NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Ply Gem Holdings, Inc. (“Ply Gem Holdings”) and its wholly owned subsidiaries (individually and collectively, the “Company” or “Ply Gem”) are diversified manufacturers of residential and commercial building products, operating with
two
segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors. Through these segments, Ply Gem Industries, Inc. (“Ply Gem Industries”) manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and remodeling and renovation markets.
Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), on January 23, 2004 by affiliates of CI Capital Partners LLC (“CI Capital Partners”) for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”). The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings, an affiliate of CI Capital Partners pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC dated as of December 19, 2003, as amended. Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”), with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Prime. On May 23, 2013 in connection with Ply Gem Holdings' initial public offering, Ply Gem Prime merged with Ply Gem Holdings with Ply Gem Holdings being the surviving entity.
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.
Principles of Consolidation
The accompanying 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 reserve for inventories, warranty reserves, insurance reserves, legal contingencies, assumptions used in the calculation of income taxes and the Tax Receivable Agreement, 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, as appropriate and are based on management’s best estimates and judgments. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and depressed housing and remodeling markets combine 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.
Recognition of Sales and Related Costs, Incentives and Allowances
The Company recognizes sales upon the shipment of products, net of applicable provisions for discounts and allowances. Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.
The Company records periodic estimates for these amounts based upon the historical results to date, estimated future results through the end of the contract period and the contractual provisions of the customer agreements. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. The Company also provides for estimates of warranty and shipping costs at the time of sale. Shipping and warranty costs are included in cost of products sold.
Cash Equivalents
Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash.
Accounts receivable
Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts was
$3.1 million
and
$2.7 million
at
December 31, 2017
and
2016
, respectively. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Bad debt provisions are included in selling, general and administrative expenses. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that are expected to impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debt. 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 consolidated balance sheets are valued at the lower of cost or net realizable value and are determined 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
December 31, 2017
, the Company had inventory purchase commitments of approximately
$120.6 million
.
The inventory provisions were approximately
$7.8 million
at
December 31, 2017
,
decreasing
by approximately
$0.6 million
compared to 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. Depreciation expense for the years ended
December 31, 2017
,
2016
, and
2015
was approximately
$32.0 million
,
$31.3 million
, and
$33.1 million
, respectively. During the year ended December 31, 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 consolidated statements of operations.
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 undiscounted operating cash flow analyses 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 flow.
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 (“US 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 (formerly known as Mitten, Inc.), acquired in May 2013, 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 asset impairment charges for the years ended December 31, 2017, 2016 or 2015.
Goodwill
Acquisition accounting involves judgment with respect to the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill. For significant acquisitions, the Company values items such as property and equipment and acquired intangibles based upon appraisals.
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. The Company assesses goodwill for impairment at the November month end each year (
November 25
for
2017
) 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. Refer to Note 3,
Goodwill
for additional considerations regarding the results of the impairment test in
2017
and
2016
.
Debt Issuance Costs
Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt, are amortized over the contractual term of the related agreement using the effective interest method. Net debt issuance costs totaled approximately
$12.7 million
and
$16.5 million
as of
December 31, 2017
and
December 31, 2016
, respectively, and have been recorded within long-term debt (
$11.0 million
at December 31, 2017 and
$14.2 million
at December 31, 2016) and other non-current assets (
$1.7 million
at December 31, 2017 and
$2.3 million
at December 31, 2016) in the accompanying 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 years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
was approximately
$3.4 million
,
$3.3 million
, and
$3.1 million
, respectively. Amortization of debt issuance costs is recorded in interest expense in the accompanying consolidated statements of operations.
Share Based Compensation
Share-based compensation cost for the Company’s stock option plan is measured at the grant date, based on the estimated fair value of the award, and is recognized over the requisite service period. The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Expected volatility is based on a review of several market indicators, including peer companies. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option.
Insurance Liabilities
The Company is self-insured for certain casualty losses and medical liabilities. The Company records insurance liabilities and related expenses for health, workers’ compensation, product and general liability losses and other insurance expenses in accordance with either the contractual terms of their policies or, if self-insured, the total liabilities that are estimable and probable as of the reporting date. Insurance liabilities are recorded as current liabilities to the extent they are expected to be paid in the succeeding year with the remaining requirements classified as long-term liabilities. The accounting for self-insured plans requires that significant judgments and estimates be made both with respect to the future liabilities to be paid for known claims and incurred but not reported claims as of the reporting date. The Company relies on historical trends when determining the appropriate incurred but not reported claims and health insurance reserves to record in its consolidated balance sheets. In certain cases where partial insurance coverage exists, the Company must estimate the portion of the liability that will be covered by existing insurance policies to arrive at the net expected liability to the Company.
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 are 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.
During the year ended December 31, 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. As a result, the Company released approximately
$86.5 million
of its valuation allowance since positive evidence outweighed negative evidence thereby allowing the Company to achieve the “more likely than not” realization threshold. Of the total valuation allowance release of
$86.5 million
,
$31.3 million
was offset against 2016 year tax expense with the remaining
$55.2 million
representing the discrete valuation allowance release. The Company still remains in a valuation allowance position at December 31, 2017 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.
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 federal, state, and foreign income tax purposes and valuation allowances required, if any, for 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. As a result of the 2013 Ply Gem Prime and Ply Gem Holdings merger, U.S. federal income tax returns are prepared and filed by Ply Gem Holdings on behalf of itself, Ply Gem Industries, Inc. (“Ply Gem Industries”), and its U.S. subsidiaries. The Company has executed a tax sharing agreement with Ply Gem Industries and Ply Gem Holdings pursuant to which tax liabilities for each respective party are computed on a stand-alone basis. 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 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, 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 year ended December 31, 2016, the Company released its discrete valuation allowance on its federal deferred tax assets and certain state deferred tax assets for approximately
$55.2 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 beginning with the year ended December 31, 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. This methodology was consistent for the year ended December 31, 2017. During the year ended December 31, 2017, the reduction of the TRA liability was a function of the lower corporate tax rates from the Tax Act causing the NOLs to be less valuable. As of
December 31, 2017
and
2016
, we had a
$69.5 million
and
$79.7 million
liability, respectively, for the amount due pursuant to the Tax Receivable Agreement.
Sales Taxes
Sales taxes collected from customers are recorded as liabilities until remitted to taxing authorities and therefore are not reflected in the consolidated statements of operations.
Advertising Costs
Advertising costs are generally expensed as incurred. Advertising expense was
$15.6 million
,
$14.0 million
, and
$15.1 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Commitments and Contingencies
The Company provides accruals 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 December 31, 2017, the Company had a
$16.7 million
insurance receivable recognized in other current assets in the Company’s consolidated balance sheet for the securities litigation (see Note 8
Commitments and Contingencies
). As of December 31, 2016, the Company did not have any insurance recoveries recognized in the consolidated balance sheet.
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.
Liquidity
The Company intends to fund its ongoing capital and working capital requirements, including its internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under the revolving credit portion of its senior secured asset based revolving credit facility. As of
December 31, 2017
, the Company had approximately
$811.6 million
of indebtedness, approximately
$71.4 million
of cash and cash equivalents, and approximately
$261.5 million
of borrowing base availability, reflecting
$0.0 million
of ABL borrowings and approximately
$9.7 million
of letters of credit and priority payable reserves issued under the ABL Facility.
Because of the inherent seasonality in the Company's business and the resulting working capital requirements, the Company’s liquidity position fluctuates within a given year. The seasonal effect that creates the Company’s greatest needs has historically been experienced during the first six months of the year and the Company anticipates borrowing funds under its ABL Facility to support this requirement. However, the Company anticipates the funds generated from operations combined with cash on hand and funds available under the ABL Facility will be adequate to finance its ongoing operational cash flow needs, capital expenditures, debt service obligations, management incentive expenses, tax receivable agreement payments, and other fees payable under other contractual obligations for the foreseeable future.
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 entity at the exchange rates in effect at year-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 consolidated balance sheets. Gains and losses arising from international intercompany transactions that are of a long-term investment nature are reported in the same manner as translation gains and losses. Realized exchange gains and losses are included in net income for the years presented.
The Company recorded a gain from foreign currency transactions of approximately
$1.4 million
, a gain of approximately
$0.3 million
, and a loss of approximately
$3.2 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. During the years ended
December 31, 2017
,
2016
, and
2015
, accumulated other comprehensive income (loss) included a currency translation adjustment of approximately
$3.8 million
,
$3.0 million
, and
$(14.7) million
, respectively.
Derivative Financial Instruments
During the year ended December 31, 2017, the Company entered into a forward contract agreement to hedge approximately
$40.4 million
of its 2018 non-functional currency inventory purchases. During the years ended December 31, 2017 and 2016, the Company entered into forward contract agreements to hedge approximately
$38.4 million
of its 2017 non-functional currency inventory purchases (settled prior to December 31, 2017). These forward contracts were established 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 the 2018, 2017, and 2016 forward contracts as cash flow hedges. As a cash flow hedge, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The 2018, 2017, and 2016 forward contracts 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 gains and losses on the derivative contract 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. During the years ended
December 31, 2017
,
2016
, and
2015
, the Company realized a loss of approximately
$0.3 million
, a loss of approximately
$0.2 million
, and a gain of approximately
$5.5 million
, respectively, within cost of goods sold in the consolidated statement of operations based on these cash flow hedges.
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 instruments 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. As of
December 31, 2017
, approximately
$6,000
of the deferred net gain on derivative instruments included in accumulated other comprehensive loss, respectively, 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.
The fair value of the foreign currency forward contract agreement is 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 included in the accompanying consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Foreign currency hedge (included in other assets)
|
$
|
6
|
|
|
$
|
962
|
|
Concentration of Credit Risk
The Company’s largest customer, ABC Supply Co. Inc., accounted for approximately
12.5%
,
13.1%
, and
11.6%
of consolidated net sales for the years ended
December 31, 2017
,
2016
, and
2015
, respectively, and
12.8%
and
14.4%
of outstanding accounts receivable as of
December 31, 2017
and
2016
, respectively.
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 following table provides information about liabilities not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
671,970
|
|
|
$
|
671,970
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan Facility
|
|
213,875
|
|
|
215,479
|
|
|
—
|
|
|
215,479
|
|
|
—
|
|
As of December 31, 2017
|
|
$
|
863,875
|
|
|
$
|
887,449
|
|
|
$
|
671,970
|
|
|
$
|
215,479
|
|
|
$
|
—
|
|
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
|
|
|
$
|
—
|
|
The fair value of the long-term debt instruments was determined by utilizing available market information. The carrying value of the Company’s other financial instruments approximates their fair value due to the short-term nature of these instruments. Refer to Note 6,
Defined Benefit Plans
for fair value disclosures related to the Company's pension assets.
Earnings per common share
Basic earnings 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
0.6 million
,
0.1 million
, and
0.1 million
shares of common stock for the years ended
December 31, 2017
, 2016 and 2015, respectively.
Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Foreign currency
translation
|
|
Unrealized gain (loss) on derivative instruments
|
|
Minimum pension
liability adjustments
|
|
Accumulated other comprehensive
(loss) income
|
Balance, December 31, 2014
|
|
$
|
(6,731
|
)
|
|
$
|
1,294
|
|
|
$
|
(14,538
|
)
|
|
$
|
(19,975
|
)
|
Net current period change
|
|
(14,690
|
)
|
|
(465
|
)
|
|
(1,436
|
)
|
|
(16,591
|
)
|
Balance, December 31, 2015
|
|
(21,421
|
)
|
|
829
|
|
|
(15,974
|
)
|
|
(36,566
|
)
|
Net current period change
|
|
2,950
|
|
|
29
|
|
|
295
|
|
|
3,274
|
|
Balance, December 31, 2016
|
|
(18,471
|
)
|
|
858
|
|
|
(15,679
|
)
|
|
(33,292
|
)
|
Net current period change
|
|
3,765
|
|
|
(853
|
)
|
|
610
|
|
|
3,522
|
|
Balance, December 31, 2017
|
|
$
|
(14,706
|
)
|
|
$
|
5
|
|
|
$
|
(15,069
|
)
|
|
$
|
(29,770
|
)
|
New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
ASU 2018-02 addresses the impact of adjustments to deferred taxes due to the reduction of the historical income tax rate to the newly enacted corporate income tax rate as required by the December 2017 Tax Act. The amendments in this update allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this standard on its consolidated financial statements.
In August 2017, the 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 does not expect the adoption of this guidance to have a material impact 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 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 year ended December 31, 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 February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The core principal of the guidance is that an entity should recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. Early adoption is permitted. The guidance is to be applied using a modified retrospective transition method with the option to elect a package of practical expedients. The Company is currently evaluating the impact of the adoption of this accounting standard update on its internal processes, operating results and financial reporting. The impact is currently not known or reasonably estimable.
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 be adopted by Ply Gem beginning in the first quarter of 2018. The evaluation of our contracts is substantially complete and, based upon the results of our evaluation, 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. ACQUISITIONS
Canyon Stone
On
May 29, 2015
, Ply Gem completed an acquisition for cash consideration of approximately
$21.0 million
to acquire substantially all of the assets of Canyon Stone Inc. ("Canyon Stone"), a manufacturer and distributor of stone veneer and accessories in the United States. Canyon Stone has manufacturing facilities in Olathe, Kansas and Youngsville, North Carolina. The purchase agreement also included contingent consideration in the form of potential earn-out payments of up to
$1.0 million
based on Canyon Stone's earnings for fiscal years 2015 through 2017. This acquisition expanded the Company's stone veneer manufacturing footprint across the United States as it complements the existing Ply Gem Stone manufacturing facility in Middleburg, Pennsylvania. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805,
Business Combinations
, which results in a new valuation for the assets and liabilities of Canyon Stone based upon fair values as of the acquisition date.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
Accounts receivable
|
$
|
3,559
|
|
Inventories
|
712
|
|
Prepaid expenses and other current assets
|
41
|
|
Property and equipment
|
2,019
|
|
Intangible assets
|
9,300
|
|
Goodwill
|
7,642
|
|
Accounts payable, accrued expenses and other long-term liabilities
|
(2,273
|
)
|
|
$
|
21,000
|
|
The
$7.6 million
of goodwill was allocated to the Siding, Fencing and Stone segment and the goodwill is expected to be deductible for tax purposes. The Company has recognized a liability of approximately
$1.0 million
and
$0.8 million
as of December 31, 2017 and December 31, 2016, respectively, for the estimated fair value of the earn-out. This amount is included within other accrued expenses in the consolidated balance sheets. During the year ended December 31, 2017, the Company incurred a
$0.2 million
expense within selling, general and administrative expenses in the consolidated statement of operations for the change in the fair value of the earn-out. Any future change in the fair value of the contingent consideration subsequent to the acquisition date will be recognized in earnings in the period of change.
For the year ended December 31, 2015, Canyon Stone contributed net sales of approximately
$17.6 million
, and net income of
$0.8 million
, which has been included within the Company’s consolidated statement of operations within the Siding, Fencing, and Stone segment. If the Canyon Stone acquisition had occurred at the beginning of 2015, the Company’s consolidated net sales and net income would have been:
|
|
|
|
|
(Amounts in thousands) (Unaudited)
|
December 31, 2015
|
Net sales
|
$
|
1,850,993
|
|
Net income
|
32,712
|
|
During the year ended December 31, 2015, the Company incurred
$0.3 million
of acquisition-related costs for Canyon Stone. These expenses are included in selling, general, and administrative expenses in the Company’s consolidated statements of operations within the Siding, Fencing and Stone segment.
3. GOODWILL
In applying the acquisition method of accounting, the Company determines the fair value of the tangible and intangible assets acquired, and the fair value of the liabilities assumed. The excess of the fair value of the consideration transferred and the fair value of the net assets acquired is recorded as goodwill. The Company performs an annual test for goodwill impairment at the November month end each year (
November 25
for
2017
) 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 year ended December 31, 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.
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 weighs 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 estimated single family housing starts and the repair and remodeling market’s growth rate through 2024. These assumptions modeled information published by the National Association of Home Builders (“NAHB”). The Company estimated single family housing starts increasing from approximately
851,000
in
2017
to approximately
1,049,000
in
2024
(terminal growth year) and estimated the repair and remodeling growth rate at approximately
3.0%
in each year through
2024
. The
1,049,000
terminal housing starts figure represents a historical average that tracks domestic population growth. The forecasted sales growth and operating earnings increases coincided with the growth in these two key assumptions. The Company utilized its weighted average cost of capital and its long-term growth rate to derive the appropriate capitalization rate used in the terminal value calculation. The Company utilized these fair value estimate assumptions during the impairment analysis conducted during the years ended December 31,
2017
and
2016
.
The Company’s annual goodwill impairment tests performed as of
November 25
,
2017
and
November 26
,
2016
indicated no impairment. The Company's estimate of the fair value of its Windows and Doors, and Siding, Fencing, and Stone reporting units exceeded their
2017
carrying values by approximately
79%
and
215%
, respectively.
The Company provides 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 Company will continue to analyze changes to these assumptions in future periods. The Company will also continue to evaluate goodwill during future periods and declines in the residential housing and remodeling markets or unfavorable performance by the Company in these markets could result in future goodwill impairments.
The reporting unit goodwill balances were as follows as of
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Siding, Fencing and Stone
|
|
$
|
349,954
|
|
|
$
|
348,553
|
|
Windows and Doors
|
|
130,609
|
|
|
129,961
|
|
|
|
$
|
480,563
|
|
|
$
|
478,514
|
|
A rollforward of goodwill for
2017
and
2016
is included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Windows and
|
|
Siding, Fencing
|
(Amounts in thousands)
|
|
Doors
|
|
and Stone
|
Balance as of January 1, 2016
|
|
|
|
|
|
|
Goodwill
|
|
$
|
457,554
|
|
|
$
|
470,185
|
|
Accumulated impairment losses
|
|
(327,773
|
)
|
|
(122,227
|
)
|
|
|
$
|
129,781
|
|
|
$
|
347,958
|
|
Currency translation adjustments
|
|
180
|
|
|
595
|
|
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
|
|
648
|
|
|
1,401
|
|
Balance as of December 31, 2017
|
|
|
|
|
|
|
Goodwill
|
|
458,382
|
|
|
472,181
|
|
Accumulated impairment losses
|
|
(327,773
|
)
|
|
(122,227
|
)
|
|
|
$
|
130,609
|
|
|
$
|
349,954
|
|
4. INTANGIBLE ASSETS
The following table presents the major components of intangible assets as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Average
Amortization
Period
|
|
|
|
Accumulated
|
|
Net Carrying
|
|
(in Years)
|
|
Cost
|
|
Amortization
|
|
Value
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
Patents
|
|
14
|
|
$
|
12,770
|
|
|
$
|
(12,261
|
)
|
|
$
|
509
|
|
Trademarks/Tradenames
|
|
12
|
|
117,473
|
|
|
(88,853
|
)
|
|
28,620
|
|
Customer relationships
|
|
13
|
|
219,614
|
|
|
(166,086
|
)
|
|
53,528
|
|
Other
|
|
4
|
|
5,750
|
|
|
(4,732
|
)
|
|
1,018
|
|
Total intangible assets
|
|
12
|
|
$
|
355,607
|
|
|
$
|
(271,932
|
)
|
|
$
|
83,675
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Intangible assets are amortized over the estimated useful life, generally on a straight-line basis. Amortization expense related to these intangible assets for the years ended
December 31, 2017
,
2016
, and
2015
was approximately
$21.3 million
,
$25.1 million
, and
$25.3 million
, respectively. Estimated amortization expense for fiscal years
2018
through
2022
is shown in the following table:
|
|
|
|
|
|
Amortization
|
(Amounts in thousands)
|
expense
|
|
|
2018
|
$
|
19,781
|
|
2019
|
15,734
|
|
2020
|
11,197
|
|
2021
|
6,718
|
|
2022
|
4,416
|
|
5. LONG-TERM DEBT
Long-term debt in the accompanying consolidated balance sheets at
December 31, 2017
and
2016
consists of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
December 31, 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 $10,560 and $17,854, respectively
|
|
203,315
|
|
|
240,321
|
|
6.50% Senior notes due 2022, net of unamortized early tender premium, discount,
|
|
|
|
|
and debt issuance costs of $41,681 and $49,935, respectively
|
|
608,319
|
|
|
600,065
|
|
|
|
$
|
811,634
|
|
|
$
|
840,386
|
|
Less current portion of long-term debt
|
|
(4,300
|
)
|
|
(4,300
|
)
|
|
|
$
|
807,334
|
|
|
$
|
836,086
|
|
2015 Debt Transaction
On November 5, 2015, Ply Gem Industries entered into a second amended and restated ABL Facility. Among other things, the second amended and restated ABL Facility: (i) increased the overall facility to
$350.0 million
, (ii) provided an accordion feature of
$50.0 million
, and (iii) established the applicable margin for borrowings under the ABL Facility to a range of
1.25%
to
2.00%
for Eurodollar rate loans, depending on availability. All outstanding loans under the second amended and restated ABL Facility are due and payable in full on November 5, 2020.
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 at par. On September 19, 2014, Ply Gem Industries issued an additional
$150.0 million
aggregate principal amount of 6.50% Senior Notes (the "Senior Tack-on 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. 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 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.
On September 5, 2014, Ply Gem Industries completed an exchange offer with respect to the 6.50% Senior Notes issued in January 2014 to exchange $500.0 million 6.50% Senior Notes registered under the Securities Act for $500.0 million of the issued and outstanding 6.50% Senior Notes. Upon completion of the exchange offer, all $500.0 million of issued and outstanding 6.50% Senior Notes were registered under the Securities Act. On January 23, 2015, Ply Gem Industries completed an exchange offer with respect to the Senior Tack-on Notes issued in September 2014 to exchange $150.0 million Senior Tack-on Notes registered under the Securities Act for $150.0 million of the issued and outstanding Senior Tack-on Notes. Upon completion of the exchange offer, all $150.0 million of issued and outstanding Senior Tack-on Notes were registered under the Securities Act.
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
December 31, 2017
, the Company's interest rate on the Term Loan Facility was
4.00%
. The effective interest rate for the Term Loan is
8.60%
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 the Company's 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 the Company's consolidated senior secured debt ratio is equal to or less than
2.00
to 1.00) of the Company's annual excess cash flow (as defined in the credit agreement), to the extent such excess cash flow exceeds
$15.0 million
, commencing with the fiscal year ended December 31, 2015; (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, 2017, the Company's consolidated senior secured debt ratio was
0.66
and as a result no excess cash flow payment under the Term Loan Facility will be required. However, the Company elected on November 3, 2017 to voluntarily prepay
$40.0 million
on the Term Loan Facility to reduce its outstanding indebtedness bringing the Company's cumulative voluntary 2016 and 2017 Term Loan Facility payments to
$200.0 million
as the Company elected on March 10, 2016 and August 4, 2016 to voluntarily prepay
$30.0 million
on each date and elected on November 4, 2016 to voluntarily pay an additional
$100.0 million
on the Term Loan Facility.
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 amendment and restatement. As a result of the 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
December 31, 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
December 31, 2017
, Ply Gem Industries had approximately
$340.3 million
of contractual availability and approximately
$261.5 million
of borrowing base availability under the ABL Facility, reflecting
$0.0 million
of borrowings outstanding and approximately
$9.7 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 agreement governing the Term Loan Facility and further elected in November 2016 to voluntarily pay an additional
$100.0 million
on the Term Loan Facility bringing the cumulative 2016 voluntary payments to
$160.0 million
. 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 in the consolidated statement of operations of approximately
$11.7 million
for the year ended December 31, 2016, reflecting the proportionate write-off of the related debt discount (
$9.4 million
) and debt issuance costs (
$2.4 million
) associated with the $160.0 million in voluntary payments, as summarized in the table below.
During November 2017, the Company made a voluntarily payment of
$40.0 million
on the Term Loan Facility to reduce its outstanding indebtedness as allowable under the terms of the agreement governing the Term Loan Facility. 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 in the consolidated statement of operations of approximately
$2.1 million
for the year ended December 31, 2017, reflecting the proportionate write-off of the related debt discount (
$1.7 million
) and debt issuance costs (
$0.4 million
) associated with this $40.0 million voluntary payment, as summarized in the table below.
Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately
$2.1 million
and
$11.7 million
for the years ended
December 31, 2017
, and
2016
, respectively, as summarized in the table below.
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
For the year ended
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Loss on modification of debt:
|
|
|
|
|
|
|
Term Loan Facility unamortized discount
|
|
$
|
(1,681
|
)
|
|
$
|
(9,375
|
)
|
Term Loan Facility unamortized debt issuance costs
|
|
(425
|
)
|
|
(2,372
|
)
|
Total loss on modification or extinguishment of debt
|
|
$
|
(2,106
|
)
|
|
$
|
(11,747
|
)
|
Debt maturities
The following table summarizes the Company’s long-term debt maturities due in each fiscal year after
December 31, 2017
:
|
|
|
|
|
|
(Amounts in thousands)
|
|
As of
|
|
|
December 31, 2017
|
2018
|
|
$
|
4,300
|
|
2019
|
|
4,300
|
|
2020
|
|
4,300
|
|
2021
|
|
200,975
|
|
2022
|
|
650,000
|
|
Thereafter
|
|
—
|
|
|
|
$
|
863,875
|
|
The Company will not be required to make an excess cash flow payment under the Term Loan Facility in 2018 based on the Company's operating performance, voluntary payments on the Term Loan Facility, and capital expenditures in 2017. However, the Company may be required to make an excess cash flow payment under the Term Loan Facility in future years based on the Company's senior secured debt levels, future operating performance and capital expenditures which the Company cannot estimate with reasonable certainty at December 31, 2017.
6. DEFINED BENEFIT PLANS
The Company has
two
pension plans, the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc. Retirement Plan (the “MW Plan”). The plans are combined in the following discussion.
The table that follows provides a reconciliation of benefit obligations, plan assets, and funded status of the combined plans in the accompanying consolidated balance sheets at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
Change in projected benefit obligation
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
47,138
|
|
|
$
|
47,652
|
|
Service cost
|
|
—
|
|
|
—
|
|
Interest cost
|
|
1,822
|
|
|
1,914
|
|
Actuarial (gain) loss
|
|
2,226
|
|
|
(227
|
)
|
Benefits and expenses paid
|
|
(2,669
|
)
|
|
(2,201
|
)
|
Projected benefit obligation at end of year
|
|
$
|
48,517
|
|
|
$
|
47,138
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
31,478
|
|
|
$
|
31,972
|
|
Actual return on plan assets
|
|
3,792
|
|
|
1,060
|
|
Employer and participant contributions
|
|
1,753
|
|
|
647
|
|
Benefits and expenses paid
|
|
(2,669
|
)
|
|
(2,201
|
)
|
Fair value of plan assets at end of year
|
|
$
|
34,354
|
|
|
$
|
31,478
|
|
|
|
|
|
|
Funded status and financial position:
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
34,354
|
|
|
$
|
31,478
|
|
Benefit obligation at end of year
|
|
48,517
|
|
|
47,138
|
|
Funded status
|
|
$
|
(14,163
|
)
|
|
$
|
(15,660
|
)
|
|
|
|
|
|
Amount recognized in the balance sheet consists of:
|
|
|
|
|
|
|
Current liability
|
|
$
|
(1,358
|
)
|
|
$
|
(1,753
|
)
|
Noncurrent liability
|
|
(12,805
|
)
|
|
(13,907
|
)
|
Liability recognized in the balance sheet
|
|
$
|
(14,163
|
)
|
|
$
|
(15,660
|
)
|
The accumulated benefit obligation for the combined plans was approximately
$48.5 million
and
$47.1 million
as of
December 31, 2017
and
2016
, respectively.
Accumulated Other Comprehensive Loss
Amounts recognized in accumulated other comprehensive loss at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Initial net asset (obligation)
|
|
$
|
—
|
|
|
$
|
—
|
|
Prior service credit (cost)
|
|
—
|
|
|
—
|
|
Net loss
|
|
17,958
|
|
|
18,817
|
|
Accumulated other comprehensive loss
|
|
$
|
17,958
|
|
|
$
|
18,817
|
|
These amounts do not include any amounts recognized in accumulated other comprehensive loss related to the nonqualified Supplemental Executive Retirement Plan.
Actuarial Assumptions
Plan assets consist of cash and cash equivalents, fixed income mutual funds, equity mutual funds, as well as other investments. The discount rate for the projected benefit obligation was chosen based upon rates of returns available for high-quality fixed-income securities as of the plan's measurement date. The Company reviewed several bond indices, comparative data, and the plan's anticipated cash flows to determine a single discount rate which would approximate the rate in which the obligation could be effectively settled. The expected long-term rate of return on assets is based on the Company’s historical rate of return. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Discount rate for projected benefit obligation
|
|
3.50
|
%
|
|
3.97
|
%
|
|
4.18
|
%
|
Discount rate for pension costs
|
|
3.97
|
%
|
|
4.18
|
%
|
|
4.25
|
%
|
Expected long-term average return on plan assets
|
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
Net Periodic Benefit Costs
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 year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
1,822
|
|
|
1,914
|
|
|
1,996
|
|
Expected return on plan assets
|
|
(2,184
|
)
|
|
(2,176
|
)
|
|
(2,309
|
)
|
Amortization of (gain) loss
|
|
1,432
|
|
|
1,348
|
|
|
1,192
|
|
Net periodic benefit expense
|
|
$
|
1,070
|
|
|
$
|
1,086
|
|
|
$
|
879
|
|
Pension Assets
The Company has established formal investment policies for the assets associated with the Company’s pension plans. Policy objectives include maximizing long-term return at acceptable risk levels, diversifying among asset classes, if appropriate, and among investment managers, as well as establishing relevant risk parameters within each asset class. Investment policies reflect the unique circumstances of the respective plans and include requirements designed to mitigate risk including quality and diversification standards. Asset allocation targets are based on periodic asset reviews and/or risk budgeting study results which help determine the appropriate investment strategies for acceptable risk levels. The investment policies permit variances from the targets within certain parameters.
Factors such as asset class allocations, long-term rates of return (actual and expected), and results of periodic asset liability modeling studies are considered when constructing the long-term rate of return assumption for the Company’s pension plans. While historical rates of return play an important role in the analysis, the Company also considers data points from other external sources if there is a reasonable justification to do so.
The plan assets are invested to maximize returns without undue exposure to risk. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. The plan’s asset allocation policies are consistent with the established investment objectives and risk tolerances. The asset allocation policies are developed by examining the historical relationships of risk and return among asset classes, and are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk. The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.
The weighted-average asset allocations at
December 31, 2017
by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
Allocation
|
|
Actual allocation as of December 31, 2017
|
|
Weighted Average
Expected Long-Term
Rate of Return (1)
|
Asset Category
|
|
|
|
|
|
|
U.S. Large Cap Funds
|
|
25.0
|
%
|
|
22.3
|
%
|
|
3.7
|
%
|
U.S. Mid Cap Funds
|
|
5.0
|
%
|
|
8.1
|
%
|
|
0.8
|
%
|
U.S. Small Cap Funds
|
|
3.0
|
%
|
|
3.0
|
%
|
|
0.4
|
%
|
International Equity
|
|
15.0
|
%
|
|
15.2
|
%
|
|
1.1
|
%
|
Fixed income
|
|
45.0
|
%
|
|
44.4
|
%
|
|
0.9
|
%
|
Other investments
|
|
7.0
|
%
|
|
7.0
|
%
|
|
0.1
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
7.0
|
%
|
(1) The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation and historical results.
The weighted-average asset allocations at
December 31, 2016
by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
Allocation
|
|
Actual allocation as of December 31, 2016
|
|
Weighted Average
Expected Long-Term
Rate of Return (1)
|
Asset Category
|
|
|
|
|
|
|
U.S. Large Cap Funds
|
|
25.0
|
%
|
|
21.6
|
%
|
|
4.2
|
%
|
U.S. Mid Cap Funds
|
|
5.0
|
%
|
|
7.9
|
%
|
|
0.7
|
%
|
U.S. Small Cap Funds
|
|
3.0
|
%
|
|
3.0
|
%
|
|
0.5
|
%
|
International Equity
|
|
15.0
|
%
|
|
14.8
|
%
|
|
1.0
|
%
|
Fixed income
|
|
45.0
|
%
|
|
44.3
|
%
|
|
0.5
|
%
|
Other investments
|
|
7.0
|
%
|
|
8.4
|
%
|
|
0.1
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
7.0
|
%
|
(1) The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation and historical results.
The following table summarizes the Company’s plan assets measured at fair value on a recurring basis (at least annually) as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Fair value as of
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
|
December 31,
|
|
Markets for Identical
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
2017
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Equity Securities (1)
|
|
|
|
|
|
|
|
|
U.S. Large Cap Funds
|
|
$
|
7,660
|
|
|
$
|
7,660
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Mid Cap Funds
|
|
2,797
|
|
|
1,381
|
|
|
1,416
|
|
|
—
|
|
U.S. Small Cap Funds
|
|
1,038
|
|
|
515
|
|
|
523
|
|
|
—
|
|
International Funds
|
|
5,203
|
|
|
5,203
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Bond Funds (2)
|
|
15,261
|
|
|
—
|
|
|
15,261
|
|
|
—
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Funds (3)
|
|
1,765
|
|
|
—
|
|
|
1,765
|
|
|
—
|
|
Cash & Cash Equivalents
|
|
630
|
|
|
630
|
|
|
—
|
|
|
—
|
|
|
|
$
|
34,354
|
|
|
$
|
15,389
|
|
|
$
|
18,965
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Fair value as of
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
|
December 31,
|
|
Markets for Identical
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
2016
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Equity Securities (1)
|
|
|
|
|
|
|
|
|
U.S. Large Cap Funds
|
|
$
|
6,784
|
|
|
$
|
6,784
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Mid Cap Funds
|
|
2,477
|
|
|
1,226
|
|
|
1,251
|
|
|
—
|
|
U.S. Small Cap Funds
|
|
931
|
|
|
470
|
|
|
461
|
|
|
—
|
|
International Funds
|
|
4,662
|
|
|
4,662
|
|
|
—
|
|
|
—
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Bond Funds (2)
|
|
13,954
|
|
|
—
|
|
|
13,954
|
|
|
—
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Funds (3)
|
|
1,584
|
|
|
—
|
|
|
1,584
|
|
|
—
|
|
Cash & Cash Equivalents
|
|
1,086
|
|
|
1,086
|
|
|
—
|
|
|
—
|
|
|
|
$
|
31,478
|
|
|
$
|
14,228
|
|
|
$
|
17,250
|
|
|
$
|
—
|
|
(1) Equity securities are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(2) Domestic bonds are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(3) Commodity funds are comprised of two mutual funds which represent small market energy funds.
The Ply Gem Plan was frozen during 1998, and no further increases in benefits may occur as a result of increases in service years or compensation and no new participants can be added to the Plan.
The MW Plan was frozen for salaried participants during 2004, and no further increases in benefits for salaried participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for non-salaried participants during 2005. No additional non-salaried participants may enter the plan, but increases in benefits as a result of increases in service years or compensation will still occur.
Benefit Plan Contributions
The Company made cash contributions to the combined plans of approximately
$1.8 million
and
$0.6 million
for the years ended
December 31, 2017
and
2016
, respectively. During fiscal year
2018
, the Company expects to make cash contributions to the combined plans of approximately
$1.4 million
.
Benefit Plan Payments
The following table shows expected benefit payments for the next five fiscal years and the aggregate five years thereafter from the combined plans. These benefit payments consist of qualified defined benefit plan payments that are made from the respective plan trusts and do not represent an immediate cash outflow to the Company.
|
|
|
|
|
|
Fiscal Year
|
|
Expected Benefit Payments
|
(Amounts in thousands)
|
|
|
|
|
|
2018
|
|
$
|
2,404
|
|
2019
|
|
2,469
|
|
2020
|
|
2,568
|
|
2021
|
|
2,624
|
|
2022
|
|
2,681
|
|
2023-2027
|
|
14,119
|
|
Other Retirement Plans
The Company also has an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees. The projected benefit obligation relating to this unfunded plan totaled approximately
$319,000
and
$319,000
at
December 31, 2017
and
2016
, respectively. The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of
December 31, 2017
and
2016
. Pension expense for the plan was approximately
$12,000
,
$14,000
and
$16,000
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
7. DEFINED CONTRIBUTION PLANS
The Company has a defined contribution 401(k) plan covering all eligible employees. The Company matches
50%
of the first
6%
of employee contributions. The Company also has the option of making discretionary contributions. The Company contributed approximately
$4.0 million
,
$3.7 million
, and
$3.6 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively, which has been expensed within selling, general, and administrative expenses in the accompanying consolidated statement of operations.
8. COMMITMENTS AND CONTINGENCIES
Operating leases
At
December 31, 2017
, the Company was obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations. Future minimum rental obligations for non-cancellable lease payments total approximately
$140.0 million
at
December 31, 2017
. The lease obligations, partially offset by sublease income, are payable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
Sublease
|
(Amounts in thousands)
|
|
Commitments
|
|
Income
|
2018
|
|
$
|
31,590
|
|
|
$
|
437
|
|
2019
|
|
27,455
|
|
|
445
|
|
2020
|
|
22,123
|
|
|
454
|
|
2021
|
|
17,755
|
|
|
463
|
|
2022
|
|
15,694
|
|
|
473
|
|
Thereafter
|
|
25,431
|
|
|
974
|
|
Total rental expense for all operating leases was approximately
$39.3 million
,
$37.3 million
, and
$37.6 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Indemnifications
In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from 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 in the approximate amount of
$1.0 million
and
$1.4 million
at
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
and
2016
, the Company has recorded liabilities related to these indemnifications of approximately
$0.4 million
and
$0.5 million
, respectively, in current liabilities and
$0.6 million
and
$0.9 million
, respectively, in long-term liabilities, consisting of the following:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31, 2017
|
|
December 31, 2016
|
Product claim liabilities
|
|
$
|
138
|
|
|
$
|
138
|
|
Multiemployer pension plan withdrawal liability
|
|
449
|
|
|
808
|
|
Other
|
|
439
|
|
|
500
|
|
|
|
$
|
1,026
|
|
|
$
|
1,446
|
|
The product claim liabilities of approximately
$0.1 million
at
December 31, 2017
and
2016
, recorded in long term liabilities, represent the estimated costs to resolve the outstanding matters related to a former subsidiary of the Company, which is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. The Company had indemnified the buyer of the former subsidiary for all known liabilities and future claims relating to such matters and retained the rights to all potential reimbursements related to insurance coverage. Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries. The Company and the former subsidiary continue to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. The Company and the former subsidiary have engaged in coverage litigation with certain insurers and have settled coverage claims with several of the insurers.
The multiemployer pension plan withdrawal liability of approximately
$0.4 million
and
$0.8 million
recorded in long term liabilities at
December 31, 2017
and
2016
, respectively, relate to liabilities assumed by the Company in 1998 when its former subsidiary, Studley Products, Inc. (“Studley”) was sold. In connection with the sale, Studley ceased making contributions to the Production Service and Sales District Council Pension Fund (the “Pension Fund”), and the Company assumed responsibility for all withdrawal liabilities to be assessed by the Pension Fund. Accordingly, the Company is making quarterly payments of approximately
$0.1 million
to the Pension Fund through 2018 based upon the assessment of withdrawal liability received from the Pension Fund. The multiemployer pension liability represents the present value of the quarterly payment stream as well as an estimate of additional amounts that may be assessed in the future by the Pension Fund under the contractual provisions of the Pension Fund.
Included in the indemnified items is approximately
$0.4 million
and
$0.5 million
for the year ended
December 31, 2017
and
2016
, respectively, of accrued expenses to cover the estimated costs and expenses of defending known litigation claims, including the estimated cost of legal services incurred, that the Company is contesting.
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 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 appropriate. As of
December 31, 2017
and
2016
, warranty liabilities of approximately
$19.7 million
and
$19.7 million
, respectively, have been recorded in current liabilities and approximately
$57.7 million
and
$57.6 million
, respectively, have been recorded in long term liabilities in the consolidated balance sheets.
Changes in the Company’s short-term and long-term warranty liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of period
|
|
$
|
77,279
|
|
|
$
|
76,562
|
|
|
$
|
84,423
|
|
Acquisitions-Canyon Stone (2015)
|
|
—
|
|
|
—
|
|
|
100
|
|
Warranty expense during period
|
|
22,309
|
|
|
22,266
|
|
|
21,264
|
|
Adjustments
|
|
—
|
|
|
—
|
|
|
(7,761
|
)
|
Settlements made during period
|
|
(22,271
|
)
|
|
(21,549
|
)
|
|
(21,464
|
)
|
Balance, end of period
|
|
$
|
77,317
|
|
|
$
|
77,279
|
|
|
$
|
76,562
|
|
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, treatment, disposal and transport of hazardous waste and other materials, investigation and 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 authorities. 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”), under 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. In 2012, the EPA approved the Workplan, which MW is currently implementing. The Company has recorded approximately
$0.3 million
of this environmental liability within current liabilities and approximately
$1.1 million
within other long-term liabilities in the Company’s consolidated balance sheets at
December 31, 2017
and
2016
. The Company may incur costs that exceed our recorded environmental liability. The Company will adjust its environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.
Environmental authorities are investigating groundwater contamination at a Superfund site in York, Nebraska. In 2010, sampling was conducted at the Kroy Building Products, Inc. (“Kroy”) facility in York, Nebraska. In February 2015, the EPA sent Kroy a request for information pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and in May 2015, Kroy responded to the request for information. Kroy could have liability for investigation and remediation costs associated with the contamination. Given the current status of this matter, the Company has not recorded a liability in its consolidated balance sheets as of December 31, 2017 and December 31, 2016.
From time to time, the Company may incur investigation and remediation costs in connection with other facilities it currently owns or operates or previously owned or operated. For example, the Company has a
$0.1 million
liability included in its consolidated balance sheets at December 31, 2017 and December 31, 2016, for potential contamination issues at its Calgary, Alberta property. In addition, the Company is required to contribute to investigation and remediation costs at various third party waste disposal facilities at which the Company or a related entity has been identified as a potentially responsible party.
The Company is a party to various acquisition and other agreements pursuant to which third parties agreed to indemnify the Company for certain costs relating to environmental liabilities. For example, the Company may be able to recover some of its Rocky Mount, Virginia investigation and remediation costs from U.S.
Industries, Inc. and may be able to recover a portion of any costs incurred in connection with the Kroy contamination matter in York, Nebraska from Alcan Aluminum Corporation. The Company's ability to seek indemnification from parties that have agreed to indemnify it may be limited. There can be no assurance that the Company would receive any funds from these parties, and any related environmental liabilities or costs could have a material adverse effect on our financial condition and results of operations.
Based on current information, the Company is not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on its results of operations, cash flows or financial position except as otherwise disclosed in the Company's consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters will not result in material costs or liabilities.
Self-insured risks
The Company maintains a broad range of insurance policies which 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 and certain coverage exclusions.
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
John Gulbankian v. MW Manufacturers, Inc.
(“Gulbankian”), a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, alleged damages as a result of the defective design and manufacture of certain MW vinyl clad windows. In
Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc.
(“Hartshorn”), a purported class action filed in July 2012 in the District Court, plaintiffs, on behalf of themselves and all others similarly situated, alleged damages as a result of the defective design and manufacture of certain MW vinyl clad windows. In April 2014, plaintiffs in both the Gulbankian and Hartshorn cases filed a Consolidated Amended Class Action Complaint, making similar claims against all MW vinyl clad windows.
MW entered into a settlement agreement with plaintiffs as of April 2014 to settle both the Gulbankian and Hartshorn cases on a nationwide basis (the “Vinyl Clad Settlement Agreement”). The Vinyl Clad Settlement Agreement provides that this settlement applies to any and all MW vinyl clad windows manufactured from January 1, 1987 through May 23, 2014, and provides for a cash payment for eligible consumers submitting qualified claims showing, among other requirements, certain damage to their MW vinyl clad windows. The period for submitting qualified claims is the later of: (i) May 28, 2016, or (ii) the last day of the warranty period for the applicable window. On December 29, 2014, the District Court granted final approval of this settlement, as well as MW’s payment of attorneys' fees and costs to plaintiffs' counsel in the amount of $2.5 million. The Company and MW deny all liability in the settlements 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 these matters.
As a result of the Vinyl Clad Settlement Agreement, the Company has a liability of approximately
$1.4 million
as of December 31, 2017 and December 31, 2016, with
$0.7 million
as a current liability within accrued expenses and
$0.7 million
as a noncurrent liability within other long-term liabilities in the Company’s consolidated balance sheets as of December 31, 2017 and December 31, 2016. It is possible that the Company may incur costs in excess of the recorded amounts; however, the Company currently expects that the total net cost will not exceed this liability.
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, meaning the case continues to be litigated with the individual named plaintiffs. 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 December 31, 2017 in the Company’s consolidated balance sheet, and also recognized an insurance receivable of
$25.4 million
within other current assets that was offset by insurance proceeds of
$8.7 million
from an insurance carrier, for a net insurance receivable of
$16.7 million
as of December 31, 2017 in the Company’s consolidated balance sheet 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 consolidated balance sheet and subsequently paid the settlement during the year ended December 31, 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 consolidated balance sheet and subsequently paid the settlement during the year ended December 31, 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 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 December 31, 2017.
9. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
Accrued expenses consist of the following at
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31, 2017
|
|
December 31, 2016
|
Insurance
|
|
$
|
7,637
|
|
|
$
|
8,297
|
|
Employee compensation and benefits
|
|
19,720
|
|
|
27,749
|
|
Sales and marketing
|
|
58,131
|
|
|
59,655
|
|
Product warranty
|
|
19,652
|
|
|
19,718
|
|
Accrued freight
|
|
3,696
|
|
|
2,146
|
|
Accrued interest
|
|
18,027
|
|
|
17,977
|
|
Accrued environmental liability
|
|
453
|
|
|
434
|
|
Accrued pension
|
|
1,358
|
|
|
1,753
|
|
Accrued sales returns and discounts
|
|
1,303
|
|
|
1,199
|
|
Accrued taxes
|
|
4,735
|
|
|
4,966
|
|
Litigation accrual
|
|
26,849
|
|
|
2,575
|
|
Other
|
|
24,296
|
|
|
22,546
|
|
|
|
$
|
185,857
|
|
|
$
|
169,015
|
|
Other long-term liabilities consist of the following at
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
December 31, 2017
|
|
December 31, 2016
|
Insurance
|
|
$
|
595
|
|
|
$
|
605
|
|
Pension liabilities
|
|
12,805
|
|
|
13,907
|
|
Multi-employer pension withdrawal liability
|
|
449
|
|
|
808
|
|
Product warranty
|
|
57,665
|
|
|
57,575
|
|
Long-term product claim liability
|
|
138
|
|
|
138
|
|
Long-term environmental liability
|
|
1,075
|
|
|
1,158
|
|
Liabilities for tax uncertainties
|
|
4,529
|
|
|
3,925
|
|
Litigation accrual
|
|
731
|
|
|
731
|
|
Other
|
|
5,437
|
|
|
7,548
|
|
|
|
$
|
83,424
|
|
|
$
|
86,395
|
|
Long-term incentive plan
The Company maintains a long-term incentive plan (“LTIP”) for certain employees which was implemented to retain and incentivize employees through the downturn in the housing market. During the years ended
December 31, 2017
and
December 31, 2016
, the Company recognized a net LTIP expense of
$5.7 million
and
$7.3 million
, respectively, which has been recorded within selling, general, and administrative expenses in the consolidated statement of operations. The LTIP liability is
$9.5 million
and
$10.0 million
as of
December 31, 2017
and
December 31, 2016
, respectively, of which
$6.0 million
and
$6.3 million
has been recorded within other current liabilities and
$3.5 million
and
$3.7 million
in other long-term liabilities in the consolidated balance sheets as of
December 31, 2017
and
December 31, 2016
, respectively. During the year ended December 31, 2017, the Company made certain modifications to the LTIP program which transformed the 2017 LTIP awards to an equity based award rather than the previous liability award. These changes consisted of granting restricted stock units at the outset of the award rather than a fixed dollar amount which had been the methodology for the previous LTIP awards. As a result, the Company recognized the 2017 LTIP awards within additional paid in capital for
$0.6 million
in the Company’s consolidated statements of stockholder’s equity (deficit) for the year ended December 31, 2017.
Other liabilities
During the years ended
December 31, 2017
,
2016
and
2015
, the Company made approximately
$1.0 million
,
$0.5 million
, and
$1.6 million
in cash payments for restructuring and integration efforts, respectively. These payments were for restructuring and integration programs 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.
10. INCOME TAXES
The following is a summary of the components of income before provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
117,750
|
|
|
$
|
35,258
|
|
|
$
|
47,901
|
|
Foreign
|
|
(2,769
|
)
|
|
(11,766
|
)
|
|
(16,301
|
)
|
|
|
$
|
114,981
|
|
|
$
|
23,492
|
|
|
$
|
31,600
|
|
The following is a summary of the provision (benefit) for income taxes included in the accompanying consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
989
|
|
|
$
|
1,043
|
|
|
$
|
692
|
|
Deferred
|
|
39,692
|
|
|
(54,692
|
)
|
|
(2,833
|
)
|
|
|
40,681
|
|
|
(53,649
|
)
|
|
(2,141
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,204
|
|
|
$
|
4,674
|
|
|
$
|
2,688
|
|
Deferred
|
|
1,259
|
|
|
(2,020
|
)
|
|
(779
|
)
|
|
|
6,463
|
|
|
2,654
|
|
|
1,909
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
838
|
|
|
$
|
277
|
|
|
$
|
833
|
|
Deferred
|
|
(1,328
|
)
|
|
(1,277
|
)
|
|
(1,289
|
)
|
|
|
(490
|
)
|
|
(1,000
|
)
|
|
(456
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,654
|
|
|
$
|
(51,995
|
)
|
|
$
|
(688
|
)
|
The table that follows reconciles the federal statutory income tax rate to the effective tax rate of approximately
40.6%
for the year ended
December 31, 2017
,
221.3%
for the year ended
December 31, 2016
, and
2.2%
for the year ended
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Income tax provision at the federal statutory rate
|
|
$
|
40,243
|
|
|
$
|
8,222
|
|
|
$
|
11,060
|
|
|
|
|
|
|
|
|
Net change from statutory rate:
|
|
|
|
|
|
|
|
|
|
Valuation allowance-US
|
|
165
|
|
|
(88,653
|
)
|
|
(30,446
|
)
|
Valuation allowance-Canada
|
|
207
|
|
|
1,714
|
|
|
3,551
|
|
State income tax provision, net of federal income tax benefit
|
|
4,462
|
|
|
5,937
|
|
|
4,986
|
|
Taxes at non-U.S. statutory rate
|
|
(283
|
)
|
|
348
|
|
|
(153
|
)
|
Additional provisions/reversals of unrecognized tax benefits
|
|
(281
|
)
|
|
187
|
|
|
(116
|
)
|
Canadian rate differential
|
|
142
|
|
|
808
|
|
|
1,284
|
|
Attribute reduction
|
|
—
|
|
|
(3,118
|
)
|
|
3,118
|
|
Tax Receivable Agreement
|
|
162
|
|
|
21,306
|
|
|
4,531
|
|
Alternative minimum tax
|
|
1,463
|
|
|
1,483
|
|
|
1,298
|
|
Minimum tax credit
|
|
(1,463
|
)
|
|
(1,483
|
)
|
|
(1,298
|
)
|
Meals and entertainment
|
|
676
|
|
|
675
|
|
|
595
|
|
Executive compensation
|
|
748
|
|
|
599
|
|
|
—
|
|
Work opportunity tax credit
|
|
(474
|
)
|
|
(438
|
)
|
|
—
|
|
Tax Reform - Deferred Taxes
|
|
4,272
|
|
|
—
|
|
|
—
|
|
Tax Reform - Tax Receivable Agreement
|
|
(3,746
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
|
361
|
|
|
418
|
|
|
902
|
|
|
|
$
|
46,654
|
|
|
$
|
(51,995
|
)
|
|
$
|
(688
|
)
|
The tax effect of temporary differences, which gave rise to significant portions of deferred income tax assets and liabilities as of
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
615
|
|
|
$
|
824
|
|
Insurance reserves
|
|
2,004
|
|
|
3,302
|
|
Warranty reserves
|
|
18,616
|
|
|
26,826
|
|
Pension accrual
|
|
3,837
|
|
|
6,292
|
|
Deferred compensation
|
|
4,683
|
|
|
10,946
|
|
Inventories
|
|
2,936
|
|
|
4,898
|
|
Federal, net operating loss carry-forwards
|
|
12,621
|
|
|
48,732
|
|
State, net operating loss carry-forwards
|
|
12,580
|
|
|
10,496
|
|
Non-capital losses - foreign jurisdiction
|
|
13,116
|
|
|
11,743
|
|
Related party interest
|
|
3,347
|
|
|
18,055
|
|
Professional fees
|
|
1,087
|
|
|
2,031
|
|
Environmental reserves
|
|
374
|
|
|
576
|
|
Alternative minimum tax
|
|
4,244
|
|
|
2,782
|
|
Other assets, net
|
|
5,008
|
|
|
7,530
|
|
Valuation allowance
|
|
(26,553
|
)
|
|
(22,889
|
)
|
Total deferred tax assets
|
|
58,515
|
|
|
132,144
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property and equipment, net
|
|
(18,851
|
)
|
|
(27,589
|
)
|
Intangible assets, net
|
|
(20,873
|
)
|
|
(36,894
|
)
|
Deferred financing
|
|
(8,991
|
)
|
|
(18,063
|
)
|
Other liabilities, net
|
|
(807
|
)
|
|
(1,973
|
)
|
Total deferred tax liabilities
|
|
(49,522
|
)
|
|
(84,519
|
)
|
Net deferred tax asset
|
|
$
|
8,993
|
|
|
$
|
47,625
|
|
Tax Act
The Tax Act enacted on December 22, 2017, makes broad and complex changes to the Internal Revenue Code (the "Code") including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, a new tax named global intangible low taxed income ("GILTI") which requires a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, eliminating the corporate AMT and changing how existing AMT credits can be realized, creating the BEAT, creating a general limitation on deductible interest expense, and changing rules related to the utilization of net operating loss carryforwards created in tax years after December 31, 2017.
Due to the complexity of the new GILTI tax rules, The Company is currently evaluating the impact of this new tax. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either treating taxes due under GILTI as a current-period expense when incurred or factoring these amounts into the Company’s measurement of deferred taxes. The Company has not made a policy decision regarding whether to record deferred taxes on GILTI since we are still in the process of evaluating this new tax provision under the Tax Act.
ASC 740
Income Taxes
requires a company to record the effects of a tax law change in the period of enactment. Due to the complexities involved in accounting for the recently enacted Tax Act, SAB 118 requires that the Company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the Company has performed an earnings and profits analysis associated with the one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, and as a result of accumulated losses, there will be no income tax effect recorded for the year ended December 31, 2017 based on the reasonable estimate guidance provided by SAB 118. The Company is continuing to assess the impact from the Tax Act and may record adjustments in 2018.
For the year ended December 31, 2017, as a result of the corporate income tax rate reduction from
35%
to
21%
effective January 1, 2018 enacted in the Tax Act, the Company recorded an expense of
$4.3 million
due to the re-measurement of the deferred tax assets at the reduced income tax rate which reduced the future benefit the Company will realize associated with these assets. This expense has been recognized within income taxes in the Company's consolidated statement of operations and was recognized during the fourth quarter of 2017.
ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
was issued in November 2015 and it establishes simplification of the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. During the fourth quarter of 2016, the Company elected to prospectively adopt this standard, thus reclassifying the current deferred tax assets to noncurrent (netted within noncurrent liabilities) on the accompanying consolidated balance sheet. The adoption of this guidance had no impact on the Company's consolidated results of operations or cash flows
.
Debt Transaction
On September 19, 2014, Ply Gem Industries issued
$150.0 million
aggregate principal amount of its 6.50% Senior Tack-on Notes with a
$10.1 million
debt discount. These Senior Tack-on Notes have the same terms and covenants as the original
$500.0 million
of 6.50% Senior Notes issued in January 2014 that were issued at par and will mature in 2022. These Senior Tack-on Notes are not considered Applicable High Yield Discount Obligation ("AHYDO"). The discount and deferred financing costs related to these notes will be amortized over the life of the notes utilizing the constant yield method.
Valuation allowance
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
During the year ended December 31, 2016, the Company determined that a valuation allowance was no longer required against its federal net deferred tax assets and a portion of its state deferred tax assets. As a result, the Company released
$86.5 million
of its total valuation allowance during the year ended December 31, 2016 since positive evidence outweighed negative evidence thereby allowing the Company to achieve the “more likely than not” realization threshold. Of the total valuation allowance reversal of
$86.5 million
,
$31.3 million
was offset against 2016 current year tax expense with the remaining $55.2 million representing the discrete valuation allowance release.
As of December 31, 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 result in future forecasted profitability for the Company. Based on the preponderance of these positive factors, the valuation allowance for federal and certain state NOL carry-forwards was released during the year ended December 31, 2016. The valuation allowance release is reflected within our benefit for income taxes in the accompanying consolidated statement of operations for the year ended December 31, 2016.
Based on the level of historical federal taxable income, projections of future taxable income, and the forecasted realization of deferred tax assets, the Company has determined that a federal valuation allowance is not required as of December 31, 2017. However, as of December 31, 2017, 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. The Company’s state valuation allowance increased to
$12.3 million
as of December 31, 2017 compared to
$10.0 million
for the year ended December 31, 2016.
As of
December 31, 2017
and December 31, 2016, the Company had a full valuation allowance on its deferred tax assets for Gienow Canada of approximately
$14.3 million
and
$13.0 million
, respectively, as of as a result of its operating performance and challenges associated with the Canadian economy and energy prices.
The Company had book goodwill of approximately
$28.0 million
that was not amortized resulting in a deferred tax liability of approximately
$7.1 million
at
December 31, 2017
. Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets. The Company continues to evaluate the realizability of its net deferred tax assets and its estimates are subject to change.
Other tax considerations
As of
December 31, 2017
, the Company has approximately
$92.1 million
of federal gross operating loss carry-forwards which can be used to offset future taxable income. These federal carry-forwards will begin to expire in 2028 if not utilized. The Company has approximately
$330.7 million
of gross state NOL carry-forwards and
$12.6 million
(net of federal benefit) of deferred tax assets related to these state NOL carry-forwards which can be used to offset future state tax liabilities. The Company has established a valuation allowance which offsets the deferred tax asset associated with certain state NOL carry-forwards. Future tax planning strategies implemented by the Company could reduce or eliminate future NOL expiration.
As of
December 31, 2017
, the Company has not established U.S. deferred taxes on unremitted earnings for 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 invested. Enactment of the Tax Act imposed a one-time U.S. federal tax on the deemed repatriation of unremitted earnings indefinitely reinvested abroad, which did not have a material impact on the Company’s financial results. The indefinite reinvestment assertion continues to apply for the purpose of determining deferred tax liabilities for U.S. state and foreign withholding tax purposes.
Unrecognized tax benefits
The Company records reserves for unrecognized tax benefits based on the likelihood of an unfavorable outcome. Of this amount, approximately
$1.7 million
, if recognized, would have an impact on the Company’s effective tax rate. As of December 31, 2017, the reserve was approximately
$4.5 million
which includes interest and penalties of approximately
$1.9 million
. As of December 31, 2016, the reserve was approximately
$3.9 million
which included interest and penalties of approximately
$1.6 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.
The Company has elected to treat interest and penalties on unrecognized tax benefits as income tax expense in its consolidated statement of operations. Interest and penalty charges have been recorded in the contingency reserve account within other long term liabilities in the Company's consolidated balance sheet.
The following is a rollforward of unrecognized tax benefits from January 1,
2016
through
December 31, 2017
.
|
|
|
|
|
(Amounts in thousands)
|
|
Unrecognized tax benefits balance at January 1, 2016
|
$
|
15,910
|
|
Additions based on tax positions related to current year
|
208
|
|
Additions for tax positions of prior years
|
603
|
|
Reductions for tax positions of prior years
|
(13
|
)
|
Settlement or lapse of applicable statutes
|
(39
|
)
|
Unrecognized tax benefits balance at December 31, 2016
|
16,669
|
|
Additions based on tax positions related to current year
|
182
|
|
Additions for tax positions of prior years
|
161
|
|
Reductions for tax positions of prior years
|
(90
|
)
|
Settlement or lapse of applicable statutes
|
(400
|
)
|
Unrecognized tax benefits balance at December 31, 2017
|
$
|
16,522
|
|
Unrecognized tax benefits are reversed as a discrete event if an examination of applicable tax returns is not begun by a federal or state tax authority within the statute of limitations or upon effective settlement with federal or state tax authorities. During the year ended
December 31, 2017
, the Company reversed approximately
$0.4 million
of unrecognized tax benefits due to the expiration of the statute of limitations in certain state jurisdictions. The Company's open tax years that are subject to federal examination are
2008
through
2016
.
During the year ended December 31, 2016, the Company reversed approximately
$0.1 million
of unrecognized tax benefits due to the expiration of the statute of limitations for the tax year ended December 31, 2008.
During the next 12 months, the Company does not anticipate the reversal of any material tax contingency reserves.
Tax Receivable Agreement
On May 22, 2013, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with PG ITR Holdco, L.P. (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) net operating loss ("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.
As a result of the future federal corporate tax rate reduction from the Tax Act enacted on December 22, 2017, the
Company estimates that the total anticipated amount of future payments under the Tax Receivable Agreement would be approximately
$74.7 million
assuming no additional material changes in the relevant tax law or federal rates, 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 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
December 31, 2017
, the Company estimates the Tax Receivable Agreement liability to be approximately
$69.5 million
with the remaining
$5.2 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 Tax Receivable Agreement liability up to the
$74.7 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 and expense the remaining $5.2 million.
As of
December 31, 2017
and 2016, the Company had a
$69.5 million
and
$79.7 million
liability, respectively, for the amount due pursuant to the Tax Receivable Agreement. The Company has
$51.4 million
and
$25.4 million
as current liabilities in the Company's consolidated balance sheets as of December 31, 2017 and December 31, 2016, respectively. The Company has
$18.1 million
and
$54.3 million
of this liability recorded as noncurrent as of December 31, 2017 and December 31, 2016, respectively, in the consolidated balance sheets as these amounts will not be paid in cash within the next 12 months. The
$10.7 million
Tax Receivable Agreement liability adjustment for the year ended
December 31, 2017
recognized in the Company's consolidated statement of operations resulted primarily from the future federal tax rate reduction enacted as part of the December 2017 Tax Act which reduced the value of the NOLs to be utilized in future years at the lower 21% corporate tax rate.
The
$60.9 million
Tax Receivable Agreement liability adjustment for the year ended December 31, 2016 resulted primarily from the
$55.2 million
discrete valuation allowance release. 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 year ended December 31, 2016 utilized future forecasts of taxable income beyond the 2016 tax year to determine the TRA liability. The
$12.9 million
Tax Receivable Agreement liability adjustment for the year ended December 31, 2015 resulted from a
$115.9 million
increase in 2015 taxable income partially offset by the timing of reversals of deferred tax assets and liabilities.