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 January 2,
2021, to the results for the year ended December 28, 2019 can be found in Item 7
of our Annual Report on Form 10-K for the year ended January 2, 2021, filed with
the SEC on March 2, 2021, which is hereby incorporated by reference. In the
comparisons which follow, the year ended January 1, 2022 consisted of 52 weeks,
whereas the year ended January 2, 2021 consisted of 53 weeks. We believe the
effect of the extra week in our 2020 fiscal year ended January 2, 2021 was
immaterial and does not impact the comparability of our results of operations
for the year ended January 1, 2022 to the year ended January 2, 2021.
Our MD&A is presented in the following sections:
•
Impact of COVID 19 on our Business;
•
Executive Overview;
•
Results of Operations;
•
Liquidity and Capital Resources;
•
Critical Accounting Estimates;
•
Recently Issued Accounting Standards; and
•
Forward Outlook
IMPACT OF COVID-19 ON OUR BUSINESS
During March 2020, a global pandemic (the "Pandemic") was declared by the World
Health Organization related to the rapidly growing outbreak of a novel strain of
coronavirus ("COVID-19"). The Pandemic has resulted in a significant number of
infections, hospitalizations and deaths in several of our key markets, including
Arizona, California, Florida and Texas. The Pandemic has significantly affected
economic conditions in those markets, and in the United States in general, and
internationally, including due to federal, state and local governments and
employers reacting to the public health crisis with mitigation measures, and
also due to the general fear and uncertainty created by the Pandemic, all of
which has resulted in workforce, supply chain and production disruptions, along
with reduced demand and spending in many industries and markets. Although many
of the government-mandated restrictions on economic and social activities that
were put in place as part of the initial response to the Pandemic have been
lifted, and vaccines with high degrees of efficacy have been approved by the
United States Food and Drug Administration, it is still uncertain when or if the
nation-wide program of vaccination will result in herd immunity to COVID-19 in
the United States or globally. This uncertainty is being impacted by several
factors, including vaccine hesitancy or resistance, and the emergence of the
highly-contagious strains of COVID-19 known as the Delta and Omicron variants.
As a result, it is still currently unclear when, or if, social, business,
occupational, educational and economic conditions will return to pre-Pandemic
conditions.
Our first priority has been and remains the health and safety of our employees,
our customers and their families and the communities in which we operate, and as
COVID-19 gained a foothold in the Southeast Florida area, we took swift action
to protect our employees by temporarily suspending operations at and fumigating
our Miami and Hialeah, Florida facilities, each for one-week periods in April
2020. We also took that step at our Western Windows Systems facility in Phoenix,
Arizona during July 2020. All of our manufacturing locations are operational and
have been deemed essential under various government orders. Each of our
facilities has implemented policies and procedures designed to protect the
health and safety of our team members in light of the Pandemic, including: 1)
continuing to monitor guidelines from federal, state and local health
authorities for personal health and safety, and updating our protocols as
needed; 2) implementing a mandatory face-mask policy for employees at all of our
locations, and providing them with those masks where needed; 3) enforcing social
distancing in common areas and work areas, including production lines where
possible; 4) implementing work-at-home programs where possible; and 5) sourcing
supplies such as reusable masks, hand sanitizer and cleaning solutions for use
by our employees. However, the highly-contagious Delta and Omicron variants
impacted our operations in 2021 through incremental costs incurred relating to
cleaning and sanitizing costs for the protection of the health of our employees
and safety of our facilities, as well as costs of lost productivity from
employee quarantines and testing, and cancellations of previously scheduled
trade shows and customer events, resulting in negative impacts on our results of
operations for the years ended January 1, 2022, and January 2, 2021.
- 30 -
--------------------------------------------------------------------------------
Although recent developments regarding the Pandemic appear to be positive, and
point to the possibility that vaccination programs and other safety measures
implemented throughout the United States may be having the hoped for beneficial
affects intended, the extent to which the continuing circumstances around the
Pandemic could affect our future business, operations and financial results
continue to depend upon numerous evolving factors that we are not able to
accurately predict, including the timing of any relief that may come from the
current program of nationwide vaccinations and its effect on the duration of the
continuing economic and market disruptions related to the Pandemic, and whether
such vaccines are effective against any current and new variants of coronavirus,
and the nature, amounts and duration of any additional government stimulus
measures designed to bolster the economy. As such, we continue to be unable to
accurately predict the impact the Pandemic and the challenges it has created for
the U.S. and global economies, will have on our financial performance and
operations going forward due to numerous uncertainties, including the severity
of the disease, the duration of the outbreak, when or if herd immunity is
achieved in the United States, especially in our key markets, actions that may
be taken by governmental authorities to attempt to control the Pandemic, the
impact to our customers' and suppliers' businesses and other factors identified
in Part I, Item 1A "Risk Factors" herein. We will continue to evaluate the
nature and extent of the impact of the Pandemic to our business, consolidated
results of operations, and financial condition.
EXECUTIVE OVERVIEW
Sales and Operations
During 2021, we experienced increases in sales at both our Southeast and Western
segments, as demand in our key markets of Florida, Arizona and California
continued to increase, and the strong order entries we reported in prior
quarters have translated into higher shipments in 2021. Our sales grew to
$1,161.5 million in our 2021 fiscal year, an increase of $278.9 million, or
31.6%, compared to $882.6 million in 2020. Sales in 2021 includes a combined
$107.1 million in sales from our Eco and Anlin acquisitions. Excluding sales
from all 2021 acquisitions, we experienced solid organic growth of $164.4
million, or 18.6%, in 2021, compared to 2020. We believe this increased demand
is being driven by improved economic conditions in 2021 and our markets in
California have gained momentum since COVID restrictions were lifted, and our
Texas and Arizona markets continued to strengthen. We continue to see strong
demand in both our new construction and repair and remodel channels in the
Southeast regions which showed strong demand as compared to the challenging
conditions of 2020 which were a result of the Pandemic. Our Southeast business
unit had sales of $968.7 million in 2021, an increase of $216.3 million, or
28.7%, compared to $752.4 million in 2020. Net sales of our Western segment
increased $62.6 million, or 48.1%, to $192.8 million in 2021, from $130.2
million in 2020.
We are optimistic that we will see this growth we have experienced continue in
2022, and we continue to make strides in investing in the resources necessary to
meet this increasing demand. During 2021 we faced headwinds from the pressure on
our margins due to recruiting, training and workforce retention costs.
Additionally, aluminum spot prices have increased significantly throughout the
year, which leaves the unhedged portions of our expected aluminum usage exposed
to the volatility of changing aluminum prices, as well as the increases in
prices we have experienced in many of our other material costs, including glass,
vinyl, hardware and supplier-based surcharges. As a result of these headwinds,
we announced a 3% surcharge in Florida that took effect in November 2021 for all
then existing and future orders to help offset these costs, which we believe
began benefiting gross margin immediately through the completion of our 2021
fiscal year. Additionally, we announced another 6% to 12% price increase for new
orders beginning November 1, 2021, that we expect to begin to impact our results
beginning in 2022 due to our lead times.
Our backlog, which we define as customer orders that we have accepted but not
yet shipped, has increased significantly, to $355.9 million as of January 1,
2022, from $199.5 million as of January 2, 2021. We define backlog as orders
that we have received and have accepted from customers, but that have not yet
shipped. The majority of this increase is a result of an increased level of
order entry during 2021, but also includes increases relating to the
acquisitions. However, during 2021, our backlog increased as a result of growth
in orders above our capacity to keep pace with the increased demand. As a
result, during 2021, we opened an additional approximately 130,000 square foot
manufacturing facility in Fort Myers, Florida to provide additional
manufacturing capacity.
During the first half of 2020, we also experienced some disruption in our
ability to obtain adequate supplies of glass for our manufacturing processes by
what we think were the impacts of the Pandemic on our glass supply chain
partners, which ultimately resulted in an increase in our lead times to our
customers. This factor lessened during the second half of 2020 and into 2021,
and obtaining adequate supplies of glass has become less of a challenge to our
supply chain. We continue to have good relations with our glass supply chain
partners, and we have gained additional control over our supply chain for glass
with our acquisition of a 75% stake in Eco, whose vertically integrated
operations include a glass manufacturing division which supplies all of the
impact-resistant glass used in Eco's window and door products. In addition,
Eco's glass division sells laminated glass products to other companies,
including to us, as an additional source of revenue. We believe that our
investment in Eco has provided us with a secure, high-quality, dependable supply
of glass for our operations.
- 31 -
--------------------------------------------------------------------------------
Liquidity and Cash Flow
During 2021, we generated $63.7 million in cash flow from operations, a decrease
of $11.8 million, compared to 2020. In 2020, during the second half of the year,
our order entry levels began increasing and continued to increase though the end
of the year. Because of this increased demand for our products, we determined to
continue to manufacture and ship during late December 2020, whereas in 2021, we
had our usual holiday shut-down. As such, we saw a decrease in accounts payable
at the end of 2021 from payments of payables not seen at the end of 2020 due to
the continuation of operations through the end of the year. The resulted in a
use of operating cash flow for payments of accounts payable at the end of 2021,
compared to a source of operating cash flow at the end of 2020.
We ended the 2021 fiscal year with $96.1 million in cash, We have no scheduled
debt repayment obligations until the maturity of our 2016 Credit Agreement due
2024, and have $74.7 million in availability under the revolving credit facility
under our 2016 Credit Agreement due 2024, which does not expire until October
2024.
Cash generated from operations was generally used to fund operations and
investing cash flows, which was primarily composed of capital expenditures in
2021. However, in 2021, we consummated several acquisitions, including the Anlin
Acquisition, which was funded primarily with proceeds from the issuance of the
2021 Senior Notes due 2029, and incremental borrowings under the 2016 Credit
Agreement due 2024, but which also included the Eco Acquisition, the funding of
which included using $31.1 million of cash on hand, and the acquisition of the
assets of CRi, which was an all-cash acquisition and used $12.1 million of cash
on hand. Additionally, during 2021, due to our decision in early 2020 to
decrease spending on a majority of capital projects as part of our cash
preservation strategy due to the uncertainty around the Pandemic, we increased
our capital spending to near pre-Pandemic levels. This resulted in an increase
in capital expenditures to $33.4 million, compared to $24.8 million in 2020, an
increase of $8.6 million in cash used.
- 32 -
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Analysis of Selected Items from our Consolidated Statements of Operations
Year Ended
January 1, January 2, Percent Change
2022 2021 2021-2020
(in thousands, except per share amounts)
Net sales $ 1,161,464 $ 882,621 31.6%
Cost of sales 757,965 561,297 35.0%
Gross profit 403,499 321,324 25.6%
Gross margin 34.7 % 36.4 %
SG&A expenses 303,043 224,386 35.1%
SG&A expenses as a percentage of net sales 26.1 % 25.4 %
Impairment of trade name - 8,000
Restructuring costs and charges - 4,227
Income from operations 100,456 84,711
Interest expense, net 30,029 27,719 8.3%
Debt extinguishment costs 25,472 -
Income tax expense 9,759 11,884 -17.9%
Net income 35,196 45,108 -22.0%
Less: Net income attributable to redeemable
non-controlling interest (2,318 ) -
Net income attributable to the Company $ 32,878 $ 45,108 -27.1%
Calculation of net income per common share
attributable to common shareholders:
Net income attributable to the Company $ 32,878 $ 45,108
Change in redemption value of redeemable (6,081 ) -
non-controlling interest
Net income attributable to common $ 26,797 $ 45,108
shareholders
Net income per common share attributable to
common shareholders:
Basic $ 0.45 $ 0.77
Diluted $ 0.45 $ 0.76
Weighted average number of common shares
outstanding:
Basic 59,518 58,887
Diluted 60,058 59,360
- 33 -
--------------------------------------------------------------------------------
Full Year 2022 Compared with Full Year 2021
Net sales
Net sales for 2021 were $1,161.5 million, a $278.9 million, or 31.6%, increase
in sales, from $882.6 million in the prior year.
The following table shows net sales by segment (in millions, except
percentages):
Year Ended
January 1, 2022 January 2, 2021
Sales % of sales Sales % of sales % change
Product category:
Southeast segment $ 968.7 83.4 % $ 752.4 85.2 % 28.7 %
Western segment 192.8 16.6 % 130.2 14.8 % 48.0 %
Total net sales $ 1,161.5 100.0 % $ 882.6 100.0 % 31.6 %
Net sales of our Southeast segment were $968.7 million in 2021, compared with
$752.4 million in 2020, an increase of $216.3 million. Net sales of our Western
segment were $192.8 million in 2021, compared with $130.2 million in 2020, an
increase of $62.6 million. Sales of our Western segment are composed of sales of
WWS.
The increase in net sales in 2021 of $278.9 million was primarily driven by
organic sales growth at both our Southeast and Western segments and the effects
of the recovery from the Pandemic, as well as revenues added through
acquisitions, which included $107.1 million from our Eco and Anlin Acquisitions.
We believe the organic increase in sales of our Southeast segment is due to a
resumption of demand for our products in both the new construction and repair
and remodel markets that approached the pre-Pandemic strength that existed in
early 2020. Our direct-to-consumer brand also experienced solid organic growth
in 2021, compared to 2020. Our Western segment experienced strong growth in
2021, compared to 2020, which we believe continued to see a strengthening
housing market in the western United States that began in late 2020, but also as
the effects of the Pandemic, which appeared to be more pronounced in the West,
lessened in 2021 compared to last year. Sales of our Western segment include the
increase from our CRi Acquisition.
Gross profit and gross margin
Gross profit was $403.5 million in 2021, an increase of $82.2 million, or 25.6%,
from $321.3 million in the prior year. Gross margin was 34.7% in 2021, compared
to 36.4% in the prior year, a percentage-point decrease of 1.7%. During the
second quarter of 2021, in response to increasing demand and a resulting
increase in our backlog of orders, we determined to increase our manufacturing
headcount across our Florida operations. While this increase in headcount
positions us to better respond to increasing demand through higher production
rates, it also required additional investments in training and onboarding of the
new members of our manufacturing team to maintain our high standards for safety
and quality as new members gain experience in their new roles. These incremental
investments resulted in a reduction in gross margin in 2021 as compared to 2020.
Gross margin was also negatively impacted by inflationary conditions on
materials, labor and material delivery costs, which continued to be prevalent in
2021. Earlier this year, we announced price increases to attempt to offset these
inflationary conditions, which began to offset these cost impacts towards the
end of 2021. We also implemented a 3% surcharge on all existing orders in
Florida which took effect in November 2021 to immediately address these rising
operating costs which began benefiting gross margin in the late third quarter of
2021.Additionally, we announced another 6% to 12% price increase for new orders
beginning November 1, 2021, that we began to see the benefit of beginning of in
2022. Gross margin in 2021 benefited from improved operating efficiencies in our
Western segment, and the addition of and accretion from our acquisitions of Eco,
CRi and Anlin.
Selling, general and administrative expenses
SG&A expenses for 2021 were $303.0 million, an increase of $78.6 million, or
35.0%, from $224.4 million in 2020. As a percentage of net sales, SG&A was 26.1%
in 2021, compared to 25.4% in 2020. The increase in SG&A is partially due to the
inclusion of SG&A from our acquisitions of Anlin, Eco and CRi in 2021.
Additionally, there were increases in 2021 compared to 2020 in several other
categories, including the acquisition costs, additional Pandemic-response and
inefficiency costs in the second half of 2021 due to the 2021 emergence of COVID
variants, depreciation, stock-based compensation, as well as additional costs
from investing in our strategic selling and marketing initiatives. SG&A was also
impacted by higher distribution costs on increased sales levels.
Impairment of trade name
There was an impairment of our WWS trade name of $8.0 million in 2020. Following
a decrease of 19.3% in the second quarter of 2020 compared to the 2019 second
quarter, as well as continued deterioration in macro-economic conditions in our
core western markets relating to the Pandemic, we determined to complete an
interim impairment test of our WWS trade name as of October 3,
- 34 -
--------------------------------------------------------------------------------
2020, which included decreases in modeling assumptions for net sales of our WWS
reporting unit. Based on our revised modeling, we concluded that the fair value
of our WWS trade name was less than its carrying value, which resulted in an
impairment of our WWS trade name of $8.0 million in 2020.
Restructuring costs and charges
In April 2020, the Company's management approved a plan to consolidate its
manufacturing operations in Florida, which included exiting our manufacturing
facility in Orlando, Florida, where our WinDoor and Eze-Breeze products were
assembled and relocate the manufacturing of those products to our Venice and
Tampa, Florida plants, respectively. We ceased production at the Orlando
facility during June 2020. As a result of this consolidation, we recorded
restructuring costs and charges totaling $4.2 million in the first nine months
ended October 3, 2020.
Income from operations
Income from operations was $100.5 million in 2021, an increase of $15.8 million,
from $84.7 million in 2020. Income from operations in 2021 includes $74.8
million from our Southeast segment and $25.6 million from our Western segment,
compared to $85.8 million and $11.1 million from our Southeast and Western
segments, respectively, in 2020, all after allocation of corporate operating
costs in both periods. Income from operations in 2020 was also impacted by an
impairment charge of $8.0 million in the second quarter of 2020 relating to our
WWS trade name of our Western segment, and restructuring costs and charges of
$4.2 million relating to our Florida plant consolidation actions taken in the
2020 second quarter, and further adjusted in the 2020 third quarter, relating to
our Southeast segment. The increase in income from operations was also related
to leverage from higher sales in 2021 compared to last year, as well as
continued efficiency improvements at our Western segment. However, during the
second quarter of 2021, in response to increasing demand and a resulting
increase in our backlog of orders, we determined to increase our manufacturing
headcount across our Florida operations. While this increase in headcount
positions us to better respond to increasing demand through higher production
rates, it also required additional investments in training and onboarding of the
new members of our manufacturing team to maintain our high standards for safety
and quality as new members gain experience in their new roles. These incremental
investments resulted in a reduction in operating income in 2021 as compared to
the 2020. Operating income was also negatively impacted by inflationary
conditions on materials, labor and material delivery costs, which continued to
be prevalent in 2021. Earlier this year, we announced price increases to attempt
to offset these inflationary conditions, which began to benefit us late in 2021.
We also implemented a 3% surcharge on all existing orders in Florida which took
effect in November 2021 to then immediately address these rising operating costs
which began benefiting operating income in 2021, and we believe will continue to
benefit operating income as we move through early 2022. Additionally, we
announced another 6% to 12% price increase for new orders beginning November 1,
2021, that we anticipate impacting our results in the beginning of 2022. Income
from operations in 2021 also includes the operating profits of our February 1,
2021, Eco acquisition, and May 2, 2021 CRi acquisition.
Interest expense
Interest expense was $30.0 million in 2021, an increase of $2.3 million from
$27.7 million in 2020. Interest expense in 2021 includes an increase in interest
expense due to the issuance of the Second Additional Senior Notes totaling $60.0
million effective on January 25, 2021, which we used to finance a portion of the
purchase price for our investment in Eco. This increase was partially offset by
a decrease in interest costs relating to the amortization of the $3.3 million
premium we received on the Second Additional Senior Notes.
Additionally, we redeemed the $425.0 million of 6.75% 2018 Senior Notes due
2026, with the $575.0 million of 4.375% 2021 Senior Notes due 2029 late in the
third quarter of 2021. Interest expense in 2021, particularly our 2021 fourth
quarter, included the offsetting effects of interest saving due to the decrease
in the interest rate on the 2021 Senior Notes due 2029, with the higher level of
notes outstanding.
Debt extinguishment costs
Debt extinguishment costs totaled $25.5 million in 2021. On September 24, 2021,
we completed the issuance of $575.0 million aggregate principal amount of 4.375%
2021 Senior Notes due 2029, issued at 100% of their principal amount. Proceeds
from the 2021 Senior Notes due 2029 were used, in part, to redeem in full the
$425.0 million of 2018 Senior Notes due 2026, including the related fees, costs
and prepayment call premium discussed further below, prepay the outstanding term
loan borrowings under the 2016 Credit Agreement due 2024 of $54.0 million and
the related fees and costs, and finance the Anlin Acquisition. See Note 5,
Acquisitions, for a discussion of the Anlin Acquisition. Redemption in-full of
the $425.0 million of 2018 Senior Notes due 2026, including accrued and unpaid
interest through September 27, 2021, also included a pre-payment call premium of
105.063% of face value, which totaled $21.5 million and is classified as debt
extinguishment costs in the accompanying consolidated statement of operations
for the year ended January 1, 2022. The remainder of debt extinguishment costs
of $4.0 million is composed of $9.4 million of unamortized third-party deferred
costs and lender fees relating to the 2021 Senior Notes due 2026, including the
First and Second Add-On Notes, offset by $5.4 million of unamortized premiums we
received from the First and Second Add-On Notes.
- 35 -
--------------------------------------------------------------------------------
Income tax expense
Income tax expense was $9.8 million for 2021, representing an effective tax rate
of 21.7%. This compares to income tax expense of $11.9 million for 2020,
representing an effective tax rate of 20.9%. Our income tax expense for the year
ended January 1, 2022 includes $1.7 million relating to our 75% share of the
pre-tax earnings of Eco.
Income tax expense in 2021 and 2020 include discrete items of income tax benefit
relating to excess tax benefits from the exercises of stock options and lapses
of restrictions on stock awards, which totaled $861 thousand in 2021, and $769
thousand in 2020. The year ended January 2, 2021 also included the benefit of a
refund from the state of Florida relating to excess taxes received by the state
caused by the Tax Cuts and Jobs Act of 2017, which totaled $553 thousand, net of
its Federal tax effect. Other discrete items included in both periods include
true-ups of research and development tax credit estimates to actual tax credits
claimed, and other tax return filing related true-ups. Excluding discrete items
of income tax, the effective tax rates for the years ended January 1, 2022, and
January 2, 2021, would have been income tax expense rates of 24.6% and 24.2%,
respectively.
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for 2021 was $2.3
million and represents the share of the net income of Eco for the period,
attributable to the 25% interest of Eco not acquired by the Company. There was
no redeemable non-controlling interest in 2020.
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. We believe our cash generating capability will continue to provide 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 2021 and 2020:
Components of Cash Flows
January 1, January 2,
(in millions) 2022 2021
Cash provided by operating activities $ 63.7 $ 75.5
Cash used in investing activities (253.9 ) (114.4 )
Cash provided by financing activities 186.1 42.0
Increase (decrease) in cash and cash equivalents $ (4.1 ) $ 3.1
Operating activities. Cash provided by operating activities was $63.7 million
for 2021, compared to $75.5 million for 2020.
The decrease in cash flows from operations of $11.8 million in 2021 compared to
2020 was primarily due to the changes in operating cash flows, including an
increase of $244.6 million in collections from customers in 2021 compared to
2020, as the result of increased sales, which was partially offset by an
increase in payments to suppliers of $153.8 million as the result of higher
procurement of inventory, an increase in personnel related disbursements of
$98.2 million due to a larger number of employees during 2021, compared to 2020,
and an increase in debt service costs of $7.4 million in 2021, compared to 2020,
primarily as a result of the issuance of the 2021 Senior Notes due 2029, and the
higher level of notes outstanding thereunder as compared to the recently
pre-paid 2018 Senior Notes due 2026. Also, net tax payments increased $3.0
million in 2021, compared to 2020. Other collections of cash and other cash
activity, net, increased by $6.0 million. Other collections of cash primarily
relate to sales of scrap aluminum.
- 36 -
--------------------------------------------------------------------------------
Direct cash flows from operations for 2021 and 2020 are presented below:
Direct Operating Cash Flows
January 1, January 2,
(in millions) 2022 2021
Collections from customers $ 1,120.6 $ 876.0
Other collections of cash 12.3 6.5
Disbursements to suppliers (720.7 ) (566.9 )
Personnel related disbursements (303.8 ) (205.6 )
Debt service costs (32.6 ) (25.2 )
Income tax payments, net (12.2 ) (9.2 )
Other cash activity, net 0.1 (0.1 )
Cash from operations $ 63.7 $ 75.5Inventory on hand as of January 1, 2022, was $91.4 million, an increase of $31.1
million from January 2, 2021. The increase in inventory on had primarily relates
to acquisitions during 2021.
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 ended January 1, 2022, was 10.0 times, on par with
10.8 times for the year ended January 2, 2021.
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 $253.9 million in
2021, compared to $114.4 million in 2020 an increase in cash used of $139.5
million. We used $220.7 million of cash to acquire businesses in 2021, compared
with cash used for acquisitions in 2020 of $90.4 million.. Also, in 2021, we
used cash of $33.4 million for capital expenditures, compared to $24.8 million
in 2020, an increase of $8.6 million in cash used. Finally, in 2021, we received
proceeds of $187 thousand from the sales of property, plant and equipment,
compared to $766 thousand in 2019, an increase of $579 thousand in cash proceeds
received from sales of property, plant and equipment.
Financing activities. Cash provided by financing activities was $186.1 million
in 2020, compared with cash provided of $42.0 million in 2020, an increase in
cash provided of $144.1 million. In 2021, we issued $575.0 million in 4.375%
2021 Senior Notes due 2029, as well as the $60.0 million of Second Additional
Senior Notes, including a premium of $3.3 million with the Second Additional
Notes. which provided proceeds from issuances of senior notes in 2021 totaling
$638.3 million. Proceeds from the 2021 Senior Notes due 2029 were used, in part,
to redeem in full the $425.0 million of 2018 Senior Notes due 2026, plus a
pre-payment call premium of 105.063% of face value, which totaled $21.5 million,
classified as debt extinguishment costs in the accompanying consolidated
statement of operations for 2021. We also prepaid the outstanding term loan
borrowings under the 2016 Credit Agreement due 2024 of $54.0 million, and
subsequently reborrowed $60.0 million in proceeds under the 2016 Credit
Agreement due 2024 used in the Anlin Acquisition. Proceeds of $63.3 million from
the issuance of the $60.0 million in Second Additional Senior Notes, including a
premium of $3.3 million, were used to partially fund our acquisition of Eco. In
2020, we issued the First Additional Senior Notes, which provided proceeds of
$53.2 million, including a premium of $3.2 million. Proceeds from the issuance
of the First Additional Senior Notes were used to partially fund our acquisition
of NewSouth.
We paid financing costs totaling $10.7 million in 2021, including financing
costs relating to bank fees and professional services costs relating to the
offering and issuance of the 2021 Senior Notes due 2026 totaling $8.7 million,
which included a 1.25% lender spread on the total principal value of the 2021
Senior Notes due 2029, or $7.2 million, and $1.5 million of other costs. We also
paid $0.6 million in financing costs relating to the Fourth Amendment of the
2016 Credit Agreement due 2024. We also paid $1.4 million in 2021 related to the
issuance of the Second Additional Senior Notes, compared to $1.3 million in
2020, related to the issuance of the First Additional Senior Notes. Taxes paid
relating to common stock withheld from employees to satisfy tax withholding
obligations in connection with the vesting of restricted stock awards were $1.6
million in 2021, versus $0.8 million in 2020. Proceeds from the exercises of
stock options for 2021 was $0.1 million, compared to proceeds of $0.6 million in
2020. There were proceeds from stock issued under our 2019 Employee Stock
Purchase Plan of $0.5 million during 2021, compared to $0.3 million during 2020.
- 37 -
--------------------------------------------------------------------------------
Share Repurchase Program. On May 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 on May 22, 2019, through December
28, 2019,we made repurchases of 393,819 shares of our common stock at a total
cost of $5.5 million. We made no repurchases under this program during 2020 or
2021. The repurchase program may be suspended or discontinued at any time. We
may make opportunistic purchases in the future.
Capital Expenditures. Capital expenditures vary depending on prevailing business
factors, including current and anticipated market conditions. Due to the
uncertainty surrounding the impact of the Pandemic on our operations and cash
flows, late in the first quarter of 2020, and continuing through the second
quarter and early third quarter of 2020, we conserved cash by reducing the level
of funding of capital projects. This period of cash conservation during 2020
resulted in a decrease of $6.5 million in cash used for capital expenditures,
from $31.3 million in 2019, to $24.8 million in 2020. During the third quarter
of 2020 and for the remainder of the year, we resumed and caught-up on funding
of capital projects, which increased our level of capital spending. This
increase in capital spending continued into 2021. In 2021, we spent $33.4
million on capital expenditures, compared to $24.8 million in 2020, an increase
in $8.6 million, primarily representing equipment purchases and facility
improvements expected to support growth.
Management expects to spend between $48 million and $52 million for capital
expenditures in 2022. 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
2021 Senior Notes due 2029
On September 24, 2021, we completed the issuance of $575.0 million aggregate
principal amount of 4.375% senior notes ("2021 Senior Notes due 2029"), issued
at 100% of their principal amount. The 2021 Senior Notes due 2029 are jointly
and severally and 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 2021 Senior Notes due 2029 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 2021 Senior Notes due
2029 were offered under Rule 144A of the Securities Act, and in transactions
outside the United States under Regulation S of the Securities Act, and have not
been, and will not be, registered under the Securities Act.
The 2021 Senior Notes due 2029 mature on October 1, 2029. Interest on the 2021
Senior Notes due 2029 is payable semi-annually, in arrears, beginning on April
1, 2022, with interest accruing at a rate of 4.375% per annum from September 24,
2021. We incurred financing costs relating to bank fees and professional
services costs relating to the offering and issuance of the 2021 Senior Notes
due 2029 totaling $8.7 million, which included a 1.25% lender spread on the
total principal value of the 2021 Senior Notes due 2029, or $7.2 million, and
$1.5 million of other costs, all of which are being amortized under the
effective interest method. See "Deferred Financing Costs" below.
As of January 1, 2022, the face value of debt outstanding under the 2021 Senior
Notes due 2029 was $575.0 million, and accrued interest totaled $6.8 million.
Proceeds from the 2021 Senior Notes due 2029 were used, in part, to redeem in
full the $425.0 million of 2018 Senior Notes due 2026, including the related
fees, costs and prepayment call premium discussed further below, prepay the
outstanding term loan borrowings under the 2016 Credit Agreement due 2024 of
$54.0 million and the related fees and costs, and finance the Anlin Acquisition
in the fourth quarter of 2021. See Note 5, Acquisitions, for a discussion of the
Anlin Acquisition.
The indenture for the 2021 Senior Notes due 2029 gives us the option to redeem
some or all of the 2021 Senior Notes due 2029 at the redemption prices and on
the terms specified in the indenture governing the 2021 Senior Notes due 2029.
The indenture governing the 2021 Senior Notes due 2029 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. We also may make optional redemptions at various premiums including a
make-whole call at the then current treasury rate plus 50 basis points prior to
October 1, 2024, then 102.188% on or after August 1, 2021, 101.094% on or after
August 2025, then at 100.000% on or after August 1, 2026.
The indenture for the 2021 Senior Notes due 2029 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
- 38 -
--------------------------------------------------------------------------------
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
2018 Senior Notes Due 2026
On August 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 were jointly and
severally and 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 were senior unsecured obligations of the Company and the
guarantors, respectively, and ranked 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
outside the United States under Regulation S of the Securities Act, and were not
registered under the Securities Act.
On January 24, 2020, we completed an add-on issuance of $50.0 million aggregate
principal amount of 6.75% 2018 Senior Notes due 2026, or the First Additional
Senior Notes, issued at 106.375% of their principal amount, resulting in a
premium to us of $3.2 million. The First Additional Senior Notes were part of
the same issuance of, and ranked equally and formed a single series with, the
2018 Senior Notes due 2026. Proceeds from the First Additional Senior Notes,
including premium, were used, together with cash on hand, to pay the $90.4
million purchase price in the NewSouth Acquisition.
On January 25, 2021, we completed a second add-on issuance of $60.0 million
aggregate principal amount of 6.75% 2018 Senior Notes due 2026, or the Second
Additional Senior Notes, issued at 105.5% of their principal amount, resulting
in a premium to us of $3.3 million. The Second Additional Notes were part of the
same issuance of, and ranked equally and form a single series with, the 2018
Senior Notes due 2026. Proceeds from the Second Additional Senior Notes,
including premium, were used, together with $31.1 million in cash on hand, to
pay the $94.4 million cash portion of the $100.5 million purchase price in the
Eco Acquisition. The common stock portion of the purchase consideration was
represented by the issuance of 357,797 shares of PGT Innovations, Inc. common
stock on February 1, 2021, with a then-current value of $21.34 per share, which
we discounted by an estimate of 20% for lack of marketability, as the common
stock is legally restricted from being sold by the recipient for a three-year
period from February 1, 2021.
The 2018 Senior Notes due 2026 were to mature on August 10, 2026. However,
effective on September 27, 2021, using proceeds from the issuance of the $575.0
million 2021 Senior Notes due 2029, discussed above, we redeemed in-full the
$425.0 million of 2018 Senior Notes due 2026, including accrued and unpaid
interest through September 27, 2021, which totaled $4.5 million, and a
pre-payment call premium of 5.063% of face value, which totaled $21.5 million
and are classified as debt extinguishment costs in the accompanying consolidated
statement of operations for the year ended January 1, 2022.
2016 Credit Agreement due 2024
On February 16, 2016, we entered into the 2016 Credit Agreement due 2024, among
us, the lending institutions identified in the 2016 Credit Agreement due 2024,
and Truist Financial Corporation (formerly known as SunTrust Bank), as
Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2024
establishes senior secured credit facilities in an aggregate amount of $310.0
million, consisting of a $270.0 million Term B term loan facility originally
maturing in February 2022 that amortizes on a basis of 1% annually during its
six-year term, and a $40.0 million revolving credit facility originally maturing
in February 2021 that included a swing line facility and a letter of credit
facility. Our obligations under the 2016 Credit Agreement due 2024 are, subject
to exceptions, guaranteed by substantially all of our wholly-owned direct and
indirect subsidiaries that are restricted subsidiaries and secured by
substantially all of our assets as well as our direct and indirect restricted
subsidiaries' assets.
On March 16, 2018, we entered into an amendment of our 2016 Credit Agreement due
2024 (the "Second Amendment"). The Second Amendment, among other things,
decreased the applicable interest rate margins for the Initial Term Loans (as
defined in the 2016 Credit Agreement due 2024). On February 17, 2017, we entered
into the first amendment to our 2016 Credit Agreement due 2024, which also
resulted in decreases in the applicable margins, but which, unlike the Second
Amendment, did not include any changes in lender positions.
On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement
due 2024 ("Third Amendment"). The Third Amendment provided for, among other
things, (i) a three-year Term A loan in the then aggregate principal amount of
$64.0 million (the "Initial Term A Loan"), maturing in October 2022, which
refinanced in full our existing Term B term loan facility under the 2016 Credit
Agreement due 2024, and had no regularly scheduled amortization, and (ii) a new
five-year revolving credit facility in an aggregate principal amount of up to
$80.0 million (the "Revolving Facility"), maturing in October 2024, which
replaced our then
- 39 -
--------------------------------------------------------------------------------
existing $40.0 million revolving credit facility under the 2016 Credit Agreement
due 2024, and includes a swing-line facility and letter of credit facility. The
Initial Term A Loan was repaid in full with proceed from the 2021 Senior Notes
due 2029.
On October 25, 2021, we entered into an amendment of our 2016 Credit Agreement
due 2024 ("Fourth Amendment"). The Fourth Amendment provides for, among other
things, a three-year Term A loan in the aggregate maximum available amount of
$60.0 million (the "Incremental Term A Loan"), maturing in October 2024,
proceeds from which were used to fund the Anlin Acquisition. The Fourth
Amendment does not change any terms relating to the Revolving Facility, under
which we 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. As of January 1, 2022, there were $5.3 million in
letters of credit outstanding and $74.7 million available under the Revolving
Facility. Our obligations under the 2016 Credit Agreement due 2024 continue to
be secured by substantially all of our assets, as well as our direct and
indirect subsidiaries' assets, and is senior in position to the 2021 Senior
Notes due 2029.
The weighted average all-in interest rate for borrowings under the term-loan
portion of the 2016 Credit Agreement due 2024 was 2.10%. as of January 1, 2022
and was 2.15% at January 2, 2021.
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 January
1, 2022, are as follows:
(in thousands) Total
At beginning of year $ 6,902
Add: Deferred financing costs from the issuance of the Second 1,363
Additional Senior Notes
Less: Premium on the Second Additional Senior Notes (3,300 )
Less: Write-off of deferred costs classified as debt (3,954 )
extinguishment costs
Add: Deferred financing costs from the issuance of the 2021 8,700
Senior Notes due 2029
Add: Deferred financing costs from the refinancing of the 2016 612
Credit Agreement
Less: Amortization expense (978 )
At end of year $ 9,345
Estimated amortization expense relating to third-party fees and costs, lender
fees and discount for the years indicated, as of January 1, 2022, is as follows:
(in thousands) Total
2022 $ 1,233
2023 1,282
2024 1,282
2025 1,083
2026 1,114
Thereafter 3,351
Total $ 9,345
The contractual future maturities of long-term debt outstanding, as of January
1, 2022, are as follows (at face value):
(in thousands) Total
2021 $ -
2022 -
2023 -
2024 60,000
2025 -
Thereafter 575,000
Total $ 635,000
- 40 -
--------------------------------------------------------------------------------
Long-Term Debt
Long-term debt consists of the following:
January 1, January 2,
2022 2021
(in thousands)
2021 Senior Notes Due 2029 - Senior notes issued on
September 24, 2021,
due October 1, 2029. Interest payable semi-
annually, in arrears, beginning
on April 1, 2022, accruing at a rate of 4.375% per
annum beginning
September 24, 2021. (1) $ 575,000 $ -
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. (2) - 365,000
2016 Credit Agreement Due 2024 - Term loan payable
with no contractually
scheduled amortization payments. Original lump-sum
payment of $60.0 million
due on October 31, 2024. Interest payable quarterly
at LIBOR or the Base
prime rate plus an applicable margin. At January 1,
2022, the average
rate was 2.10%. At January 2, 2021, the average
rate was 2.15%. (3) 60,000 54,000
Long-term debt 635,000 419,000
Fees, costs, premium and discount (4) (9,345 ) (6,902 )
Long-term debt, net, less current portion $ 625,655 $ 412,098
(1) Effective on September 24, 2021, the Company completed the issuance of
$575.0 million aggregate principal amount of 4.375% senior notes due October 1,
2029, issued at 100% of their principal amount. The proceeds from issuance of
the new senior notes were used to finance the repayment of the then outstanding
aggregate principal amount of $425.0 million of 6.75% senior notes 2026, which
required payment of a 5.063% call-premium totaling $21.5 million, lender fees of
1.25% of the face value of the 2021 Senior Notes due 2029 totaling $7.2 million,
accrued interest on the then outstanding senior notes and term loan totaling
$4.5 million, and various costs of the senior note offering and the Anlin
acquisition. The remainder of the proceeds of the new senior notes held as cash
on hand, together with $60.0 million of new borrowings under our 2016 Credit
Agreement due 2024, were subsequently used on October 25, 2021 for the Anlin
Acquisition totaling $114.2 million. Any remaining unused proceeds from issuance
of the new $575.0 million of senior notes will be held as operating cash on hand
and used to pay, if any, the contingent consideration relating to the Anlin
Acquisition. See Note 5. Acquisitions, in Item 8. Financial Statements and
Supplementary Data, for further discussion of the contingent consideration
relating to the Anlin Acquisition.
(2) Effective on August 10, 2018, the Company completed the issuance of $315.0
million aggregate principal amount of 6.75% senior notes due August 10, 2026,
issued at 100% of their principal amount. The senior notes were issued to
finance, together with cash on hand, the WWS acquisition. On January 24, 2020,
we issued an additional $50.0 million add-on senior notes, issued at 106.375% of
their principal amount, to finance, together with cash on hand, the $90.4
million acquisition of NewSouth. Effective on January 25, 2021, we issued an
additional $60.0 million add-on senior notes, issued at 105.5% of their
principal amount, to finance together with $94.4 million of cash on hand, and
fair value of $6.1 million in Company common stock, the $100.5 million
acquisition of our 75% stake in Eco. See note (1) above for a discussion of the
repayment of the 2018 Senior Notes due 2026 totaling $425.0 million.
(3) Effective on October 25, 2021, the Company entered into the fourth amendment
of the 2016 Credit Agreement due 2024. We borrowed a $60.0 million incremental
term loan in connection with this amendment, the proceeds from which were used
in combination with proceeds remaining under the 2021 Senior Notes due 2029 for
the Anlin Acquisition. See note (1) above for further discussion.
(4) Fees, costs, premium and discount represents third-party fees, lender fees,
other debt-related costs, and original issue premium and discount, recorded as a
net reduction of the carrying value of the debt and are amortized over the lives
of the debt instruments to which they relate under the effective interest
method.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements, we follow U.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.
- 41 -
--------------------------------------------------------------------------------
Valuation of Trade Names and Customer Relationships in Business Combinations
The assets and liabilities of acquired businesses are recorded under the
acquisition method of accounting at their estimated fair values at the dates of
acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses. Intangible assets
acquired in business combinations consist of trade names, developed technology,
customer relationships, and other intangible assets. The fair value of the trade
name intangible assets are determined utilizing the relief from royalty method
("RFRM") which is a form of the income approach. Under the RFRM, a royalty rate
based on observed market royalties is applied to projected revenue supporting
the trade name and discounted to present value using an appropriate discount
rate. The fair values of customer relationships are determined using the
multi-period excess earnings method ("MPEEM"), which is also a form of the
income approach. Under the MPEEM, the expected net cash flow an asset will
generate, is discounted to present value using an appropriate discount rate.
We applied the RFRM to the valuation of trade names and MPEEM to customer
relationships for acquisitions done during 2021, for which the most significant
intangible assets identified were the Eco and Anlin trade names and customer
relationships. Specific to these intangible assets, our estimates of projected
revenue included forecast revenue growth rates, estimated existing customer
retention rates, operating expense estimates and other estimates regarding
contributory asset charges that required judgment by management. Actual results
can differ from our estimates, requiring adjustments to our assumptions. The
estimated fair value of identifiable intangible assets acquired in connection
with the Eco Acquisition was $74.3 million, which included its trade name with
an estimated fair value of $34.9 million, and total customer relationships of
$39.4 million. The estimated fair value of identifiable intangible assets
acquired in connection with the Anlin Acquisition was $77.8 million, which
included its trade name with an estimated fair value of $35.4 million and its
customer relationship asset of $42.1 million.
Indefinite-lived Intangible Assets
We disclosed the Company's accounting policy for Goodwill and Trade Names under
Item 8, Note 2 - Summary of Significant Accounting Policies. We perform our
annual goodwill and indefinite-lived intangible asset impairment testing on the
first day of our fiscal fourth quarter of each year, and at interim periods if
needed based on occurrence of triggering events.
Given the general deterioration in economic and market conditions associated
with the COVID-19 pandemic, and the narrow excess of fair value over carrying
value of our WinDoor and WWS trade names as described in 2019, the Company
determined it should complete interim quantitative impairment tests of its
WinDoor and WWS trade names as of the end of the Company's first quarter of
2020. These interim impairment tests did not indicate that impairments of those
assets existed at that time. Following a decrease of 19.3% in net sales in the
second quarter of 2020, compared to the second quarter of last year, as well as
continued deterioration in macro-economic conditions in our core western markets
relating to the COVID-19 pandemic, we determined to complete a second interim
impairment test of our WWS trade name as of July 4, 2020. For this second
interim impairment test, we further decreased our modeling assumptions for net
sales of our WWS reporting unit for our 2020 fiscal year based on a reassessment
of our key assumptions in our modeling, including an updated assessment of macro
industry growth in our WWS reporting unit's key markets. We also decreased our
2021 growth rate assumption as we expect the challenging macro-economic
conditions in our core western markets to continue during 2021. Based on our
revised modeling, we concluded that the fair value of our WWS trade name was
less than its carrying value, which resulted in an impairment of our WWS trade
name of $8.0 million in our second quarter of 2020. Sales for our WWS reporting
unit for the 2020 fiscal year exceeded our modeling assumptions used during our
second impairment test of our WWS trade name as of July 4, 2020. As such, we
performed a qualitative assessment as of the first day of our 2020 fourth
quarter and concluded that it was not necessary to perform a Step 1 impairment
test for our WWS trade name indefinite-lived intangible assets as no new
triggering events or conditions were identified. During 2021, WWS enjoyed
organic growth and operational improvements, and there were no new triggering
events or conditions identified as of the first days of our 2021 fourth quarter.
Therefore, we completed a qualitative assessment of our WWS trade name, which
indicated that it is more likely than not that the fair value of our WWS trade
name exceeds it carrying value. As of January 1, 2022, and January 2, 2021, the
carrying value of our WWS trade name was $65.0 million and $65.0 million,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting."
ASU 2020-04 is intended to provide temporary optional expedients and exceptions
to U.S. GAAP guidance on contract modifications and hedge accounting to ease the
financial reporting burdens related to the expected market transition from the
London Interbank Offered Rate (LIBOR) and other interbank offered rates to
alternative reference rates. The transition to new reference interest rates will
require certain contracts to be modified and ASU 2020-04 is intended to mitigate
the effects of this transition. This new guidance was effective upon issuance of
this ASU for contract modifications and hedging relationships on a prospective
basis. We do not expect this standard to have a material impact on our
consolidated financial statements.
- 42 -
--------------------------------------------------------------------------------
FORWARD OUTLOOK
Net sales
Looking ahead into 2022, we believe economic factors that impact our business
currently are stable in all of our major markets. We have seen robust demand in
our core geographies over the past eighteen months, and we believe that the
substantial backlog we have at the end of 2021, which grew to $355.9 million at
January 1, 2022, from $199.5 million at January 2, 2021, an increase of 78.4%,
which included 60.7% of legacy growth, positions us for solid sales growth in
2022. We have been able to increase production to meet this increased demand in
large part because of actions taken throughout 2021 to increase hiring,
implement operations improvements, expand our manufacturing footprint, and
manage our supply of key inputs such as glass and aluminum. Increased orders
booked during the year translated into higher product shipments as we worked
through, and continue to work through our backlog and decrease lead times. We
are well positioned to meet strong demand across our key markets and continue
our growth trajectory in 2022.
We expect 2022 full-year sales to range between $1.35 billion and $1.45 billion,
representing an increase of between 16% and 25%, as compared to 2021. This
estimated sales range for 2022 includes our Eco Acquisition at 100% of its sales
amount.
Gross profit and gross margin
We believe the following factors, which are not all inclusive, may impact our
gross profit and gross margin in 2022:
• 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 show
more repair and remodel sales in 2022 due to acquisitions in 2021, whose sales
are weighted more towards the repair and remodel channel.
• During 2021, our gross profit and gross margin percentage were negatively
impacted by inflationary pressure on our manufacturing inputs, including
materials and labor. We have taken actions to attempt offset these factors,
including previously communicated pricing actions throughout 2021, including 6
to 12 percent price increases for new orders that originated after November 1st.
These actions already are contributing to top line growth which we believe will
contribute to improvements in gross profit and gross margin in 2022. But
inflationary headwinds continue to exist in 2022. As such, our focus in 2022
will be to continue to take actions to further improve operating efficiencies,
including material usage and labor cost reductions.
• Inflationary conditions continue to impact aluminum prices, which is one of
our most significant raw materials. During the late summer of 2021, the price of
aluminum hit all-time high spot prices, and at the time of the filing of this
Annual Report on Form 10-K, the spot price of aluminum is near those all-time
high levels. While we engage in a program of hedging our purchases of aluminum
using cash flow derivative products to help us stabilize the cost of aluminum in
our manufacturing process, our uncovered aluminum purchases have been and
continue to be impacted by the increasing cost of the key raw material input. We
believe there is uncertainty surrounding the future price of aluminum during
2022, and that volatility in the price of aluminum could be significant. As of
the beginning of 2022, we were hedged for approximately 44% of our anticipated
aluminum needs for 2022, at an average price of $1.11 per pound, which is an
average representing the cash price per pound, excluding the delivery component
for the Midwest Premium, and we were hedged for approximately 33% of the Midwest
Premium delivery component needs for 2022, at an average price of $0.12 per
pound.
• Our gross profit and gross margin are also influenced by labor costs. During
2021, we invested in increasing our headcount to meet the increase in demand in
all of our major markets. While the short-term impacts of these investments in
headcount increases result in negative margin effects due to onboarding and
training costs, as well as increased wages needed to attract sufficient
headcount in this incredibly tight labor market, we believe of our labor force
has become more tenured and, therefore, labor costs have begun to normalize as
efficiencies are achieved. However, we believe a strong jobs environment
throughout the United States will continue to result in a limited labor pool. We
expect a tight labor market to continue during 2022, which we believe may result
in operational efficiencies resulting from an experienced, trained workforce to
be partially offset by the possibility for turnover due to this being an
employee's job market.
Selling, general and administrative expenses (SG&A)
This expense category will be affected by the inclusion of the SG&A of Anlin for
the full year of 2022, including non-cash amortization depending on the level of
amortizable intangible assets we have acquired. 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 2022, compared to 2021, and
to continue to look for areas within SG&A to drive efficiencies. However, we
expect to continue to invest in strategic marketing initiatives and advertising,
especially at our NewSouth direct-to-consumer business which relies heavily on
outreach to consumers. As such, savings from SG&A efficiencies could be more
than offset by increases in spending on strategic programs which we believe will
provide a favorable return on investment. We have also seen the effects of
inflationary pressure on our distribution costs as fuel prices continue to rise
and affect the cost of operating our fleet. As previously mentioned, we have
increased prices in an attempt to address these inflationary pressures, but such
benefits could be more than offset by rising prices, including fuel prices.
- 43 -
--------------------------------------------------------------------------------
Depreciation and Amortization
Including the impact on depreciation and amortization from our Anlin
Acquisition, depreciation and amortization is estimated to be approximately $55
million in 2022.
Interest expense
During 2022, we refinanced our $425.0 million of 6.75% 2018 Senior Notes due
2026 with our $575.0 million of 4.375% 2021 Senior Notes due 2029, incremental
proceeds from which were used to finance the cash portion of the purchase price
for the Anlin Acquisition. Additionally, we increased our borrowings under the
2016 Credit Agreement from $54.0 million to $60.0 million in October 2021 in
connection with the Anlin Acquisition, without any impact to the borrowing rate
thereunder. Although the level of our outstanding indebtedness increased to
$635.0 million at January 1, 2022, from $479.0 at January 2, 2021, we expect
that the increasing impact on interest expense from the higher level of
indebtedness will be more than offset by the decrease in interest rate on our
outstanding senior notes. We believe interest expense on our long-term debt will
be approximately $28 million in 2021, 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 2022, 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 corporate income tax
rate of 21%, plus a blended statutory state rate, taking into consideration the
increase in income tax rate in Florida from 3.535% in 2021 to 5.5% through 2022.
Liquidity and capital resources
We had $96.1 million of cash on hand as of January 1, 2022. During 2022, 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 $48 million and $52 million for capital expenditures in 2022. As a
result of the Fourth Amendment, we have no further mandatory required payments
remaining until the maturity in October 2024 of our 2016 Credit Agreement due
2024 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. We currently have $74.7 million of availability under the Revolving
Facility portion of the 2016 Credit Agreement due 2024. The Revolving Facility
also expires in October 2024.
© Edgar Online, source Glimpses
PGT INNOVATIONS, INC. 
