio cannot exceed 4.00:1.00 (4.50:1.00 during a significant acquisition period as defined). We have not been required to test our first lien net leverage ratio because we have not exceeded 35% of our revolving capacity. The 2016 Credit Agreement due 2022 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, entry into restrictive agreements, prepayments of certain debt and transactions with affiliates, in each case, subject to exceptions and qualifications. The 2016 Credit Agreement due 2022 also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement due 2022 may be accelerated and may become immediately due and payable. OnSeptember 18, 2018 , contemporaneously with the 2018 Equity Issuance, we prepaid$152.0 million in borrowings outstanding under the term loan portion of the 2016 Credit Agreement due 2022. OnDecember 19, 2018 , we voluntarily prepaid an additional$8.0 million in borrowings under the 2016 Credit Agreement due 2022. Interest expense, net, in the consolidated statement of operations in the year endedDecember 29, 2018 includes$5.6 million of accelerated amortization of lenders fees and discount relating to the prepayments of$152.0 million and$8.0 million of borrowings under the term loan portion of the 2016 Credit Agreement due 2022 we made. - 29 - --------------------------------------------------------------------------------
Deferred Financing Costs
All debt-related fees, costs and original issue discount, including those
related to the revolving credit portion of the facility, is classified as a
reduction of the carrying value of long-term debt. The activity relating to
third-party fees and costs, lender fees and discount for the year ended
(in thousands) Total At beginning of year$ 12,361
Less: Amortization expense relating to 2016 Credit Agreement due 2022 (663 ) Add: Third amendment of 2016 Credit Agreement refinancing costs
854
Less: Debt extinguishment costs relating to third amendment (1,512 ) Less: Amortization expense relating to 2018 Senior Notes due 2026 (1,011 ) At end of year$ 10,029 Estimated amortization expense relating to third-party fees and costs, lender fees and discount for the years indicated, as ofDecember 28, 2019 , is as follows: (in thousands) Total 2020$ 1,390 2021 1,454 2022 1,521 2023 1,476 2024 1,561 Thereafter 2,627 Total$ 10,029 As a result of prepayments of the term loan portion of the 2016 Credit Agreement due 2022 totaling$204.0 million since its inception inFebruary 2016 , and pursuant to the Third Amendment, we have no future scheduled repayments until the maturity of the facility onOctober 31, 2022 . The contractual future maturities of long-term debt outstanding, including other debt relating to our software license financing arrangement, as ofDecember 28, 2019 , are as follows (at face value): (in thousands) Total 2020 $ - 2021 - 2022 64,000 2023 - 2024 - Thereafter 315,000 Total$ 379,000 - 30 -
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Long-Term Debt
Long-term debt consists of the following:
December 28, December 29,
2019 2018
(in thousands)
2018 Senior Notes Due 2026 - Senior notes issued
on
August 10, 2018 , due August 10, 2026 . Interest
payable semi-annually, in arrears, beginning on
February 16, 2019 , accruing at a rate of 6.75%
per annum beginning August 10, 2018. (1) $ 315,000 $ 315,000 2016 Credit Agreement Due 2022 - Term loan payable with no
contractually scheduled amortization payments. A lump sum payment
of$64.0 million due onOctober 31, 2022 . Interest payable quarterly at LIBOR or the Base prime rate plus an applicable margin. AtDecember 28, 2019 , the average rate was 2.00% plus a margin of 1.77%. AtDecember 29, 2018 , the average rate was 2.34% plus a margin of 3.50%. (2) 64,000 63,975 Other debt (3) - 163 Long-term debt 379,000 379,138 Fees, costs and original issue discount (4) (10,029 )
(12,361 )
Long-term debt, net 368,971
366,777
Less current portion of long-term debt (3) -
(163 )
Long-term debt, net, less current portion$ 368,971 $ 366,614
(1) Effective on
million aggregate principal amount of 6.75% senior notes due
issued at 100% of their principal amount. The senior notes were issued to
finance, together with cash on hand, the WWS acquisition. On
2020, we issued an additional
106.375% of their principal amount, to finance, together with cash on hand,
the
(2) Effective on
loan into a new
credit facility, due
(3) In
purchase of an enterprise-wide software license relating to office
productivity software. This financing arrangement requires 24 monthly
payments of
arrangement to be
6.00%, which approximated our borrowing rate under the 2016 Credit Agreement
due 2022 at that time, a Level 3 input. This note was fully repaid in 2019.
(4) Fees, costs and original issue discount - represents third-party fees, lender
fees, other debt-related costs, and original issue discount, recorded as a
reduction of the carrying value of the debt pursuant to ASU 2015-03, and are
amortized over the lives of the debt instruments under the effective interest
method.
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DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations as ofDecember 28, 2019 (in thousands): Payments Due by Period Contractual Obligations Total Current 2-3 Years 4-5 Years Thereafter Long-term debt - 2016 Credit Agreement due 2022 (1)$ 71,925 $ 2,693 $ 68,878 $ 354 $ - Long-term debt - 2018 Senior Notes due 2026 (2) 527,903 24,385 49,275 49,275 404,968 Operating leases 36,171 6,319 8,649 7,512 13,691 Aluminum forward contracts 317 317 - - - Supply agreements 14,875 14,875 - - - Equipment purchase commitments 1,357 1,357 - - - Total contractual cash obligations$ 652,548 $ 49,946 $ 126,802 $ 57,141 $ 418,659
(1) Includes estimated future interest expense on our term debt under the 2016
Credit Agreement due 2022 at a weighted-average interest rate of 3.77% as of
margin of 1.77%. Includes unused revolver availability fees at 0.25%, the
rate as of
(2) Includes estimated future interest expense on our 2018 Senior Notes due 2026
at a fixed interest rate of 6.75% as of
additional
The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year atDecember 28, 2019 . Purchase orders entered into in the ordinary course of business are excluded from the above table. Amounts for which we are liable are reflected on our consolidated balance sheet as accounts payable and accrued liabilities. We are obligated to purchase certain raw materials used in the production of our products from certain suppliers pursuant to stocking programs. If all of these programs were cancelled by us, as ofDecember 28, 2019 , we would be required to pay$14.9 million for various materials. AtDecember 28, 2019 , we had$2.0 million in standby letters of credit related to our workers' compensation insurance coverage, and commitments to purchase equipment of$1.4 million .
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements, we followU.S. generally accepted accounting principles. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in Item 8, Note 2. The following is a summary of our more significant accounting estimates that require the use of judgment in preparing the financial statements.
We disclosed the Company's accounting policy for
For our Southeast reporting unit, we completed a qualitative assessment of our Southeast reporting unit goodwill on the first day of our fourth quarter of 2019. This qualitative assessment included an evaluation of relevant events and circumstances that existed at the date of our assessment. Those events and circumstances included conditions specific to our Southeast reporting unit, such as the inputs that would be used to calculate its fair values, as well as events and circumstances related to the Southeast reporting unit, such as the industry in which we operate, our competitive environment, the availability and costs of its raw materials and labor, the financial performance of our Southeast reporting unit, and factors related to the markets in which our Southeast reporting unit operates. We also considered that, for our Southeast reporting unit, no new impairment indicators were identified since the date of our prior assessment, which was a qualitative assessment. Based on the most recent qualitative assessment, we concluded that it is not more likely than not that the Southeast reporting unit's carrying value exceeds it fair value. For our WWS reporting unit, for the nine-month period in 2019 endedSeptember 28, 2019 , we experienced financial results which were below the financial projections as included in our valuation of certain intangible assets relating to ourWWS Acquisition . As such, we elected to forego a qualitative assessment of our WWS acquisition goodwill and completed a quantitative assessment on - 32 - -------------------------------------------------------------------------------- the first day of our fourth quarter of 2019. The quantitative assessment was conducted using various valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and included a reconciliation of the estimated combined fair values of both of our reporting units to the market capitalization of the Company. Based on that quantitative assessment, we concluded that it is not more likely than not that the carrying value our WWS reporting unit exceeds it fair value, as the estimated fair value of our WWS reporting unit substantially exceeded the carrying value. We completed qualitative assessments of our PGT and CGI trade names on the first day of our fourth quarter of 2019. The qualitative assessments included an evaluation of relevant events and circumstances that existed at the date of our assessment. Those events and circumstances included conditions specific to our PGT and CGI trade names, such as the inputs that would be used to calculate their fair values, as well as events and circumstances related to the PGT and CGI trade names, such as the industry in which we use the PGT and CGI trade names, our competitive environment, the availability and costs of its raw materials and labor, the financial performance of our Company, and factors related to the markets in which our Company operates. We also considered that, for our PGT and CGI trade names, no new impairment indicators were identified since the date of our prior assessment, which was a qualitative assessment for our PGT trade name, and a quantitative assessment for our CGI trade. The quantitative assessment for CGI resulted from a triggering event inJanuary 2019 , consistent with management's plan for CGI's Estate Collection of products, in which we began the process of rebranding our Estate Collection as WinDoor-branded products. This rebranding aligns the Estate Collection's status as a high-end, luxury product line, with WinDoor's focus on the luxury market. We considered this rebranding of CGI's Estate Collection of products as WinDoor-branded products as a triggering event in 2018 as it results in a shift in revenues from being sold under the CGI trade name, to being sold under the WinDoor trade name. Based on these qualitative assessments, we concluded that it is not more likely than not that our PGT and CGI trade names are impaired. In 2019, our WinDoor trade name did not meet the financial projections used in our prior quantitative assessment. Also, our WWS tradename was affected by the same factors as discussed above for our WWS goodwill. As such, we completed quantitative assessments of our WinDoor and WWS trade names on the first day of our fourth quarter of 2019. Based on these quantitative assessments, we concluded that it is not more likely than not that our WinDoor and WWS trade names are impaired, as the estimated fair value of the tradenames exceeded the carrying value. The carrying value for the WinDoor and WWS trade names are$18.4 million and$73.0 million , respectively. Actual results can differ from our estimates, requiring adjustments to our assumptions. The result of these changes could result in a material change in our calculation and an impairment of our trade names. If our WinDoor and WWS brands do not perform to the levels expected in their most recent quantitative assessments of fair value, the WinDoor and WWS trade names are at higher degrees of risk for future impairment. The quantitative assessments resulted in the fair value exceeding the carrying value of the WinDoor and WWS trade names by 7% and 6%, respectively. An increase of 1 percentage point in the discount rate, coupled with a 5% decrease in cash flows would result in the carrying values exceeding the fair values of these trade names, and result in impairments.
RECENTLY ISSUED ACCOUNTING STANDARDS
Fair Value Measurement Disclosures
InAugust 2018 , the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement". The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company does not believe that the adoption of this guidance will have a significant impact on its fair value disclosures.
Financial Instruments - Credit Losses
InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. Subsequently, inNovember 2018 , the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses". ASU 2018-19 clarifies the codification and corrects unintended application of the guidance. ASU's 2016-13 and 2018-19 are effective for us for our fiscal year beginning afterDecember 15, 2019 . We do not believe that the adoption of this guidance will have a significant impact on our consolidated financial statements. - 33 - --------------------------------------------------------------------------------
FORWARD OUTLOOK Net sales Looking ahead into 2020, we believeFlorida's economic factors that impact our business currently are stable. Single-family housing starts in 2019 grew approximately 6%, below what we believe theFlorida market can support. Within our coreFlorida market, we expect our sales into the repair and remodel segment to grow modestly in 2020, as compared to 2019. We expect to continue to see growth in our sales into the new construction segment due in part to what we believe will be continued growth in single-family starts and dealer expansion. Homebuilder confidence indices ended the year at near record levels, both nationally and regionally, in the South and West. Based on that confidence, as well as interest rates remaining relatively low and the persistent shortage of housing in many markets, we believe indications are that 2020 will be a solid year for single-family housing starts in our primary markets, which may be moderated somewhat by the continuing shortage of workers in many of the construction trades. For our Western business, we expect our core market inCalifornia to begin to rebound from the depressed levels seen in 2019. Our initiatives to grow Western's custom product sales in core and emerging markets delivered strong growth in 2019 and we expect this trajectory to continue in 2020. In addition, we plan to expand Western sales into the repair and remodel segment with the opening of a pilot site inCalifornia in 2020, and the introduction of our Western products to dealers that have a focus on the repair and remodel segment in the westernUnited States .
We expect 2020 full-year sales to range between
Gross profit and gross margin
We believe the following factors, which are not all inclusive, may impact our gross profit and gross margin in 2020:
• Our gross margin percentages are influenced by total sales due to operating
leverage of fixed costs, and also by product mix. We expect product mix to
begin moving toward a more normalized historical mix in both our PGT legacy
brands and WWS.
• During 2019, our gross profit and gross margin percentage continued to
benefit from improved operational efficiencies in our PGT legacy business
and the higher gross margin contributed by our WWS sales. Our focus in 2020
will be to continue to sustain and strive to further improve our scrap rate
performance and operating efficiencies, in addition to improving the
operational efficiency, including materials and labor cost reductions, at
WWS in support of its current product mix, which has a relatively higher
level of custom sales products, and which are more costly to manufacture,
versus its volume products, as compared to its historical mix. Furthermore,
we have taken steps in our product pricing to benefit gross margin and
offset input inflation.
• Aluminum prices, which can fluctuate significantly, increased during the
first half of 2019, but stabilized in the second half of the year. We
believe that the fluctuations in aluminum prices are in some part affected
by the current
imports of steel and aluminum, including the potential for the imposition
of additional tariffs on such products entering
believe the uncertainty surrounding the potential for these actions has and
may continue to cause unpredictable volatility in aluminum prices during
2020, and that volatility may be significant. As of the beginning of 2020,
we are hedged for approximately 64 percent of our anticipated aluminum
needs through
is an average representing the cash price per pound, excluding the delivery
component for the Midwest Premium, which is currently approximately
per pound. We have entered into additional coverage for 2021 where we are
covered for approximately 15 percent of our anticipated needs through June
2021 at an average cash price of
approximately
• Our gross profit and gross margin are also influenced by costs of labor.
Portions of our labor force have become more tenured and, therefore, labor
costs have begun to normalize as efficiencies are achieved. However, the
strong jobs environment in Florida has resulted in a contraction in thelabor pool, which has caused construction labor market wage inflation on
the Company. We expect the tight construction labor market to continue
during 2020.
Selling, general and administrative expenses (SG&A)
This expense category will be affected by the inclusion of the SG&A of NewSouth in 2020, including non-cash amortization depending on the level of amortizable intangible assets we determine to have acquired, if any. We are currently in the process of estimating the fair values of acquired intangible assets. We expect to leverage fixed SG&A on anticipated higher sales in 2020, compared to 2019, and to continue to look for areas within SG&A to drive efficiencies.
Depreciation and Amortization
Including the estimated impact on depreciation and amortization from our
acquisition of NewSouth, depreciation and amortization is estimated to be
approximately
- 34 -
--------------------------------------------------------------------------------Interest expense
During 2019, we entered into the Third Amendment of the 2016 Credit Agreement due 2022, which resulted in reductions in our overall borrowing rate of 150 basis points, which we expect to reduce interest costs under this agreement. However, with the issuance of the add-on notes we used to finance a portion of the purchase price for acquiring NewSouth, totaling additional$50.0 million , added onto the 2018 Senior Notes due 2026, the level of our debt outstanding increased to$429.0 million , of which$365.0 million is at a fixed interest rate of 6.75%. We believe interest expense on our long-term debt will be approximately$29 million in 2020, including an estimated$1 million of non-cash amortization of net deferred financing costs.
Income tax expense
We expect to continue to be profitable in 2020, and thus, we believe that we will incur income tax expense at a combined Federal and state effective rate of between approximately 25% to 26%. This rate is based on the lower overall corporate income tax rate of 21% as the result of the Tax Act, plus a blended statutory state rate, taking into consideration a reduction in the corporate tax rate inFlorida from 5.5% to 4.458%.
Liquidity and capital resources
We had$97.2 million of cash on hand as ofDecember 28, 2019 . OnFebruary 1, 2020 , we completed our acquisition of NewSouth Acquisition for$92 million in cash, financed by the issuance of the Additional Senior Notes of$50.0 million aggregate principal amount of additional 6.75% 2018 Senior Notes due 2026 onJanuary 24, 2020 , issued at 106.375% of their principal amount, resulting in a premium to us of$3.2 million , together with cash on hand. During 2020, we expect to continue to generate sufficient cash from operations to service the interest requirements on our debt, cover our operating expenses, and spend between$28 million and$34 million for capital expenditures, excluding any capital expenditures required by NewSouth. As a result of the Third Amendment, we have no further mandatory required payments remaining until the maturity inOctober 2022 of our 2016 Credit Agreement due 2022 but may continue to make voluntary prepayments in the future as our cash generation and other relevant factors permit. However, no assurances can be given that cash from operations will be sufficient for some or all these purposes.
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