PGT INNOVATIONS, INC. 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 endedDecember 28, 2019 , included in our most recent Annual Report on Form 10-K as filed with theSecurities and Exchange Commission onFebruary 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
where the substantial portion of our sales are currently generated, and in the
• 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
2020, and "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K
for the year endedDecember 28, 2019 and our otherSEC 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
DuringMarch 2020 , a global pandemic (the "Pandemic") was declared by theWorld Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). More recently, in July andAugust 2020 , the Pandemic has resulted in a significant number of infections, hospitalizations and deaths in several of our key markets, includingArizona ,California ,Florida andTexas . The Pandemic has significantly affected economic conditions in those markets, and inthe 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 theU.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 inCalifornia , 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 theSoutheast Florida area, we took swift action to protect our employees by temporarily suspending operations at and fumigating ourMiami andHialeah, Florida facilities, each for one-week periods inApril 2020 . We also took that step at our Western Windows Systems facility inPhoenix, Arizona duringJuly 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 ourCOVID-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 internalCOVID-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 onthe United States economy, including in our core markets, and on our business, onApril 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 onOctober 31, 2022 . - 32 - -------------------------------------------------------------------------------- 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 inFlorida 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 ofCalifornia ,Arizona andNevada , 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 inthe 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 throughoutthe 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 onFebruary 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 intoOctober 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 ENDEDOCTOBER 3, 2020 ANDSEPTEMBER 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 onApril 20, 2020 , the Company's management approved a plan to consolidate its manufacturing operations inFlorida , which included exiting our manufacturing facility inOrlando, Florida , where our WinDoor and Eze-Breeze products were assembled, and relocating the manufacturing of those products to the ourVenice andTampa, Florida plants, respectively. We ceased production at theOrlando facility duringJune 2020 . We made an adjustment of$321 thousand to the restructuring costs and charges, incurred and disbursed in the three months endedOctober 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 ourFlorida 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 onJanuary 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 endedOctober 3, 2020 , was an expense rate of 24.7%, and was an expense rate of 20.4% for the three months endedSeptember 28, 2019 . Income tax expense in the three months endedOctober 3, 2020 included no discrete items of income tax. For the three months endedSeptember 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 endedOctober 3, 2020 , and were$665 thousand in the three months endedSeptember 28, 2019 . Excluding discrete items of income tax, the effective tax rates for the three months endedOctober 3, 2020 , andSeptember 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, inMarch 2020 , theU.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 endedOctober 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 tothe 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 untilJuly 15, 2020 . However, we received a refund from the state ofFlorida 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 endedSeptember 28, 2019 , we made payments of estimated Federal and state income taxes totaling$4.3 million . - 36 -
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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDEDOCTOBER 3, 2020 ANDSEPTEMBER 28, 2019 Net sales Nine Months Ended October 3, 2020 September 28, 2019 Net Sales % of sales Net Sales % of sales % change By segment: Southeast segment$ 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 onFebruary 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 endedOctober 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 ofJuly 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 ofJuly 4, 2020 . As such, we concluded that it was not necessary to update our impairment test as ofOctober 3, 2020 .
Restructuring costs and charges
As we announced onApril 20, 2020 , the Company's management approved a plan to consolidate its manufacturing operations inFlorida , which included exiting our manufacturing facility inOrlando, Florida , where our WinDoor and Eze-Breeze products were assembled, and relocating the manufacturing of those products to ourVenice andTampa, Florida plants, respectively. We ceased production at theOrlando facility duringJune 2020 . As a result of this consolidation, we recorded restructuring costs and charges totaling$4.2 million in the nine months endedOctober 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 theOrlando, 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 endedOctober 3, 2020 , which includes an adjustment of$321 thousand incurred and disbursed in the three months endedOctober 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 ourFlorida 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 onJanuary 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 endedOctober 3, 2020 , was 21.0%, and was 21.8% for the nine months endedSeptember 28, 2019 . Income tax expense in the nine months endedOctober 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 ofFlorida 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 endedSeptember 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 endedOctober 3, 2020 , and were$1.7 million in the nine months endedSeptember 28, 2019 . Excluding discrete items of income tax, the effective tax rates for the nine months endedOctober 3, 2020 , andSeptember 28, 2019 , would have been income tax expense rates of 24.6% and 25.3%, respectively. In response to the Pandemic, inMarch 2020 , theU.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 endedOctober 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 tothe 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 untilJuly 15, 2020 . However, we received a refund from the state ofFlorida 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 endedSeptember 28, 2019 , we made payments of estimated Federal and state income taxes totaling$10.8 million . - 39 -
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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 theU.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 onOctober 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:
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