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MarketScreener Homepage  >  Equities  >  Nyse  >  PGT Innovations, Inc.    PGTI

PGT INNOVATIONS, INC.

(PGTI)
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PGT INNOVATIONS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/05/2020 | 12:14pm EST
The following discussion of our financial condition and results of operations
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto for the year ended December 28, 2019, included in
our most recent Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on February 26, 2020. All amounts herein are unaudited.

Special Note Regarding Forward-Looking Statements




Except for historical information contained herein, the matters set forth in
this Quarterly Report on Form 10-Q are forward-looking statements. These
statements are based on management's current expectations and plans, which
involve risks and uncertainties. Such forward-looking statements generally can
be identified by the use of forward-looking terminology such as "expected,"
"guidance," "believe," "expect," "may," "outlook," "forecast," "intend,"
"could," "project," "estimate," "anticipate," "should," "plan" and similar
terminology. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the filing date of this
Quarterly Report and which involve risks and uncertainties that may cause our
actual results to differ materially from those set forth in the forward-looking
statements. Those risks and uncertainties that could cause actual results to
differ materially from those described in our forward-looking statements
include, but are not limited to:



• 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;

• our dependence on a limited number of suppliers for certain of our key

materials;

• our dependence on our impact-resistant product lines 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 acquisitions of NewSouth and

Western Window Systems;

• our level of indebtedness, which increased in connection with our acquisition

of Western Window Systems, and increased further in connection with our

acquisition of NewSouth;

• increases in bad debt owed to us by our customers in the event of a downturn

in the home repair and remodeling 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 acquisitions of NewSouth and

Western Window Systems 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;

• 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;

• in addition to the acquisitions of NewSouth and Western Window Systems, 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 3,

2020, and "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K

   for the year ended December 28, 2019 and our other SEC filings.




Any forward-looking statements made by us or on our behalf speak only as of the
date they are made and, except as may be required by law, we do not undertake
any obligation to update any forward-looking statement to reflect the impact of
subsequent events or circumstances.


                                     - 31 -

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EXECUTIVE OVERVIEW

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). More recently, in July and August 2020, 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, including in our core markets in Western states,
creating significant uncertainties in the U.S. economy. Although certain 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, it is
currently unclear the extent to which increased interactions of social,
business, occupational and educational natures will adversely affect efforts to
reduce the Pandemic's health and other effects, how widespread additional or
renewed restrictions will be implemented, as they have been in California, for
example, and/or how long an economic recovery could take. The extent to which
the Pandemic could affect our business, operations and financial results will
depend upon numerous evolving factors that we may not be able to accurately
predict, including the duration and severity of the length and extent of the
economic and market disruptions related to the Pandemic, and the nature, amounts
and duration of any additional government stimulus measures designed to bolster
the economy.

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
the COVID-19 virus 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. As of the date of this filing,
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 -- with oversight from our senior executives
and our COVID-19 Task Force, which is comprised of managers from multiple
functional areas and locations -- 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) enforcing social distancing
in common areas, work areas, and production lines where possible; 4) allowing
only essential business visitors into our facilities, but only after
prescreening and a temperature check; 5) implementing work-at-home programs
where possible; 6) allowing only essential business travel; 7) implementing a
mandatory face-mask policy for employees at all of our locations, and providing
them with those masks where needed; and 8) sourcing supplies such as reusable
masks, hand sanitizer and cleaning solutions for use by our employees. Also, we
have established an internal COVID-19 Task Force that meets weekly to monitor
the Company's ongoing response to this Pandemic and to communicate with team
members and group leaders regarding any essential information relating to the
Pandemic.

Due to the then unprecedented uncertainty associated with the Pandemic and its
impact on the United States economy, including in our core markets, and on our
business, on April 8, 2020, we announced that we were withdrawing our financial
performance guidance for 2020. Additionally, due to that same uncertainty, we
then took certain actions aimed at preserving cash and maintaining our
liquidity, including canceling planned capital expenditures, reducing
discretionary spending, closely monitoring and forecasting cash collections and
disbursements, and controlling labor-related costs. Given the strong order entry
and related increase in sales we began to experience in the second quarter of
2020, and our increased cash position and overall liquidity, we have resumed
funding of certain previously delayed capital projects and increased spending on
labor-related costs to meet our customers' requirements. However, we will
continue to monitor spending and liquidity, and may reinstate restrictions on
spending where we believe it is prudent to do so, whether due to the Pandemic or
otherwise.

We ended our third quarter of 2020 with $99.3 million in cash, and $76.0 million
in availability under our 2016 Credit Agreement due 2022. Given our cash
position and overall liquidity, during our third quarter of 2020, we made
voluntary prepayments of borrowings under the term loan of the 2016 Credit
Agreement, totaling $10.0 million. After these prepayments, borrowings
outstanding under the term loan portion of the 2016 Credit Agreement due 2022
are $54.0 million. We have no scheduled debt repayment obligations until the
maturity of our 2016 Credit Agreement on October 31, 2022.

                                     - 32 -

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While we have experienced some delays in receiving certain materials from
certain of our suppliers, none of those supply chain disruptions have been
significant to-date. However, there can be no assurances that we will not
experience significant disruptions to our materials supply chain in future
periods during the Pandemic. Our manufacturing, sales and servicing operations
have been deemed essential operations under the COVID-19 related government
orders issued to-date, and thus, our operations have been permitted to continue
at all of our locations. However, there can be no assurance that our operations
will continue to be considered essential and exempt from any such emergency or
executive orders issued by governmental authorities in response to any future
increases in the extent or severity of the Pandemic.

Sales and Operations


During the third quarter of 2020, excluding the sales of our recent NewSouth
acquisition, we experienced an increase in sales at our Southeast segment, as
increased demand in Florida more than offset any economic effects of the
Pandemic. Net sales of our Southeast segment, excluding the sales of NewSouth,
were $177 million in the third quarter of 2020, compared to $162 million in the
third quarter of 2019, an increase of $15 million, or 9%. Net sales of our
Western segment decreased $2 million, or 5%, to $34 million in the third quarter
of 2020, from $36 million in the third quarter of 2019. We believe this decrease
was due to the change in the economy as a result of the Pandemic, especially in
our core markets of California, Arizona and Nevada, offset by strengthening
demand driving increased order activity. Our NewSouth acquisition contributed
$27 million in the third quarter of 2020.

Our Southeast and Western business units together saw order entries grow 26%
over the prior-year quarter, while NewSouth increased orders by approximately
48% compared to last year. Execution of strategic selling and marketing
initiatives has been a key driver of sales in addition to recovering market
demand for our portfolio of products, aided by an active hurricane season. Due
primarily to strengthening order volume, and to a lesser extent, due to longer
lead times associated with delays in receiving certain raw materials needed to
manufacture our products, we ended the third quarter of 2020 with a consolidated
backlog of $198 million at the end of our third quarter of 2020, which includes
$45 million from NewSouth, an increase of $131 million from our backlog at
year-end of 2019.

Our start to 2020 was strong, with 2020 first quarter consolidated net sales
increasing 27%, net income increasing 89%, and net income per diluted share
increasing 86%, all as compared to the first quarter of 2019. The first part of
our 2020 second quarter was unfavorably impacted by the effects of the Pandemic
and the negative economic effects it created, but ended with strengthened demand
and increasing order volumes, our third quarter of 2020 saw consolidated net
sales increase 20%, to $238.0 million, including the net sales of our NewSouth
acquisition, net income increased 15%, to $17.3 million, and net income per
diluted share increased 12%, to $0.29. While we believe the Pandemic and its
negative economic impacts resulted in some softness in our primary western
markets, where we continue to experience challenging macro-economic conditions,
we also believe that our strong order volumes on a consolidated basis indicate
that our markets as a whole and the new construction and repair and remodel
industries into which our products are sold have not been as negatively impacted
by the Pandemic as certain other industries in the United States.

Due to the continued uncertainty regarding the duration and severity of the
Pandemic and its impact on the economy, and given the significant increase in
the number of COVID-19 infections throughout the United States as we enter the
Fall season, our ability to forecast our operational and financial performance
for the fourth quarter of 2020 and beyond continues to be limited. As such, in
lieu of giving full guidance, we are providing a limited outlook for the 2020
fourth quarter. We expect our fourth quarter 2020 consolidated net sales,
inclusive of NewSouth, which we acquired on February 1, 2020, to range between
$200 million and $210 million, or an increase in the range of 14%, to 20% as
compared to the fourth quarter of 2019, reflecting the continuing strength of
our order entries during the back half of the third quarter and into October
2020.


                                     - 33 -

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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 (in thousands, except percentages):

                                                                  Three Months Ended
                                                      October 3,                   September 28,
                                                         2020                           2019
                                                                     (unaudited)
Net sales                                      $ 238,033       100.0%        $  197,823       100.0%
Cost of sales                                    151,097        63.5%           127,828        64.6%

Gross profit                                      86,936        36.5%            69,995        35.4%

Selling, general and administrative expenses 56,659 23.8%

      44,564        22.5%
Restructuring costs and charges                      321        0.1%                  -          -

Income from operations                            29,956        12.6%            25,431        12.9%

Interest expense, net                              6,954        2.9%              6,452        3.3%

Income before income taxes                        23,002        9.7%             18,979        9.6%

Income tax expense                                 5,680        2.4%              3,873        2.0%

Net income                                     $  17,322        7.3%         $   15,106        7.6%




                                                                  Nine Months Ended
                                                      October 3,                   September 28,
                                                         2020                           2019
                                                                     (unaudited)
Net sales                                      $ 661,020       100.0%        $  570,130       100.0%
Cost of sales                                    418,494        63.3%           365,925        64.2%

Gross profit                                     242,526        36.7%           204,205        35.8%

Selling, general and administrative expenses 164,848 24.9%

     132,604        23.3%
Impairment of trade name                           8,000        1.2%                  -          -
Restructuring costs and charges                    4,227        0.6%                  -          -

Income from operations                            65,451        9.9%             71,601        12.6%

Interest expense, net                             20,979        3.2%             19,922        3.5%

Income before income taxes                        44,472        6.7%             51,679        9.1%

Income tax expense                                 9,351        1.4%             11,271        2.0%

Net income                                     $  35,121        5.3%         $   40,408        7.1%





                                     - 34 -

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 3, 2020 AND SEPTEMBER
28, 2019



Net sales

                                                   Three Months Ended
                                October 3, 2020                       September 28, 2019
                        Net Sales          % of sales         Net Sales            % of sales            % change
By segment:
Southeast segment      $      203.7           85.6%          $      161.9             81.8%               25.9%
Western segment                34.3           14.4%                  35.9             18.2%               (4.6%)

Total net sales        $      238.0          100.0%          $      197.8            100.0%               20.3%


Net sales for the third quarter of 2020 were $238.0 million, a $40.2 million, or
20.3%, increase in sales, from $197.8 million in the third quarter of the prior
year.

Net sales of our Southeast segment were $203.7 million in the third quarter of
2020, compared with $161.9 million in the 2019 third quarter, an increase of
$41.8 million, or 25.9%. Southeast segment sales in the third quarter of 2020
includes $27.2 million from our NewSouth Acquisition. Net sales of our Western
segment were $34.3 million in the third quarter of 2020, compared with $35.9
million in the third quarter of 2019, a decrease of $1.6 million, or 4.6%. Sales
of our Western segment are composed of the sales of WWS.

The $40.2 million increase in net sales for the third quarter of 2020 was
primarily driven by the inclusion of the net sales of our NewSouth acquisition,
but also organic sales growth in our Southeast segment. These increases in net
sales were partially offset by a slight sales decrease at our Western segment.
Net sales of our Southeast segment, excluding the sales of our NewSouth
acquisition, increased $14.6 million, or 9.0% as compared to the third quarter
of 2019. Net sales of our Western segment decreased $1.6 million, or 4.6%, in
the third quarter of 2020 compared to the 2019 third quarter. 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 our 2020 first
quarter. We believe that our Western segment, saw a slowing rate of decline in
demand in the 2020 third quarter, as compared to the 2020 second quarter, due to
a strengthening housing market in the West, but to a lesser extent than in the
Southeast. We believe the negative impact of the Pandemic, although continuing
to unfavorably impact our Western segment during the 2020 third quarter, was
offset by our customers in the Southeast preparing for what was expected to be,
and has been, an active 2020 hurricane season. Net sales of our Southeast
segment in the third quarter of 2020 included $27.2 million from our NewSouth
acquisition.

Gross profit and gross margin


Gross profit was $86.9 million in the third quarter of 2020, an increase of
$16.9 million, or 24.2%, from $70.0 million in the third quarter of 2019. The
gross margin percentage was 36.5% in the third quarter of 2020, compared to
35.4% in the prior year third quarter. Gross margin in the third quarter of
2020, compared to the third quarter of 2019, benefitted from operating leverage
provided by the increased organic sales volume in our Southeast segment,
improvements driven by operational efficiencies at our Western segment, and the
addition of and accretion from our NewSouth Acquisition.

Selling, general and administrative expenses


Selling, general and administrative ("SG&A") expenses were $56.7 million in the
third quarter of 2020, an increase of $12.1 million, from $44.6 million in the
third quarter of 2019. SG&A in the third quarter of 2020 was 23.8% of net sales,
compared to 22.5% of net sales in the third quarter of 2019. The increase in
SG&A is primarily the result of the inclusion of the SG&A expenses of NewSouth
for the third quarter of 2020, which resulted in an increase in SG&A totaling
$10.7 million from its acquisition on February 1, 2020, which includes $0.8
million in amortization of the amortizable intangible assets acquired in the
acquisition of NewSouth. Excluding the increase in SG&A from the inclusion of
NewSouth, SG&A increased $1.3 million in the third quarter of 2020, compared to
the third quarter of 2019. The increase in SG&A in the third quarter of 2020,
compared to the 2019 third quarter, was primarily due to the inclusion of costs
in the third quarter of 2020 of $0.8 million relating to COVID-19 safety
measures taken at all Company facilities. Additionally, there were increases in
several other categories, including 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


As we announced on April 20, 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 relocating the manufacturing of those products to
the our Venice and Tampa, Florida plants, respectively. We ceased production at
the Orlando facility during June 2020. We made an adjustment of $321 thousand to
the restructuring costs and charges, incurred and disbursed in the three months
ended October 3, 2020, related to additional property, plant and equipment
costs.


                                     - 35 -

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Income from operations


Income from operations was $30.0 million in the third quarter of 2020, an
increase of $4.6 million, from $25.4 million in the third quarter of 2019.
Income from operations in the third quarter of 2020 includes $25.7 million from
our Southeast segment and $4.5 million from our Western segment, compared to
$22.4 million and $3.0 million from our Southeast and Western segments,
respectively, in the third quarter of 2019, all after allocation of corporate
operating costs in both periods. Income from operations in the third quarter of
2020 was also impacted by a third quarter adjustment of $321 thousand relating
to restructuring costs and charges from our Florida plant consolidation actions
taken in the 2020 second quarter, adjusted in the 2020 third quarter, relating
to our Southeast segment. The increase in income from operations in the third
quarter of 2020 compared to the third quarter of 2019 is primarily a result of
the increase in gross profit discussed above, including the accretion to gross
profit from the addition of NewSouth, partially offset by an increase in SG&A in
the third quarter of 2020, compared to last year's third quarter.

Interest expense, net


Interest expense was $7.0 million in the third quarter of 2020, an increase of
$0.5 million, or 7.8%, from $6.5 million in the third quarter of 2019. Interest
expense in the third quarter of 2020 includes an increase in interest expense
due to the issuance of the Additional Senior Notes totaling $50.0 million
effective on January 24, 2020, which we used to finance a portion of the
purchase price for our acquisition of NewSouth. This increase was partially
offset by a decrease in interest costs for our term loan under our 2016 Credit
Agreement due to a decrease in the borrowing rate in the third quarter of 2020,
compared to the 2019 third quarter.

Income tax expense


Our income tax expense was $5.7 million for the third quarter of 2020, compared
with income tax expense of $3.9 million for the third quarter of 2019. Our
effective tax rate for the three months ended October 3, 2020, was an expense
rate of 24.7%, and was an expense rate of 20.4% for the three months ended
September 28, 2019.

Income tax expense in the three months ended October 3, 2020 included no
discrete items of income tax. For the three months ended September 28, 2019,
there were Federal and state research and development tax credit true-ups
totaling $146 thousand. Excess tax benefits relating to equity awards, treated
as a discrete item of income tax, were zero in the three months ended October 3,
2020, and were $665 thousand in the three months ended September 28, 2019.

Excluding discrete items of income tax, the effective tax rates for the three
months ended October 3, 2020, and September 28, 2019, would have been income tax
expense rates of 24.7% and 24.8%, respectively. Our estimated annual effective
tax rate, excluding the discrete items discussed above, approximates our current
combined statutory federal and state rate of 25.0%.

In response to the Pandemic, in March 2020, the U.S. Congress passed the
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") legislation
aimed at providing relief for individuals and businesses that have been
negatively impacted by the Pandemic. The CARES Act did not have a material
impact to our consolidated financial statements. During the three months ended
October 3, 2020, we made payments of estimated Federal and state income taxes
totaling $4.0 million. We made no payments of estimated Federal or state income
taxes prior to the third quarter of 2020, as the deadlines for such payments to
the United States government, and the majority of states in which we have nexus,
which followed the payment deadline extension of the CARES Act, had been
deferred until July 15, 2020. However, we received 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, described above, which was $700 thousand, before Federal
effect. During the three months ended September 28, 2019, we made payments of
estimated Federal and state income taxes totaling $4.3 million.




                                     - 36 -

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 3, 2020 AND SEPTEMBER
28, 2019



Net sales

                                                   Nine Months Ended
                                October 3, 2020                       September 28, 2019
                        Net Sales          % of sales         Net Sales            % of sales            % change
By segment:
Southeast segment      $      560.2           84.7%          $      465.1             81.6%               20.5%
Western segment               100.8           15.3%                 105.0             18.4%               (4.1%)

Total net sales        $      661.0          100.0%          $      570.1            100.0%               15.9%


Net sales for the first nine months of 2020 were $661.0 million, a $90.9
million, or 15.9%, increase in sales, from $570.1 million in the first nine
months of 2019. Southeast segment sales in the first nine months of 2020
includes $66.2 million from our NewSouth Acquisition. The first nine months of
2020 includes 40 weeks of sales, compared to 39 weeks in the first nine months
of 2019, as our fiscal year of 2020 will be 53 weeks long, compared to 52 weeks
in our 2019 fiscal year.

Net sales of our Southeast segment were $560.2 million in the first nine months
of 2020, compared with $465.1 million in the first nine months of 2019, an
increase of $95.1 million, or 20.5%. Net sales of our Western segment were
$100.8 million in the first nine months of 2020, compared with $105.1 million in
the first nine months of 2019, a decrease of $4.2 million. Sales of our Western
segment are composed of sales of WWS.

The $90.9 million increase in net sales for the first nine months of 2020 was
primarily driven by the inclusion of the net sales of our NewSouth acquisition.
These increases were partially offset by a slight sales decrease at our Western
segment. Net sales of our Southeast segment, excluding the sales of our NewSouth
acquisition, increased $28.9 million, or 6.2%, while net sales of our Western
segment decreased $4.2 million, or 4.1%, in the first nine months of 2020
compared to the 2019 first nine months. The organic sales growth at our
Southeast segment in the first nine months of 2020 was a result of strong
organic growth in the 2020 first and third quarters, partially offset by an
organic sales decrease in the second quarter of 2020, as our Southeast segment
was unfavorably impacted by the Pandemic and consumer and government responses
thereto. The decrease in sales at our Western segment in the first nine months
of 2020 was driven by the economic challenges and related decrease in demand for
our products in our core Western states, especially during the second quarter of
2020, but also continuing into the third quarter of 2020, caused by the Pandemic
and government responses thereto, including stay-at-home orders, as well as by
the general economic uncertainty that persisted in those markets. That decline
in sales was offset in part by stronger sales in the first quarter of 2020,
prior to the Pandemic. However, the rate of decrease in sales at our Western
segment lessened during the third quarter of 2020, as compared to the second
quarter of 2020, due to a strengthening new construction housing market in the
West, but to a lesser extent than the new construction markets in the Southeast.
We believe the Pandemic has impacted our Southeast segment to a lesser degree
than our Western segment as, during the second and third quarters of 2020, our
customers in the Southeast continued to prepare for what was expected to be, and
has been, an active 2020 hurricane season. Net sales of our Southeast segment
for the third quarter of 2020 included $66.2 million from our NewSouth
acquisition.

Gross profit and gross margin


Gross profit was $242.5 million in the first nine months of 2020, an increase of
$38.3 million, or 18.8%, from $204.2 million in the first nine months of 2019.
The gross margin percentage was 36.7% in the first nine months of 2020, compared
to 35.8% in the first nine months of 2019, an increase of 0.9%. Gross margin
increased in the first nine months of 2020 due primarily to the favorable
effects of a higher sales and the resulting additional leverage provided to
cover fixed costs, lower material costs, primarily aluminum costs, a heightened
focus on labor cost management leading to improved operating efficiencies,
especially at our Western segment, and the addition of and accretion from our
NewSouth Acquisition. These benefits were offset by the negative effects of a
decrease in organic volume, and a change in mix of products during the first
nine months of 2020 compared to last year's first nine months.

Selling, general and administrative expenses


SG&A expenses were $164.8 million in the first nine months of 2020, an increase
of $32.2 million, from $132.6 million in the first nine months of 2019. SG&A in
the first nine months of 2020 was 24.9% of net sales, compared to 23.3% of net
sales in the first nine months of 2019. The increase in SG&A is primarily the
result of the inclusion of the SG&A expenses of NewSouth for the third quarter
of 2020, which resulted in an increase in SG&A totaling $25.7 million from its
acquisition on February 1, 2020, which includes $2.2 million in amortization of
the amortizable intangible assets acquired in the acquisition of NewSouth.
Excluding the increase in SG&A from the inclusion of NewSouth, SG&A increased
$6.5 million in the first nine months of 2020, compared to the 2019 first nine
months. The increase in SG&A in the first nine months of 2020, compared to the
2019 first nine months, was due to the inclusion of costs in the first nine
months of 2020 of $2.4 million relating to COVID-19 safety measures taken,
including increased frequency of cleaning and sanitization of all facilities, as
well as $0.9 million in acquisition costs relating to our NewSouth acquisition.
Additionally, there were increases in several other categories, including
depreciation, stock-based compensation, as well as additional costs from
investing in our strategic selling and marketing initiatives, and higher
distribution costs on increased sales levels.

                                     - 37 -

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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 14.0% in the first
quarter of 2020, compared to the first quarter of last year, net sales at our
WWS reporting unit decreased 19.3% in the second quarter of 2020 compared to
last year's second quarter. As a result of this decrease in net sales in our
second quarter of 2020, compared to the second quarter of last year, as well as
continued deterioration in economic and market conditions surrounding the
Pandemic, we determined to complete an interim impairment test of our WWS trade
name as of July 4, 2020. For this interim impairment test, we 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 the second quarter of 2020.

The rate of decrease in sales at our WWS reporting unit slowed during the third
quarter of 2020, decreasing just 4.6% in the third quarter of 2020, compared to
the third quarter of last year, which was within our modeling assumptions used
during our second impairment test of our WWS trade name as of July 4, 2020. As
such, we concluded that it was not necessary to update our impairment test as of
October 3, 2020.

Restructuring costs and charges


As we announced on April 20, 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 relocating 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 nine
months ended October 3, 2020.

Of the $4.2 million in restructuring costs and charges, $1.9 million represents
costs relating to and write-offs of property, plant and equipment, including the
impairment of the right-of-use asset of the lease of the Orlando, Florida
facility, $1.2 million represents charges relating to inventory not expected to
be used due to product rationalization, which we chose to dispose of, and $1.1
million represents personnel-related costs. Substantially all of the
personnel-related costs had been paid in cash by the end of our 2020 first nine
months.

The following represents activities of restructuring costs and charges for the
nine months ended October 3, 2020, which includes an adjustment of $321 thousand
incurred and disbursed in the three months ended October 3, 2020 related to
additional property, plant and equipment costs:



                                                          Nine Months Ended October 3, 2020
                                   Beginning          Charged         Write-offs of                         End of
Restructuring costs and                                                                  Settled in
charges                            of Period         to Expense          Assets             Cash            Period
(in thousands)
Property, plant and equipment
costs and charges                $            -     $      1,284     $          (540 )   $      (744 )   $          -
Impairment of operating lease
right-of-use asset                            -              639                (639 )             -                -
Inventory charges                             -            1,164              (1,263 )            99                -
Personnel-related costs                       -            1,140                   -          (1,140 )              -

Total restructuring costs and
charges                          $            -     $      4,227$        (2,442 )$    (1,785 )   $          -


Income from operations

Income from operations was $65.5 million in the first nine months of 2020, a
decrease of $6.1 million, from $71.6 million in the first nine months of 2019.
Income from operations in the first nine months of 2020 includes $70.3 million
from our Southeast segment and $7.4 million from our Western segment, compared
to $62.9 million and $8.7 million from our Southeast and Western segments,
respectively, in the first nine months of 2019, all after allocation of
corporate operating costs in both periods. Income from operations in the first
nine months of 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 decrease in income from operations in the first nine months of 2020 compared
to the first nine months of 2019 is primarily a result of these charges, but
also due to the increase in gross profit discussed above, partially offset by
the increase in SG&A in the first nine months of 2020, compared to last year's
first nine months.

                                     - 38 -

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Interest expense, net


Interest expense was $21.0 million in the first nine months of 2020, an increase
of $1.1 million, or 5.3%, from $19.9 million in the first nine months of 2019.
Interest expense in the first nine months of 2020 includes an increase in
interest expense due to the issuance of the Additional Senior Notes totaling
$50.0 million effective on January 24, 2020, which we used to finance a portion
of the purchase price for our acquisition of NewSouth. This increase was
partially offset by a decrease in interest costs for our term loan under our
2016 Credit Agreement due to a decrease in the weighted-average borrowing rate
in the first nine months of 2020, compared to the first nine months of 2019.

Income tax expense


Our income tax expense was $9.4 million for the first nine months of 2020,
compared with $11.3 million for the first nine months of 2019. Our effective tax
rate for the nine months ended October 3, 2020, was 21.0%, and was 21.8% for the
nine months ended September 28, 2019.

Income tax expense in the nine months ended October 3, 2020 includes several
discrete items of income tax benefits, including Federal and state research and
development tax credit true-ups to actual from the assumptions we made when
preparing our 2019 tax provision, which totaled $319 thousand, and 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 was $700 thousand, which benefitted tax
expense by $553 thousand, net of its Federal tax effect. For the nine months
ended September 28, 2019, there were Federal and state research and development
tax credit true-ups totaling $146 thousand. Excess tax benefits relating to
equity awards, treated as a discrete item of income tax, were $737 thousand in
the nine months ended October 3, 2020, and were $1.7 million in the nine months
ended September 28, 2019.

Excluding discrete items of income tax, the effective tax rates for the nine
months ended October 3, 2020, and September 28, 2019, would have been income tax
expense rates of 24.6% and 25.3%, respectively.

In response to the Pandemic, in March 2020, the U.S. Congress passed the
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") legislation
aimed at providing relief for individuals and businesses that have been
negatively impacted by the Pandemic. The CARES Act did not have a material
impact to our consolidated financial statements. During the three months ended
October 3, 2020, we made payments of estimated Federal and state income taxes
totaling $4.0 million. We made no payments of estimated Federal or state income
taxes prior to the third quarter of 2020, as the deadlines for such payments to
the United States government, and the majority of states in which we have nexus,
which followed the payment deadline extension of the CARES Act, had been
deferred until July 15, 2020. However, we received 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, described above, which was $700 thousand, before Federal
effect. During the nine months ended September 28, 2019, we made payments of
estimated Federal and state income taxes totaling $10.8 million.


                                     - 39 -

--------------------------------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

Impact of COVID-19 on Our Business


Due to the unprecedented uncertainty regarding the extent and duration of the
Pandemic, and the impact it may have on the U.S. economy and our business and
operations, we have taken actions aimed at preserving cash and maintaining our
liquidity, including : 1) delaying or canceling planned capital expenditures; 2)
reducing discretionary spending; 3) optimizing net working capital by closely
monitoring and forecasting cash collections and disbursement; and 4) closely
managing labor costs.

We ended the third quarter of 2020 with $99.3 million in cash on hand and have
$76.0 million in availability under the revolving credit facility of our 2016
Credit Agreement due 2022. Additionally, we have no scheduled debt repayment
obligations until the maturity of the outstanding balance of $54.0 million under
our 2016 Credit Agreement on October 31, 2022.

Given the increase in orders for our products and resulting sales that we began
to experience at the end of the second quarter of 2020 and in the third quarter,
and due to the increase in our cash position and overall liquidity, we have
resumed capital expenditures for certain selected projects, in addition to
repaying $10 million of the term loan portion of our 2016 Credit Agreement due
2022, following the end of the third quarter. However, given the economic
uncertainty created by the Pandemic, and especially in light of the increasing
number of COVID-19 infections heading into the Fall season, we intend to closely
monitor our business operations, costs and expenses and liquidity in future
periods for the foreseeable future, and will make adjustments to our capital
expenditures and other expenses when we believe it is prudent to do so.

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, due to the possible adverse impacts that the Pandemic
and its effects on the economy may have on our business. 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 2020 and 2019:

© Edgar Online, source Glimpses

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