The following discussion and analysis of our financial condition and results of
operations and quantitative and qualitative disclosures should be read in
conjunction with our unaudited condensed consolidated financial statements and
related notes and with our audited consolidated financial statements included in
our Annual Report on Form 10-K for the year ended January 2, 2021, as filed with
the Securities and Exchange Commission. Management's Discussion and Analysis of
Financial Condition and Results of Operations contains a number of
forward-looking statements that reflect our plans, estimates, and beliefs, all
of which are based on our current expectations and could be affected by certain
uncertainties, risks, and other factors described under Cautionary Note
Regarding Forward-Looking Statements and elsewhere throughout this Quarterly
Report, as well as the factors described in our Annual Report on Form 10-K for
the year ended December 31, 2020, and subsequent periodic reports filed with the
Securities and Exchange Commission, particularly under "Risk Factors." Our
actual results could differ materially from those discussed in the
forward-looking statements.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward looking statements" within
the meaning of the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by
words such as: "assume," "believe," "could," "estimate," "guidance," "may,"
"outlook," "forecast," "intend," "could," "project," "estimate," "anticipate,"
"should," "plan," "will" and similar references to future periods.
Forward-looking statements are neither historical facts nor assurances of future
performance. Instead, they are based only on current beliefs, expectations and
assumptions regarding the future of our business, future plans and strategies,
projections, anticipated events and trends, the economy and other future
conditions. Because forward-looking statements relate to the future, they are
subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict and many of which are outside of our control. Our actual
results and financial condition may differ materially from those indicated in
the forward-looking statements. Therefore, you should not rely on any of these
forward-looking statements. Important factors that could cause our actual
results and financial condition to differ materially from those indicated in the
forward-looking statements include, among others, the following:
•
the impact of the COVID-19 pandemic and related measures taken by governmental
or regulatory authorities to combat the pandemic, including the impact of the
pandemic and these measures on the economies and demand for our products in the
states where we sell them, and on our customers, suppliers, labor force,
business, operations and financial performance;
•
unpredictable weather and macroeconomic factors that may negatively impact the
repair and remodel and new construction markets and the construction industry
generally, especially in the state of Florida and the western United States,
where the substantial portion of our sales are currently generated, and in the
U.S. generally;
•
changes in raw material prices, especially for aluminum, glass and vinyl,
including, price increases due to the implementation of tariffs and other
trade-related restrictions or pandemic-related supply chain interruptions;
•
our dependence on a limited number of suppliers for certain of our key
materials;
•
our dependence on our impact-resistant product lines, which increased with the
Eco Acquisition, and contemporary indoor/outdoor window and door systems, and on
consumer preferences for those types and styles of products;
•
the effects of increased expenses or unanticipated liabilities incurred as a
result of, or due to activities related to, our recent acquisitions, including
Anlin, NewSouth and our Eco Acquisition;
•
our level of indebtedness, which increased in connection with our acquisition of
NewSouth, and increased further in connection with our Eco Acquisition, and the
acquisition of Anlin;
•
increases in bad debt owed to us by our customers in the event of a downturn in
the home repair and remodel or new home construction channels in our core
markets and our inability to collect such debt;
•
the risks that the anticipated cost savings, synergies, revenue enhancement
strategies and other benefits expected from our acquisition of NewSouth, and of
Anlin, and from our Eco Acquisition may not be fully realized or may take longer
to realize than expected or that our actual integration costs may exceed our
estimates;
•
increases in transportation costs, including increases in fuel prices;
•
our dependence on our limited number of geographically concentrated
manufacturing facilities, which increased further due to our Eco Acquisition;
•
sales fluctuations to and changes in our relationships with key customers;
•
federal, state and local laws and regulations, including unfavorable changes in
local building codes and environmental and energy code regulations;
•
risks associated with our information technology systems, including
cybersecurity-related risks, such as unauthorized intrusions into our systems by
"hackers" and theft of data and information from our systems, and the risks that
our information technology systems do not function as intended or experience
temporary or long-term failures to perform as intended;
•
product liability and warranty claims brought against us;
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•
in addition to our acquisition of NewSouth, and of Anlin, and our Eco
Acquisition, our ability to successfully integrate businesses we may acquire in
the future, or that any business we acquire may not perform as we expected at
the time we acquired it; and
•
the other risks and uncertainties discussed under "Risk Factors" in Part II,
Item 1A of this Quarterly Report on Form 10-Q for the quarter ended October 2,
2021, and under "Risk Factors" in Part I, Item 1A of our Annual Report on Form
10-K for the year ended January 2, 2021 and our other filings with the
Securities and Exchange Commission.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q
is based only on information currently available to us and speaks only as of the
date on which it is made. We undertake no obligation to publicly update any
forward-looking statement, whether written or oral, that may be made from time
to time, whether as a result of new information, future developments or
otherwise.
EXECUTIVE OVERVIEW
Sales and Operations
During the third quarter of 2021, we experienced increases in sales at both our
Southeast and Western segments, as demand in our key markets of Florida
continued to increase, and in the strong order entries we reported in prior
quarters have translated into higher shipments in the 2021 third quarter. 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. This
strength has been seen in both our legacy brands and our 2021 Eco acquisition.
Our sales increased due to the inclusion of the net sales of our acquisition of
Eco by $25 million in the third quarter of 2021. Strength in the housing sector
and improving economic conditions in our key markets in the southeast and west
U.S. continued to drive solid order entry as year-over-year orders were up 5% in
the third quarter of 2021 compared to last year's third quarter, which included
year-over-year order growth of 31% in our Western market, resulting in a 141%
increase in backlog as of the end of the third quarter of 2021 compared to the
third quarter of 2020. Legacy Southeast business unit order entry decreased 8%
year-over-year, as orders in the 2020 third quarter included the benefit of a
then post-COVID sales promotion. However, legacy Southeast backlog was still up
69% as of the end of the 2021 third quarter compared to last year's third
quarter.
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, and face the headwinds from the pressure on our
margins due to recruiting, training and workforce retention costs. Additionally,
aluminum spot prices have increase 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 for all existing and future orders that took
effect in November 2021 to help offset these costs, which we believe will begin
benefiting gross margin immediately and will continue to benefit gross margin as
we move through the completion of our 2021 fiscal year. Additionally, we
announced an additional , 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.
Because we believe housing demand in the United States will continue to be
solid, we have determined to maintain our 2021 full-year sales guidance range of
$1.10 billion to $1.20 billion, which was as of August 12, 2021. This range
includes our Eco Acquisition from the date of our investment of February 1, 2021
at 100% of its sales.
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Performance Summary
The following table presents financial data derived from our unaudited condensed
consolidated statements of operations as a percentage of total net sales for the
periods indicated. The three-month periods ended October 2, 2021 and October 3.
2020 are composed of 13 weeks. The nine-month period ended October 2, 2021 is
composed of 39 weeks, whereas the nine-month period ended October 3, 2020 is
composed of 40 weeks (in thousands, except percentages):
Three Months Ended
October 2, October 3,
2021 2020
(unaudited)
Net sales $ 300,431 100.0 % $ 238,033 100.0 %
Cost of sales 196,228 65.3 % 151,097 63.5 %
Gross profit 104,203 34.7 % 86,936 36.5 %
Selling, general and administrative 78,595 26.2 % 56,659 23.8 %
expenses
Restructuring costs and charges - - 321 0.1 %
Income from operations 25,608 8.5 % 29,956 12.6 %
Interest expense, net 7,686 2.6 % 6,954 2.9 %
Debt extinguishment costs 25,472 8.5 % - -
Income (loss) before income taxes (7,550 ) (2.5)% 23,002 9.7 %
Income tax expense (benefit) (2,410 ) (0.8)% 5,680 2.4 %
Net income (loss) (5,140 ) (1.7)% 17,322 7.3 %
Less: Net income attributable to redeemable (677 ) (0.2)% - -
non-controlling interest
Net income (loss) attributable to the $ (5,817 ) (1.9)% $ 17,322 7.3 %
Company
Nine Months Ended
October 2, October 3,
2021 2020
(unaudited)
Net sales $ 857,023 100.0 % $ 661,020 100.0 %
Cost of sales 561,849 65.6 % 418,494 63.3 %
Gross profit 295,174 34.4 % 242,526 36.7 %
Selling, general and administrative 224,106 26.1 % 164,848 24.9 %
expenses
Impairment of trade name - - 8,000 1.2 %
Restructuring costs and charges - - 4,227 0.6 %
Income from operations 71,068 8.3 % 65,451 9.9 %
Interest expense, net 22,968 2.7 % 20,979 3.2 %
Debt extinguishment costs 25,472 3.0 % - -
Income before income taxes 22,628 2.6 % 44,472 6.7 %
Income tax expense 4,260 0.5 % 9,351 1.4 %
Net income 18,368 2.1 % 35,121 5.3 %
Less: Net income attributable to redeemable (1,656 ) (0.2)% - -
non-controlling interest
Net income attributable to the Company 16,712 2.0 % 35,121 5.3 %
Change in redemption value of redeemable (4,528 ) (0.5)% - -
non-controlling interest
Net income attributable to common $ 12,184 1.4 % $ 35,121 5.3 %
shareholders
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 2, 2021 AND OCTOBER 3,
2020
The three-month periods ended October 2, 2021 and October 3, 2020 are composed
of 13 weeks each.
Net sales
Three Months Ended
October 2, 2021 October 3, 2020
Net Sales % of sales Net Sales % of sales % change
By segment:
Southeast segment $ 255.2 84.9% $ 203.7 85.6% 25.2%
Western segment 45.2 15.1% 34.3 14.4% 32.0%
Total net sales $ 300.4 100.0% $ 238.0 100.0% 26.2%
Net sales for the third quarter of 2021 were $300.4 million, a $62.4 million, or
26.2%, increase in sales, from $238.0 million in the third quarter of the prior
year.
Net sales of our Southeast segment were $255.2 million in the third quarter of
2021, compared with $203.7 million in the 2020 third quarter, an increase of
$51.5 million, or 25.2%. Southeast segment sales in the third quarter of 2021
includes $24.7 million from our acquisition of our 75% ownership stake in Eco in
the first quarter of 2021. Net sales of our Western segment were $45.2 million
in the third quarter of 2021, compared with $34.3 million in the third quarter
of 2020, an increase of $10.9 million, or 32.0%. Sales of our Western segment
are composed of the sales of WWS, including sales from our CRi Acquisition,
which totaled $4.1 million in the 2021 third quarter.
The $62.4 million increase in net sales for the third quarter of 2021 was
primarily driven by organic growth, and the effects of the recovery from the
Pandemic, at both our Southeast and Western segments, and the inclusion in the
third quarter of 2021 of the net sales of our acquisition of Eco. Net sales of
our Southeast segment for the third quarter of 2021, excluding the sales of Eco
of $24.7 million, increased $26.8 million, or 13.2% as compared to the third
quarter of 2020. 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 NewSouth direct-to-consumer brand also
experienced solid organic growth in the 2021 third quarter, compared to last
year's third quarter. Our Western segment experienced strong growth in the third
quarter of 2021, compared to the 2020 second quarter, 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 the 2021 second quarter compared to last
year. Sales of our Western segment include the increase from our CRi
Acquisition, which totaled $4.1 million in the 2021 third quarter.
Gross profit and gross margin
Gross profit was $104.2 million in the third quarter of 2021, an increase of
$17.3 million, or 19.9%, from $86.9 million in the third quarter of 2020. Our
gross margin was 34.7% in the third quarter of 2021, compared to 36.5% in the
prior year third quarter. During the third 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 the 2021 third quarter as compared to the third
quarter of 2020. Gross margin was also negatively impacted by inflationary
conditions on materials, labor and material delivery costs, which continued into
the third quarter of 2021 from the 2021 second quarter. Earlier this year, we
announced price increases to attempt to offset these inflationary conditions,
which we expect will begin to offset these cost impacts during our 2021 second
half. 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 we believe began benefiting gross margin in the late third quarter of 2021
and will continue to benefit gross margin as we move 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 anticipate our
results in the beginning of 2022. Gross margin in the third quarter of 2021
benefited from improved operating efficiencies in our Western segment, and the
addition of and accretion from our acquisitions of Eco and CRi.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses were $78.6 million in the
third quarter of 2021, an increase of $21.9 million, from $56.7 million in the
third quarter of 2020. SG&A in the third quarter of 2021 was 26.2% of net sales,
compared to 23.8% of net sales in the third quarter of 2020. The increase in
SG&A is partially due to the inclusion of SG&A from our second quarter 2021
acquisition of Eco, which totaled $6.5 million. Excluding the SG&A of $6.5
million, and sales of Eco of $24.7 million, SG&A as a percentage of sales would
be 26.2%.
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Additionally, there were increases compared to the third quarter of 2020 in
several other categories, including Anlin Acquisition costs, which totaled $1.0
million, higher pandemic-response and inefficiency costs in the third quarter of
2021 compared to the third quarter of 2020 due to the 2021 Delta variant
resurgence, depreciation, stock-based compensation, as well as additional costs
from investing in our strategic selling and marketing initiatives, as well as
higher distribution costs on increased sales levels.
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 $0.3 million in the three months ended
October 3, 2020.
Income from operations
Income from operations was $25.6 million in the third quarter of 2021, a
decrease of $4.4 million, from $30.0 million in the third quarter of 2020.
Income from operations in the third quarter of 2021 includes $20.7 million from
our Southeast segment and nearly $4.9 million from our Western segment, compared
to $25.7 million and $4.5 million from our Southeast and Western segments,
respectively, in the third quarter of 2020, all after allocation of corporate
operating costs in both periods, but also included a restructuring costs and
charges adjustment of $0.3 million relating to our Florida plant consolidation
taken in the 2020 third quarter relating to our Southeast segment.
The decrease in income from operations was related to the benefit from the
leverage from higher sales in the third quarter of 2021 compared to last year's
third quarter, as well as the benefits of the continued efficiency improvements
at our Western segment, being more than offset by rising costs for materials in
both aluminum and glass, including the increasing costs of distribution being
passed onto us by our vendors, and the continuing costs of attracting, training
and retaining an experienced labor force.
In the third quarter of 2021 compared to last year's third quarter, we
experienced efficiency improvements at our Western segment which benefitted
income from operations in the third quarter of 2021 compared to the third
quarter of 2020. However, during the first half of 2021, in response to
increasing demand and a resulting increase in our backlog of orders, especially
in the southeast, 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 the third quarter of 2021 as
compared to the third quarter of 2020, especially in the southeast. Operating
income was also negatively impacted by inflationary conditions on materials,
labor and material delivery costs, which continued to be prevalent in the third
quarter of 2021. Earlier this year, we announced price increases to attempt to
offset these inflationary conditions, which we expect will begin to offset these
cost impacts later in 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 we believe began benefiting operating income
in the late third quarter of 2021, and will continue to benefit operating income
as we move 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 anticipate impacting our results in the beginning of 2022. Income
from operations in the first nine months of 2021 also includes the operating
profits of our February 1, 2021, Eco acquisition, and May 2, 2021 CRi
acquisition.
Income from operations in the third quarter of 2021 also includes the operating
profits of both our Eco and CRi acquisitions.
Interest expense, net
Interest expense was $7.7 million in the third quarter of 2021, an increase of
$0.7 million, or 10.5%, from $7.0 million in the third quarter of 2020. Interest
expense in the third quarter of 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.
While the redemption of 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 will be expected to
impact interest expense in future periods, the lateness of such actions in the
2021 third quarter did not have a significant impact on interest expense, net,
in the third quarter of 2021 compares to the third quarter of 2020.
Debt Extinguishment Costs
Debt extinguishment costs totaled $25.5 million in the three months ended
October 2, 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
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borrowings under the 2016 Credit Agreement of $54.0 million and the related fees
and costs, and finance the Anlin Acquisition. See Note 18, Subsequent Event, 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 condensed consolidated statement of operations for the
three months ended October 2, 2021. 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.
Income tax expense
We had an income tax benefit of $2.4 million for the three months ended October
2, 2021, compared with an income tax expense of $5.7 million for the three
months ended October 3, 2020. Our effective tax rate for the three months ended
October 2, 2021, was a benefit rate of 31.9%, and was an expense rate of 24.7%
for the three months ended October 3, 2020. Our income tax expense for the three
months ended October 2, 2021 includes $449 thousand relating to our 75% share of
the pre-tax earnings of Eco.
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Income tax expense in the three months ended October 2, 2021 and October 3, 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 $14 thousand in the three months ended October 2, 2021, and zero
in the three months ended October 3, 2020. 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 three
months ended October 2, 2021, and October 3, 2020, would have been an income tax
benefit rate of 30.8% and an income tax expense rate of 24.7%, respectively.
In September 2021, the state of Florida announced that the corporate income tax
rate for the 2021 tax year was being lowered from its current level of 4.458% to
3.535%. As such, we have adjusted our annual effective tax rate for 2021 to
include an estimated combined statutory federal and state rate of 24.2% from its
previous estimate of 24.7%.
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the three
months ended October 2, 2021, was $0.7 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 the
third quarter of 2020.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 2, 2021 AND OCTOBER 3,
2020
The nine-month period ended October 2, 2021 is composed of 39 weeks, whereas the
nine-month period ended October 3, 2020 was composed of 40 weeks. We do not
believe that this difference significantly affects comparability of the
following results of operations.
Net sales
Nine Months Ended
October 2, 2021 October 3, 2020
Net Sales % of sales Net Sales % of sales % change
By segment:
Southeast segment $ 731.2 85.3% $ 560.2 84.7% 30.5%
Western segment 125.8 14.7% 100.8 15.3% 24.8%
Total net sales $ 857.0 100.0% $ 661.0 100.0% 29.7%
Net sales for the first nine months of 2021 were $857.0 million, a $196.0
million, or 29.7%, increase in sales, from $661.0 million in the first nine
month of the prior year.
Net sales of our Southeast segment were $731.2 million in the first nine months
of 2021, compared with $560.2 million in the 2020 first nine months, an increase
of $171.0 million, or 30.5%. Southeast segment sales in the first nine month of
2021 includes $64.3 million from our acquisition of Eco. Net sales of our
Western segment were $125.8 million in the first nine months of 2021, compared
with $100.8 million in the first nine months of 2020, an increase of $25.0
million, or 24.8%. Sales of our Western segment are composed of the sales of
WWS, including sales from our CRi Acquisition, which totaled $7.2 million in the
2021 first nine months.
The $196.0 million increase in net sales for the first nine of 2021 was
primarily driven by organic growth, and the effects of the recovery from the
Pandemic, at both our Southeast and Western segments, and the inclusion in the
first nine months of 2021 of the net sales of our acquisition of Eco. Net sales
of our Southeast segment for the first nine of 2021, excluding the sales of Eco
of $64.3 million, increased $106.7 million, or 19.0% as compared to the first
nine months of 2020. 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 NewSouth direct-to-consumer brand also
experienced solid organic growth in the 2021 first nine months, compared to last
year's first nine months. Our Western segment experienced strong growth in the
first nine months of 2021, compared to the 2020 first nine months, 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, which totaled $7.2 million in the five-month post-acquisition
period in 2021.
Gross profit and gross margin
Gross profit was $295.2 million in the first nine months of 2021, an increase of
$52.6 million, or 21.7%, from $242.5 million in the first nine months of 2020.
Our gross margin was 34.4% in the first nine month of 2021, compared to 36.7% in
the prior year first nine months. 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
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experience in their new roles. These incremental investments resulted in a
reduction in gross margin in the first nine months of 2021 as compared to the
first nine months of 2020. Gross margin was also negatively impacted by
inflationary conditions on materials, labor and material delivery costs, which
continued to be prevalent in the first nine months of 2021. Earlier this year,
we announced price increases to attempt to offset these inflationary conditions,
which we expect will begin to offset these cost impacts later during our 2021
second half. 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 we believe began benefiting gross margin in the late third
quarter of 2021 and will continue to benefit gross margin as we move 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 anticipate our
results in the beginning of 2022. Gross margin in the first nine months of 2021
benefited from improved operating efficiencies in our Western segment, and the
addition of and accretion from our acquisitions of Eco and CRi.
Selling, general and administrative expenses
SG&A expenses were $224.1 million in the first nine months of 2021, an increase
of $59.3 million, from $164.8 million in the first nine months of 2020. SG&A in
the first nine months of 2021 was 26.1% of net sales, compared to 24.9% of net
sales in the first nine months of 2020. The increase in SG&A is partially due to
the inclusion of SG&A from our acquisition of Eco in the 2021 first nine months,
which totaled $15.8 million. Excluding the SG&A of $15.8 million of ECO SG&A in
the first nine months of 2021, and sales of Eco of $64.3 million, SG&A as a
percentage of sales would be 26.3%.
Additionally, there were increases compared to the third quarter of 2020 in
several other categories, including Anlin Acquisition costs, which totaled $1.0
million, additional pandemic-response and inefficiency costs in the third
quarter of 2021 due to the 2021 Delta variant resurgence, depreciation,
stock-based compensation, as well as additional costs from investing in our
strategic selling and marketing initiatives, as well as 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 the nine months
ended October 3, 2020. Following an increase in net sales of 14.3% in the first
quarter of 2020, compared to the first quarter of 2019, net sales at our WWS
reporting unit decreased 19.3% in the second quarter of 2020 compared to the
2019 second quarter. As a result of this decrease in net sales, 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, 2020, which included decreases in
modeling assumptions for net sales of our WWS reporting unit for our 2020 and
2021 fiscal years. 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 the first nine months of
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 $71.1 million in the first nine months of 2021, an
increase of $5.6 million, from $65.5 million in the first nine months of 2020.
Income from operations in the first nine months of 2021 includes $55.0 million
from our Southeast segment and $16.1 million from our Western segment, compared
to $70.3 million and $7.4 million from our Southeast and Western segments,
respectively, in the first nine months of 2020, all after allocation of
corporate operating costs in both periods, but also included an impairment
charge of $8.0 million 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 first nine months relating to our
Southeast segment. The increase in income from operations was also related to
leverage from higher sales in the first nine months of 2021 compared to last
year's first nine months, 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 the first nine months of 2021 as compared to
the first nine months of 2020. Operating income was also negatively impacted by
inflationary conditions on materials, labor and material delivery costs, which
continued to be prevalent in the first nine months of 2021. Earlier this year,
we announced price increases to attempt to offset these inflationary conditions,
which we expect will begin to offset these cost impacts later in our 2021 second
half. 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 we believe began benefiting operating income in the late third quarter of
2021, and will continue to benefit operating income as we move 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 anticipate
impacting our results in the beginning of 2022. Income from
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operations in the first nine months of 2021 also includes the operating profits
of our February 1, 2021, Eco acquisition, and May 2, 2021 CRi acquisition.
Interest expense, net
Interest expense was $23.0 million in the first nine months of 2021, an increase
of $2.0 million, or 9.5%, from $21.0 million in the first nine months of 2020.
Interest expense in the first nine months of 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.
While the redemption of 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 will be expect to
impact interest expense in future periods, the lateness of such actions in the
2021 third quarter did not have a significant impact on interest expense, net,
in the third quarter of 2021 compares to the third quarter of 2020.
Debt Extinguishment Costs
Debt extinguishment costs totaled $25.5 million in the nine months ended October
2, 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 of $54.0 million and the related fees and costs, and finance the Anlin
Acquisition. See Note 18, Subsequent Event, 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
condensed consolidated statement of operations for the nine months ended October
2, 2021. 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.
Income tax expense
Our income tax expense was $4.3 million for the nine months ended October 2,
2021, compared with income tax expense of $9.4 million for the nine months ended
October 3, 2020. Our effective tax rate for the nine months ended October 2,
2021, was an expense rate of 18.8%, and was an expense rate of 21.0% for the
nine months ended October 3, 2020. Our income tax expense for the nine months
ended October 2, 2021 includes $1.2 million relating to our 75% share of the
pre-tax earnings of Eco.
Income tax expense in the nine months ended October 2, 2021 and October 3, 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 $714 thousand in the nine months ended October 2, 2021, and $737
thousand in the nine months ended October 3, 2020. The nine-month period ended
October 3, 2020 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 nine months ended October 2, 2021, and October 3,
2020, would have been income tax expense rates of 21.9% and 24.6%, respectively.
In September 2021, the state of Florida announced that the corporate income tax
rate for the 2021 tax year was being lowered from its current level of 4.458% to
3.535%. As such, we have adjusted our annual effective tax rate for 2021 to
include an estimated combined statutory federal and state rate of 24.2% from its
previous estimate of 24.7%.
Net income attributable to redeemable non-controlling interest
Net income attributable to redeemable non-controlling interest for the nine
months ended October 2, 2021, was $1.7 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 the
first nine months of 2020.
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LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Our principal source of liquidity is cash flow generated by operations and
supplemented by borrowings under our credit facilities. We expect that this cash
generating capability will provide us with financial flexibility in meeting
operating and investing needs, but there can be no assurance that will be the
case in future periods. Our primary capital requirements are to fund working
capital needs, meet required debt service payments on our credit facilities and
fund capital expenditures.
The following table summarizes our cash flow results for the first nine months
of 2021 and 2020:
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