NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1
.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ply Gem Holdings, Inc. and its subsidiaries (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with U.S. generally accepted accounting principles as described in the consolidated financial statements and related notes included in our
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2017. These statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles and should be read in conjunction with our
2016
Annual Report on Form 10-K. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included. Operating results for the period from January 1,
2017
through
September 30, 2017
are not necessarily indicative of the results that may be expected for the year ending December 31,
2017
.
The condensed consolidated balance sheet at December 31,
2016
has been derived from the audited consolidated financial statements of Ply Gem Holdings at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
The Company’s fiscal quarters are based on periods ending on the Saturday of the last week in the quarter. Therefore, the financial results of certain fiscal quarters will not be comparable to the prior and subsequent fiscal quarters. The accompanying financial statements include the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the
three and nine
months ended
September 30, 2017
and
October 1, 2016
, the condensed consolidated statements of cash flows for the
nine months ended
September 30, 2017
and
October 1, 2016
, and the condensed consolidated balance sheets as of
September 30, 2017
and
December 31, 2016
.
Ply Gem is a diversified manufacturer of residential and commercial building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets. The demand for the Company’s products is seasonal, particularly in the Northeast and Midwest regions of the United States and Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors. The Company’s sales are usually lower during the first and fourth quarters.
To a significant extent our performance is dependent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence, unemployment, and availability of consumer credit.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.
Accounting Policies and Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable. Such estimates include the allowance for doubtful accounts receivable, rebates, pensions, valuation of inventories, warranty reserves, insurance reserves, legal contingencies, assumptions used in the calculation of income taxes and the tax receivable agreement liability, projected cash flows used in the goodwill and intangible asset impairment tests, and environmental accruals and other contingencies. These judgments are based on the Company’s historical experience, current trends and information available from other sources, and are based on management’s best estimates and judgments. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Volatile equity markets, foreign currency, and litigation risk have combined to increase the uncertainty inherent in such estimates and assumptions. If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.
Cash and Cash Equivalents
Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less and that are readily convertible into cash.
Accounts Receivable
Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts was
$2.9 million
at
September 30, 2017
and
$2.7 million
at
December 31, 2016
. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, the financial health of its customers, unusual macroeconomic conditions and historical experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible trade accounts receivable against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
Inventories
Inventories in the accompanying condensed consolidated balance sheets are valued at the lower of cost or net realizable value and are determined primarily by the first-in, first-out (FIFO) method. The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold. As of
September 30, 2017
, the Company had inventory purchase commitments of approximately
$16.3 million
.
Inventory provisions were approximately
$8.4 million
at
September 30, 2017
and were consistent with the December 31, 2016 provision of approximately
$8.4 million
.
Property and Equipment
Property and equipment are presented at cost. Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows:
|
|
|
Buildings and improvements
|
10-37 years
|
Machinery and equipment, including leases
|
3-15 years
|
Leasehold improvements
|
Term of lease or useful life, whichever is shorter
|
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations. During the nine months ended September 30, 2017, the Company recognized a
$1.9 million
gain on the sale of a Canadian building as the Company consolidated windows and siding operations into a new leased facility in Saskatoon. The gain on sale has been recorded within selling, general, and administrative expenses in the Company's condensed consolidated statements of operations and comprehensive income (loss).
Intangible Assets, Goodwill and Other Long-lived Assets
Long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs an undiscounted operating cash flow analysis to determine if impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flows.
The Company tests for long-lived asset impairment at the following asset group levels: (i) the combined U.S. Siding, Fencing and Stone companies in the Siding, Fencing and Stone segment (“Siding”), (ii) the combined U.S. Windows companies in the Windows and Doors segment (“U.S. Windows”), (iii) the combined Simonton windows companies in the Windows and Doors segment, (iv) Gienow Canada Inc. ("Gienow Canada") (a combined Western Canadian company created by the January 2014 amalgamation of the Company's legacy Western Canadian business and the Gienow entity acquired in April 2013) in the Windows and Doors segment, and (v) Mitten in the Siding, Fencing and Stone segment. For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities. There were no indicators of impairment during the three and
nine months ended September 30, 2017
.
Goodwill and other intangible assets
The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant. All other intangible assets are amortized over their estimated useful lives and are assessed for impairment as necessary. The Company assesses goodwill for impairment at the November month end each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies. A significant reduction in projected sales and earnings, which would lead to a reduction in future cash flows, could indicate potential impairment. There were no indicators of impairment during the three and
nine months ended September 30, 2017
that would trigger an interim impairment test. The Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets could result in goodwill impairments.
Debt Issuance Costs
Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt financing, are amortized over the contractual term of the related agreement using the effective interest method. Net debt issuance costs totaled approximately
$14.0 million
and
$16.5 million
as of
September 30, 2017
and
December 31, 2016
, respectively, and have been recorded within long-term debt (
$12.1 million
at
September 30, 2017
and
$14.2 million
at
December 31, 2016
) and other non-current assets (
$1.9 million
at
September 30, 2017
and
$2.3 million
at
December 31, 2016
) in the accompanying condensed consolidated balance sheets. The debt issuance costs included in other long term assets relate to the Senior Secured Asset Based Revolving Credit Facility due 2020 ("ABL Facility"). Amortization of debt issuance costs for the three months ended
September 30, 2017
and
October 1, 2016
was approximately
$0.9 million
and
$0.8 million
, respectively. Amortization of debt issuance costs for the
nine months ended
September 30, 2017
and
October 1, 2016
was approximately
$2.6 million
and
$2.5 million
, respectively. Amortization of debt issuance costs is recorded in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes, which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for deferred tax assets that may not be realized in the future. The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. The Company, along with its U.S. subsidiaries, file a consolidated federal income tax return, separate state income tax returns, combined state returns, and unitary state returns. Gienow Canada and Mitten both file separate Canadian federal income tax returns and separate provincial returns.
Tax receivable agreement ("TRA") liability
The TRA liability generally provides for the payment by the Company to PG ITR Holdco, L.P. (the “Tax Receivable Entity”) of 85% of the amount of cash savings, if any, in the U.S. federal, state and local income tax that the Company actually realizes in periods ending after the Company's initial public offering as a result of (i) net operating loss carryovers ("NOLs") from periods ending before January 1, 2013, (ii) deductible expenses attributable to the initial public offering and (iii) deductions related to imputed interest. Since the inception of the TRA liability with the Company’s 2013 initial public offering through June 2016, the Company had been in a full valuation allowance for federal purposes and had partial valuation allowances on certain state and Canadian jurisdictions. As a result of the Company’s tax valuation allowance position for federal and state purposes, the Company historically calculated the TRA liability considering (i) current year taxable income only (due to the uncertainty of future taxable income associated with the Company’s cumulative loss position) and (ii) future income due to the expected reversals of deferred tax liabilities. During the three and nine months ended October 1, 2016, the Company released its valuation allowance on its federal deferred tax assets and certain state deferred tax assets for approximately
$50.1 million
due to positive factors outweighing negative evidence thereby allowing the Company to achieve the “more likely than not” realization threshold. The factors surrounding the release of this valuation allowance thereby eliminated any uncertainty as to future taxable income. Consequently, for purposes of calculating the TRA liability, the Company, during the three and nine months ended October 1, 2016, utilized future forecasts of taxable income beyond the 2016 tax year to determine the TRA liability. The Company’s future taxable income estimate was used to determine the cumulative NOLs that are expected to be utilized and the TRA liability was accordingly adjusted using the 85% TRA rate as the Company retains the benefit of 15% of the tax savings.
Environmental
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Environmental remediation obligation accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Commitments and Contingencies
The Company accrues for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Costs accrued have been estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes. Insurance recoveries are recorded as assets when their receipt is deemed probable. As of
September 30, 2017
, the Company had a
$25.4 million
insurance receivable recognized in other current assets in the Company's condensed consolidated balance sheets for the securities litigation (see Note 7). As of
December 31, 2016
, the Company did not have any insurance recoveries recognized in the condensed consolidated balance sheets.
Foreign Currency
Gienow Canada and Mitten, the Company’s Canadian subsidiaries, utilize the Canadian dollar as their functional currency. For reporting purposes, the Company translates the assets and liabilities of its foreign entities at the exchange rates in effect at period-end. Net sales and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying condensed consolidated balance sheets.
The Company recorded a
gain
from foreign currency transactions of approximately
$0.8 million
for the three months ended
September 30, 2017
and a
loss
of
$0.1 million
for the three months ended
October 1, 2016
. The Company recorded a
gain
from foreign currency transactions of approximately
$1.6 million
and
$0.7 million
for the
nine months ended
September 30, 2017
and
October 1, 2016
, respectively. During the
nine months ended September 30, 2017
, accumulated other comprehensive income (loss) included a currency translation gain of approximately
$4.2 million
and a gain of approximately
$4.1 million
for the
nine months ended October 1, 2016
.
Derivative Financial Instruments
As of
September 30, 2017
, the Company had entered into foreign currency forward contract agreements to hedge approximately
$78.8 million
of its 2017 and 2018 non-functional currency inventory purchases to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar.
The Company has designated these forward contracts as cash flow hedges. As a cash flow hedge, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. These forward contract agreements are highly correlated to the changes in foreign currency rates to which the Company is exposed. Unrealized gains and losses on these agreements are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income or loss to cost of goods sold.
The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instrument are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings.
The gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As of
September 30, 2017
, approximately
$0.6 million
of the deferred net liability on derivative instruments included in accumulated other comprehensive loss is expected to be reclassified to cost of goods sold during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions. During the three and
nine months ended September 30, 2017
, the Company recognized
$0.5 million
and
$0.0 million
, respectively, within earnings as an increase to cost of goods sold in the condensed consolidated statement of operations and comprehensive income (loss). During the three and
nine months ended October 1, 2016
, the Company recognized
$0.2 million
and
$0.5 million
, respectively, within earnings as an increase of cost of goods sold in the condensed consolidated statement of operations and comprehensive income (loss).
The fair value of the foreign currency forward contract agreements are estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs (Level 2). A summary of the recorded asset and liability included in the accompanying condensed consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
September 30, 2017
|
|
December 31, 2016
|
Foreign currency hedge included in other current assets (accrued expenses)
|
$
|
(623
|
)
|
|
$
|
962
|
|
Fair Value Measurement
The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3: Inputs that reflect the reporting entity’s own assumptions.
|
The hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The fair value of the long-term debt instruments was determined by utilizing available market information. The carrying value of the Company’s other assets and liabilities approximates their fair value. The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active Markets
|
|
Significant
Other
|
|
Significant
|
(Amounts in thousands)
|
|
|
|
Fair
|
|
for Identical
|
|
Observable
|
|
Unobservable
|
|
|
Carrying
|
|
Value
|
|
Assets
|
|
Inputs
|
|
Inputs
|
Description
|
|
Value
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Senior Notes-6.50%
|
|
$
|
650,000
|
|
|
$
|
676,000
|
|
|
$
|
676,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan Facility
|
|
254,950
|
|
|
257,181
|
|
|
—
|
|
|
257,181
|
|
|
—
|
|
As of September 30, 2017
|
|
$
|
904,950
|
|
|
$
|
933,181
|
|
|
$
|
676,000
|
|
|
$
|
257,181
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes-6.50%
|
|
$
|
650,000
|
|
|
$
|
676,000
|
|
|
$
|
676,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan Facility
|
|
258,175
|
|
|
260,757
|
|
|
—
|
|
|
260,757
|
|
|
—
|
|
As of December 31, 2016
|
|
$
|
908,175
|
|
|
$
|
936,757
|
|
|
$
|
676,000
|
|
|
$
|
260,757
|
|
|
$
|
—
|
|
Earnings (Loss) Per Common Share
Basic earnings (loss) per share ("EPS") is computed based upon weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Ply Gem Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.
The computation of the dilutive effect of other potential common shares included options and unvested restricted stock representing approximately
0.5 million
and
0.5 million
shares of common stock for the three and
nine months ended
September 30, 2017
, respectively. The computation of the dilutive effect of other potential common shares included options and unvested restricted stock representing approximately
0.2 million
and
0.1 million
shares of common stock for the three and nine months ended
October 1, 2016
, respectively.
New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. generally accepted accounting principles ("GAAP"). The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The effective date for the standard is for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the pending adoption of this standard on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
. ASU 2017-09 addresses which changes to terms or conditions of a share-based payment award require the application of modification accounting within the scope of Topic 718. ASU 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU 2017-07 changes the statement of operations presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in other income and expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. ASU 2017-07 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017 or fiscal 2018 for the Company. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
Effective January 1, 2017, the Company adopted
ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The standard update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the condensed consolidated statements of cash flows. As a result of the adoption, on a modified retrospective basis, we recognized
$1.3 million
of excess tax benefits during the nine months ended September 30, 2017 from stock-based compensation through a cumulative-effect adjustment decreasing accumulated deficit. We elected not to change our policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the Company's results of operations.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will become effective for Ply Gem beginning with the first quarter of 2018. The evaluation of our contracts is substantially complete and, based upon the results of our work to date, we currently do not expect the application of the new standard to these contracts to have a material impact to our consolidated statements of operations, balance sheets, or cash flows either at initial implementation or on an ongoing basis. The Company is also evaluating the new disclosures required by the standard to determine what additional information will need to be disclosed and additional disaggregated revenue disclosures are expected to be included upon adoption.
2
.
GOODWILL
The Company records the excess of the fair value of the acquisition consideration over the net tangible and intangible assets of acquired companies as goodwill. The Company performs an annual test for goodwill impairment at the November month end each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level. The Company has
two
reporting units: (1) Siding, Fencing and Stone and (2) Windows and Doors. Separate valuations are performed for each of these reporting units in order to test for impairment.
The Company early adopted ASU No. 2017-04,
Intangibles-Goodwill and other (Topic 350)
during the
nine months ended
September 30, 2017
. As such, the Company measures the goodwill impairment as the amount by which the reporting unit's carrying value exceeds its fair value not to exceed the carrying amount of goodwill in a reporting unit. The Company has elected not to utilize the qualitative Step Zero impairment assessment. There was
no
goodwill impairment for the year ended
December 31, 2016
and no impairment indicators that would trigger an interim impairment test during the
three and nine
months ended
September 30, 2017
. However, the Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets or the Company's market capitalization could result in goodwill impairments.
To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies. The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate. The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples. These comparable public company multiples are then applied to the reporting unit’s financial performance. The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable. Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.
The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples. In order to accurately forecast future cash flows, the Company estimates single family housing starts and the repair and remodeling market's growth rates. However, there is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase, or (3) the earnings, book values or projected earnings and cash flows of the Company's reporting units will not decline.
The reporting unit goodwill balances were as follows as of
September 30, 2017
and
December 31, 2016
:
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(Amounts in thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Siding, Fencing and Stone
|
|
$
|
350,065
|
|
|
$
|
348,553
|
|
Windows and Doors
|
|
130,661
|
|
|
129,961
|
|
|
|
$
|
480,726
|
|
|
$
|
478,514
|
|
The changes in the goodwill balances from
December 31, 2016
to
September 30, 2017
relate to currency translation. A goodwill rollforward for
2017
is included in the table below:
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|
Windows and
|
|
Siding, Fencing
|
(Amounts in thousands)
|
|
Doors
|
|
and Stone
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
Goodwill
|
|
$
|
457,734
|
|
|
$
|
470,780
|
|
Accumulated impairment losses
|
|
(327,773
|
)
|
|
(122,227
|
)
|
|
|
$
|
129,961
|
|
|
$
|
348,553
|
|
Currency translation adjustments
|
|
700
|
|
|
1,512
|
|
Balance as of September 30, 2017
|
|
|
|
|
|
|
Goodwill
|
|
458,434
|
|
|
472,292
|
|
Accumulated impairment losses
|
|
(327,773
|
)
|
|
(122,227
|
)
|
|
|
$
|
130,661
|
|
|
$
|
350,065
|
|
3
.
INTANGIBLE ASSETS
The table that follows presents the major components of intangible assets as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Average
Amortization
Period
|
|
|
|
Accumulated
|
|
Net Carrying
|
|
|
(in Years)
|
|
Cost
|
|
Amortization
|
|
Value
|
As of September 30, 2017:
|
|
|
|
|
|
|
|
|
Patents
|
|
14
|
|
$
|
12,770
|
|
|
$
|
(12,307
|
)
|
|
$
|
463
|
|
Trademarks/Tradenames
|
|
12
|
|
117,472
|
|
|
(88,127
|
)
|
|
29,345
|
|
Customer relationships
|
|
13
|
|
219,617
|
|
|
(161,654
|
)
|
|
57,963
|
|
Other
|
|
4
|
|
5,752
|
|
|
(4,452
|
)
|
|
1,300
|
|
Total intangible assets
|
|
12
|
|
$
|
355,611
|
|
|
$
|
(266,540
|
)
|
|
$
|
89,071
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
14
|
|
$
|
12,770
|
|
|
$
|
(12,078
|
)
|
|
$
|
692
|
|
Trademarks/Tradenames
|
|
12
|
|
117,124
|
|
|
(82,723
|
)
|
|
34,401
|
|
Customer relationships
|
|
13
|
|
217,861
|
|
|
(150,310
|
)
|
|
67,551
|
|
Other
|
|
4
|
|
5,661
|
|
|
(4,146
|
)
|
|
1,515
|
|
Total intangible assets
|
|
12
|
|
$
|
353,416
|
|
|
$
|
(249,257
|
)
|
|
$
|
104,159
|
|
Amortization expense for the three months ended
September 30, 2017
and
October 1, 2016
was
$5.3 million
and
$6.4 million
, respectively. Amortization expense for the
nine months ended
September 30, 2017
and
October 1, 2016
was
$15.9 million
and
$19.3 million
, respectively.
Estimated amortization expense for the fiscal years
2017
through
2021
is shown in the following table:
|
|
|
|
|
|
Amortization
|
(Amounts in thousands)
|
expense
|
|
|
2017 (remainder of year)
|
$
|
5,188
|
|
2018
|
20,280
|
|
2019
|
16,154
|
|
2020
|
11,464
|
|
2021
|
6,718
|
|
4
.
COMPREHENSIVE INCOME
Comprehensive income, net of tax is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30, 2017
|
|
October 1, 2016
|
|
September 30, 2017
|
|
October 1, 2016
|
Net income
|
|
$
|
27,534
|
|
|
$
|
54,755
|
|
|
$
|
53,756
|
|
|
$
|
68,824
|
|
Foreign currency translation adjustment
|
|
2,321
|
|
|
(1,258
|
)
|
|
4,165
|
|
|
4,099
|
|
Unrealized gain (loss) on derivative instruments
|
|
(441
|
)
|
|
619
|
|
|
(1,417
|
)
|
|
(530
|
)
|
Comprehensive income
|
|
$
|
29,414
|
|
|
$
|
54,116
|
|
|
$
|
56,504
|
|
|
$
|
72,393
|
|
5. LONG-TERM DEBT
Long-term debt in the accompanying condensed consolidated balance sheets at
September 30, 2017
and
December 31, 2016
consists of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Senior secured asset based revolving credit facility
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan due 2021, net of unamortized early tender premium,
|
|
|
|
|
discount, and debt issuance costs of $13,845 and $17,854, respectively
|
|
241,105
|
|
|
240,321
|
|
6.50% Senior notes due 2022, net of unamortized early tender premium,
|
|
|
|
|
discount, and debt issuance costs of $43,800 and $49,935, respectively
|
|
606,200
|
|
|
600,065
|
|
|
|
$
|
847,305
|
|
|
$
|
840,386
|
|
Less current portion of long-term debt
|
|
(4,300
|
)
|
|
(4,300
|
)
|
|
|
$
|
843,005
|
|
|
$
|
836,086
|
|
6.50% Senior Notes due 2022
On January 30, 2014, Ply Gem Industries issued
$500.0 million
aggregate principal amount of 6.50% Senior Notes due 2022 (the "
6.50% Senior Notes
") at par. On September 19, 2014, Ply Gem Industries issued an additional
$150.0 million
aggregate principal amount of
6.50% Senior Notes
at an issue price of
93.25%
. Interest accrues at 6.50% per annum and is paid semi-annually on February 1 and August 1 of each year. All issued and outstanding
6.50% Senior Notes
are registered under the Securities Act. The
6.50% Senior Notes
will mature on
February 1, 2022
. At any time on or after February 1, 2017, Ply Gem Industries may redeem the
6.50% Senior Notes
, in whole or in part, at declining redemption prices set forth in the indenture governing the
6.50% Senior Notes
plus, in each case, accrued and unpaid interest, if any, to the redemption date. The effective interest rate for the
6.50% Senior Notes
is
8.39%
after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
The
6.50% Senior Notes
are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Ply Gem Holdings and all of the wholly owned domestic subsidiaries of Ply Gem Industries (the “Guarantors”). The indenture governing the
6.50% Senior Notes
contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt (as defined in the indenture) in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least
2.00
to 1.00.
In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt under certain circumstances, including, but not limited to, debt under credit facilities (as defined in the indenture) (x) in an amount not to exceed the greater of (a)
$350.0 million
and (b) the borrowing base (as defined in the indenture) and (y) in an amount not to exceed the greater of (A)
$575.0 million
and (B) the aggregate amount of indebtedness (as defined in the indenture) that would cause the consolidated secured debt ratio (as defined in the indenture) to be equal to
4.00
to 1.00; purchase money indebtedness in an aggregate amount not to exceed the greater of (x)
$35.0 million
and (y)
10%
of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed the greater of (x)
$60.0 million
and (y)
15%
of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt pursuant to a general basket in an aggregate amount at any one time outstanding not to exceed the greater of (x)
$75.0 million
and (y)
20%
of consolidated net tangible assets; and the refinancing of debt under certain circumstances.
Term Loan Facility due 2021
On January 30, 2014, Ply Gem Industries entered into a credit agreement governing the terms of its
$430.0 million
Term Loan Facility. Ply Gem Industries originally borrowed
$430.0 million
under the Term Loan Facility on
January 30, 2014
, with an original discount of approximately
$2.2 million
, yielding proceeds of approximately
$427.9 million
. The Term Loan Facility will mature on
January 30, 2021
. The Term Loan Facility requires scheduled quarterly payments in an aggregate annual amount equal to
1.00%
of the original aggregate principal amount of the Term Loan Facility with the balance due at maturity. Interest on outstanding borrowings under the Term Loan Facility is paid quarterly.
Borrowings under the Term Loan Facility bear interest at a rate equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the highest of (i) the prime rate of the administrative agent under the credit agreement, (ii) the federal funds rate plus
0.50%
and (iii) the adjusted LIBO rate for a one-month interest period plus
1.00%
or (b) a LIBO rate determined by reference to the cost of funds for eurocurrency deposits in dollars for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a
1.00%
floor, plus, in each case, an applicable margin of
3.00%
for any eurocurrency loan and
2.00%
for any alternate base rate loan. As of
September 30, 2017
, the Company's interest rate on the Term Loan Facility was
4.33%
. The effective interest rate for the Term Loan is
8.78%
after considering each of the different interest expense components of this instrument, including the coupon payment, the deferred debt issuance costs and the original issue discount.
The Term Loan Facility allows Ply Gem Industries to request one or more incremental term loan facilities in an aggregate amount not to exceed the greater of (x)
$140.0 million
and (y) an amount such that Ply Gem Industries’ consolidated senior secured debt ratio (as defined in the credit agreement), on a pro forma basis, does not exceed
3.75
to 1.00, in each case, subject to certain conditions and receipt of commitments by existing or additional financial institutions or institutional lenders.
The Term Loan Facility requires Ply Gem Industries to prepay outstanding term loans, subject to certain exceptions, with: (i)
50%
(which percentage will be reduced to
25%
if our consolidated senior secured debt ratio is equal or less than
2.50
to 1.00 but greater than
2.00
to 1.00 and to
0%
if our consolidated senior secured debt ratio is equal to or less than
2.00
to 1.00) of our annual excess cash flow (as defined in the credit agreement), to the extent such excess cash flow exceeds
$15.0 million
; (ii)
100%
of the net cash proceeds of certain non-ordinary course asset sales or certain insurance and condemnation proceeds, in each case subject to certain exceptions and reinvestment rights; and (iii)
100%
of the net cash proceeds of certain issuances of debt, other than proceeds from debt permitted under the Term Loan Facility. Ply Gem Industries may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. As of and for the year ended December 31, 2016, the Company's consolidated senior secured debt ratio was
0.93
and as a result no excess cash flow payment under the Term Loan Facility was required in 2017. However, the Company elected on March 10, 2016 and August 4, 2016 to voluntarily prepay
$30.0 million
on each date on the Term Loan Facility to reduce its outstanding indebtedness. The Company elected on November 4, 2016 to voluntarily prepay an additional
$100.0 million
on the Term Loan Facility. Finally, the Company elected on November 3, 2017 to voluntarily prepay
$40.0 million
on the Term Loan Facility to further reduce its outstanding indebtedness bringing the cumulative voluntary 2016 and 2017 Term Loan Facility payments to
$200.0 million
.
The Term Loan Facility is secured on a first-priority lien basis by the stock of Ply Gem Industries and by substantially all of the assets (other than the assets securing the obligations under the ABL Facility, which primarily consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper, contract rights, instruments, documents related thereto and proceeds of the foregoing) of Ply Gem Industries and the Guarantors that are subsidiaries of Ply Gem Industries and on a second-priority lien basis by the assets that secure the ABL Facility.
The Term Loan Facility includes negative covenants, subject to certain exceptions, that are substantially the same as the negative covenants in the 6.50% Senior Notes but does not contain any restrictive financial covenants. The Term Loan Facility also restricts the ability of Ply Gem Industries’ subsidiaries to enter into agreements restricting their ability to grant liens to secure the Term Loan Facility and contains a restriction on changes in fiscal year.
Senior Secured Asset Based Revolving Credit Facility due 2020
On November 5, 2015, Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Gienow Canada Inc., and Mitten Inc. (together with Gienow, the “Canadian Borrowers”) entered into a second amended and restated credit agreement governing the ABL Facility. Among other things, the second amendment and restatement of the credit agreement governing the ABL Facility: (i) increased the overall facility to
$350.0 million
from
$300.0 million
, (ii) established an accordion feature of
$50.0 million
, (iii) reduced the applicable margin for borrowings under the ABL Facility to a range from
1.25%
to
2.00%
for Eurodollar rate loans, depending on availability, and (iv) extended the maturity until November 5, 2020. Under the ABL Facility,
$300.0 million
is available to Ply Gem Industries and
$50.0 million
is available to the Canadian Borrowers. The following summary describes the ABL Facility after giving effect to the second amendment and restatement. As a result of the November 2015 ABL Facility amendment in which the loan syndication consisted of previous members who either maintained or increased their position as well as new syndication members, the Company capitalized new debt issuance costs of
$1.5 million
and amortizes these costs through 2020.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent under the ABL Facility and (2) the federal funds rate plus
0.5%
or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the ABL Facility was
0.50%
for base rate loans and
1.50%
for Eurodollar rate loans. The applicable margin for borrowings under the ABL Facility is subject to step ups and step downs based on average excess availability under the ABL Facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.
In addition to paying interest on outstanding principal under the ABL Facility, Ply Gem Industries is required to pay a commitment fee in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the ABL Facility (increasing when utilization is low and decreasing when utilization is high) multiplied by a commitment fee rate determined by reference to average excess availability under the ABL Facility. The commitment fee rate during any fiscal quarter is
0.375%
when average excess availability is greater than
$100.0 million
for the preceding fiscal quarter and
0.25%
when average availability is less than or equal to
$100.0 million
for the preceding fiscal quarter. Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. As of
September 30, 2017
, the Company’s interest rate on the ABL Facility was approximately
2.56%
. The ABL Facility requires that if (a) excess availability is less than the greater of (x)
10.0%
of the lower of the borrowing base and the aggregate commitments and (y)
$25.0 million
or (b) any event of default has occurred and is continuing, Ply Gem Industries must comply with a minimum fixed charge coverage ratio test of
1.0
to 1.0. If the excess availability under the ABL Facility is less than the greater of (a)
12.5%
of the lesser of the borrowing base and the aggregate commitments and (b)
$30.0 million
(
$27.5 million
for the months of January, February, March and April) for a period of
5
consecutive days or an event of default has occurred and is continuing, all cash from Ply Gem Industries material deposit accounts (including all concentration accounts) will be swept daily into a collection account controlled by the administrative agent under the ABL Facility and used to repay outstanding loans and cash collateralize letters of credit.
All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the Term Loan Facility on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of the Canadian Borrowers, which are borrowers under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiaries, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining
35%
of the equity interests of the Canadian Borrowers pledged only to secure the Canadian sub-facility.
The ABL Facility contains certain covenants that limit Ply Gem Industries’ ability and the ability of Ply Gem Industries’ subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets.
As of
September 30, 2017
, Ply Gem Industries had approximately
$340.2 million
of contractual availability and approximately
$305.3 million
of borrowing base availability under the ABL Facility, reflecting
$0.0 million
of borrowings outstanding and approximately
$9.8 million
of letters of credit and priority payables reserves.
Loss on debt modification or extinguishment
During both March and August 2016, the Company made voluntarily payments of
$30.0 million
on the Term Loan Facility to reduce its outstanding indebtedness as allowable under the terms of the Term Loan Facility totaling
$60.0 million
during the three and nine months ended October 1, 2016. The Company performed an analysis to determine the proper accounting treatment for each of these voluntary payments by evaluating the change in cash flows and determined that there were no changes in creditors as a result of the payments. Consequently, the Company recognized a loss on debt modification or extinguishment of approximately
$2.3 million
and
$4.7 million
for the three and
nine months ended
October 1, 2016
, respectively, reflecting the proportionate write-off of the related debt discount and debt issuance costs associated with each $30.0 million payment, as summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30, 2017
|
|
October 1, 2016
|
|
September 30, 2017
|
|
October 1, 2016
|
Loss on modification of debt:
|
|
|
|
|
|
|
|
|
Term Loan Facility unamortized discount
|
|
$
|
—
|
|
|
$
|
1,797
|
|
|
$
|
—
|
|
|
$
|
3,712
|
|
Term Loan Facility unamortized debt issuance costs
|
|
—
|
|
|
454
|
|
|
—
|
|
|
938
|
|
Total loss on modification or extinguishment of debt
|
|
$
|
—
|
|
|
$
|
2,251
|
|
|
$
|
—
|
|
|
$
|
4,650
|
|
6. PENSION PLANS
The Company has
two
pension plans, the Ply Gem Group Pension Plan and the MW Manufacturers, Inc. Retirement Plan. The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
September 30, 2017
|
|
October 1, 2016
|
|
September 30, 2017
|
|
October 1, 2016
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
459
|
|
|
486
|
|
|
1,376
|
|
|
1,458
|
|
|
Expected return on plan assets
|
|
(546
|
)
|
|
(545
|
)
|
|
(1,639
|
)
|
|
(1,634
|
)
|
|
Amortization of loss
|
|
351
|
|
|
354
|
|
|
1,052
|
|
|
1,031
|
|
|
Net periodic benefit expense
|
|
$
|
264
|
|
|
$
|
295
|
|
|
$
|
789
|
|
|
$
|
855
|
|
|
7. COMMITMENTS AND CONTINGENCIES
Indemnifications
In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek, Inc. (“Nortek”) in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition. In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable. The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement. A receivable related to this indemnification has been recorded in other long-term assets of approximately
$1.1 million
and
$1.4 million
at
September 30, 2017
and
December 31, 2016
, respectively. As of
September 30, 2017
and
December 31, 2016
, the Company has recorded liabilities related to these indemnifications of approximately
$0.4 million
and
$0.5 million
, respectively, in current liabilities and
$0.7 million
and
$0.9 million
, respectively, in other long-term liabilities in the Company's condensed consolidated balance sheets, consisting of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Product claim liabilities
|
|
$
|
138
|
|
|
$
|
138
|
|
Multi-employer pension plan withdrawal liability
|
|
538
|
|
|
808
|
|
Other
|
|
440
|
|
|
500
|
|
|
|
$
|
1,116
|
|
|
$
|
1,446
|
|
Warranty claims
The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. As of
September 30, 2017
and
December 31, 2016
, warranty liabilities of approximately
$20.4 million
and
$19.7 million
, respectively, have been recorded in current liabilities and approximately
$58.6 million
and
$57.6 million
, respectively, have been recorded in long-term liabilities in the Company's condensed consolidated balance sheets.
Changes in the Company’s short-term and long-term warranty liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
(Amounts in thousands)
|
|
September 30, 2017
|
|
October 1, 2016
|
|
September 30, 2017
|
|
October 1, 2016
|
Balance, beginning of period
|
|
$
|
78,214
|
|
|
$
|
77,313
|
|
|
$
|
77,293
|
|
|
$
|
76,562
|
|
Warranty expense during period
|
|
6,432
|
|
|
5,074
|
|
|
18,132
|
|
|
15,869
|
|
Settlements made during period
|
|
(5,577
|
)
|
|
(5,635
|
)
|
|
(16,356
|
)
|
|
(15,679
|
)
|
Balance, end of period
|
|
$
|
79,069
|
|
|
$
|
76,752
|
|
|
$
|
79,069
|
|
|
$
|
76,752
|
|
Environmental
The Company is subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety. From time to time, the Company's facilities are subject to investigation by governmental regulators. In addition, the Company has been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which it or its predecessors are alleged to have sent hazardous materials for recycling or disposal. The Company may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of the Company's properties from activities conducted by us or previous occupants. The amount of any liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.
MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, Inc., entered into an Administrative Order on Consent (the “Consent Order”), effective September 12, 2011, with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act ("RCRA"), with respect to its Rocky Mount, Virginia property. During 2011, as part of the Consent Order, MW provided the EPA, among other things, a RCRA Facility Investigation Workplan (the “Workplan”) as well as a preliminary cost estimate of approximately
$1.8 million
for the predicted assessment, remediation and monitoring activities to be conducted pursuant to the Consent Order over the remediation period, which is currently estimated through 2023. During 2012, the EPA approved the Workplan, and MW is currently implementing the Workplan. The Company has recorded approximately
$0.3 million
of this environmental liability within current liabilities and approximately
$1.2 million
within other long-term liabilities in the Company’s condensed consolidated balance sheets at
September 30, 2017
and
December 31, 2016
. The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.
Certain liabilities with respect to this contamination relate to the previous closure of an underground storage tank and were assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to FPI Acquisition Corp. (“Fenway Partners”). As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc. Notwithstanding this indemnity, however, under applicable Federal and State laws, MW, and the Company as its parent, could be held liable for all or part of the costs associated with the matter under certain circumstances. Moreover, the Company’s ability to seek indemnification from U.S. Industries, Inc. is limited by the terms and limits of the indemnity as well as the strength of U.S. Industries, Inc.’s financial condition, which could change in the future. As of
September 30, 2017
, no recovery has been recognized in the Company’s condensed consolidated balance sheet, but the Company will actively pursue this indemnity in future periods and will recognize future recoveries in the period in which they become probable.
The State of Nebraska is investigating certain groundwater contamination in northern York, Nebraska, comprised primarily of volatile organic compounds (VOC) (predominantly trichloroethene (TCE)). In December 2013, the EPA announced its proposal to add this groundwater contamination site to the Superfund National Priorities List (NPL) after it was referred to the EPA by the State of Nebraska. Sampling was conducted at the Kroy Building Products, Inc. (“Kroy”) facility in York, Nebraska during the first quarter of 2010. In February 2015, the EPA sent a request for information pursuant to Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and Kroy has responded to this request for information. Given the preliminary stage of this matter, the Company has not recorded a liability for this matter in its condensed consolidated balance sheets as of
September 30, 2017
and December 31, 2016. Alcan Aluminum Corporation (“Alcan”) has assumed the obligation to indemnify the Company with respect to certain liabilities for environmental contamination of the Kroy facility occurring prior to 1994. Notwithstanding this indemnity, however, under applicable Federal and State laws, Kroy, and Ply Gem as its parent, could be held liable for all or part of the costs associated with the matter under certain circumstances. Moreover, the ability of Kroy and Ply Gem to seek indemnification may be limited by the terms and limits of the indemnity as well as the strength of Alcan’s financial condition, which could change in the future.
The Company is currently involved in environmental proceedings involving Gienow Canada Inc. (f/k/a Ply Gem Canada, Inc.) and Alberta Environment (arising from subsurface contamination discovered at our Calgary, Alberta property) for which the Company has a
$0.1 million
liability included in its condensed consolidated balance sheets at
September 30, 2017
and
December 31, 2016
, and the Company may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania), Mastic Home Exteriors, Inc. (“MHE”) (relating to a closed landfill site in Sidney, Ohio as well as participating as a potentially responsible party in nine contaminated sites in Indiana, Ohio and South Carolina), and Simonton (relating to closed lagoons and certain contamination in Paris, Illinois as well as certain contamination associated with certain 7-Eleven convenience food stores). Under the stock purchase agreement governing the MHE acquisition, Alcoa Securities Corporation and Alcoa, Inc. are to indemnify the Company for certain environmental liabilities in excess of
$2.5 million
including liabilities relating to the landfill site in Sidney, Ohio and the nine contaminated sites in Indiana, Ohio and South Carolina. Under the stock purchase agreement governing the Simonton acquisition, Fortune Brands Windows & Doors, Inc., is to indemnify the Company for any environmental claims associated with the 7-Eleven convenience food stores. The Company's ability to seek indemnification or enforce these and other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as the terms and limits of any such indemnities or obligations.
Based on current information, the Company is not aware of any compliance obligations, claims, releases or investigations that will have a material adverse effect on our results of operations, cash flows or financial position except as otherwise disclosed in the Company's condensed consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters or any inability to enforce our available indemnification rights against previous owners of the Company, its subsidiaries, or their businesses or properties will not result in material costs or liabilities. While the purchase agreements governing certain of our acquisitions provide that the sellers will indemnify us, subject to certain limitations, for certain environmental liabilities, our ability to seek indemnification from the respective sellers is limited by various factors, including the financial condition of the indemnitor or responsible party as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from the sellers, and any related environmental liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
Self-insured risks
The Company maintains a broad range of insurance policies that include general liability insurance coverage and workers compensation. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a portion of the overall risk for such claims through its self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The Company's general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. The Company's insurance coverage is generally subject to a per occurrence retention.
The Company reserves for costs associated with claims, as well as incurred but not reported losses (“IBNR”), based on an outside actuarial analysis of its historical claims. These estimates make up a significant portion of the Company's liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in type of claims, claims reporting and resolution patterns, frequency and timing of claims, third party recoveries, estimates of claim values, claims management expenses (including legal fees and expert fees), insurance industry practices, the regulatory environment, and legal precedent. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.
Litigation
During the past several years, the Company incurred increased litigation expense primarily related to the claims discussed below. The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In
Anthony Pagliaroni et al. v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC
, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by Mastic Home Exteriors, Inc. (“MHE”). The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. The damages sought in this action have not yet been quantified. The hearing regarding plaintiffs’ motion for class certification was held on March 10, 2015, and the District Court denied plaintiffs’ motion for class certification on September 22, 2015. On October 6, 2015, plaintiffs filed a petition for interlocutory appeal of the denial of class certification to the U.S. Court of Appeals for the First Circuit, and on April 12, 2016, the Court of Appeals denied this petition for appeal. Deceuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify MHE for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. MHE's ability to seek indemnification from Deceuninck is, however, limited by the terms and limits of the indemnity as well as the strength of Deceuninck's financial condition, which could change in the future.
In
re Ply Gem Holdings, Inc. Securities Litigation
is a purported federal securities class action filed on May 19, 2014 in the United States District Court for the Southern District of New York against Ply Gem Holdings, Inc., several of its directors and officers, and the underwriters associated with the Company’s initial public offering ("IPO"). It is filed on behalf of all persons or entities, other than the defendants, who purchased the common shares of the Company pursuant and/or traceable to the Company’s IPO and seeks remedies under Sections 11 and 15 of the Securities Act of 1933, alleging that the Company’s Form S-1 registration statement was negligently prepared and materially inaccurate, containing untrue statements of material fact and omitting material information which was required to be disclosed. The plaintiffs seek a variety of relief, including (i) damages together with interest thereon and (ii) attorneys’ fees and costs of litigation. On October 14, 2014, Strathclyde Pension Fund was certified as lead plaintiff, and class counsel was appointed. Pursuant to the Underwriting Agreement, dated May 22, 2013, entered into in connection with the IPO, the Company has agreed to reimburse the underwriters for the legal fees and other expenses reasonably incurred by the underwriters’ law firm in its representation of the underwriters in connection with this matter. Pursuant to Indemnification Agreements, dated as of May 22, 2013, between the Company and each of the directors and officers named in this action, the Company has agreed to assume the defense of such directors and officers. The parties have reached an agreement in principle to settle the matter for approximately
$26.0 million
and notified the Court of this, which is subject to the finalization of the settlement agreement, Court approval and requests for exclusion by members of the settlement class. The Company accrued the $26.0 million within accrued expenses as of September 30, 2017 in the Company’s condensed consolidated balance sheets, and also recognized an insurance receivable of
$25.4 million
within other current assets as of September 30, 2017 in the Company’s condensed consolidated balance sheets as certain of its directors' and officers' liability insurance carriers are to fund the majority of the settlement amount with the Company agreeing to pay certain disputed litigation expenses of approximately
$0.6 million
. The defendants deny all liability in the settlement and with respect to the facts and claims alleged. The Company, however, is aware of the substantial burden, expense, inconvenience and distraction of continued litigation, and therefore agreed to settle this matter.
In
Raul Carrillo-Hueso and Chec Xiong v. Ply Gem Industries, Inc. and Ply Gem Pacific Windows Corporation
, a purported class action filed on November 25, 2015 in the Superior Court of the State of California, County of Alameda, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of, among other things, the defendants’ failure to provide (i) statutorily required meal breaks at the Sacramento, California facility, (ii) accurate wage statements to employees in California, and (iii) all wages due on termination in California. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) statutory damages, (iii) penalties, (iv) pre- and post-judgment interest, and (v) attorneys' fees and costs of litigation. On January 7, 2017, the parties agreed to settle this matter for approximately
$1.0 million
, and on June 29, 2017, the Court granted final approval of the settlement. The Company accrued for this amount in accrued expenses as of December 31, 2016 in the Company's condensed consolidated balance sheets and subsequently paid the settlement during the three and nine months ended
September 30, 2017
. The Company denies all liability in the settlement and with respect to the facts and claims alleged. The Company, however, is aware of the substantial burden, expense, inconvenience and distraction of continued litigation, and therefore agreed to settle this matter.
In
Tina Morgan v. Ply Gem Industries, Inc. and Simonton Industries, Inc.
, a purported class action filed on December 11, 2015 in the Superior Court of the State of California, County of Solano, plaintiff, on behalf of herself and all others similarly situated, alleges damages as a result of, among other things, the defendants’ failure at the Vacaville, California facility to (i) pay overtime wages, (ii) provide statutorily required meal breaks, (iii) provide accurate wage statements, and (iv) pay all wages owed upon termination. The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) statutory damages, (iii) penalties, (iv) pre- and post-judgment interest, and (v) attorneys' fees and costs of litigation. On December 9, 2016, the parties agreed to settle this matter for approximately
$0.9 million
, and on May 22, 2017, the Court granted final approval of the settlement. The Company accrued for this amount in accrued expenses as of December 31, 2016 in the Company's condensed consolidated balance sheets and subsequently paid the settlement during the three months and nine ended
September 30, 2017
. The Company denies all liability in the settlement and with respect to the facts and claims alleged. The Company, however, is aware of the substantial burden, expense, inconvenience and distraction of continued litigation, and therefore agreed to settle this matter.
In
Kiefer et al. v. Simonton Building Products, LLC et al
., a purported class action filed on October 17, 2016 in the United States District Court for the District of Minnesota, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of, among other things, the defective design and manufacture of certain Simonton windows containing two-pane insulating glass units. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) punitive or other exemplary damages, (iii) pre- and post-judgment interest, and (iv) attorneys' fees and costs of litigation. On April 17, 2017, the District Court granted the defendants’ motion to dismiss the complaint. Plaintiffs filed a notice of appeal and its appellant brief on May 16, 2017 and July 7, 2017, respectively, defendants filed its appellee brief on August 7, 2017, and plaintiffs filed its reply brief on August 21, 2017. The appeal is pending. The damages sought in this action have not yet been quantified.
In
Gazzillo et al. v. Ply Gem Industries, Inc. et al
., a purported class action filed on September 26, 2017 in the United States District Court for the Northern District of New York, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of, among other things, the defective design and manufacture of certain vinyl siding products. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) punitive or other exemplary damages, (iii) pre- and post-judgment interest, and (iv) attorneys' fees and costs of litigation. The damages sought in this action have not yet been quantified.
Other contingencies
The Company is subject to other contingencies, including legal proceedings and claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in its products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of
September 30, 2017
.
8. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
Accrued expenses consist of the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Insurance
|
|
$
|
7,888
|
|
|
$
|
8,297
|
|
Employee compensation and benefits
|
|
20,762
|
|
|
27,749
|
|
Sales and marketing
|
|
57,760
|
|
|
59,655
|
|
Product warranty
|
|
20,431
|
|
|
19,718
|
|
Accrued freight
|
|
3,452
|
|
|
2,146
|
|
Accrued interest
|
|
7,336
|
|
|
17,977
|
|
Accrued environmental liability
|
|
453
|
|
|
434
|
|
Accrued pension
|
|
1,753
|
|
|
1,753
|
|
Accrued sales returns and discounts
|
|
1,381
|
|
|
1,199
|
|
Accrued taxes
|
|
5,800
|
|
|
4,966
|
|
Litigation accrual
|
|
26,849
|
|
|
2,575
|
|
Other
|
|
27,352
|
|
|
22,546
|
|
|
|
$
|
181,217
|
|
|
$
|
169,015
|
|
Other long-term liabilities consist of the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Insurance
|
|
$
|
563
|
|
|
$
|
605
|
|
Pension liabilities
|
|
13,459
|
|
|
13,907
|
|
Multi-employer pension withdrawal liability
|
|
538
|
|
|
808
|
|
Product warranty
|
|
58,638
|
|
|
57,575
|
|
Long-term product claim liability
|
|
138
|
|
|
138
|
|
Long-term environmental liability
|
|
1,157
|
|
|
1,158
|
|
Liabilities for tax uncertainties
|
|
4,127
|
|
|
3,925
|
|
Litigation accrual
|
|
731
|
|
|
731
|
|
Other
|
|
5,233
|
|
|
7,548
|
|
|
|
$
|
84,584
|
|
|
$
|
86,395
|
|
Long-term incentive plan
The Company has a long-term incentive plan (“LTIP”) for certain employees. The long-term incentive plan was implemented to retain and incentivize key employees. During the three months ended
September 30, 2017
and
October 1, 2016
, the Company recognized a LTIP expense of
$1.3 million
and
$1.4 million
, respectively, which has been recorded within selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). During the
nine months ended
September 30, 2017
and
October 1, 2016
, the Company recognized a LTIP expense of
$4.0 million
and
$4.9 million
, respectively, which has been recorded within selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). The LTIP liability was
$7.6 million
and
$10.0 million
as of
September 30, 2017
and
December 31, 2016
, respectively, of which
$5.6 million
and
$6.3 million
has been recorded within accrued expenses and
$2.0 million
and
$3.7 million
in other long-term liabilities in the condensed consolidated balance sheets as of
September 30, 2017
and
December 31, 2016
, respectively. During the
nine months ended
September 30, 2017
, the Company issued
129,176
shares of its common stock based on a December 30, 2016 closing stock price of
$16.25
to settle LTIP awards of
$3.3 million
. In connection with this settlement, the Company paid
$1.2 million
to tax authorities on behalf of these employees, which has been recognized as a financing activity in the Company's condensed consolidated statement of cash flows for the
nine months ended
September 30, 2017
.
Other liabilities
During the
nine months ended
September 30, 2017
and
October 1, 2016
, the Company made approximately
$0.7 million
and
$0.6 million
, in cash payments on restructuring liabilities, respectively. These payments were for a restructuring and integration program implemented in Western Canada and general back office centralization efforts incurred as well as product simplification costs incurred for the entire Windows and Doors segment.
9. INCOME TAXES
Effective tax rate
Under FASB Accounting Standards Codification 740-270,
Income Taxes - Interim Reporting
, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date pre-tax book income (loss). In addition, the Company excludes jurisdictions with a projected loss for the year or the year-to-date loss where the Company cannot recognize a tax benefit from its estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company includes certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense in future periods in accordance with ASC 740-270.
For the
nine months ended
September 30, 2017
, the Company's estimated annual effective income tax rate was approximately
40.7%
, which varied from the statutory rate primarily due to state income tax expense, valuation allowances, and foreign income taxes. The effective tax rate including discrete items related to unrecognized tax benefits, stock compensation, and adjustments to state income tax rates, was
40.0%
for the
nine months ended
September 30, 2017
. The tax expense for the three months ended
September 30, 2017
was approximately
$17.7 million
and the tax benefit for the three months ended
October 1, 2016
was approximately
$49.1 million
. The tax expense for the
nine months ended
September 30, 2017
was approximately
$35.9 million
and the tax benefit for the
nine months ended
October 1, 2016
was approximately
$48.6 million
.
Valuation allowance
During the three and nine months ended October 1, 2016, the Company determined that a valuation allowance was no longer required against its federal deferred tax assets and a portion of its state deferred tax assets. Therefore, the Company released approximately
$50.1 million
of its valuation allowance since positive evidence outweighed negative evidence thereby allowing the Company to achieve the “more likely than not” realization threshold. As of October 1, 2016, the Company was no longer in a three-year cumulative pre-tax loss position due to the significant improvement in the Company’s profitability from the housing market recovery. The housing market has experienced steady improvement from a demand perspective over the last several years which has benefited the Company’s financial performance and profitability for both new construction and repair and remodeling reflected in the Company’s net sales and earnings growth. This annual financial improvement was further evidenced by the Company continuing to have net sales and profitability growth in the Company’s second and third quarters which are traditionally the Company’s strongest financial quarters based on seasonality. Finally, the consensus expectation and outlook for both new construction and repair and remodeling both showed positive growth rates over the next few years which would result in future forecasted profitability for the Company. Based on the preponderance of these positive factors, the valuation allowance was released during the three and nine months ended October 1, 2016. The valuation allowance release is reflected within our provision (benefit) for income taxes in the accompanying condensed consolidated statement of operations and comprehensive income (loss) during the three and nine months ended October 1, 2016.
The Company remains in a valuation allowance position against its deferred tax assets for certain state and Canadian jurisdictions as it is currently deemed "more likely than not" that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these states and Canadian jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowances as necessary.
Unrecognized tax benefits
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the condensed consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities. During the
nine months ended
September 30, 2017
, the tax reserves increased by approximately
$0.2 million
. The increase is primarily related to new unrecognized tax benefits and interest expense related to unrecognized tax benefits, partially offset by the lapse of applicable statutes of limitation on certain unrecognized tax benefits.
The liability for unrecognized tax benefits as of
September 30, 2017
was approximately
$4.1 million
and is recorded in other long-term liabilities in the accompanying condensed consolidated balance sheet. The corresponding amount of gross unrecognized tax benefit was approximately
$16.5 million
. The difference between the total unrecognized tax benefits and the amount of the liability for unrecognized tax benefits represents unrecognized tax benefits that have been netted against deferred tax assets related to net operating losses in accordance with ASC 740 in addition to accrued penalties and interest.
Tax Receivable Agreement
On May 22, 2013, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with the Tax Receivable Entity. The Tax Receivable Agreement generally provides for the payment by the Company to the Tax Receivable Entity of
85%
of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes in periods ending after the IPO as a result of (i) NOL carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to the IPO and (iii) deductions related to imputed interest deemed to be paid by the Company as a result of or attributable to payments under the Tax Receivable Agreement. The term of the Tax Receivable Agreement will continue until all such benefits have been utilized or expired. The Company will retain the benefit of the remaining
15%
of these tax savings. The Tax Receivable Agreement will obligate the Company to make payments to the Tax Receivable Entity generally equal to
85%
of the applicable cash savings that is actually realized as a result of utilizing NOL carryovers once the tax returns are filed for that respective tax year.
The Company estimates that the total anticipated amount of future payments under the Tax Receivable Agreement could be up to approximately
$84.0 million
assuming no material changes in the relevant tax law, that the Company earns sufficient taxable income to utilize the net operating loss carry forwards, and that utilization of such tax attributes is not subject to limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") as the result of an “ownership change”. It is possible that future transactions or events including but not limited to tax law changes or changes in estimates could increase or decrease the actual tax benefits realized from these tax attributes and the corresponding Tax Receivable Agreement payments and liability.
As of
September 30, 2017
, the Company estimates the TRA liability to be approximately
$79.7 million
with the remaining
$4.3 million
estimated for the state NOLs associated with the Tax Receivable Agreement, which have a valuation allowance. Future changes in the Company's state valuation allowance position, including the reversal of all or a portion of the Company's remaining state valuation allowance, may increase the TRA liability up to the $84.0 million estimate as the Company at that point in time will project future taxable income beyond the current fiscal year for certain state income tax purposes.
As of
September 30, 2017
and
December 31, 2016
, the Company had a long-term liability of approximately
$54.3 million
and a current liability of
$25.4 million
, for the amount due pursuant to the Tax Receivable Agreement. The Company recognized a
$0.0 million
and
$42.2 million
expense for this liability during the three months ended
September 30, 2017
and
October 1, 2016
, respectively. The Company recognized a
$0.0 million
and
$60.6 million
expense for this liability during the
nine months ended
September 30, 2017
and
October 1, 2016
, respectively. The remaining liability of $4.3 million will be recognized as the state valuation allowances are released in future years.
Other
As of
September 30, 2017
, the Company has not established U.S. deferred taxes on unremitted earnings of the Company’s foreign subsidiaries. Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently reinvested.
10. STOCK-BASED COMPENSATION
A rollforward of stock options outstanding during the
nine months ended
September 30, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
Balance at January 1, 2017
|
|
2,495,533
|
|
|
$
|
13.96
|
|
|
4.35
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
(60,353
|
)
|
|
12.35
|
|
|
—
|
|
Forfeited or expired
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at September 30, 2017
|
|
2,435,180
|
|
|
$
|
14.00
|
|
|
3.65
|
|
As of
September 30, 2017
,
2,313,047
options were
100%
vested. At
September 30, 2017
, the Company had approximately
$0.3 million
of total unrecognized compensation expense that will be recognized over a weighted average period of
0.60
years. The Company recorded compensation expense of
$0.1 million
and
$0.1 million
for the three months ended
September 30, 2017
and
October 1, 2016
, respectively, and
$0.4 million
and
$0.6 million
for the nine months ended
September 30, 2017
and
October 1, 2016
, respectively, related to stock option grants.
Restricted stock
During December 2015, the Company issued an aggregate of
25,664
restricted shares of common stock in an equal number to each of the
four
independent members of the Board of Directors. These shares vested over the 2016 calendar period and the Company expensed these items as compensation expense, ratably during 2016. During the
three and nine
months ended
October 1, 2016
, the Company expensed approximately
$0.1 million
and
$0.2 million
, respectively, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).
During December 2016, the Company issued an aggregate of
19,420
restricted shares of common stock in an equal number to each of the
four
independent members of the Board of Directors. These shares will vest over the 2017 calendar year and the Company will expense these items as compensation expense ratably during 2017. During the
three and nine
months ended
September 30, 2017
, the Company expensed approximately
$0.1 million
and
$0.2 million
, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).
11. SEGMENT INFORMATION
The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Company has
two
reportable segments: (1) Siding, Fencing and Stone and (2) Windows and Doors.
The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses. Unallocated income and expenses include items that are not directly attributed to or allocated to either of the Company’s reporting segments. Such items include interest, legal costs, corporate payroll, and unallocated finance, and accounting expenses. Unallocated corporate assets include cash and certain receivables. Interest expense is presented net of interest income.
Following is a summary of the Company’s segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30, 2017
|
|
October 1, 2016
|
|
September 30, 2017
|
|
October 1, 2016
|
Net sales
|
|
|
|
|
|
|
|
|
Siding, Fencing and Stone
|
|
$
|
278,179
|
|
|
$
|
258,924
|
|
|
$
|
732,609
|
|
|
$
|
679,711
|
|
Windows and Doors
|
|
286,484
|
|
|
271,468
|
|
|
806,836
|
|
|
769,840
|
|
|
|
$
|
564,663
|
|
|
$
|
530,392
|
|
|
$
|
1,539,445
|
|
|
$
|
1,449,551
|
|
Operating earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Siding, Fencing and Stone
|
|
$
|
48,127
|
|
|
$
|
54,853
|
|
|
$
|
115,529
|
|
|
$
|
126,531
|
|
Windows and Doors
|
|
20,251
|
|
|
18,911
|
|
|
46,405
|
|
|
35,662
|
|
Unallocated
|
|
(6,477
|
)
|
|
(5,755
|
)
|
|
(22,108
|
)
|
|
(22,426
|
)
|
|
|
$
|
61,901
|
|
|
$
|
68,009
|
|
|
$
|
139,826
|
|
|
$
|
139,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
Siding, Fencing and Stone
|
|
$
|
760,642
|
|
|
$
|
691,930
|
|
|
|
|
|
Windows and Doors
|
|
530,527
|
|
|
509,055
|
|
|
|
|
|
Unallocated
|
|
62,952
|
|
|
56,756
|
|
|
|
|
|
|
|
$
|
1,354,121
|
|
|
$
|
1,257,741
|
|
|
|
|
|
12. RELATED PARTY TRANSACTIONS
During March 2015, the Company entered into retention agreements with the Company's Chief Executive Officer and Chief Financial Officer for
$3.0 million
and
$1.3 million
, respectively. These retention agreements incentivize these individuals for three years and will require the Company to make cumulative payments of
$4.3 million
on December 31, 2017, if both individuals remain employed in their current positions on that date. As of
September 30, 2017
and December 31, 2016, these retention payments have been accrued at
$3.9 million
and
$2.8 million
, respectively, in accrued expenses and other long-term liabilities, respectively, in the Company's condensed consolidated balance sheets.
13
.
GUARANTOR/NON-GUARANTOR
The 6.50% Senior Notes were issued by our direct 100% owned subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries. Ply Gem Industries is a 100% owned subsidiary of Ply Gem Holdings. Accordingly, the following guarantor and non-guarantor information is presented as of
September 30, 2017
and
December 31, 2016
, and for the three and
nine months ended September 30, 2017
and
October 1, 2016
. The non-guarantor information presented represents our Canadian subsidiaries: Gienow and Mitten.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
Three months ended September 30, 2017
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
496,437
|
|
|
$
|
68,226
|
|
|
$
|
—
|
|
|
$
|
564,663
|
|
Cost of products sold
|
|
—
|
|
|
—
|
|
|
383,042
|
|
|
49,655
|
|
|
—
|
|
|
432,697
|
|
Gross profit
|
|
—
|
|
|
—
|
|
|
113,395
|
|
|
18,571
|
|
|
—
|
|
|
131,966
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
—
|
|
|
6,477
|
|
|
45,936
|
|
|
12,311
|
|
|
—
|
|
|
64,724
|
|
Intercompany administrative charges
|
|
—
|
|
|
—
|
|
|
7,017
|
|
|
1,181
|
|
|
(8,198
|
)
|
|
—
|
|
Amortization of intangible assets
|
|
—
|
|
|
—
|
|
|
4,231
|
|
|
1,110
|
|
|
—
|
|
|
5,341
|
|
Total operating expenses
|
|
—
|
|
|
6,477
|
|
|
57,184
|
|
|
14,602
|
|
|
(8,198
|
)
|
|
70,065
|
|
Operating earnings (loss)
|
|
—
|
|
|
(6,477
|
)
|
|
56,211
|
|
|
3,969
|
|
|
8,198
|
|
|
61,901
|
|
Foreign currency gain
|
|
—
|
|
|
—
|
|
|
—
|
|
|
810
|
|
|
—
|
|
|
810
|
|
Intercompany interest
|
|
—
|
|
|
14,224
|
|
|
(14,040
|
)
|
|
(184
|
)
|
|
—
|
|
|
—
|
|
Interest expense
|
|
—
|
|
|
(17,545
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,545
|
)
|
Interest income
|
|
—
|
|
|
9
|
|
|
11
|
|
|
7
|
|
|
—
|
|
|
27
|
|
Intercompany administrative income
|
|
—
|
|
|
8,198
|
|
|
—
|
|
|
—
|
|
|
(8,198
|
)
|
|
—
|
|
Income (loss) before equity in
subsidiaries' income
|
|
—
|
|
|
(1,591
|
)
|
|
42,182
|
|
|
4,602
|
|
|
—
|
|
|
45,193
|
|
Equity in subsidiaries' income
|
|
27,534
|
|
|
29,125
|
|
|
—
|
|
|
—
|
|
|
(56,659
|
)
|
|
—
|
|
Income before provision
for income taxes
|
|
27,534
|
|
|
27,534
|
|
|
42,182
|
|
|
4,602
|
|
|
(56,659
|
)
|
|
45,193
|
|
Provision for income taxes
|
|
—
|
|
|
—
|
|
|
16,975
|
|
|
684
|
|
|
—
|
|
|
17,659
|
|
Net income
|
|
$
|
27,534
|
|
|
$
|
27,534
|
|
|
$
|
25,207
|
|
|
$
|
3,918
|
|
|
$
|
(56,659
|
)
|
|
$
|
27,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,321
|
|
|
—
|
|
|
2,321
|
|
Unrealized loss on derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(441
|
)
|
|
—
|
|
|
(441
|
)
|
Total comprehensive income
|
|
$
|
27,534
|
|
|
$
|
27,534
|
|
|
$
|
25,207
|
|
|
$
|
5,798
|
|
|
$
|
(56,659
|
)
|
|
$
|
29,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
Three months ended October 1, 2016
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiary
|
|
Adjustments
|
|
Consolidated
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
472,592
|
|
|
$
|
57,800
|
|
|
$
|
—
|
|
|
$
|
530,392
|
|
Cost of products sold
|
|
—
|
|
|
—
|
|
|
351,261
|
|
|
42,331
|
|
|
—
|
|
|
393,592
|
|
Gross profit
|
|
—
|
|
|
—
|
|
|
121,331
|
|
|
15,469
|
|
|
—
|
|
|
136,800
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
—
|
|
|
5,755
|
|
|
45,034
|
|
|
11,573
|
|
|
—
|
|
|
62,362
|
|
Intercompany administrative charges
|
|
—
|
|
|
—
|
|
|
7,932
|
|
|
1,635
|
|
|
(9,567
|
)
|
|
—
|
|
Amortization of intangible assets
|
|
—
|
|
|
—
|
|
|
5,360
|
|
|
1,069
|
|
|
—
|
|
|
6,429
|
|
Total operating expenses
|
|
—
|
|
|
5,755
|
|
|
58,326
|
|
|
14,277
|
|
|
(9,567
|
)
|
|
68,791
|
|
Operating earnings (loss)
|
|
—
|
|
|
(5,755
|
)
|
|
63,005
|
|
|
1,192
|
|
|
9,567
|
|
|
68,009
|
|
Foreign currency loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(111
|
)
|
|
—
|
|
|
(111
|
)
|
Intercompany interest
|
|
—
|
|
|
15,927
|
|
|
(14,854
|
)
|
|
(1,073
|
)
|
|
—
|
|
|
—
|
|
Interest expense
|
|
—
|
|
|
(17,815
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,815
|
)
|
Interest income
|
|
—
|
|
|
2
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
10
|
|
Loss on modification or
extinguishment of debt
|
|
—
|
|
|
(2,251
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,251
|
)
|
Tax receivable agreement liability adjustment
|
|
—
|
|
|
(42,215
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,215
|
)
|
Intercompany administrative income
|
|
—
|
|
|
9,567
|
|
|
—
|
|
|
—
|
|
|
(9,567
|
)
|
|
—
|
|
Income (loss) before equity in
subsidiaries' income
|
|
—
|
|
|
(42,540
|
)
|
|
48,155
|
|
|
12
|
|
|
—
|
|
|
5,627
|
|
Equity in subsidiaries' income
|
|
54,755
|
|
|
97,295
|
|
|
—
|
|
|
—
|
|
|
(152,050
|
)
|
|
—
|
|
Income before benefit
for income taxes
|
|
54,755
|
|
|
54,755
|
|
|
48,155
|
|
|
12
|
|
|
(152,050
|
)
|
|
5,627
|
|
Benefit for income taxes
|
|
—
|
|
|
—
|
|
|
(49,083
|
)
|
|
(45
|
)
|
|
—
|
|
|
(49,128
|
)
|
Net income
|
|
$
|
54,755
|
|
|
$
|
54,755
|
|
|
$
|
97,238
|
|
|
$
|
57
|
|
|
$
|
(152,050
|
)
|
|
$
|
54,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,258
|
)
|
|
—
|
|
|
(1,258
|
)
|
Unrealized gain on derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
619
|
|
|
—
|
|
|
619
|
|
Total comprehensive income (loss)
|
|
$
|
54,755
|
|
|
$
|
54,755
|
|
|
$
|
97,238
|
|
|
$
|
(582
|
)
|
|
$
|
(152,050
|
)
|
|
$
|
54,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
For the nine months ended September 30, 2017
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,374,904
|
|
|
$
|
164,541
|
|
|
$
|
—
|
|
|
$
|
1,539,445
|
|
Cost of products sold
|
|
—
|
|
|
—
|
|
|
1,057,483
|
|
|
123,583
|
|
|
—
|
|
|
1,181,066
|
|
Gross profit
|
|
—
|
|
|
—
|
|
|
317,421
|
|
|
40,958
|
|
|
—
|
|
|
358,379
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
—
|
|
|
22,108
|
|
|
146,040
|
|
|
34,462
|
|
|
—
|
|
|
202,610
|
|
Intercompany administrative charges
|
|
—
|
|
|
—
|
|
|
31,126
|
|
|
3,019
|
|
|
(34,145
|
)
|
|
—
|
|
Amortization of intangible assets
|
|
—
|
|
|
—
|
|
|
12,667
|
|
|
3,276
|
|
|
—
|
|
|
15,943
|
|
Total operating expenses
|
|
—
|
|
|
22,108
|
|
|
189,833
|
|
|
40,757
|
|
|
(34,145
|
)
|
|
218,553
|
|
Operating earnings (loss)
|
|
—
|
|
|
(22,108
|
)
|
|
127,588
|
|
|
201
|
|
|
34,145
|
|
|
139,826
|
|
Foreign currency gain
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,582
|
|
|
—
|
|
|
1,582
|
|
Intercompany interest
|
|
—
|
|
|
42,657
|
|
|
(39,739
|
)
|
|
(2,918
|
)
|
|
—
|
|
|
—
|
|
Interest expense
|
|
—
|
|
|
(51,830
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51,830
|
)
|
Interest income
|
|
—
|
|
|
21
|
|
|
24
|
|
|
15
|
|
|
—
|
|
|
60
|
|
Intercompany administrative income
|
|
—
|
|
|
34,145
|
|
|
—
|
|
|
—
|
|
|
(34,145
|
)
|
|
—
|
|
Income (loss) before equity in
subsidiaries' income (loss)
|
|
—
|
|
|
2,885
|
|
|
87,873
|
|
|
(1,120
|
)
|
|
—
|
|
|
89,638
|
|
Equity in subsidiaries' income (loss)
|
|
53,756
|
|
|
50,871
|
|
|
—
|
|
|
—
|
|
|
(104,627
|
)
|
|
—
|
|
Income (loss) before provision
(benefit) for income taxes
|
|
53,756
|
|
|
53,756
|
|
|
87,873
|
|
|
(1,120
|
)
|
|
(104,627
|
)
|
|
89,638
|
|
Provision (benefit) for income taxes
|
|
—
|
|
|
—
|
|
|
36,339
|
|
|
(457
|
)
|
|
—
|
|
|
35,882
|
|
Net income (loss)
|
|
$
|
53,756
|
|
|
$
|
53,756
|
|
|
$
|
51,534
|
|
|
$
|
(663
|
)
|
|
$
|
(104,627
|
)
|
|
$
|
53,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,165
|
|
|
—
|
|
|
4,165
|
|
Unrealized loss on derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,417
|
)
|
|
—
|
|
|
(1,417
|
)
|
Total comprehensive income
|
|
$
|
53,756
|
|
|
$
|
53,756
|
|
|
$
|
51,534
|
|
|
$
|
2,085
|
|
|
$
|
(104,627
|
)
|
|
$
|
56,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
For the nine months ended October 1, 2016
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiary
|
|
Adjustments
|
|
Consolidated
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,299,760
|
|
|
$
|
149,791
|
|
|
$
|
—
|
|
|
$
|
1,449,551
|
|
Cost of products sold
|
|
—
|
|
|
—
|
|
|
975,801
|
|
|
114,960
|
|
|
—
|
|
|
1,090,761
|
|
Gross profit
|
|
—
|
|
|
—
|
|
|
323,959
|
|
|
34,831
|
|
|
—
|
|
|
358,790
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
—
|
|
|
22,426
|
|
|
142,325
|
|
|
34,994
|
|
|
—
|
|
|
199,745
|
|
Intercompany administrative charges
|
|
—
|
|
|
—
|
|
|
26,341
|
|
|
3,857
|
|
|
(30,198
|
)
|
|
—
|
|
Amortization of intangible assets
|
|
—
|
|
|
—
|
|
|
15,997
|
|
|
3,281
|
|
|
—
|
|
|
19,278
|
|
Total operating expenses
|
|
—
|
|
|
22,426
|
|
|
184,663
|
|
|
42,132
|
|
|
(30,198
|
)
|
|
219,023
|
|
Operating earnings (loss)
|
|
—
|
|
|
(22,426
|
)
|
|
139,296
|
|
|
(7,301
|
)
|
|
30,198
|
|
|
139,767
|
|
Foreign currency gain
|
|
—
|
|
|
—
|
|
|
—
|
|
|
728
|
|
|
—
|
|
|
728
|
|
Intercompany interest
|
|
—
|
|
|
47,788
|
|
|
(44,889
|
)
|
|
(2,899
|
)
|
|
—
|
|
|
—
|
|
Interest expense
|
|
—
|
|
|
(55,040
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(55,041
|
)
|
Interest income
|
|
—
|
|
|
5
|
|
|
10
|
|
|
14
|
|
|
—
|
|
|
29
|
|
Loss on modification or
extinguishment of debt
|
|
—
|
|
|
(4,650
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,650
|
)
|
Tax receivable agreement liability adjustment
|
|
—
|
|
|
(60,606
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60,606
|
)
|
Intercompany administrative income
|
|
—
|
|
|
30,198
|
|
|
—
|
|
|
—
|
|
|
(30,198
|
)
|
|
—
|
|
Income (loss) before equity in
subsidiaries' income (loss)
|
|
—
|
|
|
(64,731
|
)
|
|
94,417
|
|
|
(9,459
|
)
|
|
—
|
|
|
20,227
|
|
Equity in subsidiaries' income (loss)
|
|
68,824
|
|
|
133,555
|
|
|
—
|
|
|
—
|
|
|
(202,379
|
)
|
|
—
|
|
Income (loss) before benefit
for income taxes
|
|
68,824
|
|
|
68,824
|
|
|
94,417
|
|
|
(9,459
|
)
|
|
(202,379
|
)
|
|
20,227
|
|
Benefit for income taxes
|
|
—
|
|
|
—
|
|
|
(48,448
|
)
|
|
(149
|
)
|
|
—
|
|
|
(48,597
|
)
|
Net income (loss)
|
|
$
|
68,824
|
|
|
$
|
68,824
|
|
|
$
|
142,865
|
|
|
$
|
(9,310
|
)
|
|
$
|
(202,379
|
)
|
|
$
|
68,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,099
|
|
|
—
|
|
|
4,099
|
|
Unrealized loss on derivative instrument
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(530
|
)
|
|
—
|
|
|
(530
|
)
|
Total comprehensive income (loss)
|
|
$
|
68,824
|
|
|
$
|
68,824
|
|
|
$
|
142,865
|
|
|
$
|
(5,741
|
)
|
|
$
|
(202,379
|
)
|
|
$
|
72,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
As of September 30, 2017
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
ASSETS
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
28,724
|
|
|
$
|
(12,232
|
)
|
|
$
|
11,905
|
|
|
$
|
—
|
|
|
$
|
28,397
|
|
Accounts receivable, net
|
|
—
|
|
|
—
|
|
|
271,255
|
|
|
37,327
|
|
|
—
|
|
|
308,582
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
—
|
|
|
—
|
|
|
80,515
|
|
|
6,323
|
|
|
—
|
|
|
86,838
|
|
Work in process
|
|
—
|
|
|
—
|
|
|
29,895
|
|
|
2,053
|
|
|
—
|
|
|
31,948
|
|
Finished goods
|
|
—
|
|
|
—
|
|
|
60,833
|
|
|
16,620
|
|
|
—
|
|
|
77,453
|
|
Total inventory
|
|
—
|
|
|
—
|
|
|
171,243
|
|
|
24,996
|
|
|
—
|
|
|
196,239
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
28,676
|
|
|
20,398
|
|
|
3,491
|
|
|
—
|
|
|
52,565
|
|
Total current assets
|
|
—
|
|
|
57,400
|
|
|
450,664
|
|
|
77,719
|
|
|
—
|
|
|
585,783
|
|
Investments in subsidiaries
|
|
65,361
|
|
|
(162,336
|
)
|
|
—
|
|
|
—
|
|
|
96,975
|
|
|
—
|
|
Property and Equipment, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
—
|
|
|
—
|
|
|
7,553
|
|
|
680
|
|
|
—
|
|
|
8,233
|
|
Buildings and improvements
|
|
—
|
|
|
518
|
|
|
62,568
|
|
|
4,378
|
|
|
—
|
|
|
67,464
|
|
Machinery and equipment
|
|
—
|
|
|
3,771
|
|
|
413,746
|
|
|
22,867
|
|
|
—
|
|
|
440,384
|
|
Total property and equipment
|
|
—
|
|
|
4,289
|
|
|
483,867
|
|
|
27,925
|
|
|
—
|
|
|
516,081
|
|
Less accumulated depreciation
|
|
—
|
|
|
(870
|
)
|
|
(331,267
|
)
|
|
(13,070
|
)
|
|
—
|
|
|
(345,207
|
)
|
Total property and equipment, net
|
|
—
|
|
|
3,419
|
|
|
152,600
|
|
|
14,855
|
|
|
—
|
|
|
170,874
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
79,149
|
|
|
9,922
|
|
|
—
|
|
|
89,071
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
449,366
|
|
|
31,360
|
|
|
—
|
|
|
480,726
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
20,476
|
|
|
—
|
|
|
—
|
|
|
20,476
|
|
Intercompany note receivable
|
|
—
|
|
|
1,139,073
|
|
|
—
|
|
|
—
|
|
|
(1,139,073
|
)
|
|
—
|
|
Other
|
|
—
|
|
|
2,133
|
|
|
5,058
|
|
|
—
|
|
|
—
|
|
|
7,191
|
|
Total other assets
|
|
—
|
|
|
1,141,206
|
|
|
554,049
|
|
|
41,282
|
|
|
(1,139,073
|
)
|
|
597,464
|
|
|
|
$
|
65,361
|
|
|
$
|
1,039,689
|
|
|
$
|
1,157,313
|
|
|
$
|
133,856
|
|
|
$
|
(1,042,098
|
)
|
|
$
|
1,354,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
372
|
|
|
$
|
76,606
|
|
|
$
|
16,896
|
|
|
$
|
—
|
|
|
$
|
93,874
|
|
Accrued expenses
|
|
—
|
|
|
40,376
|
|
|
119,062
|
|
|
21,779
|
|
|
—
|
|
|
181,217
|
|
Current portion of payable to related parties
pursuant to tax receivable agreement
|
|
—
|
|
|
25,383
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,383
|
|
Current portion of long-term debt
|
|
—
|
|
|
4,300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,300
|
|
Total current liabilities
|
|
—
|
|
|
70,431
|
|
|
195,668
|
|
|
38,675
|
|
|
—
|
|
|
304,774
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,061
|
|
|
—
|
|
|
2,061
|
|
Intercompany note payable
|
|
—
|
|
|
—
|
|
|
1,017,283
|
|
|
121,790
|
|
|
(1,139,073
|
)
|
|
—
|
|
Long-term portion of payable to related parties
pursuant to tax receivable agreement
|
|
—
|
|
|
54,336
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,336
|
|
Other long-term liabilities
|
|
—
|
|
|
6,556
|
|
|
72,228
|
|
|
5,800
|
|
|
—
|
|
|
84,584
|
|
Long-term debt
|
|
—
|
|
|
843,005
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
843,005
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock
|
|
685
|
|
|
685
|
|
|
—
|
|
|
—
|
|
|
(685
|
)
|
|
685
|
|
Additional paid-in-capital
|
|
754,879
|
|
|
754,879
|
|
|
258,904
|
|
|
17,592
|
|
|
(1,031,375
|
)
|
|
754,879
|
|
Accumulated deficit
|
|
(659,661
|
)
|
|
(659,661
|
)
|
|
(371,088
|
)
|
|
(36,975
|
)
|
|
1,067,724
|
|
|
(659,661
|
)
|
Accumulated other comprehensive loss
|
|
(30,542
|
)
|
|
(30,542
|
)
|
|
(15,682
|
)
|
|
(15,087
|
)
|
|
61,311
|
|
|
(30,542
|
)
|
Total stockholders' equity (deficit)
|
|
65,361
|
|
|
65,361
|
|
|
(127,866
|
)
|
|
(34,470
|
)
|
|
96,975
|
|
|
65,361
|
|
|
|
$
|
65,361
|
|
|
$
|
1,039,689
|
|
|
$
|
1,157,313
|
|
|
$
|
133,856
|
|
|
$
|
(1,042,098
|
)
|
|
$
|
1,354,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING BALANCE SHEET
|
As of December 31, 2016
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiary
|
|
Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
50,035
|
|
|
$
|
(10,918
|
)
|
|
$
|
12,480
|
|
|
$
|
—
|
|
|
$
|
51,597
|
|
Accounts receivable, net
|
|
—
|
|
|
—
|
|
|
189,983
|
|
|
19,936
|
|
|
—
|
|
|
209,919
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
—
|
|
|
—
|
|
|
63,829
|
|
|
5,810
|
|
|
—
|
|
|
69,639
|
|
Work in process
|
|
—
|
|
|
—
|
|
|
23,007
|
|
|
1,614
|
|
|
—
|
|
|
24,621
|
|
Finished goods
|
|
—
|
|
|
—
|
|
|
54,346
|
|
|
13,350
|
|
|
—
|
|
|
67,696
|
|
Total inventory
|
|
—
|
|
|
—
|
|
|
141,182
|
|
|
20,774
|
|
|
—
|
|
|
161,956
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
1,276
|
|
|
21,940
|
|
|
3,634
|
|
|
—
|
|
|
26,850
|
|
Total current assets
|
|
—
|
|
|
51,311
|
|
|
342,187
|
|
|
56,824
|
|
|
—
|
|
|
450,322
|
|
Investments in subsidiaries
|
|
4,106
|
|
|
(231,236
|
)
|
|
—
|
|
|
—
|
|
|
227,130
|
|
|
—
|
|
Property and Equipment, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
—
|
|
|
—
|
|
|
7,487
|
|
|
762
|
|
|
—
|
|
|
8,249
|
|
Buildings and improvements
|
|
—
|
|
|
510
|
|
|
63,000
|
|
|
4,441
|
|
|
—
|
|
|
67,951
|
|
Machinery and equipment
|
|
—
|
|
|
1,675
|
|
|
392,068
|
|
|
19,822
|
|
|
—
|
|
|
413,565
|
|
Total property and equipment
|
|
—
|
|
|
2,185
|
|
|
462,555
|
|
|
25,025
|
|
|
—
|
|
|
489,765
|
|
Less accumulated depreciation
|
|
—
|
|
|
(665
|
)
|
|
(312,759
|
)
|
|
(10,785
|
)
|
|
—
|
|
|
(324,209
|
)
|
Total property and equipment, net
|
|
—
|
|
|
1,520
|
|
|
149,796
|
|
|
14,240
|
|
|
—
|
|
|
165,556
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
91,748
|
|
|
12,411
|
|
|
—
|
|
|
104,159
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
449,366
|
|
|
29,148
|
|
|
—
|
|
|
478,514
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
50,347
|
|
|
—
|
|
|
—
|
|
|
50,347
|
|
Intercompany note receivable
|
|
—
|
|
|
1,135,073
|
|
|
—
|
|
|
—
|
|
|
(1,135,073
|
)
|
|
—
|
|
Other
|
|
—
|
|
|
3,925
|
|
|
4,918
|
|
|
—
|
|
|
—
|
|
|
8,843
|
|
Total other assets
|
|
—
|
|
|
1,138,998
|
|
|
596,379
|
|
|
41,559
|
|
|
(1,135,073
|
)
|
|
641,863
|
|
|
|
$
|
4,106
|
|
|
$
|
960,593
|
|
|
$
|
1,088,362
|
|
|
$
|
112,623
|
|
|
$
|
(907,943
|
)
|
|
$
|
1,257,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
377
|
|
|
$
|
64,206
|
|
|
$
|
10,815
|
|
|
$
|
—
|
|
|
$
|
75,398
|
|
Accrued expenses
|
|
—
|
|
|
29,812
|
|
|
124,723
|
|
|
14,480
|
|
|
—
|
|
|
169,015
|
|
Current portion of payable to related parties
pursuant to tax receivable agreement
|
|
—
|
|
|
25,383
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,383
|
|
Current portion of long-term debt
|
|
—
|
|
|
4,300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,300
|
|
Total current liabilities
|
|
—
|
|
|
59,872
|
|
|
188,929
|
|
|
25,295
|
|
|
—
|
|
|
274,096
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,722
|
|
|
—
|
|
|
2,722
|
|
Intercompany note payable
|
|
—
|
|
|
—
|
|
|
1,026,657
|
|
|
108,416
|
|
|
(1,135,073
|
)
|
|
—
|
|
Long-term portion of payable to related parties
pursuant to tax receivable agreement
|
|
—
|
|
|
54,336
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,336
|
|
Other long-term liabilities
|
|
—
|
|
|
6,193
|
|
|
74,835
|
|
|
5,367
|
|
|
—
|
|
|
86,395
|
|
Long-term debt
|
|
—
|
|
|
836,086
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
836,086
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock
|
|
683
|
|
|
683
|
|
|
—
|
|
|
—
|
|
|
(683
|
)
|
|
683
|
|
Additional paid-in-capital
|
|
751,452
|
|
|
751,452
|
|
|
236,242
|
|
|
26,464
|
|
|
(1,014,158
|
)
|
|
751,452
|
|
Accumulated deficit
|
|
(714,737
|
)
|
|
(714,737
|
)
|
|
(422,622
|
)
|
|
(36,312
|
)
|
|
1,173,671
|
|
|
(714,737
|
)
|
Accumulated other comprehensive loss
|
|
(33,292
|
)
|
|
(33,292
|
)
|
|
(15,679
|
)
|
|
(19,329
|
)
|
|
68,300
|
|
|
(33,292
|
)
|
Total stockholders' equity (deficit)
|
|
4,106
|
|
|
4,106
|
|
|
(202,059
|
)
|
|
(29,177
|
)
|
|
227,130
|
|
|
4,106
|
|
|
|
$
|
4,106
|
|
|
$
|
960,593
|
|
|
$
|
1,088,362
|
|
|
$
|
112,623
|
|
|
$
|
(907,943
|
)
|
|
$
|
1,257,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
For the nine months ended September 30,
2017
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
53,756
|
|
|
$
|
53,756
|
|
|
$
|
51,534
|
|
|
$
|
(663
|
)
|
|
$
|
(104,627
|
)
|
|
$
|
53,756
|
|
Adjustments to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
—
|
|
|
204
|
|
|
34,388
|
|
|
5,200
|
|
|
—
|
|
|
39,792
|
|
Non-cash restructuring costs
|
|
—
|
|
|
—
|
|
|
1,198
|
|
|
—
|
|
|
—
|
|
|
1,198
|
|
Non-cash interest expense, net
|
|
—
|
|
|
10,595
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,595
|
|
Gain on foreign currency transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,582
|
)
|
|
—
|
|
|
(1,582
|
)
|
Non-cash litigation expense
|
|
—
|
|
|
650
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
650
|
|
Stock based compensation
|
|
—
|
|
|
585
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
585
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
31,182
|
|
|
(757
|
)
|
|
—
|
|
|
30,425
|
|
Increase in tax uncertainty,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of valuation allowance
|
|
—
|
|
|
—
|
|
|
202
|
|
|
—
|
|
|
—
|
|
|
202
|
|
Equity in subsidiaries' net income (loss)
|
|
(53,756
|
)
|
|
(50,871
|
)
|
|
—
|
|
|
—
|
|
|
104,627
|
|
|
—
|
|
Gain on sale of building
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,880
|
)
|
|
—
|
|
|
(1,880
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
(75
|
)
|
|
—
|
|
|
—
|
|
|
(75
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
—
|
|
|
—
|
|
|
(82,760
|
)
|
|
(15,181
|
)
|
|
—
|
|
|
(97,941
|
)
|
Inventories
|
|
—
|
|
|
—
|
|
|
(31,637
|
)
|
|
(2,526
|
)
|
|
—
|
|
|
(34,163
|
)
|
Prepaid expenses and other assets
|
|
—
|
|
|
(641
|
)
|
|
990
|
|
|
(453
|
)
|
|
—
|
|
|
(104
|
)
|
Accounts payable
|
|
—
|
|
|
(5
|
)
|
|
23,740
|
|
|
(5,020
|
)
|
|
—
|
|
|
18,715
|
|
Accrued expenses
|
|
—
|
|
|
(11,685
|
)
|
|
4,140
|
|
|
(5,900
|
)
|
|
—
|
|
|
(13,445
|
)
|
Cash payments on restructuring liabilities
|
|
—
|
|
|
—
|
|
|
(693
|
)
|
|
—
|
|
|
—
|
|
|
(693
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(237
|
)
|
|
—
|
|
|
(237
|
)
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities
|
|
—
|
|
|
2,588
|
|
|
32,209
|
|
|
(28,999
|
)
|
|
—
|
|
|
5,798
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
—
|
|
|
(2,128
|
)
|
|
(24,696
|
)
|
|
(1,753
|
)
|
|
—
|
|
|
(28,577
|
)
|
Proceeds from sale of assets
|
|
—
|
|
|
—
|
|
|
80
|
|
|
2,359
|
|
|
—
|
|
|
2,439
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing activities
|
|
—
|
|
|
(2,128
|
)
|
|
(24,616
|
)
|
|
606
|
|
|
—
|
|
|
(26,138
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
—
|
|
|
(3,225
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,225
|
)
|
Payments to tax authority for employee
stock based compensation
|
|
—
|
|
|
(1,186
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,186
|
)
|
Proceeds from exercises of employee stock options
|
|
—
|
|
|
745
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
745
|
|
Proceeds from intercompany
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
|
|
—
|
|
|
(18,105
|
)
|
|
(8,907
|
)
|
|
27,012
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing activities
|
|
—
|
|
|
(21,771
|
)
|
|
(8,907
|
)
|
|
27,012
|
|
|
—
|
|
|
(3,666
|
)
|
Impact of exchange rate movements on cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
806
|
|
|
—
|
|
|
806
|
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(21,311
|
)
|
|
(1,314
|
)
|
|
(575
|
)
|
|
—
|
|
|
(23,200
|
)
|
Cash and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of the period
|
|
—
|
|
|
50,035
|
|
|
(10,918
|
)
|
|
12,480
|
|
|
—
|
|
|
51,597
|
|
Cash and cash equivalents at the end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the period
|
|
$
|
—
|
|
|
$
|
28,724
|
|
|
$
|
(12,232
|
)
|
|
$
|
11,905
|
|
|
$
|
—
|
|
|
$
|
28,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
For the nine months ended October 1, 2016
|
(Amounts in thousands)
|
|
Guarantor
|
|
Issuer
|
|
|
|
Non-
|
|
|
|
|
|
|
Ply Gem
|
|
Ply Gem
|
|
Guarantor
|
|
Guarantor
|
|
Consolidating
|
|
|
|
|
Holdings, Inc.
|
|
Industries, Inc.
|
|
Subsidiaries
|
|
Subsidiary
|
|
Adjustments
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
68,824
|
|
|
$
|
68,824
|
|
|
$
|
142,865
|
|
|
$
|
(9,310
|
)
|
|
$
|
(202,379
|
)
|
|
$
|
68,824
|
|
Adjustments to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
—
|
|
|
117
|
|
|
37,271
|
|
|
5,078
|
|
|
—
|
|
|
42,466
|
|
Non-cash restructuring expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
491
|
|
|
—
|
|
|
491
|
|
Non-cash interest expense, net
|
|
—
|
|
|
10,143
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,143
|
|
Gain on foreign currency transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(728
|
)
|
|
—
|
|
|
(728
|
)
|
Loss on modification or extinguishment of debt
|
|
—
|
|
|
4,650
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,650
|
|
Stock based compensation
|
|
—
|
|
|
808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
808
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
(52,908
|
)
|
|
(172
|
)
|
|
—
|
|
|
(53,080
|
)
|
Tax receivable agreement liability adjustment
|
|
—
|
|
|
60,606
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,606
|
|
Increase in tax uncertainty,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of valuation allowance
|
|
—
|
|
|
—
|
|
|
190
|
|
|
—
|
|
|
—
|
|
|
190
|
|
Equity in subsidiaries' net income (loss)
|
|
(68,824
|
)
|
|
(133,555
|
)
|
|
—
|
|
|
—
|
|
|
202,379
|
|
|
—
|
|
Other
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
—
|
|
|
—
|
|
|
(83,042
|
)
|
|
(5,408
|
)
|
|
—
|
|
|
(88,450
|
)
|
Inventories
|
|
—
|
|
|
—
|
|
|
(17,538
|
)
|
|
145
|
|
|
—
|
|
|
(17,393
|
)
|
Prepaid expenses and other assets
|
|
—
|
|
|
(985
|
)
|
|
(1,734
|
)
|
|
538
|
|
|
—
|
|
|
(2,181
|
)
|
Accounts payable
|
|
—
|
|
|
9
|
|
|
14,062
|
|
|
1,835
|
|
|
—
|
|
|
15,906
|
|
Accrued expenses
|
|
—
|
|
|
(13,174
|
)
|
|
15,424
|
|
|
(4,183
|
)
|
|
—
|
|
|
(1,933
|
)
|
Cash payments on restructuring liabilities
|
|
—
|
|
|
—
|
|
|
(112
|
)
|
|
(491
|
)
|
|
—
|
|
|
(603
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
318
|
|
|
—
|
|
|
318
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities
|
|
—
|
|
|
(2,557
|
)
|
|
54,435
|
|
|
(11,887
|
)
|
|
—
|
|
|
39,991
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
—
|
|
|
(1,262
|
)
|
|
(22,959
|
)
|
|
(2,193
|
)
|
|
—
|
|
|
(26,414
|
)
|
Proceeds from sale of assets
|
|
—
|
|
|
—
|
|
|
59
|
|
|
102
|
|
|
—
|
|
|
161
|
|
Net cash used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing activities
|
|
—
|
|
|
(1,262
|
)
|
|
(22,900
|
)
|
|
(2,091
|
)
|
|
—
|
|
|
(26,253
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
—
|
|
|
(63,225
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(63,225
|
)
|
Proceeds from exercises of employee stock options
|
|
—
|
|
|
689
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
689
|
|
Proceeds from intercompany
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
|
|
—
|
|
|
34,262
|
|
|
(36,807
|
)
|
|
2,545
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing activities
|
|
—
|
|
|
(28,274
|
)
|
|
(36,807
|
)
|
|
2,545
|
|
|
—
|
|
|
(62,536
|
)
|
Impact of exchange rate movement on cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,066
|
|
|
—
|
|
|
2,066
|
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(32,093
|
)
|
|
(5,272
|
)
|
|
(9,367
|
)
|
|
—
|
|
|
(46,732
|
)
|
Cash and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of the period
|
|
—
|
|
|
94,692
|
|
|
(4,944
|
)
|
|
19,677
|
|
|
—
|
|
|
109,425
|
|
Cash and cash equivalents at the end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the period
|
|
$
|
—
|
|
|
$
|
62,599
|
|
|
$
|
(10,216
|
)
|
|
$
|
10,310
|
|
|
$
|
—
|
|
|
$
|
62,693
|
|