UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________.
Commission File Number: 001-35930
PLY GEM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 20-0645710 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
5020 Weston Parkway, Suite 400, Cary, North Carolina | | 27513 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: 919-677-3900
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: | | Name of each exchange on which registered: |
Common Stock, par value $0.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant, as of July 1, 2017, was approximately $407.5 million. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the NYSE on July 1, 2017. For purposes of making this calculation only, the registrant has defined affiliates as including only directors and executive officers and shareholders holding greater than 10% of the voting stock of the registrant as of July 1, 2017.
The Company had 68,556,650 shares of common stock outstanding as of March 5, 2018.
Documents incorporated by reference: The information required by Part III (Items 10, 11, 12, 13 and 14) of this form 10-K, to the extent not set forth herein, is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017.
Form 10-K Annual Report
Table of Contents
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements made in connection with this Annual Report on Form 10-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements included herein. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations, except as required by federal securities laws.
There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to, the following:
• disruptions in our business caused by the proposed acquisition of us by CD&R (as defined below);
• failure to complete the Merger (as defined below) in a timely manner or at all;
• downturns or negative trends in the home repair and remodeling or the new construction end markets, or the U.S. and Canadian economies or the availability of consumer credit;
• competition from other exterior building products manufacturers and alternative building materials;
• an inability to successfully develop new products or improve existing products;
• changes in the costs and availability of raw materials, especially polyvinyl chloride ("PVC") resin, aluminum and glass;
• consolidation and further growth of our customers;
• loss of, or a reduction in orders from, any of our significant customers;
• the credit risk of our customers;
• inclement weather conditions;
• increases in the cost of labor, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
• our ability to attract, employ, train and retain qualified personnel at a competitive cost;
• failure to effectively manage labor inefficiencies associated with increased production and new employees added to the Company;
• claims arising from the operations of our various businesses prior to our acquisitions;
• products liability claims, including class action claims and warranties, relating to the products we manufacture;
• litigation costs of defense;
• loss of certain key personnel;
• operational problems or disruptions may cause significant lost production and increased lead times;
• interruptions in deliveries of raw materials or finished goods;
• changes in building codes that could increase the cost of our products or lower the demand for our products;
• environmental costs and liabilities;
• failure to successfully consummate and integrate acquisitions, including any future acquisitions;
• manufacturing or assembly realignments;
• threats to, or impairments of, our intellectual property rights;
• increases in transportation, freight and fuel costs;
• increases in foreign currency exchange and interest rates;
• material non-cash impairment charges;
• our significant amount of indebtedness;
• non-compliance with covenants in the credit agreement governing our senior secured asset-based revolving credit facility (the "ABL Facility"), the credit agreement governing our senior secured term loan facility (the "Term Loan Facility") and the indenture governing our 6.50% senior notes due 2022 (the "6.50% Senior Notes");
• failure to generate sufficient cash to service all of our indebtedness and make capital expenditures;
• downgrades of our external credit ratings;
• recently enacted U.S. tax law revisions could impact our financial results;
• limitations on our net operating losses and payments under the tax receivable agreement to our stockholders;
• exposure of systems and IT infrastructure to security breaches and other cyber security incidents;
• control by the CI Partnerships (as defined below); and
• changes in factors and assumptions used to measure our defined benefit plan.
These and other factors are more fully discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Annual Report on Form 10-K.
PART I
Item 1. BUSINESS
Company Overview
We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing, and Stone and (ii) Windows and Doors, which comprised approximately 47% and 53% of our sales, respectively, for the fiscal year ended December 31, 2017. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl railing, stone veneer, roofing, and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.
Additional information concerning our business is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.
On January 31, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pisces Midco, Inc. (“Parent”) and Pisces Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), each a wholly owned subsidiary of funds sponsored by Clayton, Dubilier & Rice (“CD&R”). Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with Ply Gem Holdings surviving the Merger as a wholly owned subsidiary of Parent (the “Acquisition”). At the effective time of the Merger (the “Effective Time”), each of our issued and outstanding shares of common stock, par value $0.01 per share, will be cancelled and extinguished and converted into the right to receive $21.64 in cash, without interest (the “Merger Consideration”), less any applicable withholding taxes. The consummation of the Merger remains subject to customary closing conditions. As a result of the Merger, we will cease to be a publicly traded company.
Unless the context indicates or requires otherwise, (i) the term “Ply Gem Holdings” refers to Ply Gem Holdings, Inc., (ii) the term “Ply Gem Industries” refers to Ply Gem Industries, Inc., our principal operating subsidiary, and (iii) the terms “we”, “our”, “us”, “Ply Gem”, and the “Company” refer collectively to Ply Gem Holdings and its subsidiaries. The use of these terms is not intended to imply that Ply Gem Holdings and Ply Gem Industries and its subsidiaries are not separate and distinct legal entities.
History
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 for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”). The Ply Gem acquisition was completed on February 12, 2004. Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands. Since the Ply Gem acquisition, we have acquired ten additional businesses to complement and expand our product portfolio and geographical diversity. Gary E. Robinette, our President, Chief Executive Officer and Chairman of the Board, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand. 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, Ply Gem Holdings issued 18,157,895 shares of common stock in an initial public offering ("IPO"), receiving net proceeds of approximately $353.8 million. In connection with and prior to the IPO, Ply Gem Holdings also issued 48,962,494 shares of common stock in connection with the merger of Ply Gem Prime with Ply Gem Holdings being the surviving entity.
The following is a summary of Ply Gem’s recent acquisition history:
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• | On April 9, 2013, Ply Gem acquired the capital stock of Gienow WinDoor Ltd. (which was amalgamated into Gienow Canada Inc. with our legacy Ply Gem Canada business effective January 2014) ("Gienow"), a manufacturer of windows and doors in Western Canada. Gienow is part of our Western Canadian windows business and is part of the Windows and Doors segment. |
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• | On May 31, 2013, Ply Gem completed the acquisition of Mitten Inc. ("Mitten"), a manufacturer of vinyl siding and distributor of various other exterior building products in Canada. The majority of Mitten's operations are part of the Siding, Fencing and Stone segment. |
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• | On September 19, 2014, Ply Gem acquired the capital stock of Fortune Brands Windows, Inc., and its direct and indirect wholly owned subsidiaries: Simonton Building Products LLC, Simonton Industries, Inc., Simonton Windows, Inc., and SimEx, Inc. (together "Simonton"). Simonton is a premier repair and remodeling window company with leading brand recognition and is part of the Windows and Doors segment. |
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• | On May 29, 2015, Ply Gem acquired substantially all of the assets of Canyon Stone, Inc. (“Canyon Stone”), a manufacturer of stone veneer. Canyon Stone has manufacturing facilities in Olathe, Kansas and Youngsville, North Carolina. Canyon Stone is included in our Siding, Fencing, and Stone segment. |
Access to Company Information
The Company maintains a website with the address www.plygem.com. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”).
Business Strategy
We are pursuing the following business and growth strategies:
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• | Capture Growth Related to Housing Market Continued Recovery. As a leading manufacturer of exterior building products, we intend to capitalize on the continued recoveries in the new construction and the home repair and remodeling markets. The National Association of Home Builders’ (“NAHB”) 2017 estimate of single family housing starts were approximately 849,000, which was 17% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels. Furthermore, we believe that the underinvestment in homes and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling. |
We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings. Our broad product offering addresses expected demand growth from all of these key trends through our exposure to the new construction and the home repair and remodeling end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.
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• | Continue to Increase Market Penetration. We intend to increase the market penetration of our siding, fencing, and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities. Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories. In 2017, our U.S. vinyl siding leading market position increased to approximately 40.4% from our 2016 market position of 39.8%. Beginning in 2013 and continuing through 2017, we expanded our repair and remodeling presence with the Simonton acquisition and expanded our entry into new product categories such as PVC trim and engineered slate roofing. |
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• | Building Brand Equity and Driving Growth through Innovative Product Solutions. We are a leading building products manufacturer with a vision to provide sustainable and innovative solutions that help families and businesses realize their dreams through better homes and workplaces. We are committed to being the leading brand of choice in each market we serve. We create value for our stakeholders using a business model that combines a broad portfolio of high-quality sustainable products and services, efficient operations and an unrelenting customer focus. As a leader in vinyl siding, aluminum accessories, vinyl and aluminum windows, we are committed to marketing research, product innovation and marketing excellence to drive growth across the breadth of categories. |
We utilize a fully integrated approach to leverage our marketing investment across businesses with a goal of optimizing results. We have committed resources to advancements in digital marketing with new initiatives in search engine optimization, lead generation and website user experience to engage with our target audiences directly. Our social marketing efforts across Ply Gem brands gives us direct daily access to over 190,000 people. We are committed to building brand equity with a stronger master brand strategy for Ply Gem and continue to advertise using traditional media such as trade advertising, radio and digital. We continue our commitment to our Home for Good project, to help raise awareness to the need for affordable housing. During 2017, this brand campaign delivered over 500 million impressions for our brand while positively impacting over 70 communities in the U.S. We have helped build over 450 homes with our donation to Habitat for Humanity and our relationship with Home For Good ambassador, Darius Rucker.
We remain focused on our customers and providing best in class product and customer marketing. We successfully launched Ply Gem Engineered Roofing in 2014 and cellular PVC Trim in 2013, and continue to develop innovative product solutions within our existing categories and explore new product solutions adjacent to our core categories. The 2016 launch of our "Insight Center" in Durham, North Carolina provides a dedicated resource for innovation and product development.
The result of our commitment to product development and innovation has been demonstrated in the approximately $530.6 million of incremental annualized sales that we recognized for new products introduced from 2015 to 2017 excluding any cannibalization of sales of pre-existing products.
We also invest in our future and further brand development by pursuing certain strategic acquisitions if they fit our strategic focus. For example, in April 2013 we acquired Gienow, a manufacturer of windows and doors in Western Canada, in May 2013 we acquired Mitten, a leading manufacturer of vinyl siding and accessories in Canada, in September 2014 we acquired Simonton, a premier repair and remodeling window company with leading brand recognition, and in May 2015 we acquired Canyon Stone, a manufacturer and distributor of stone veneer and accessories in the United States. These acquisitions provide us with access to new revenue streams and operating efficiencies to drive further market gains.
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• | Drive Operational Leverage and Further Improvements. While we reduced our production capacity during the housing downturn, we retained flexibility and have since brought back previously idled lines, facilities, and production shifts in order to increase our production as market conditions continue to improve. This incremental capacity can be selectively restarted, providing us with the ability to match increasing customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment. In our Windows and Doors segment, our product platforms combined with strong customer relationships enable us to serve the new construction and repair and remodeling markets driving increased volumes through our manufacturing facilities and enhancing our operating margins. |
Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements. During 2017, we announced a new initiative entitled “2x20” which represents a profitability improvement measure as a percentage of our net sales by 2020 of at least $40.0 million. We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands. Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina and believe that additional opportunities remain including further synergies from the Simonton acquisition, continuous improvement of our manufacturing processes through automation, and further general and administration improvements. We believe these factors should drive continued profitable growth while improving our cash flow and capital efficiency.
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• | Continue to Improve Financial Leverage. As a result of the ten strategic acquisitions that we have completed since 2004, we incurred significant amounts of indebtedness to finance these acquisitions. This acquisition strategy combined with a severe housing market recession during 2009-2011 ultimately increased our financial leverage to 8.9 during 2011. Over the last several years, we have focused on improving our financial leverage. As the housing market continued to improve, so did our financial performance demonstrated by our significant cash flow generation over the last several years. During 2016 and 2017, we voluntarily elected to pay down $200.0 million on the Term Loan Facility and decreased our financial leverage to 3.4 as of and for the year ended December 31, 2017. |
Industry Overview
Demand for exterior building products, including siding, fencing, stone, windows and doors, is primarily driven by construction of new homes and repair and remodeling of existing homes, which are affected by changes in national and local economic and demographic conditions, employment levels, availability of financing, interest rates, consumer confidence and other economic factors.
New Home Construction
Management believes that a U.S. housing recovery will continue on a national basis, supported by favorable demographic trends, historically low interest rates and consumers who are increasingly optimistic about the U.S. housing market. New home construction in the United States experienced strong growth from the early 1990s to 2006, with housing starts increasing at a compounded annual growth rate of 3.8%. However, according to the U.S Census Bureau, from 2006 to 2017, single family housing starts are estimated to have declined 42%. While the industry has experienced a period of severe correction, management believes that the long-term economic outlook for new construction in the United States is favorable and supported by an attractive interest rate environment, increasing consumer confidence, improving employment growth and strong demographics, as new household formations drive demand for starter homes. According to the Joint Center for Housing Studies of Harvard University, net new household formations between 2015 and 2025 are expected to be approximately 13.6 million units.
During 2017, single family housing starts are estimated to have increased 8.6% to approximately 849,000 compared to 2016. During 2016, single family housing starts increased 9.4% to approximately 782,000 compared to 2015. The NAHB is currently forecasting single family housing starts to further increase in 2018 and 2019 by 5.2% and 5.6%, respectively.
Home Repair and Remodeling
Management believes that the U.S. home repair and remodeling products market is poised for a recovery. Since the early 1990s and through 2006, demand for home repair and remodeling products in the United States increased at a compounded annual growth rate of 4.3%, according to the U.S. Census Bureau, as a result of strong economic growth, low interest rates and favorable demographics. However, beginning in 2007 the ability for homeowners to finance repair and remodeling expenditures, such as replacement windows or vinyl siding, has been negatively impacted by a general tightening of lending requirements by financial institutions and the significant decrease in home values, which limited the amount of home equity against which homeowners could borrow. Management believes that expenditures for home repair and remodeling products are also affected by consumer confidence, economic conditions, debt ceiling and national budget deliberations, and unemployment levels. Management believes the long-term economic outlook of the demand for home repair and remodeling products in the United States is favorable and supported by the move towards more energy-efficient products, recent underinvestment in home maintenance and repair, and an aging housing stock.
Description of Business
Financial information about our segments is included in the Notes to Consolidated Financial Statements and incorporated herein by reference.
Building Products
The breadth of building products offered by us provides a competitive advantage as we manufacture a wide assortment of products for the exterior of the home as illustrated below.
Siding, Fencing and Stone segment
Products
In our Siding, Fencing and Stone segment, our principal products include vinyl siding and skirting, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, fabricated aluminum gutters, aluminum and steel roofing accessories, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl railing, engineered slate and cedar shake roofing, and stone veneer in the United States and Canada. We sell our siding and accessories under our Variform®, Napco®, Mastic® Home Exteriors, Mitten®, Ply Gem/Cellwood®, and Durabuilt® brand names and under the Georgia-Pacific brand name through a private label program. Our cellular PVC Trim products are sold under our Ply Gem® Trim and Mouldings brand name. Our vinyl fencing and railing products are sold under the Ply Gem brand name. Our stone veneer products are sold under our Canyon Stone and Ply Gem Stone brand name. Our engineered slate and shake roofing products are sold under our Ply Gem Roofing brand name. Our gutter protection products are sold under our Leaf Relief®, Leaf Relief® Snap Tight, Leaf Smart® and Leaf Logic® brand names. A summary of our product lines is presented below according to price point:
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| | Mastic® Home Exteriors | | Variform® | | Napco® | | Ply Gem/Cellwood ® | | Durabuilt® | | Georgia Pacific | | Mitten® | | Ply Gem Fence/Rail | | Ply Gem® Stone | Canyon Stone (1) | Ply Gem ® Trim and Mouldings (2)
| Ply Gem Roofing (3) |
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Specialty/Super Premium | | Cedar Discovery® Structure® Home Insulation System™ | | Heritage Cedar®™ Climaforce™ | | Cedar Select® American Essence™ | | Cedar Dimensions™ | | 670 Series™ Hand Split 650 Series™ Shingle Siding 660 Series™ Round Cut Siding
800 Series Insulated Siding | | Cedar Spectrum™ Caliber™ High Performance Insulated Siding | | InsulPlankII Grand River | | | | Fieldstone Tuscan Fieldstone Shadow Ledgestone Cut Cobblestone Cobblestone Ridgestone Riverstone Brick Cascade Ledge True Stack Manorstone | Canyon Ledge Castle Cathedral Classic Cobblestone Country Ledge Fieldstone Limestone Manchester River Rock Timber Ledge Tuscan Field Stone Southern Ledge Strip Ledge Brick | | |
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Premium | | Quest® Barkwood® Liberty Elite® Board + Batten
Designer Series™
Carvedwood 44® | | Vortex Extreme™ Board & Batten
Camden Pointe® | | American Splendor® American Accents
Board & Batten™ | | Dimensions® Board & Batten | | 480 Series™ Board & Batten
| | Compass™ Board & Batten | | Sentry Southern Beaded | | Elegance Vinyl Fence | | | | Trim Boards Corners Post Wraps Mouldings Beadboard
Skirtboard Sheets
J-Notch Trim
Post Accents | Engineered Slate Engineered Shake |
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Standard | | Ovation™ Charleston Beaded® | | Nottingham® Ashton Heights® Victoria Harbor® | | American Herald® American Tradition American 76 Beaded® | | Progressions® Colonial Beaded | | 440 Series™
450 Series™ Beaded | | Forest Ridge® Shadow Ridge® Castle Ridge®
Somerset™ Coastal | | Highland Oregon Pride
| | Performance Vinyl Fence and Rail | | | | | |
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Economy | | Mill Creek® Eclipse™ | | Contractors Choice® | | American Comfort® | | Evolutions® | | 410 Series™ | | Vision Pro® Chatham Ridge® Parkside® Oakside® | | Entree
| | Classic Vinyl Fence | | | | | |
(1) The Canyon Stone product line was integrated in 2015 with the May 2015 acquisition of Canyon Stone Inc.
(2) The cellular PVC Trim product category launched during the first quarter of 2013.
(3) The Engineered Slate Roofing product category launched during the third quarter of 2014.
(4) The Cellwood brand transitioned to the Ply Gem brand during 2017.
The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).
Customers and distribution
We have a multi-channel distribution network that serves both the new construction and the home repair and remodeling sectors, which exhibit different, often counter-balancing, demand characteristics. In conjunction with our multiple brand and price point strategy, we believe our multi-channel distribution strategy enables us to increase our sales and sector penetration while minimizing channel conflict. We believe our strategy reduces our dependence on any one channel, which provides us with a greater ability to sustain our financial performance through economic fluctuations.
We sell our siding and accessories to specialty distributors (one-step distribution) and to wholesale distributors (two-step distribution). Our specialty distributors sell directly to remodeling contractors and builders. Our wholesale distributors sell to retail home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers. In the specialty channel, we have developed an extensive network of approximately 800 independent distributors, serving over 22,000 contractors and builders nationwide. We are well-positioned in this channel as many of these distributors are both the largest and leading consolidators in the industry. In the wholesale channel, we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a distribution operation of the Georgia-Pacific Corporation), one of the largest building products distributors in the United States. Through BlueLinx, our Georgia-Pacific private label vinyl siding products are sold at major retail home centers, lumberyards and manufactured housing manufacturers. A portion of our siding and accessories is also sold directly to home improvement centers. Our growing customer base of fencing and railing consists of fabricators, distributors, retail home centers and lumberyards. Our customer base of stone veneer products consists of distributors, lumberyards, retailers, builders and contractors. Our customer base of roofing products consists of distributors, lumberyards, retailers and contractors. In Canada, our complete offering of vinyl siding, accessories, trim, and moldings, along with Ply Gem manufactured and third party sourced complimentary products are primarily distributed through our 18 Mitten branch locations, to retail home centers and lumberyards, and new construction and remodeling contractors.
Our largest customer, ABC Supply Co., Inc., comprised 17.4%, 17.1%, and 16.9% of the net sales of our Siding, Fencing, and Stone segment for the years ended December 31, 2017, 2016, and 2015, respectively.
Production and facilities
Vinyl siding, skirting, soffit and accessories are manufactured in our Martinsburg, West Virginia, Jasper, Tennessee, Stuarts Draft, Virginia, Kearney, Missouri, and Paris, Ontario facilities, while all metal products are produced in our Sidney, Ohio facility. The majority of our injection molded products such as shakes, shingles, scallops, shutters, vents and mounts are manufactured in our Gaffney, South Carolina facility. The cellular PVC trim and mouldings products are manufactured in St. Marys, West Virginia. The vinyl, metal, and injected molded plants have sufficient capacity to support planned levels of sales growth for the foreseeable future. Our fencing and railing products are currently manufactured at our York, Nebraska and Fair Bluff, North Carolina facilities. The fencing and railing plants have sufficient capacity to support our planned sales growth for the foreseeable future. Our stone veneer products are manufactured at our Selinsgrove, Pennsylvania, Olathe, Kansas and Youngsville, North Carolina facilities. Our engineered slate and cedar roofing products are currently manufactured at our Fair Bluff, North Carolina facility. Our manufacturing facilities are among the safest in all of North America with three of them having received the highest federal and/or state OSHA safety award and rating.
Raw materials and suppliers
PVC resin and aluminum are major components in the production of our Siding, Fencing, and Stone products. PVC resin and aluminum are commodity products and are available from both domestic and international suppliers. Changes in PVC resin and aluminum prices have a direct impact on our cost of products sold. Historically, we have been able to pass on the price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.
Recycled plastics are a major component in the production of our roofing products. The price of recycled plastics has risen above historical levels and is expected to remain high. The recycled plastic market is driven by supply and demand and therefore causes the recycled plastic market to be volatile.
Competition
We compete with other national and regional manufacturers of vinyl siding, aluminum, cellular PVC, fencing, and stone products. We believe we are currently the largest manufacturer of vinyl siding in North America. Our vinyl siding competitors include CertainTeed, Alside, Royal Building Products and smaller regional competitors. Based on our internal estimates and industry experience, we believe that we have a U.S. vinyl siding market position of 40.4% in 2017, and a Canadian market position of 32.7%. Our aluminum accessories competitors include Rollex, Euramax, Gentek and other smaller regional competitors. Significant growth in vinyl fencing and railing has attracted many new entrants, and the sector today is fragmented with numerous competitors including U.S. Fence, Homeland, Westech, Bufftech, and Azek. Our cellular PVC trim and moulding competitors include Azek, Inteplast, Kommerling (KOMA), Wolfpac (Versatex), Tapco (Kleer), CertainTeed and Royal Building Products. Our stone veneer competitors include Boral (Cultured Stone and Eldorado Stone), Coronado Stone and smaller regional competitors. We generally compete on product quality, breadth of product offering, sales and service support. In addition to competition from other vinyl siding, fencing and stone products, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry. Increases in competition from other exterior building products manufacturers and alternative building materials could cause us to lose customers and lead to net sales decreases.
Intellectual property
We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, licenses, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Siding, Fencing, and Stone segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. With Mitten Building Products in the Canadian market, we license our Procanna Windows and Doors brand for the production of exclusive Mitten distributed products from contracted, regional third-party fabricators. We license the Georgia-Pacific trademark for our Georgia-Pacific private label vinyl siding products sold through BlueLinx. While we do not believe the Siding, Fencing, and Stone segment is dependent on any one of our trademarks, we believe that our trademarks are important to the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.
Seasonality
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because a portion of our overhead and expenses are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.
We generally carry increased working capital during the first half of a fiscal year to support those months where customer demand exceeds production capacity. We believe that this is typical within the industry.
Backlog
Our Siding, Fencing, and Stone segment had a backlog of approximately $26.8 million at December 31, 2017 and a backlog of approximately $20.3 million at December 31, 2016. We filled 100% of the backlog at December 31, 2016 during 2017. We expect to fill 100% of the orders during 2018 that were included in our backlog at December 31, 2017.
Windows and Doors segment
Products
In our Windows and Doors segment, our principal products include vinyl, aluminum-clad vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada. Our products in our Windows and Doors segment are sold under the Ply Gem® Windows, Simonton® Windows, Great Lakes® Window, and Ply Gem® Canada brands. A summary of our current product lines is presented below according to price point:
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| Ply Gem U.S. Windows | Great Lakes Window | Ply Gem Canada | Simonton |
| New Construction | Replacement | Replacement | New Construction & Replacement | New Construction | Replacement |
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Specialty/Super-Premium | Mira® Premium Series | | EcoSMART | Signature | | Stormbreaker Plus VantagePointeTM 6500
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Premium | Mira® Premium Series | Premium Series | Comfort Smart | Design Enviro Fiber Stain
| ProFinish® Brickmould 600
| Reflections® 5500 Daylight MaxTM LumeraTM Madeira Impressions 9800 VantagePointeTM 6400
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Standard | Pro Series | Pro Series | HarborLight | Classic Comfort Fiber Tuff | Brickmould 300 ProFinish® Contractor ProFinish® Master
| VantagePointeTM 6100 VantagePointeTM 6200 VantagePointeTM 6060 ClearValue Verona Reflections® 5050 Reflections® 5300
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Economy | Builder Series | Contractor Series | | Vista Steel | ProFinish® Builder
| AsureTM
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We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. The breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).
Customers and distribution
We have a multi-channel distribution and product strategy that enables us to serve both the new construction and the home repair and remodeling markets. By offering this broad product offering and industry leading service, we are able to meet the local needs of our customers on a national scale. This strategy has enabled our customer base (existing and new) to simplify their supply chain by consolidating window suppliers. Our good, better, best product and price point strategy allows us to increase our sales and sector penetration while minimizing channel conflict. This strategy reduces our dependence on any one channel, providing us with a greater ability to sustain our financial performance through economic fluctuations.
The new construction product lines are sold for use in new residential and light commercial construction through a highly diversified customer base, which includes independent building material dealers, regional/national lumberyard chains, builder direct/OEMs and retail home centers. Our repair and remodeling window products are primarily sold through independent home improvement dealers, one-step distributors, and big box retail outlets. Dealers typically market directly to homeowners or contractors in connection with remodeling requirements while distributors concentrate on local independent retailers.
In Canada, sales of product lines for new construction are predominantly made through direct sales to builders and contractors, while sales for repair and remodeling are made primarily through retail lumberyards but also direct to contractors and direct to consumers through our supply and install services. Ply Gem Canada products are distributed through twelve Ply Gem distribution centers.
Our largest customer, The Home Depot, comprised 10.4%, 10.2%, and 9.7% of the net sales of our Windows and Doors segment for the years ended December 31, 2017, 2016, and 2015, respectively.
Production and facilities
Our window and door products leverage a network of vertically integrated production and distribution facilities located in Virginia, Ohio, North Carolina, Georgia, Texas, California, Washington, West Virginia, Illinois and Alberta, Canada. Our window and door manufacturing facilities have benefited from our continued investment and commitment to product development and product quality combined with increasing integration of best practices across our product offerings. In 2010, we began producing vinyl compound for our west coast facilities which improved our operating efficiency and resulted in lower production cost for these items. In 2010, we continued making upgrades to insulated glass production lines in anticipation of more stringent energy efficiency requirements driven by changes in building codes and consumer demand for Energy Star rated products.
While market conditions will dictate future capacity requirements, we have the ability to increase capacity in a cost effective manner by expanding production shifts and lines. Significant housing demand increases to historical levels may require additional capital investment in certain geographical areas to meet this increased demand. Any capacity increase may, however, initially be offset by labor inefficiencies or difficulties obtaining the appropriate labor force. Ongoing capital investments will focus on new product introductions and simplification, production automation, equipment maintenance and cost reductions.
During 2014, our Windows and Doors segment further streamlined its product offerings by realigning its SKUs to simplify the structure and manufacturing process while maximizing product features for our customers at competitive prices. During 2014, we consolidated Canadian production and distribution facilities, and rationalized and rebranded product lines. As a result, during 2014 and 2015 four redundant distribution facilities were closed, and manufacturing was largely consolidated. During 2017, three additional Canadian distribution facilities were consolidated with our Canadian siding business to promote product cross selling.
Raw materials and suppliers
PVC compound, wood, aluminum and glass are major components in the production of our window and door products. These products are commodity products available from both domestic and international suppliers. Historically, changes in PVC compound, aluminum billet and wood cutstock prices have had the most significant impact on our material cost of products sold in our Windows and Doors segment. We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material. The PVC resin compound that is used in our window lineal production is produced internally. The leveraging of our PVC resin buying power and our PVC resin compounding capabilities benefits all of our window companies. Our window plants have consolidated glass purchases to take advantage of strategic sourcing savings opportunities. In addition, we have continued to vertically integrate aluminum extrusion in our window plants.
Competition
The window and patio door sector remains fragmented, comprised primarily of local and regional manufacturers with limited product offerings. The sector’s competitors in the United States include national brands, such as Jeld-Wen, Pella and Andersen, and numerous regional brands, including MI Home Products, Atrium, Weathershield and Milgard. Competitors in Canada include Jeld-Wen, All Weather, Durabuilt, and numerous regional brands. We generally compete on service, product performance, product offering, sales and support. We believe all of our products are competitively priced and that we are one of the only manufacturers to serve all end markets and price points.
Intellectual property
We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, licenses, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Windows and Doors segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe the Windows and Doors segment is dependent on any one of our trademarks, we believe that our trademarks are important to the Windows and Doors segment and the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.
Seasonality
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Accordingly, our working capital is typically higher in the second and third quarters as well. Because much of our overhead and expense are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing lower profit margins when such conditions exist.
Because we have successfully implemented lean manufacturing techniques and many of our windows and doors are made to order, inventories in our Windows and Doors segment do not change significantly with seasonal demand.
Backlog
Our Windows and Doors segment had a backlog of approximately $57.6 million at December 31, 2017 and approximately $45.1 million at December 31, 2016. We filled 100% of the backlog at December 31, 2016 during 2017. We expect to fill 100% of the orders during 2018 that were included in our backlog at December 31, 2017.
Environmental and Other Regulatory Matters
We are 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, our facilities are subject to investigation by governmental authorities. In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which our entities or their predecessors are alleged to have sent hazardous materials for recycling or disposal. We 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 our 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. We have recorded approximately $0.3 million of this environmental liability within current liabilities and approximately $1.1 million within other long-term liabilities in our consolidated balance sheets at December 31, 2017 and 2016, respectively. We may incur costs that exceed our recorded environmental liability. We will adjust our 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, we have not recorded a liability in our consolidated balance sheets as of December 31, 2017 and December 31, 2016.
From time to time, we may incur investigation and remediation costs in connection with other facilities we currently own or operate or previously owned or operated. For example, we have a $0.1 million liability included in our consolidated balance sheets at December 31, 2017 and December 31, 2016, for potential contamination issues at our Calgary, Alberta property. In addition, we are required to contribute to investigation and remediation costs at various third party waste disposal facilities at which we or a related entity have been identified as a potentially responsible party.
We are a party to various acquisition and other agreements pursuant to which third parties agreed to indemnify us for certain costs relating to environmental liabilities. For example, we may be able to recover some of our 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. Our ability to seek indemnification from parties that have agreed to indemnify us may be limited. There can be no assurance that we 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, we are not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on our results of operations, cash flows or financial position except as otherwise disclosed in our consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters will not result in material costs or liabilities.
Employees
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• | As of December 31, 2017, we had 9,471 full-time employees worldwide, of whom 8,279 were in the United States and 1,192 were in Canada. Employees at our Calgary, Alberta plant are currently our only employees with whom we have a collective bargaining agreement. |
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• | Approximately 5.0% of our total employees are represented by the United Brotherhood of Carpenters and Joiners of America. These Canadian employees remain subject to the terms of the Collective Bargaining Agreement ("CBA") which expires in June 2021. |
Financial Information about Geographic Areas
All of the Company’s operations are located in the United States and Canada.
Revenue from external customers for the year ended December 31, 2017 consisted of:
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• | $1,849.9 million from United States customers |
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• | $202.8 million from Canadian customers |
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• | $3.6 million from all other foreign customers |
Revenue from external customers for the year ended December 31, 2016 consisted of:
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• | $1,741.2 million from United States customers |
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• | $166.5 million from Canadian customers |
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• | $4.1 million from all other foreign customers |
Revenue from external customers for the year ended December 31, 2015 consisted of:
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• | $1,642.2 million from United States customers |
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• | $192.5 million from Canadian customers |
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• | $5.0 million from all other foreign customers |
At December 31, 2017, 2016, and 2015, long-lived assets totaled approximately $55.4 million, $55.8 million, and $57.7 million, respectively, in Canada, and $700.8 million, $751.6 million, and $718.0 million, respectively, in the United States. We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations.
Item 1A. RISK FACTORS
Risks Relating to the Merger
The proposed acquisition of us by CD&R may cause disruption in our business.
On January 31, 2018, we entered into the Merger Agreement with an affiliate of CD&R, pursuant to which we will be acquired by CD&R in an all cash transaction. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and restricts us, without CD&R’s consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
In connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel while the Merger is pending. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger, and may depart prior to the consummation of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain key employees to the same extent that we have been able to in the past.
The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Merger may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect our financial results.
We also could be subject to litigation related to the proposed Merger, which could result in significant costs and expenses. In addition to potential litigation-related expenses, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the proposed Merger is consummated.
Failure to complete the Merger in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and financial condition, results of operations and cash flows.
We currently anticipate the Merger will close in the second quarter of 2018, but it cannot be certain when or if the conditions for the proposed Merger will be satisfied or (if permissible under the Merger Agreement and applicable law) waived. The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under the Merger Agreement applicable law) waived. In the event that the Merger is not completed for any reason, the holders of our common stock will not receive any payment for their shares of our common stock in connection with the proposed Merger. Instead, we will remain an independent public company and holders of our common stock will continue to own their shares.
Additionally, if the Merger is not consummated in a timely manner or at all, our ongoing business may be adversely affected as follows:
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• | we may experience negative reactions from financial markets and our stock price could decline; |
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• | we may experience negative reactions from employees, customers, suppliers or other third parties; |
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• | our management’s focus would have been diverted from pursuing other opportunities that could have been beneficial to us; and |
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• | the costs of pursuing the Merger may be higher than anticipated and would be born entirely by us. |
If the acquisition by CD&R is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, financial conditions, results of operations or cash flows.
Risks Associated with Our Business
Downturns or negative trends in the home repair or the remodeling and new construction end markets, or the U.S. and Canadian economies or the availability of consumer credit, could adversely impact our end users and lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.
Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new construction spending, which declined significantly beginning in 2008 and continued through 2013 with recovery commencing in 2014. Housing levels in 2017 remained slightly lower relative to historical averages, despite the recovery the last few years, and are affected by such factors as interest rates, inflation, consumer confidence, unemployment and the availability of consumer credit.
Our performance is also dependent upon consumers having the ability to finance home repair and remodeling projects and/or the purchase of new homes. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures, which in turn could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. Trends such as declining home values, increased home foreclosures and tightening of credit standards by lending institutions, negatively impacted the home repair and remodeling and the new construction sectors during the recession which began in 2008. Despite the recent abatement of these negative market factors, any recurrence or worsening of these items may adversely affect our net sales and net income.
We face competition from other exterior building products manufacturers and alternative building materials. If we are unable to compete successfully, we could lose customers and our sales could decline.
We compete with other national and regional manufacturers of exterior building products. Some of these companies are larger and have greater financial resources than we do. Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do. Competitors could take a greater share of sales and cause us to lose business from our customers. Additionally, our products face competition from alternative materials, such as wood, metal, fiber cement, masonry and composites in siding, and wood, composites and fiberglass in windows. An increase in competition from other exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to net sales decreases.
An inability to successfully develop new products or improve existing products could negatively impact our ability to attract new customer and/or retain existing customers.
Our success depends on meeting consumer needs and anticipating changes in consumer preferences with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in sales of existing products. While we devote significant focus to the development of new products, we may not be successful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products more rapidly or effectively, which could adversely affect our sales. Furthermore, market demand may decline as a result of consumer preferences trending away from our categories or trending down within our brands or product categories, which could adversely impact our results of operations, cash flows and financial condition.
Changes in the costs and availability of raw materials, especially PVC resin, aluminum and glass, can decrease our profit margins by increasing our costs.
Our principal raw materials, PVC resin, aluminum and glass, have been subject to rapid price changes in the past and could change in the future from market conditions and other factors including potential tariffs which may be subject to change. While we have historically been able to substantially pass on significant PVC resin, aluminum, and glass cost increases through price increases to our customers, our results of operations for individual quarters can be and have been hurt by a delay between the time of PVC resin, aluminum, and glass cost increases and price increases in our products. While we expect that any significant future PVC resin, aluminum, and glass cost increases will be offset in part or whole over time by price increases to our customers, we may not be able to pass on any future price increases.
Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our sales, results of operations and financial position.
Certain of our important customers are large companies with significant buying power. In addition, potential further consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our sales, operating results and financial position may be materially and adversely affected.
Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may decline if our key customers reduce the amount of products that they purchase from us.
Our top ten customers accounted for approximately 47.5% of our net sales for the year ended December 31, 2017. Our largest customer for the year ended December 31, 2017, ABC Supply Co., Inc., distributes our products within its building products distribution business, and accounted for approximately 12.5% of our consolidated 2017 net sales. We expect a small number of customers to continue to account for a substantial portion of our net sales for the foreseeable future.
The loss of, or a significant adverse change in our relationships with, our largest customer or any other major customer, or loss of market position of any major customer, could cause a material decrease in our net sales. The loss of, or a reduction in orders from, any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or performance or related matters, or our inability to collect accounts receivable from any major customer could cause a decrease in our net income and our cash flow. In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.
We are subject to the credit risk of our customers.
We are subject to the credit risk of our customers because we provide credit to our customers in the normal course of business. All of our customers are sensitive to economic changes and to the cyclical nature of the building industry. Especially during protracted or severe economic declines and cyclical downturns in the building industry, our customers may be unable to perform on their payment obligations, including their debts to us. Any failure by our customers to meet their obligations to us may have a material adverse effect on our business, financial condition, and results of operations. In addition, we may incur increased expenses related to collections in the future if we find it necessary to take legal action to enforce the contractual obligations of a significant number of our customers.
Our business is seasonal and can be affected by inclement weather conditions that could affect the timing of the demand for our products and cause reduced profit margins when such conditions exist.
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing reduced profit margins when such conditions exist. For example, unseasonably cold weather or extraordinary amounts of rainfall may decrease construction activity.
Increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.
Our financial performance is affected by the cost of labor. As of December 31, 2017, approximately 5.0% of our employees were represented by labor unions. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.
Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.
Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to attract, employ, train and retain qualified personnel with the ability to design, manufacture and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market continues to recover in the United States and Canada. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both. In addition, we believe that our success depends in part on our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.
We may be subject to claims arising from the operations of our various businesses arising from periods prior to the dates we acquired them. Our ability to seek indemnification from the former owners of our subsidiaries may be limited, in which case, we would be liable for these claims.
We have acquired all of our subsidiaries, including Ply Gem Industries, MWM Holding, AWC Holding Company, MHE, Pacific Windows, Gienow, Mitten, Simonton, and substantially all of the assets of Ply Gem Stone, Canyon Stone, and Greendeck Products, LLC, in the last several years. We may be subject to claims or liabilities arising from the ownership or operation of our subsidiaries for the periods prior to our acquisition of them, including environmental liabilities. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners of our subsidiaries for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce any indemnification rights we may have against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, or if we do not have any right to indemnification, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.
We could face potential product liability claims, including class action claims and warranties, relating to products we manufacture.
We face an inherent business risk of exposure to product liability claims, including class action claims and warranties, in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products is defective or proves to be defective, among other things, we may be responsible for damages related to any defective products and we may be required to cease production, recall or redesign such products. Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any insurance we maintain may not continue to be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Further, any claim or product discontinuance, recall or redesign could result in adverse publicity against us, which could cause our sales to decline, or increase our warranty costs.
We could face other types of litigation outside of product liability claims that could result in costly defense efforts.
We are from time to time involved in various claims, litigation matters and regulatory proceedings that arise in the ordinary course of our business which could have a material adverse effect on us. These matters may include contract disputes, workers compensation and other personal injury claims, warranty disputes, other tort claims, employment and tax matters and other proceedings and litigation, including class action lawsuits. We have generally denied liability and have vigorously defended these cases. Due to their scope and complexity, however, these lawsuits can be particularly costly to defend and resolve, and we have and may continue to incur significant costs as a result of these types of lawsuits. Although we intend to defend all claims and litigation matters vigorously, given the inherently unpredictable nature of claims and litigation, we cannot predict with certainty the outcome or effect of any claim or litigation matter. We maintain insurance against some, but not all, of these risks of loss resulting from claims and litigation. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant accident, judgment, claim or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations.
We are dependent on certain key personnel, the loss of whom could materially affect our financial performance and prospects.
Our continued success depends to a large extent upon the continued services of our senior management and certain key employees. To encourage the retention of certain key executives, we have entered into various equity-based compensation agreements with our senior executives, including Messrs. Robinette, Poe, and Wayne designed to encourage their retention. Each member of our senior management team has substantial experience and expertise in our industry and has made significant contributions to our growth and success. We do face the risk, however, that members of our senior management may not continue in their current positions and the loss of their services could cause us to lose customers and reduce our net sales, lead to employee morale problems and/or the loss of key employees, or cause disruptions to our production. Also, we may be unable to find qualified individuals to replace any of the senior executive officers who leave our company.
Operational problems or disruptions at any of our facilities may cause significant lost production and increased lead times, which could have a negative impact on the efficiency of our production and profitability.
Our manufacturing processes could be affected by operational problems that could impair our production capability. Disruptions at any of our facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of our equipment; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, hurricanes, earthquakes or other catastrophic disasters; an act of terrorism; or other operational problems. Any prolonged disruption in operations at any of our facilities could cause a significant loss in production. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility, which could cause our customers to purchase from our competitors either temporarily or permanently. If any of these events were to occur, it could adversely effect on our business, financial condition and results of operations.
Interruptions in deliveries of raw materials or finished goods could adversely affect our production and increase our costs, thereby decreasing our profitability.
Our dependency upon regular deliveries from suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. If any of our suppliers were unable to deliver materials to us for an extended period of time, as the result of financial difficulties, catastrophic events affecting their facilities or other factors beyond our control, or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us. Even if acceptable alternatives were found, the process of locating and securing such alternatives might be disruptive to our business. Extended unavailability of a necessary raw material or finished goods could cause us to cease manufacturing one or more of our products for a period of time.
Additionally, our suppliers may be forced to cease operations unexpectedly due to equipment failures or events beyond their control, such as fires, floods, hurricanes, earthquakes or other environmental catastrophes. Any downtime or facility damage may impact their ability to deliver critical raw materials to us. If any of our key suppliers were to experience such issues and not be able to deliver raw materials for a prolonged period, it would reduce our ability to effectively produce our finished goods, which could materially and adversely affect our business, financial condition, operating results and cash flows.
Changes in building codes and standards could increase the cost of our products, lower the demand for our products, or otherwise adversely affect our business.
Our products and markets are subject to extensive and complex local, state, federal, and foreign statutes, ordinances, rules, and regulations. These mandates, including building design and safety and construction standards and zoning requirements, affect the cost, selection, and quality requirements of building components like windows and siding.
These statutes, ordinances, rules, and regulations often provide broad discretion to governmental authorities as to the types and quality specifications of products used in new residential and non-residential construction and home renovations and improvement projects, and governmental authorities can impose different standards. Compliance with these standards and changes in such statutes, ordinances, rules, and regulations may increase the costs of manufacturing our products or may reduce the demand for certain of our products in the affected geographical areas or product markets. Conversely, a decrease in product safety standards could reduce demand for our more modern products if less expensive alternatives that did not meet higher standards became available for use in that market. All or any of these changes could have a material adverse effect on our business, financial condition, and results of operations.
Environmental requirements may impose significant costs and liabilities on us.
Our facilities are subject to numerous 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, our facilities are subject to investigation by governmental authorities. In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal. We may be held liable, or incur fines or penalties in connection with such requirements or liabilities for, among other things, hazardous substances used in or released from our current or former operations or products, 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 our properties from activities conducted by previous occupants. The amount of such liability, fine or penalty may be material. For example, MW, a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the EPA relating to contamination at its Rocky Mount, Virginia property. 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.
In addition, changes in environmental laws and regulations or in their enforcement, the discovery of previously unknown contamination or other liabilities relating to our properties and operations or the inability to enforce the indemnification obligations of the previous owners of our subsidiaries could result in significant environmental liabilities that could adversely impact our operating performance. In addition, we might incur significant capital and other costs to comply with increasingly stringent United States or Canadian environmental laws or enforcement policies that would decrease our cash flow.
Finally, while the purchase agreements governing certain of our acquisitions provide that the sellers will indemnify us, subject to certain limitations, for certain environmental liabilities, our ability to seek indemnification from the respective sellers is limited by various factors, including the financial condition of the indemnitor or responsible party as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from the sellers, and any related environmental liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
Our ability to consummate and effectively integrate future acquisitions, if any, will be critical to maintaining and improving our operating performance.
We will continue to pursue strategic acquisitions into our business if they provide future financial and operational benefits. Successful completion of any strategic transaction depends on a number of factors that are not entirely within our control, including our ability to negotiate acceptable terms, conclude satisfactory agreements and obtain all necessary regulatory approvals. There can be no assurance that we will consummate future acquisitions. In addition, our ability to effectively integrate these acquisitions into our existing business, culture, and financial reporting processes and internal controls may not be successful which could jeopardize future operational performance for the combined businesses.
Manufacturing or assembly realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, due to the costs of implementation.
We continually review our manufacturing and assembly operations and sourcing capabilities. Effects of periodic manufacturing realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize. Such programs may include the consolidation and integration of facilities, functions, systems and procedures. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.
We rely on a variety of intellectual property rights. Any threat to, or impairment of, these rights could cause us to incur costs to defend these rights.
As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands. We also have issued patents and rely on trade secret and copyright protection for certain of our technologies. These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our intellectual property rights, which may harm our operating results. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we would have to defend these rights. There is also a risk that third parties, including our current competitors, will claim that our products infringe on their intellectual property rights. These third parties may bring infringement claims against us or our customers, which may harm our operating results.
We also rely on third party license agreements for certain trademarks and technologies we employ. There is a risk that third parties may modify or terminate such licenses, which may harm our operating results. While these license agreements generally provide that the licensors will indemnify us, subject to certain limitations, for certain infringement liabilities, our ability to seek indemnification from the respective licensors is limited by various factors, including the financial condition of the licensor as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from licensors, and any related infringement liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
Increases in transportation, freight and fuel costs could cause our cost of products sold to increase and net income to decrease.
Increases in transportation, freight and fuel costs could negatively impact our cost to deliver our products to our customers and thus increase our cost of products sold. The Company estimates that a 10% increase in fuel costs for the year ended December 31, 2017 would have increased costs of products sold during such period by approximately $1.0 million. In addition to fuel costs, the availability of truck drivers and lane availability from third party carriers can also negatively impact our profit margins if market prices increase significantly for these freight services. If we are unable to increase the selling price of our products to our customers to cover any increases in transportation and fuel costs, net income may be adversely affected.
Changes in foreign currency exchange and interest rates could have a material adverse effect on our operating results and liquidity.
We have operations in Canada that generated approximately 10.9% of our revenues in 2017. As such, our net sales, earnings and cash flow are exposed to risk from changes in foreign exchange rates, which can be difficult to mitigate. For example, during 2017 the U.S. dollar weakened against the Canadian dollar by approximately 2.0%. Depending on the direction of changes relative to the U.S. dollar, Canadian dollar values can increase or decrease the reported values of our net assets and results of operations. The change in foreign currency exchange rates had a $4.3 million and $1.1 million net favorable translation impact on our net sales and gross profit, respectively, in 2017 compared to 2016 rates. We hedge this foreign currency exposure by evaluating the usage of certain derivative instruments which hedge certain, but not all, underlying economic exposures.
We are also exposed to changes in interest rates as the Term Loan and ABL Facility bear interest at variable interest rates. As a result, future interest rate increases will negatively impact our financial results. Our ability to access capital markets could also be impeded if adverse liquidity market conditions occur.
Declines in our business conditions may result in an impairment of our tangible and intangible assets, which could result in a material non-cash charge.
A negative long-term performance outlook could result in a net sales decrease, which could result in a decrease in operating cash flows, adversely impacting our business and results of operations, and have a material adverse effect on our financial condition. These declines could result in an impairment of our tangible and intangible assets which results when the carrying value of the assets exceed their fair value.
The significant amount of our indebtedness may limit the cash flow available to invest in the ongoing needs of our business.
Our indebtedness could have important consequences. For example, it could:
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• | require us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, reducing the availability of our cash flow for other purposes, such as capital expenditures, acquisitions and working capital; |
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• | limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate and the general economy; |
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• | place us at a disadvantage compared to our competitors that have less debt; |
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• | expose us to fluctuations in the interest rate environment because the interest rates of our ABL Facility and our Term Loan Facility are at variable rates; and |
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• | limit our ability to borrow additional funds. |
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and ability to satisfy our obligations under our indebtedness.
The terms of our debt covenants and the Merger Agreement could limit how we conduct our business and our ability to raise additional funds.
The agreements that govern the terms of our debt, including the credit agreement that governs the ABL Facility, the credit agreement that governs the Term Loan Facility and the indenture governing the 6.50% Senior Notes, contain covenants that restrict our ability and the ability of our subsidiaries to:
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• | incur and guarantee indebtedness or issue equity interests of restricted subsidiaries; |
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• | repay subordinated indebtedness prior to its stated maturity; |
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• | pay dividends or make other distributions on or redeem or repurchase our stock; |
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• | make certain investments or acquisitions; |
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• | sell certain assets or merge with or into other companies; |
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• | enter into certain transactions with stockholders and affiliates; |
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• | make capital expenditures; and |
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• | pay dividends, distributions or other payments from our subsidiaries. |
These restrictions, in addition to the restrictions under the Merger Agreement, may affect our ability to grow our business and take advantage of market and business opportunities or to raise additional debt or equity capital.
In addition, under the ABL Facility, if (a) our excess availability is less than the greater of (x) 10.0% of the lesser of the aggregate commitments and the borrowing base and (y) $25.0 million or (b) an event of default has occurred and is continuing, we will be required to comply with a minimum fixed charge coverage ratio test. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure that we will meet this ratio. A breach of any of these covenants under the ABL Facility, Term Loan Facility or the indenture governing the 6.50% Senior Notes could result in an event of default under the ABL Facility, the Term Loan Facility, and/or the indenture. An event of default under any of our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable and, in some cases, proceed against the collateral securing such indebtedness.
Moreover, the ABL Facility provides the lenders considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under the ABL Facility will not impose such actions during the term of the ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our liquidity.
We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. We may also be unable to generate sufficient cash to make required capital expenditures.
Our ability to make scheduled payments on or to refinance our debt obligations and to make capital expenditures depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors. We will not be able to control many of these factors, such as economic conditions in the industry in which we operate and competitive pressures. We cannot assure that we will maintain a level of cash flows from operating activities sufficient to permit us to pay or refinance our indebtedness, including the 6.50% Senior Notes or our indebtedness under our ABL Facility or Term Loan Facility, or make required capital expenditures. If our cash flows and capital resources are insufficient to fund our debt service obligations, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness.
In addition, if we do not have, or are unable to obtain, adequate funds to make all necessary capital expenditures when required, or if the amount of future capital expenditures are materially in excess of our anticipated or current expenditures, our product offerings may become dated, our productivity may decrease and the quality of our products may decline, which, in turn, could reduce our sales and profitability.
A downgrade of our external credit ratings could adversely impact our interest expense as well as future borrowings.
Our credit ratings are important to our cost of capital. The major debt rating agencies routinely evaluate our debt based on a number of factors, which include financial strength and business risk as well as transparency with rating agencies and timeliness of financial reporting. A downgrade in our debt rating could result in increased interest and other expenses on our existing variable interest rate debt, and could result in increased interest and other financing expenses on future borrowings. Downgrades in our debt rating could also restrict our access to capital markets and affect the value and marketability of our outstanding notes.
Recently enacted U.S. tax law revisions could materially impact our financial results.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, H.R. 1, originally known as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act 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, requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized, creating the base erosion anti-abuse tax ("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.
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, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that we include in our financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Although we believe these provisional amounts represent a reasonable estimate of the ultimate enactment-related impact the Tax Act will have on our consolidated financial statements, the amounts could be adjusted materially as additional information becomes available and further analyses are completed. The impact of the Tax Act to our business in future periods is also subject to a variety of factors beyond our control including, but not limited to, (i) potential amendments to the Tax Act; (ii) potential changes to state, local, and foreign tax laws in response to the Tax Act; and (iii) potential new or interpretative guidance issued by the Financial Accounting Standards Board or the Internal Revenue Service and other tax agencies. Any of these factors could cause our actual results to differ materiality from our current expectations and/or investors' expectations and there can be no assurance that the Tax Act will not have a materially adverse impact on our financial results.
We will be required to pay an affiliate of Ply Gem Holdings’ stockholders for certain tax benefits, including net operating loss carryovers, we may claim, and the amounts we may pay could be significant.
In connection with Ply Gem Holdings’ initial public offering, Ply Gem Holdings entered into a tax receivable agreement (the "Tax Receivable Agreement") with an entity controlled by an affiliate of the CI Partnerships (the “Tax Receivable Entity”). The Tax Receivable Agreement generally provides for the payment by us 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 we actually realize in periods after the initial public offering as a result of (i) NOL carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to the initial public offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of or attributable to payments under the Tax Receivable Agreement.
The amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future and the tax rate then applicable, our use of NOL carryovers and the portion of our payments under the Tax Receivable Agreement constituting imputed interest.
The payments we will be required to make under the Tax Receivable Agreement could be substantial. We expect that, as a result of the amount of the NOL carryovers from prior periods (or portions thereof) and assuming that we earn sufficient taxable income to realize the potential tax benefit described above, future payments under the Tax Receivable Agreement, in respect of the federal and state NOL carryovers, would be approximately $74.7 million in the aggregate and may be paid within the next five years, assuming that utilization of such tax attributes is not subject to limitation under Section 382 of the Code as the result of an “ownership change” (within the meaning of Section 382 of the Code) of Ply Gem Holdings. These amounts reflect only the cash savings attributable to current tax attributes resulting from the NOL carryovers. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreement payments from these tax attributes.
In addition, although we are not aware of any issue that would cause the U.S. Internal Revenue Service (“IRS”) to challenge the benefits arising under the Tax Receivable Agreement, the Tax Receivable Entity will not reimburse us for any payments previously made if such benefits are subsequently disallowed. As a result, in such circumstances, we could make payments under the Tax Receivable Agreement that are greater than our actual cash tax savings and may not be able to recoup those payments, which could adversely affect our liquidity. However, any excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess.
Finally, because Ply Gem Holdings is a holding company with no operations of its own, its ability to make payments under the Tax Receivable Agreement is dependent on the ability of Ply Gem Industries and its subsidiaries to make distributions to it. We may be required to make payments to Ply Gem Holdings to fund payments under the Tax Receivable Agreement, and the indenture governing the notes will permit us to make such payments. To the extent that Ply Gem Holdings is unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid, which could adversely affect our results of operations and could also affect our liquidity in periods in which such payments are made.
In addition, the Tax Receivable Agreement provides that, upon certain mergers, asset sales, or other forms of business combinations or certain other changes of control, Ply Gem Holdings’ or its successor’s obligations with respect to tax benefits would be based on certain assumptions, including that Ply Gem Holdings or its successor would have sufficient taxable income to fully utilize the NOL carryovers covered by the Tax Receivable Agreement. As a result, upon a change of control, Ply Gem Holdings may be required to make payments under the Tax Receivable Agreement that are greater than or less than the specified percentage of actual cash tax savings.
Our systems and IT infrastructure may be subject to security breaches and other cyber security incidents.
Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers' business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We may face attempts by experienced hackers, cybercriminals or others with authorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs is critical to our business. To the extent that any disruptions or security breaches result in a loss or damage to our data, it could cause harm to our reputation or brand. This could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or use competing products; state or federal enforcement action, which could result in fines, penalties and/or other liabilities and which may cause us to incur legal fees and costs, and/or additional costs associated with responding to a cyberattack. Increased regulation regarding cyber security may increase our costs of compliance, including fines and penalties, as well as costs of cyber security audits. Any of these actions could materially adversely impact our business and results of operations.
We have invested in industry appropriate protections and monitoring practices of our data and information technology to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats. There can be no assurance, however, that our efforts will prevent breakdowns or breaches to our third party providers' databases or systems that could adversely affect our business.
We are controlled by the CI Partnerships whose interest in our business may be different than yours.
The CI Partnerships own approximately 66.7% of the outstanding common stock of Ply Gem Holdings, the direct parent company of Ply Gem Industries. Ply Gem Holdings has entered into an amended and restated stockholders agreement with the CI Partnerships and certain of our members of management. Under the stockholders agreement, the CI Partnerships are currently entitled to nominate a majority of the members of Ply Gem Holdings' board of directors and all of the parties to the stockholders agreement have agreed to vote their shares of our common stock as directed by the CI Partnerships. Accordingly, the CI Partnerships will be able to exercise significant influence over our business policies and affairs. In addition, the CI Partnerships can control any action requiring the general approval of Ply Gem Holdings' stockholders, including the election of directors, the adoption of amendments to Ply Gem Holdings' certificate of incorporation or by-laws and the approval of mergers or sales of substantially all of our assets.
Significant changes in factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our operating results and cash flows.
The recognition of costs and liabilities associated with our pension plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates. These assumptions are generally updated annually.
Our pension plans were underfunded by $14.2 million as of December 31, 2017. In recent years, the declining interest rates and changes to mortality assumptions have negatively impacted the funded status of our pension plans. In addition, volatile asset performance, most notably since 2008, has also negatively impacted the funded status of our pension plans. Funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our pension plan obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our corporate headquarters is located in Cary, North Carolina. We own and lease several additional properties in the United States and Canada. We operate the following facilities as indicated, and each facility is leased unless indicated with “Owned” under the Lease Expiration Date column below.
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Location | | Square Footage | | Facility Use | | Lease Expiration Date |
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Siding, Fencing, and Stone Segment | | |
Jasper, TN | | 270,000 | | Manufacturing and Administration | | Owned |
Fair Bluff, NC (1) | | 198,000 | | Manufacturing and Administration | | 9/30/2024 |
Kearney, MO (1) | | 175,000 | | Manufacturing and Administration | | 9/30/2024 |
Valencia, PA (2) | | 104,000 | | Manufacturing and Administration | | 9/30/2024 |
Martinsburg, WV (1) | | 163,000 | | Manufacturing and Administration | | 9/30/2024 |
Martinsburg, WV | | 195,000 | | Warehouse | | 12/1/2019 |
York, NE (1) | | 76,000 | | Manufacturing | | 9/30/2024 |
Stuarts Draft, VA | | 257,000 | | Manufacturing and Administration | | Owned |
Sidney, OH | | 819,000 | | Manufacturing and Administration | | Owned |
Gaffney, SC | | 259,000 | | Manufacturing and Administration | | Owned |
Harrisonburg, VA | | 358,000 | | Warehouse | | 7/31/2023 |
Kansas City, MO | | 36,000 | | Administration | | 12/31/2022 |
South Pittsburgh, TN | | 95,000 | | Warehouse | | 10/31/2018 |
Gaffney, SC | | 150,000 | | Warehouse | | 12/31/2020 |
Paris, ON, Canada | | 132,000 | | Manufacturing and Administration | | Owned |
Brantford, ON, Canada | | 225,000 | | Warehouse and Administration | | 1/31/2020 |
Mount Pearl, NFLD, Canada | | 20,000 | | Warehouse | | 10/31/2019 |
Dartmouth, NS, Canada | | 16,000 | | Warehouse | | 4/30/2022 |
Dartmouth, NS, Canada | | 15,000 | | Warehouse | | 1/31/2019 |
Saint John, NB, Canada | | 14,000 | | Warehouse | | 3/31/2018 |
Moncton, NB, Canada | | 19,000 | | Warehouse | | 7/31/2020 |
Fredericton, NB, Canada | | 16,000 | | Warehouse | | 12/31/2020 |
Le Gardeur, QC, Canada | | 20,000 | | Warehouse | | 8/31/2019 |
St. Hubert, QC, Canada | | 9,000 | | Warehouse | | 3/31/2019 |
Ottawa, ON, Canada | | 26,000 | | Warehouse | | 12/31/2022 |
Scarborough, ON, Canada | | 20,000 | | Warehouse | | 2/28/2019 |
London, ON, Canada | | 18,000 | | Warehouse | | 4/30/2022 |
Calgary, AB, Canada | | 41,000 | | Warehouse and Administration | | 8/31/2024 |
Edmonton, AB, Canada | | 37,000 | | Warehouse | | 12/31/2018 |
Langley, BC, Canada | | 17,000 | | Warehouse | | 10/31/2021 |
Selinsgrove, PA | | 86,000 | | Warehouse | | 5/31/2021 |
Olathe, KS | | 95,000 | | Manufacturing and Administration | | 5/31/2025 |
Youngsville, NC | | 75,000 | | Manufacturing and Administration | | 5/31/2025 |
Apopka, FL | | 18,000 | | Warehouse and Administration | | 5/30/2019 |
Clive, IA | | 2,000 | | Warehouse and Administration | | 2/29/2020 |
Adamstown, MD | | 1,000 | | Warehouse and Administration | | 10/19/2018 |
Charlotte, NC | | 4,000 | | Warehouse and Administration | | 3/30/2020 |
Mineral Wells, WV | | 20,000 | | Warehouse | | 1/1/2020 |
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Windows and Doors Segment | | | | |
Walbridge, OH (1) | | 250,000 | | Manufacturing and Administration | | 9/30/2024 |
Walbridge, OH | | 20,000 | | Warehouse | | 5/30/2018 |
Rocky Mount, VA (1) | | 600,000 | | Manufacturing and Administration | | 9/30/2024 |
Rocky Mount, VA | | 163,000 | | Manufacturing | | 5/31/2023 |
Rocky Mount, VA | | 180,000 | | Manufacturing | | 12/31/2023 |
Rocky Mount, VA | | 70,000 | | Warehouse | | 11/1/2021 |
Rocky Mount, VA | | 80,000 | | Warehouse | | 12/31/2023 |
Rocky Mount, VA | | 120,000 | | Warehouse | | 12/31/2023 |
Fayetteville, NC | | 56,000 | | Warehouse | | Owned |
Peachtree City, GA | | 148,000 | | Manufacturing and Administration | | 8/20/2024 |
Peachtree City, GA | | 40,000 | | Manufacturing and Administration | | Owned |
Dallas, TX | | 213,000 | | Manufacturing and Administration | | 2/17/2019 |
Bryan, TX | | 273,000 | | Manufacturing and Administration | | 8/20/2024 |
Bryan, TX | | 75,000 | | Manufacturing | | 8/31/2019 |
Auburn, WA | | 262,000 | | Manufacturing and Administration | | 1/31/2022 |
Corona, CA | | 128,000 | | Manufacturing and Administration | | 12/31/2020 |
Sacramento, CA | | 234,000 | | Manufacturing and Administration | | 9/12/2019 |
Calgary, AB, Canada (1) | | 301,000 | | Manufacturing and Administration | | 9/30/2024 |
Edmonton, AB, Canada | | 29,000 | | Warehouse | | 4/30/2021 |
Red Deer, AB, Canada | | 12,000 | | Warehouse | | 4/30/2018 |
Medicine Hat, AB, Canada | | 9,000 | | Warehouse | | 12/31/2020 |
Regina, SK, Canada | | 19,000 | | Warehouse | | 3/31/2021 |
Saskatoon, SK, Canada (3) | | 35,000 | | Warehouse | | 10/31/2027 |
Calgary, AB, Canada | | 351,000 | | Manufacturing and Administration | | 10/30/2022 |
Kelowna, BC, Canada | | 15,000 | | Warehouse | | 6/30/2021 |
Prince George, BC, Canada | | 16,000 | | Warehouse | | 5/31/2021 |
Vancouver, BC, Canada | | 17,000 | | Warehouse | | 10/31/2021 |
Edmonton, AB, Canada | | 18,000 | | Warehouse | | 4/30/2018 |
Lethbridge, AB, Canada | | 3,000 | | Warehouse | | 12/31/2018 |
Winnipeg, MB, Canada (3) | | 28,000 | | Warehouse | | 6/30/2022 |
Clairmont, AB, Canada | | 4,000 | | Warehouse | | 12/31/2018 |
Vacaville, CA | | 193,000 | | Manufacturing and Administration | | 9/12/2019 |
St. Marys, WV | | 198,000 | | Manufacturing and Administration | | Owned |
Ellenboro, WV | | 200,000 | | Manufacturing and Administration | | Owned |
Harrisville, WV | | 55,000 | | Manufacturing | | Owned |
Pennsboro, WV | | 101,000 | | Manufacturing and Administration | | Owned |
Paris, IL | | 224,000 | | Manufacturing and Administration | | Owned |
Vienna, WV | | 131,000 | | Warehouse | | 6/30/2018 |
Paris, IL | | 120,000 | | Warehouse | | 3/31/2025 |
Columbus, OH | | 23,000 | | Administration | | 5/31/2021 |
| | | | | | |
Corporate | | | | | | |
Cary, NC | | 38,000 | | Administration | | 10/31/2020 |
Durham, NC | | 95,000 | | Research & Development | | 12/31/2022 |
| |
(1) | These properties are included in a long-term lease entered into as a result of a sale/leaseback agreement entered into in August 2004. |
| |
(2) | This property was subleased to a third party starting in 2010. |
| |
(3) | These properties are utilized by the Siding, Fence and Stone segment as well as the Windows and Doors segment. |
Item 3. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings and litigation arising out of our 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.
Environmental
We are 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, our facilities are subject to investigation by governmental authorities. In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which our entities or their predecessors are alleged to have sent hazardous materials for recycling or disposal. We 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 our 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. We have recorded approximately $0.3 million of this environmental liability within current liabilities and approximately $1.1 million within other long-term liabilities in our consolidated balance sheets at December 31, 2017 and 2016, respectively. We may incur costs that exceed our recorded environmental liability. We will adjust our 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, we have not recorded a liability in our consolidated balance sheets as of December 31, 2017 and December 31, 2016.
From time to time, we may incur investigation and remediation costs in connection with other facilities we currently own or operate or previously owned or operated. For example, we have a $0.1 million liability included in our consolidated balance sheets at December 31, 2017 and December 31, 2016, for potential contamination issues at our Calgary, Alberta property. In addition, we are required to contribute to investigation and remediation costs at various third party waste disposal facilities at which we or a related entity have been identified as a potentially responsible party.
We are a party to various acquisition and other agreements pursuant to which third parties agreed to indemnify us for certain costs relating to environmental liabilities. For example, we may be able to recover some of our 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. Our ability to seek indemnification from parties that have agreed to indemnify us may be limited. There can be no assurance that we 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, we are not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on our results of operations, cash flows or financial position except as otherwise disclosed in our 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
We maintain 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, we retain a portion of the overall risk for such claims through our self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. Our general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. Our insurance coverage is generally subject to a per occurrence retention and certain coverage exclusions.
Our 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 our 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, we incurred increased litigation expense primarily related to the claims discussed below. We believe we have 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 we 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 our business, results of operations, cash flows or financial position.
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. We, however, are 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, we have 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 our consolidated balance sheets as of December 31, 2017 and December 31, 2016. It is possible that we may incur costs in excess of the recorded amounts; however, we currently expect 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 our 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 our IPO and seeks remedies under Sections 11 and 15 of the Securities Act of 1933, alleging that our 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, we have 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 us and each of the directors and officers named in this action, we have agreed to assume the defense of such directors and officers. During 2017, 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. We accrued the $26.0 million within accrued expenses as of December 31, 2017 in our consolidated balance sheet, and also initially recognized an insurance receivable of $25.4 million within other current assets that was offset by 2017 insurance proceeds of $8.7 million, for a net insurance receivable of $16.7 million as of December 31, 2017 in our consolidated balance sheet as certain of our directors' and officers' liability insurance carriers are to fund the majority of the settlement amount with us 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. We, however, are 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 (a) statutorily required meal breaks at the Sacramento, California facility, (b) accurate wage statements to employees in California, and (c) 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. We accrued for this amount in accrued expenses as of December 31, 2016 in our consolidated balance sheet and subsequently paid the settlement during the year ended December 31, 2017. We deny all liability in the settlement and with respect to the facts and claims alleged. We, however, are 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 (a) pay overtime wages, (b) provide statutorily required meal breaks, (c) 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. We accrued for this amount in accrued expenses as of December 31, 2016 in our consolidated balance sheet and subsequently paid the settlement during the year ended December 31, 2017. We deny all liability in the settlement and with respect to the facts and claims alleged. We, however, are 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
We are 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. We have 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.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed and traded on the New York Stock Exchange under the symbol “PGEM”. The following table sets forth, for our fiscal quarters indicated, high and low sale prices for a share of our common stock on the NYSE, as reported by the NYSE:
|
| | | | | | | | |
Year | | High | | Low |
2017: | | | | |
Fourth Quarter | | $ | 18.80 |
| | $ | 15.20 |
|
Third Quarter | | 18.05 |
| | 14.55 |
|
Second Quarter | | 20.00 |
| | 16.10 |
|
First Quarter | | 20.00 |
| | 15.40 |
|
| | | | |
2016: | | | | |
Fourth Quarter | | $ | 16.90 |
| | $ | 12.85 |
|
Third Quarter | | 16.09 |
| | 12.96 |
|
Second Quarter | | 15.72 |
| | 13.22 |
|
First Quarter | | 14.66 |
| | 8.58 |
|
Stock Performance Graph
The following graph shows a comparison from May 23, 2013 (the date our common stock commenced trading on the NYSE) through December 31, 2017 of the cumulative return for our common stock (PGEM), the Standard & Poor's 500 Stock Index (S&P 500), and the Standard & Poor's Industrials Index (S&P Industrials Index). The graph assumes that $100 was invested at the market close on May 23, 2013 in the common stock of Ply Gem Holdings, Inc., the S&P 500 Index and the S&P Industrials Index, and assumes reinvestments of dividends, if any. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Holders
As of March 5, 2018, there were approximately 5 stockholders of record of our common stock, one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held of record by Cede & Co., who is considered to be one stockholder of record. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of common stock are held of record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions, we are unable to determine the total number of stockholders we have.
Unregistered Sales of Equity Securities and Use of Proceeds
No securities of ours which were not registered under the Securities Act of 1933 were issued or sold by us during the three months ended December 31, 2017.
Purchases of Equity Securities by the Issuer
There were no purchases by the Company of our common stock during the three months ended December 31, 2017.
Dividends
Ply Gem Holdings has paid no dividends in the years ended December 31, 2017 and 2016.
The indenture for the 6.50% Senior Notes, the Term Loan Facility and the ABL Facility restrict the ability of Ply Gem Industries and its subsidiaries to make certain payments and transfer assets to Ply Gem Holdings. In addition, the ABL Facility imposes restrictions on the ability of Ply Gem Holdings to make certain dividend payments.
Item 6. SELECTED FINANCIAL DATA
The financial data set forth below is for the five-year period ended December 31, 2017. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements, related notes and other financial information included elsewhere in this report.
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| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
(Amounts in thousands, except per share data) | | 2017 | | 2016 | | 2015 (1) | | 2014 (2) | | 2013 (3) |
Statement of operations data: | | | | | | | | | | |
Net sales | | $ | 2,056,303 |
| | $ | 1,911,844 |
| | $ | 1,839,726 |
| | $ | 1,566,643 |
| | $ | 1,365,581 |
|
Cost of products sold | | 1,587,790 |
| | 1,449,570 |
| | 1,420,014 |
| | 1,258,842 |
| | 1,106,911 |
|
Gross profit | | 468,513 |
| | 462,274 |
| | 419,712 |
| | 307,801 |
| | 258,670 |
|
Operating expenses: | | |
| | | | | | | | |
Selling, general and administrative expenses | | 272,984 |
| | 268,714 |
| | 271,874 |
| | 224,163 |
| | 187,131 |
|
Amortization of intangible assets | | 21,271 |
| | 25,064 |
| | 25,306 |
| | 22,140 |
| | 20,236 |
|
Initial public offering costs | | — |
| | — |
| | — |
| | — |
| | 23,527 |
|
Total operating expenses | | 294,255 |
| | 293,778 |
| | 297,180 |
| | 246,303 |
| | 230,894 |
|
Operating earnings | | 174,258 |
| | 168,496 |
| | 122,532 |
| | 61,498 |
| | 27,776 |
|
Foreign currency gain (loss) | | 1,363 |
| | 299 |
| | (3,166 | ) | | (992 | ) | | (1,533 | ) |
Interest expense | | (69,361 | ) | | (72,718 | ) | | (74,876 | ) | | (71,269 | ) | | (92,046 | ) |
Interest income | | 78 |
| | 36 |
| | 57 |
| | 83 |
| | 362 |
|
Tax receivable agreement liability adjustment | | 10,749 |
| | (60,874 | ) | | (12,947 | ) | | 670 |
| | 5,167 |
|
Loss on modification or extinguishment of debt | | (2,106 | ) | | (11,747 | ) | | — |
| | (21,364 | ) | | (18,948 | ) |
Income (loss) before provision (benefit) for income taxes | | 114,981 |
| | 23,492 |
| | 31,600 |
| | (31,374 | ) | | (79,222 | ) |
Provision (benefit) for income taxes | | 46,654 |
| | (51,995 | ) | | (688 | ) | | (105 | ) | | 298 |
|
Net income (loss) | | $ | 68,327 |
| | $ | 75,487 |
| | $ | 32,288 |
| | $ | (31,269 | ) | | $ | (79,520 | ) |
| | | | | | | | | | |
Per basic common share: | | | | | | | | | | |
Net income (loss) applicable to common shares | | $ | 1.00 |
| | $ | 1.11 |
| | $ | 0.47 |
| | $ | (0.46 | ) | | $ | (1.32 | ) |
Per diluted common share: | | | | | | | | | | |
Net income (loss) applicable to common shares | | $ | 0.99 |
| | $ | 1.10 |
| | $ | 0.47 |
| | $ | (0.46 | ) | | $ | (1.32 | ) |
| | | | | | | | | | |
Total assets(4) | | $ | 1,319,567 |
| | $ | 1,257,741 |
| (5) | $ | 1,266,572 |
| | $ | 1,232,711 |
| | $ | 1,025,836 |
|
Long-term debt, less current maturities (4) | | $ | 807,334 |
| | $ | 836,086 |
| | $ | 975,531 |
| | $ | 967,053 |
| | $ | 801,890 |
|
| |
(1) | Includes the results of Canyon Stone from the date of acquisition, May 29, 2015. |
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(2) | Includes the results of Simonton from the date of acquisition, September 19, 2014. |
| |
(3) | Includes the results of Gienow from the date of acquisition, April 9, 2013 and Mitten from the date of acquisition, May 31, 2013. |
| |
(4) | In accordance with ASU No. 2015-03 Interest-Imputed Interest: Simplifying the Presentation of Debt Issuance Costs, the Company reclassified $19.3 million in 2015, $21.9 million in 2014, and $15.1 million in 2013 of debt issuance costs to long-term debt. Total assets and total liabilities were each reduced by these amounts with no impact to net income (loss) or total shareholders’ equity (deficit) previously reported. |
| |
(5) | The Company elected to prospectively adopt ASU No. 2015-17 Income taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, during the year ended December 31, 2016. The impact of this adoption was a reclassification of current deferred tax assets to noncurrent deferred tax assets, prior years were not retrospectively adjusted. |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the years covered by the consolidated financial statements included in this Annual Report on Form 10-K. This discussion should be read in conjunction with, and is qualified by reference to, the other related information including, but not limited to, the audited consolidated financial statements (including the notes thereto and the independent registered public accounting firm’s reports thereon), and the description of our business, all as set forth in this Annual Report on Form 10-K, as well as the risk factors discussed below and in Item 1A.
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” See “Cautionary Statement with Respect to Forward-Looking Statements” and “Risk Factors.”
General
We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing, and Stone and (ii) Windows and Doors, which comprised approximately 47% and 53% of our sales, respectively, for the fiscal year ended December 31, 2017. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.
The following is a summary of Ply Gem’s recent acquisition history:
| |
• | On September 19, 2014, Ply Gem completed an acquisition for cash consideration of approximately $130.0 million to acquire the capital stock of Fortune Brands Windows, Inc., and its direct and indirect wholly owned subsidiaries Simonton Building Products LLC, Simonton Industries, Inc., Simonton Windows, Inc., and SimEx, Inc. Simonton is a premier repair and remodeling window company with leading brand recognition and is part of the Windows and Doors segment. |
| |
• | On May 29, 2015, Ply Gem acquired substantially all of the assets of Canyon Stone, Inc. (“Canyon Stone”), a manufacturer of stone veneer, for a purchase price of $21.0 million, subject to certain purchase price adjustments. Canyon Stone is included in our Siding, Fencing, and Stone segment. |
Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, which was a wholly owned subsidiary of Ply Gem Prime. On January 11, 2010, Ply Gem Investment Holdings merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. In May 2013, the Company issued 18,157,895 shares of common stock in an initial public offering (“IPO”) and received gross proceeds of approximately $381.3 million in the IPO. The shares began trading on The New York Stock Exchange on May 23, 2013 under the symbol "PGEM". Immediately prior to the closing of the IPO, Ply Gem Prime merged with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the merger, all of the preferred stock of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that was converted into preferred stock in connection with the IPO) was converted into a number of shares of the Company's common stock based on the IPO price of the common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock.
On January 31, 2018, we entered into the Merger Agreement with Parent and Merger Sub, each a wholly owned subsidiary of funds sponsored by CD&R. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with Ply Gem Holdings surviving the Merger as a wholly owned subsidiary of Parent (the “Acquisition”). At the Effective Time, each of our issued and outstanding shares of common stock, par value $0.01 per share, will be cancelled and extinguished and converted into the right to receive $21.64 in cash, without interest (the “Merger Consideration”), less any applicable withholding taxes. The consummation of the Merger remains subject to customary closing conditions. As a result of the Merger, we will cease to be a publicly traded company.
We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries' $350.0 million ABL Facility and the credit agreement governing the terms of its $430.0 million Term Loan Facility place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us. Further, the terms of the indenture governing Ply Gem Industries' $650.0 million 6.50% Senior Notes place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.
Financial statement presentation
Net sales. Net sales represent the fixed selling price of our products plus certain shipping charges less applicable provisions for discounts and allowances. Allowances include cash discounts, volume rebates and returns among others.
Cost of products sold. Cost of products sold includes direct material and manufacturing costs, manufacturing depreciation, third-party and in-house delivery costs and product warranty expense.
Selling, general and administrative expense. Selling, general and administrative expense (“SG&A expense”) includes all non-product related operating expenses, including selling, marketing, research and development costs, information technology, and other general and administrative expenses.
Operating earnings (loss). Operating earnings (loss) represents net sales less cost of products sold, SG&A expense, and amortization of intangible assets.
Impact of commodity pricing
PVC resin, aluminum, and glass are major components in the production of our products and changes in PVC resin, aluminum, and glass prices have a direct impact on our cost of products sold. Historically, we have been able to pass on a substantial portion of significant price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.
Impact of weather
Since our building products are intended for exterior use, our sales and operating earnings tend to be lower during periods of inclement weather. Weather conditions in the first and fourth quarters of each calendar year historically result in these quarters producing significantly less sales revenue than our second and third quarters of the year. As a result, we have historically had lower profits or higher losses in the first and fourth quarters of each calendar year. Our results of operations for individual quarters in the future may be impacted by adverse weather conditions. In addition, favorable or unfavorable weather conditions may influence the comparability of our results from year to year or from quarter to quarter.
Critical accounting policies
The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Certain of our accounting policies require the application of judgments in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate. If different conditions occur compared to our assumptions and judgments, the results could be materially different from our estimates. Management also believes that the nine areas where different assumptions could result in materially different reported results are (1) goodwill and intangible asset impairment tests, (2) accounts receivable related to the estimation of allowances for doubtful accounts, (3) inventories in estimating reserves for obsolete and excess inventory, (4) warranty reserves, (5) insurance reserves, (6) income taxes including the Tax Receivable Agreement, (7) rebates, (8) pensions, and (9) environmental accruals and other contingencies. Although we believe the likelihood of a material difference in these areas is low based upon our historical experience, a 10% change in our allowance for doubtful accounts, inventory provision estimates, and warranty reserve at December 31, 2017 would result in an approximate $0.3 million, $0.8 million, and $7.7 million impact on expenses, respectively. Additionally, we have included in the discussion that follows our estimation methodology for both accounts receivable and inventories. While all significant policies are important to our consolidated financial statements, some of these policies may be viewed as being critical. Our critical accounting policies include:
Revenue Recognition. We recognize sales based upon shipment of products to our customers 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 standard that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Revenue includes the selling price of the product and all shipping costs paid by the customer. Revenue is reduced at the time of sale for estimated sales returns and all applicable allowances and discounts based on historical experience. We also provide for estimates of warranty, shipping costs and certain sales-related customer programs at the time of sale. Shipping and warranty costs are included in cost of products sold. Bad debt expense and certain marketing expenses are included in SG&A expense. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are reconciled to the actual amounts. Starting in fiscal 2018, in connection with the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, we expect to include additional disaggregated revenue disclosures.
Accounts Receivable. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which is provided for in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers’ receivables, considering customers’ financial condition, credit history and other current economic conditions. If a customer’s financial condition was to deteriorate, which might impact its ability to make payment, then additional allowances may be required.
Inventories. Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or net realizable value. We record 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 subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will 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.
Goodwill Impairment. We perform an annual test for goodwill impairment during the fourth quarter of each year (November 25th 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. We early adopted ASU No. 2017-04, Intangibles-Goodwill and other (Topic 350) during the year ended December 31, 2017. As such, we measure 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. We have elected not to utilize the qualitative Step Zero impairment assessment. There was no goodwill impairment for the years ended December 31, 2017 and December 31, 2016. However, we will continue to evaluate goodwill during future years and future declines in the residential housing and repair and remodeling markets or our market capitalization could result in goodwill impairments.
To evaluate goodwill impairment, we estimate 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.
A summary of the key assumptions utilized in the goodwill impairment analysis at November 25, 2017, November 26, 2016, and November 28, 2015, as it relates to the fair values and the sensitivities for these assumptions follows:
|
| | | | | | | | | | | | |
| | Siding, Fencing, and Stone |
| | As of
November 25,
2017 | | As of
November 26,
2016 | | As of
November 28,
2015 |
Assumptions: | | | | | | |
Income approach: | | | | | | |
Estimated housing starts in terminal year | | 1,049,000 |
| | 1,100,000 |
| | 1,100,000 |
|
Terminal growth rate | | 3.0 | % | | 3.0 | % | | 3.0 | % |
Discount rate | | 11.5 | % | | 11.0 | % | | 11.5 | % |
| | | | | | |
Market approach: | | | | | | |
Control premiums | | 5.0 | % | | 5.0 | % | | 5.0 | % |
| | | | | | |
Sensitivities: | | | | | | |
(Amounts in thousands) | | | | | | |
Estimated fair value decrease in the event of a | | | | | | |
1% decrease in the terminal year growth | | $ | 121,553 |
| | $ | 116,628 |
| | $ | 104,863 |
|
Estimated fair value decrease in the event of a | | | | | | |
1% increase in the discount rate | | 203,109 |
| | 203,838 |
| | 189,363 |
|
Estimated fair value decrease in the event of a | | | | | | |
1% decrease in the control premium | | 17,141 |
| | 17,363 |
| | 16,790 |
|
As of November 25, 2017, we reduced the terminal year estimated housing starts assumption from 1,100,000 in 2016 to 1,049,000 for the 2017 valuation, which reflects a normalized housing start level with an adjustment for potential pullback during the terminal period as the U.S. housing market has been in a growing market for over seven years. We estimate that normalized recurring housing starts will be in a range of 1,000,000 to 1,200,000 to keep up with U.S. population growth according to the Joint Center for Housing Studies of Harvard University. We also maintained our terminal growth rate assumption at 3.0% for the three-year period, which is 0.5% lower than the assumption utilized in the Windows and Doors analysis due to Windows and Doors' higher correlation with the new construction market, which provides higher growth levels as we return to a normalized housing market. As of November 25, 2017, we increased Siding, Fencing, and Stone’s discount rate by 0.5% to 11.5%, due to the risk associated with the decrease in operating earnings of $10.3 million or 6.6% from higher material costs not fully offset by higher net selling prices despite the net sales increase of $83.3 million achieved during 2017. As of November 26, 2016, we decreased Siding, Fencing, and Stone’s discount rate by 0.5% to 11.0%, due to the consistent profitable financial performance demonstrated by Siding, Fencing, and Stone increasing their operating earnings $22.4 million or 16.6% during 2016.
|
| | | | | | | | | | | | |
| | Windows and Doors |
| | As of
November 25,
2017 | | As of
November 26,
2016 | | As of
November 28,
2015 |
Assumptions: | | | | | | |
Income approach: | | | | | | |
Estimated housing starts in terminal year | | 1,049,000 |
| | 1,100,000 |
| | 1,100,000 |
|
Terminal growth rate | | 3.5 | % | | 3.5 | % | | 3.5 | % |
Discount rate | | 18.0 | % | | 16.0 | % | | 17.0 | % |
| | | | | | |
Market approach: | | | | | | |
Control premiums | | 10.0 | % | | 10.0 | % | | 10.0 | % |
| | | | | | |
Sensitivities: | | | | | | |
(Amounts in thousands) | | | | | | |
Estimated fair value decrease in the event of a | | | | | | |
1% decrease in the terminal year growth | | $ | 18,582 |
| | $ | 14,695 |
| | $ | 12,554 |
|
Estimated fair value decrease in the event of a | | | | | | |
1% increase in the discount rate | | 43,485 |
| | 37,662 |
| | 35,285 |
|
Estimated fair value decrease in the event of a | | | | | | |
1% decrease in the control premium | | 5,568 |
| | 4,885 |
| | 4,451 |
|
As of November 25, 2017, we reduced the terminal year estimated housing starts assumption from 1,100,000 in 2016 to 1,049,000 for the 2017 valuation, which reflects a normalized housing start level with an adjustment for a potential pullback during the terminal period as the U.S. housing market has been in a growing market for over seven years. As of November 25, 2017, we increased the Windows and Doors’ discount rate by 2.0% to 18.0% to account for the risk associated with continuing projected gross margin expansion within the competitive building products industry combined with the risk of a pullback in the terminal year despite the $12.9 million or 29.5% improvement in operating earnings achieved during 2017. As of November 26, 2016, we decreased the Windows and Doors’ discount rate by 1.0% to 16.0% as a reflection of the improved operating performance of the Windows and Doors reporting unit which increased their operating earnings $25.4 million or 139.5% during the year ended December 31, 2016 due to improved gross profit margins resulting from higher selling prices and favorable material costs.
As of November 25, 2017, we maintained the Windows and Doors’ control premium at 10.0%, consistent with the prior year due to the consistent performance of the business achieved during 2017.
Overall, we utilize the same key assumptions in preparing the prospective financial information (“PFI”) utilized in the discounted cash flow test for the Siding, Fencing, and Stone and Windows and Doors reporting units. However, each reporting unit is impacted differently by industry trends, how market factors are influencing the reporting units’ expected performance, competition, and other unique business factors as mentioned above. The Windows and Doors reporting unit has more exposure to the new construction market which experienced depressed housing market conditions during 2009-2011, which ultimately decreased operating performance for this reporting unit. Siding, Fencing, and Stone’s performance has been more consistent and profitable resulting in less risk in the PFI.
|
| | | | | | | | | | | | |
(Amounts in thousands) | | As of | | As of | | As of |
| | November 25, | | November 26, | | November 28, |
| | 2017 | | 2016 | | 2015 |
Estimated Windows and Doors reporting unit fair value increase (decrease) in the event of a 10% increase in the weighting of the market multiples method | | $ | (5,000 | ) | | $ | 4,000 |
| | $ | 3,000 |
|
Estimated Siding, Fencing, and Stone reporting unit fair value increase (decrease) in the event of a 10% increase in the weighting of the market multiples method | | (10,000 | ) | | 3,000 |
| | 2,000 |
|
As of November 25, 2017, the discounted cash flow method valuation produced a higher value for both reporting units than the guideline public company method and as such the change to market multiple weighting would reduce the 2017 valuation.
We provide 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 our reporting units will not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods and future declines in the residential housing and remodeling markets could result in future goodwill impairments.
Income Taxes. We utilize the asset and liability method in accounting for income taxes, which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financial statements and the amounts included in our federal, state, and foreign income tax returns be recognized in the consolidated balance sheet. The amount recorded in our consolidated financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states in which we and our 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. We establish 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. We have executed a tax sharing agreement with Ply Gem Holdings and Ply Gem Investment Holdings pursuant to which tax liabilities for each respective party are computed on a stand-alone basis. The tax sharing agreement was amended in 2013 to reflect the merger of Ply Gem Prime Holdings with and into Ply Gem Holdings. Our U.S. subsidiaries file a consolidated federal income tax return, unitary, combined, or separate state income tax returns. Gienow Canada and Mitten file separate Canadian income tax returns.
During the year ended December 31, 2016, we determined that a valuation allowance was no longer required against our net federal deferred tax assets and a portion of our net state deferred tax assets. As a result, we released approximately $86.5 million of our valuation allowance since positive evidence outweighed negative evidence thereby allowing us to achieve the “more likely than not” realization threshold. We still remain in a valuation allowance position at December 31, 2017 against our 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. Refer to Note 10 Income Taxes to the consolidated financial statements for additional information regarding income taxes.
Tax Receivable Agreement (“TRA”) Liability. The TRA liability generally provides for our payment 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 we actually realize in periods ending after the IPO as a result of (i) net operating loss carryovers ("NOLs") from periods ending before January 1, 2013, (ii) deductible expenses attributable to the IPO and (iii) deductions related to imputed interest. Since the inception of the TRA liability with the 2013 IPO, we have historically had a full valuation allowance for federal purposes and had partial valuation allowances on certain state and Canadian jurisdictions. As a result of the tax valuation allowance position for federal and state purposes, we 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 previous cumulative loss position) and (ii) future income due to the expected reversal of deferred tax liabilities. During the year ended December 31, 2016, we released our discrete valuation allowance on our federal deferred tax assets and certain state deferred tax assets of approximately $55.2 million, due to positive factors outweighing negative evidence thereby allowing us 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, we utilized future forecasts of taxable income beyond the 2016 tax year to determine the TRA liability. Our 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 we retain the benefit of 15% of the tax savings. 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.
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, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“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, we have 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. We are continuing to assess the impact from the Tax Act and may record further adjustments in 2018.
Results of Operations
The following table summarizes net sales and net income by segment and is derived from the accompanying consolidated statements of operations included in this report.
|
| | | | | | | | | | | | |
| | Year ended December 31, |
(Amounts in thousands) | | 2017 | | 2016 | | 2015 |
Net Sales | | | | | | |
Siding, Fencing, and Stone | | $ | 970,198 |
| | $ | 886,851 |
| | $ | 840,118 |
|
Windows and Doors | | 1,086,105 |
| | 1,024,993 |
| | 999,608 |
|
Operating earnings (loss) | | |
| | |
| | |
|
Siding, Fencing, and Stone | | 146,753 |
| | 157,058 |
| | 134,654 |
|
Windows and Doors | | 56,435 |
| | 43,579 |
| | 18,195 |
|
Unallocated | | (28,930 | ) | | (32,141 | ) | | (30,317 | ) |
Foreign currency gain (loss) | | |
| | |
| | |
|
Siding, Fencing, and Stone | | 303 |
| | 204 |
| | (954 | ) |
Windows and Doors | | 1,060 |
| | 95 |
| | (2,212 | ) |
Interest income (expense), net | | |
| | |
| | |
|
Siding, Fencing, and Stone | | 29 |
| | 16 |
| | 22 |
|
Windows and Doors | | 21 |
| | 12 |
| | 17 |
|
Unallocated | | (69,333 | ) | | (72,710 | ) | | (74,858 | ) |
Income tax benefit (expense) | | |
| | |
| | |
|
Unallocated | | (46,654 | ) | | 51,995 |
| | 688 |
|
Loss on modification or | | |
| | |
| | |
|
extinguishment of debt | | |
| | |
| | |
|
Unallocated | | (2,106 | ) | | (11,747 | ) | | — |
|
Tax receivable agreement liability adjustment | | |
| | |
| | |
|
Unallocated | | 10,749 |
| | (60,874 | ) | | (12,947 | ) |
| | | | | | |
Net income | | $ | 68,327 |
| | $ | 75,487 |
| | $ | 32,288 |
|
The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated. However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.
This review of performance is organized by business segment, reflecting the way we manage our business. Each business group leader is responsible for operating results down to operating earnings (loss). We use operating earnings as a performance measure as it captures the income and expenses within the management control of our business leaders. Corporate management is responsible for making all financing decisions. Therefore, each segment discussion focuses on the factors affecting operating earnings, while interest expense and income taxes and certain other unallocated expenses are separately discussed at the corporate level.
Siding, Fencing, and Stone Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Amounts in thousands) | | 2017 | | 2016 | | 2015 |
Statement of operations data: | | | | | | | | | | | | |
Net sales | | $ | 970,198 |
| | 100.0 | % | | $ | 886,851 |
| | 100.0 | % | | $ | 840,118 |
| | 100.0 | % |
Gross profit | | 248,249 |
| | 25.6 | % | | 259,485 |
| | 29.3 | % | | 238,326 |
| | 28.4 | % |
SG&A expense | | 92,541 |
| | 9.5 | % | | 89,704 |
| | 10.1 | % | | 90,760 |
| | 10.8 | % |
Amortization of intangible assets | | 8,955 |
| | 0.9 | % | | 12,723 |
| | 1.4 | % | | 12,912 |
| | 1.5 | % |
Operating earnings | | 146,753 |
| | 15.1 | % | | 157,058 |
| | 17.7 | % | | 134,654 |
| | 16.0 | % |
Currency transaction gain (loss) | | 303 |
| | — | % | | 204 |
| | — | % | | (954 | ) | | (0.1 | )% |
Net Sales
Net sales for the year ended December 31, 2017 increased $83.3 million or 9.4% compared to the year ended December 31, 2016. The 9.4% net sales increase was driven by a $76.5 million or 9.4% net sales increase for the U.S. market and a net sales increase of $6.8 million or 9.1% for the Canadian market for the year ended December 31, 2017 relative to the year ended December 31, 2016. In the U.S. market, the 9.4% net sales increase resulted from improved U.S. market demand for our products, new business wins, and higher average selling prices, which increased in response to higher material costs. The favorable U.S. demand factors increased our vinyl siding unit sales by 7.0% for the year ended December 31, 2017 compared to the year ended December 31, 2016. In addition, our average selling prices increased 0.5% in response to higher material costs resulting in higher net sales of approximately $15.0 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. Overall, we achieved the 9.4% net sales increase in the U.S. market from improved volume, price, and market share gains that were partially offset by inventory buybacks of $2.7 million related to new business wins during the year ended December 31, 2017. In Canada, we achieved the 9.1% net sales increase from increased unit volume sales of 4.6% for our vinyl siding products in Canada and a favorable foreign currency impact of $2.2 million. Our improved net sales in the Canadian market continues to reflect the stabilization in the Canadian market despite the challenging conditions that currently exist in Canada from the significant decline in energy prices that have stymied housing and economic development particularly in Western Canada for the last several years.
Our building products are typically installed on a new construction home 90 to 120 days after the start of the home, therefore, single family housing starts commencing in the period from September 2016 to September 2017 directly impacts the demand for our products for the year ended December 31, 2017. According to the U.S. Census Bureau, single family housing starts increased 9.6% during this lag affected period reflecting these improved market conditions. Specifically, the heavy vinyl siding geographic areas in the Northeast increased 3.2% while the Midwest increased 9.4% during the lag affected year. In addition to the new construction market improvement, remodeling activity, according to the Leading Indicator of Remodeling Activity (“LIRA”), reflected the 2017 fourth quarter trailing twelve months increasing 6.6% compared to 2016. However, due to the relative high dollar value or “big ticket” nature of our replacement products, we believe that true remodeling market demand for our big ticket exterior products increased approximately 3.0%. Since our Siding, Fencing, and Stone segment is heavily weighted to the repair and remodeling market, we estimate the weighted average U.S. market increase to be 5.3% for the year ended December 31, 2017, which we exceeded with our 7.0% vinyl siding unit net sales increase in the U.S. for the year ended December 31, 2017. Our 7.0% vinyl siding unit sales increase also exceeded the market indicators as reported by the Vinyl Siding Institute which reported that U.S. vinyl siding industry shipments increased 5.7% during the year. The improved U.S. and Canadian market conditions accounted for the majority of the 9.4% net sales increase achieved during the year ended December 31, 2017, however our sales also benefited from new business wins, which we believe is demonstrated by the improvement in our U.S. market position in vinyl siding, which increased from 39.8% to 40.4% during 2017 relative to 2016, while our share of the Canadian vinyl siding market improved from 31.5% to 32.7% during 2017 relative to 2016. For the years ended December 31, 2017 and 2016, the percentage of net sales in vinyl siding and metal accessories represented approximately 57.0% and 25.2% and 58.0% and 24.7%, respectively, with our net sales of other products comprising approximately 17.8% and 17.3%, respectively.
Net sales for the year ended December 31, 2016 increased $46.7 million or 5.6% compared to the year ended December 31, 2015. The net sales increase resulted from a $52.0 million net sales increase or 7.1% in the U.S. market partially offset by a net sales decrease of $5.3 million or 4.9% for the Canadian market. In the U.S. market, the 7.1% net sales increase for the year ended December 31, 2016 was primarily driven by improved U.S. market demand for our products, new business wins of approximately $34.0 million, and $11.7 million of net sales attributed to our Canyon Stone acquisition, which was completed on May 29, 2015. Excluding Canyon Stone, our net sales in the U.S. market would have increased 5.5% for the year ended December 31, 2016 compared to the year ended December 31, 2015. Our net sales growth in the U.S. market resulted from increased unit sales of approximately 10.6% partially offset by lower average selling prices of approximately 4.4% that were reduced in response to lower raw material input costs experienced during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The lower average selling prices for our products negatively impacted our net sales by approximately $35.2 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The positive demand factors in the U.S. market were partially offset by continued weaker market demand in Canada which when combined with $3.8 million of negative foreign currency resulted in the $5.3 million Canadian net sales decrease. Market demand in Canada has been negatively impacted by the 2016 decline in energy prices, particularly in Western Canada, where housing starts have declined significantly in Alberta (21.0%).
Our building products are typically installed on a new construction home 90 to 120 days after the start of the home, therefore, single family housing starts commencing in the period from September 2015 to September 2016 directly impacts the demand for our products for the year ended December 31, 2016. According to the U.S. Census Bureau, single family housing starts increased 9.0% during this lag affected period reflecting the improved market conditions. In addition to the new construction market improvement, remodeling activity, according to the LIRA, reflected the 2016 trailing twelve months increasing 6.0% compared to the 2015 period. However, due to the relative higher dollar value or “big ticket” nature of our replacement products, we believe that true remodeling market demand for our big ticket exterior products increased 3.0% to 4.0%. Since our Siding, Fencing, and Stone segment is heavily weighted to the repair and remodeling market, we estimate the weighted average U.S. market repair and remodeling increase to be 5.4% for 2016. Our U.S. unit sales increase of 10.6% outperformed the estimated market increase but was partially offset by our lower average selling prices. The improvement in single family housing starts and remodeling expenditures as well as our ability to exceed these market indicators on a unit basis is evidenced by the Vinyl Siding Institute reporting that U.S. vinyl siding industry shipments increased 5.2% while shipments in Canada decreased 8.5% for 2016 relative to 2015 compared to our vinyl industry shipments increase of 8.1% in the U.S. and our 4.5% decrease in Canada.
The improved U.S. market conditions drove our 5.6% net sales increase during the year ended December 31, 2016; however our sales also benefited from new business wins of $34.0 million which we believe is demonstrated by the improvement in our U.S. market position in vinyl siding which increased from 38.8% to 39.8% for the year ended December 31, 2016 relative to the year ended December 31, 2015, while our share of the Canadian vinyl siding market improved from 30.2% to 31.5% for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Gross Profit
Gross profit for the year ended December 31, 2017 decreased $11.2 million or 4.3% compared to the year ended December 31, 2016. The gross profit decrease resulted from higher raw material input costs that were not fully offset by increased average selling prices, higher freight costs and the near-term negative impact of Hurricanes Harvey and Irma. The increased raw material costs were largely related to aluminum and PVC resin which increased 22.2% and 10.3%, respectively, during the year ended December 31, 2017 relative to the year ended December 31, 2016. This unfavorable material cost pricing decreased gross profit by approximately $28.6 million during the year ended December 31, 2017 relative to the year ended December 31, 2016. Although we were able to partially offset this $28.6 million with selling price increases of $15.0 million that were implemented during the first and second quarters of 2017, our realization from the early price increases was below expectations due to timing and market acceptance and, as a result, we announced additional price increases during the second quarter of 2017. These additional price increases are expected to improve gross margins during 2018. While historically we have successfully demonstrated our ability to pass along these material cost increases to customers, which enables our gross margins to remain relatively stable over an annualized period, our gross profit margins may be compressed during periods of rising raw material costs and expand as our selling price increases take effect or material inflation abates. In addition to the higher material costs, we also incurred increased freight expenses during the year ended December 31, 2017 of $5.1 million due to a 15.1% increase in diesel costs for the year ended December 31, 2017 compared to 2016 as well as limited experienced drivers and route availability which impacted our common carrier cost, as well as higher operating costs relative to the year ended December 31, 2016 that negatively impacted our gross profit. Furthermore, we incurred unfavorable mix from the $25.6 million increase in metal sales during the year ended December 31, 2017 compared to the year ended December 31, 2016, which carry lower gross profit margins than vinyl sales. The negative trends within gross profit were partially offset by improved operating metrics within our Canadian business which experienced higher gross profit of $2.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016, which can be attributed to higher average selling prices, improved market conditions within Canada that led to unit volume increases, and favorable foreign currency rates.
In addition to the higher material, operating, and freight costs as well as unfavorable product mix, our siding, fencing and stone segment was also negatively impacted by Hurricanes Harvey and Irma by approximately $6.2 million during the year ended December 31, 2017. Hurricane Harvey’s torrential rainfall and flooding of the Houston, Texas area negatively impacted our raw material sourcing with two of the four domestic PVC resin producers declaring “force majeure”. In addition, we incurred higher freight charges related to moving our existing supply of PVC resin between our plants because of the temporary PVC resin shortage in the Houston chemical market which supplies a significant percentage of the total U.S. PVC resin market. Since Hurricanes Harvey and Irma occurred on August 24th and September 10th, respectively, the negative impact from these storms commenced during the later portion of our third quarter but permeated into our fourth quarter as well from continued negative raw material pricing, sourcing and freight costs. Overall, our gross profit declined during the year ended December 31, 2017 compared to the year ended December 31, 2016 despite volume increases and higher average selling prices as they were fully offset by higher material, freight, and operating costs.
As a percentage of net sales, gross profit decreased from 29.3% for the year ended December 31, 2016 to 25.6% for the year ended December 31, 2017. The 370 basis point decrease for the year ended December 31, 2017 resulted from increased raw material costs primarily for aluminum and PVC resin that were not fully offset during 2017 by increased selling prices. Also, our sales of our metal accessories, which typically carry lower gross profit margins, outpaced our vinyl siding sales, that resulted in a negative product mix impact on our gross profit percentage. In addition, our gross profit margins were unfavorably impacted by Hurricanes Harvey and Irma as well as higher operating and freight costs experienced during the year ended December 31, 2017.
Gross profit for the year ended December 31, 2016 increased $21.2 million or 8.9% compared to the year ended December 31, 2015. The gross profit increase for the year ended December 31, 2016 primarily resulted from the 5.6% net sales increase and included approximately $3.4 million of gross profit from our Canyon Stone acquisition, which was completed on May 29, 2015. Excluding Canyon Stone, our gross profit increase would have been $17.8 million or 7.4% for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Overall, the higher sales volumes experienced during 2016 in the U.S. market of 5.5% enabled us to increase our operating leverage and gross profit relative to 2015. In addition, we experienced favorable material cost pricing during the year ended December 31, 2016 relative to the year ended December 31, 2015 specifically for aluminum and PVC resin. This favorable net material cost pricing favorably impacted gross profit by approximately $33.5 million during the year ended December 31, 2016 relative to the year ended December 31, 2015, but was offset by $35.2 million of lower net selling prices that were reduced as a result of lower material costs. In addition, our Canadian gross profit declined 12.7% or $4.2 million during the year ended December 31, 2016 relative to the year ended December 31, 2015 primarily as a result of an unfavorable foreign currency impact of $3.0 million as well as the declining Canadian economic conditions prevalent in Western Canada which are heavily dependent on energy prices to sustain their economy partially offset by favorable material costing of $0.9 million.
As a percentage of net sales, gross profit increased from 28.4% for the year ended December 31, 2015 to 29.3% for the year ended December 31, 2016 excluding the impact of the Canyon Stone acquisition. The 90 basis point increase for the year ended December 31, 2016 resulted mainly from improved operating leverage from the 5.6% net sales increase as well as favorable material cost pricing and freight expense partially offset by lower average sales prices, an unfavorable foreign currency impact from a weakening Canadian dollar as well as weakening demand in Canada due to the economic slowdown.
SG&A Expense
SG&A expense for the year ended December 31, 2017 increased from the year ended December 31, 2016 by approximately $2.8 million or 3.2%. The $2.8 million SG&A expense increase resulted from $2.9 million in higher selling and marketing expenses related to the 9.4% net sales increase, $0.9 million in higher legal and professional expenses, $0.7 million in unfavorable workers compensation expenses, $0.2 million in higher research and development expenses, and $0.5 million in increased SG&A expenses for the stone business partially offset by lower management compensation expense of $2.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. As a percentage of net sales, SG&A expense decreased 60 basis points from 10.1% for the year ended December 31, 2016 to 9.5% for the year ended December 31, 2017 as a result of the lower management compensation expense and improved operating leverage related to the net sales increase.
SG&A expense for the year ended December 31, 2016 decreased from the year ended December 31, 2015 by approximately $1.1 million or 1.2%. Excluding the impact of the Canyon Stone acquisition which was completed on May 29, 2015 and incurred SG&A expense of approximately $2.6 million, SG&A expense for the year ended December 31, 2016 decreased $3.7 million or 4.0% compared to the year ended December 31, 2015. SG&A expense decreased primarily due to lower sales and marketing spending that resulted from our initiative to better leverage our marketing resources. The success of these initiatives is demonstrated with the SG&A expense reduction while achieving $34.0 million in market share gains during 2016.
As a percentage of net sales excluding Canyon Stone, SG&A expense decreased from 10.8% for the year ended December 31, 2015 to 10.1% for the year ended December 31, 2016. The decrease reflects improved leverage on the fixed component of our SG&A expenses relative to the net sales increase as well as the impact of certain sales and marketing cost initiatives which resulted in our sales and marketing expenses decreasing $3.6 million during the year ended December 31, 2016 relative to the year ended December 31, 2015.
Amortization of Intangible Assets
Amortization expense for the year ended December 31, 2017 decreased approximately $3.8 million or 29.6% compared to the year ended December 31, 2016 due to certain customer relationship intangible assets becoming fully amortized during the year ended December 31, 2016. As a percentage of net sales, amortization expense decreased to 0.9% for the year ended December 31, 2017 from 1.4% for the year ended December 31, 2016.
Amortization expense for the year ended December 31, 2016 was consistent with the year ended December 31, 2015 at approximately $12.7 million and 1.4% of net sales relative to $12.9 million and 1.5% of net sales, respectively.
Currency Transaction Gain (Loss)
A currency transaction impact was established in 2013 with the acquisition of Mitten within the Siding, Fencing, and Stone segment. The currency transaction gain for the year ended December 31, 2017 was $0.3 million. The currency transaction gain for the year ended December 31, 2016 was $0.2 million and for the year ended December 31, 2015 was a transaction loss of $1.0 million related to the Mitten entity. The $1.2 million increase in the foreign currency gain for the year ended December 31, 2016 was due to the positive movement in the Canadian dollar relative to the U.S. dollar during the year ended December 31, 2016.
Windows and Doors Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Amounts in thousands) | | 2017 | | 2016 | | 2015 |
Statement of operations data: | | | | | | | | | | | | |
Net sales | | $ | 1,086,105 |
| | 100.0 | % | | $ | 1,024,993 |
| | 100.0 | % | | $ | 999,608 |
| | 100.0 | % |
Gross profit | | 220,264 |
| | 20.3 | % | | 202,789 |
| | 19.8 | % | | 181,386 |
| | 18.1 | % |
SG&A expense | | 151,513 |
| | 14.0 | % | | 146,869 |
| | 14.3 | % | | 150,797 |
| | 15.1 | % |
Amortization of intangible assets | | 12,316 |
| | 1.1 | % | | 12,341 |
| | 1.2 | % | | 12,394 |
| | 1.2 | % |
Operating earnings | | 56,435 |
| | 5.2 | % | | 43,579 |
| | 4.3 | % | | 18,195 |
| | 1.8 | % |
Currency transaction gain (loss) | | 1,060 |
| | 0.1 | % | | 95 |
| | — | % | | (2,212 | ) | | (0.2 | )% |
Net Sales
Net sales for the year ended December 31, 2017 increased $61.1 million or 6.0% compared to the year ended December 31, 2016. The 6.0% net sales increase resulted from improved U.S. and Canadian market demand conditions, which primarily favorably impacted our new construction. For the year ended December 31, 2017 compared to the year ended December 31, 2016 our U.S. new construction business increased $54.1 million or 8.3% due in part to higher average selling prices of 2.7% and our U.S. repair and remodeling business decreased $11.4 million or 4.1% from lower unit volume sales of 1.9% partially offset by higher average selling prices of 3.9%. Our Canadian net sales increased $18.4 million or 19.4% for the year ended December 31, 2017 relative to the year ended December 31, 2016 due to an improving Western Canadian market which culminated in a unit volume increase of 14.1% and a favorable foreign currency impact of $2.1 million. Our Western Canada sales have been impacted by depressed market conditions that resulted from the significant decline in energy prices that have stymied housing and economic development in Western Canada, however recently we have begun to see some recovery in those markets.
The net sales increase for the U.S. market can be attributed to improved market conditions as evidenced by the U.S. Census Bureau reporting that single family housing starts increased 9.6% during the lag effected period which resulted in higher net sales for our new construction business. Our building products are typically installed on a new construction home 90 to 120 days after the start of the home, therefore single family starts commencing in the period from September 2016 to September 2017 directly impacts the demand for our products for the year ended December 31, 2017. For the repair and remodeling business, LIRA reported that the 2017 trailing twelve months increased 6.6% compared to the 2016 period creating a favorable demand environment. However, due to the relative high dollar value or “big ticket” nature of our replacement products, we believe that true remodeling market demand for our big ticket exterior products increased approximately 3.0%. Our vinyl unit net sales for new construction increased 4.4% which was less than the 9.6% new construction market increase while our repair and remodeling unit sales decreased 1.9% which was lower than the repair and remodeling demand market indicators for the year ended December 31, 2017. The lower unit volumes for new construction relative to market indicators resulted from our ability to realize higher average selling prices on our products combined with aggressive price action taken by certain competitors which suppressed our market gains. The lower unit volumes relative to the overall market for our repair and remodeling window products was caused by acquisition integration activities for certain customers, which adversely impacted unit volumes in certain geographic areas. In addition, Hurricanes Harvey and Irma negatively impacted our ability to ship product to significant markets in Houston and Florida for certain days in late third quarter and early fourth quarter resulting in estimated lost net sales of approximately $10.0 million for the year ended December 31, 2017. Despite these lower net sales amounts relative to demand market indicators for our new construction and repair and remodeling businesses, we achieved an overall 6.0% net sales increase due in part to higher average selling prices of 3.1% for the year ended December 31, 2017 compared to the year ended December 31, 2016. These higher average selling prices increased our U.S. and Canadian net sales by approximately $30.8 million and $3.2 million, respectively, for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Net sales for the year ended December 31, 2016 increased $25.4 million or 2.5% compared to the year ended December 31, 2015. The net sales increase for the year ended December 31, 2016 can be attributed to the improved U.S. market conditions favorably impacting both our new construction business as well as our repair and remodeling business. For the year ended December 31, 2016 compared to the year ended December 31, 2015, our new construction business increased $38.7 million or 6.7% while our repair and remodeling business increased $6.1 million or 2.0%. This U.S. net sales increase was partially offset by a $19.4 million net sales decline or 17.0% for our Canadian net sales for the year ended December 31, 2016 relative to the year ended December 31, 2015 due to a weakening Canadian market.
The net sales increase for the U.S. market can be attributed to improved market conditions as evidenced by the U.S. Census Bureau reporting that single family housing starts increased 9.0% during the lag effected period which resulted in higher net sales for our new construction products. Our building products are typically installed on a new construction home 90 to 120 days after the start of the home, therefore single family starts commencing in the period from September 2015 to September 2016 directly impacts the demand for our products for the year ended December 31, 2016. As previously mentioned, we believe that true market demand for big ticket repair and remodeling products increased 3.0% to 4.0%. Our net sales for new construction and repair and remodeling were lower than the demand market indicators for the year ended December 31, 2016 due primarily to lower sales in certain geographical areas, namely Texas, specifically Houston, due to extraordinary levels of rainfall which negatively impacted the construction industry and economic conditions in the Houston market related to the oil and gas industry. Our net sales of window products in the Houston market declined $7.9 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. In addition to Houston, we incurred lost sales in our repair and remodeling business of $11.3 million and $2.2 million in our new construction business from competitive price action taken by certain competitors in other geographic regions in which we maintained our pricing discipline in the marketplace.
Despite these lower net sales amounts relative to demand market indicators for the year ended December 31, 2016 compared to the year ended December 31, 2015, we achieved higher average selling prices of 3.3% for the year ended December 31, 2016 compared to the year ended December 31, 2015. These higher average selling prices increased our U.S. net sales by approximately $26.2 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The overall U.S. net sales increase of $44.8 million was partially offset by a $19.4 million or 17.0% net sales decline for our Western Canadian business which endured challenging market conditions negatively impacted by demand softness due to declining energy prices and poor economic growth as well as a negative foreign currency impact of $3.1 million.
Gross Profit
Gross profit for the year ended December 31, 2017 increased $17.5 or 8.6% compared to the year ended December 31, 2016. The gross profit increase for the year ended December 31, 2017 resulted from the continued improvement in our new construction business partially offset by declining gross profit performance for our repair and remodeling business within the U.S. while our Canadian business experienced improved gross profit of $5.9 million relative to the prior year period. Gross profit for our U.S. new construction business increased $12.7 million while our repair and remodeling gross profit declined $1.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The gross profit net improvement for our U.S. businesses was driven by increased selling prices of 3.1%, improved operating efficiencies and favorable product mix, which improved gross profit by $30.8 million partially offset by lower gross margins within our repair and remodeling business which experienced reduced unit volumes during the year decreasing our manufacturing operating leverage. Our Canadian business also experienced favorable pricing of $3.2 million from higher average selling prices for the year ended December 31, 2017 relative to the year ended December 31, 2016. These factors coupled with improved manufacturing leverage from the unit volume increases and a favorable foreign currency impact of $0.5 million enabled our Canadian business to realize improved gross profit of $5.9 million despite the challenging economic and demand conditions that exist in Western Canada due to lower energy prices. For the Windows and Doors segment, we achieved higher average selling prices during the year ended December 31, 2017 compared to the year ended December 31, 2016 from announced price increases implemented to offset the aforementioned raw material cost increases for aluminum and PVC resin as well as glass costs. These higher material costs negatively impacted our gross profit by approximately $14.0 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. In addition to the higher material costs, we also incurred increased freight expenses during the year ended December 31, 2017 of $4.0 million due to a 15% increase in diesel costs for the year ended December 31, 2017 compared to 2016 as well as limited experienced drivers and route availability which impacted our common carrier cost.
In addition to the higher material and freight costs, our gross profit was negatively impacted by Hurricanes Harvey and Irma during the year ended December 31, 2017. We incurred lost sales of approximately $10.0 million with an estimated gross profit of approximately $2.8 million from the hurricanes impacting our significant new construction and repair and remodeling window markets in Florida and Houston as well as higher material costs of approximately $1.1 million and higher freight expenses of approximately $0.6 million from moving our existing supply of PVC resin between our plants because of the temporary shortages in the Houston area. Since Hurricanes Harvey and Irma occurred on August 24th and September 10th, respectively, the negative impact from these storms commenced during the later portion of our third quarter but permeated into our fourth quarter as well from continued negative raw material pricing, sourcing, and freight costs. Overall, our net sales increase of 6.0% achieved through improved market conditions and higher selling prices was mitigated by higher material costs and the negative hurricane impact resulting in a gross profit improvement of 8.6% during the year ended December 31, 2017 compared to the year ended December 31, 2016.
As a percentage of net sales, gross profit increased from 19.8% for the year ended December 31, 2016 to 20.3% for the year ended December 31, 2017. The 50 basis point increase in gross profit reflects improvements of 110 basis points for our U.S. new construction businesses and 190 basis points for our Canadian business partially offset by an 80 basis point deterioration in our repair and remodeling business due to lower operating leverage on reduced unit sales volume. These net gross margin improvements resulted from improved demand levels and higher average selling prices partially offset by rising material costs for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Gross profit for the year ended December 31, 2016 increased $21.4 or 11.8% compared to the year ended December 31, 2015. The gross profit increase for the year ended December 31, 2016 primarily resulted from the continued improvement in our new construction and repair and remodeling businesses partially offset by the negative impact from lower net sales in Canada. Gross profit for our U.S. new construction and repair and remodeling business increased $16.1 million and $6.9 million, respectively, during the year ended December 31, 2016 compared to the year ended December 31, 2015. The gross profit improvement for our U.S. businesses was driven by increased selling prices of 3.3%, favorable product mix and lower raw material costs and cost savings and synergies that were realized from our Simonton acquisition. These favorable factors were partially offset by higher costs in our U.S. new construction window business related to labor and freight. These overall net gross profit improvements in the U.S. were partially offset by a gross profit decrease of $1.6 million for our Western Canadian business which experienced weaker market demand due to depressed economic conditions including a negative foreign currency impact of $4.0 million during the year ended December 31, 2016 compared to the year ended December 31, 2015.
As a percentage of net sales, gross profit increased from 18.1% for the year ended December 31, 2015 to 19.8% for the year ended December 31, 2016. The 170 basis point gross profit increase reflects improvements for both our U.S. new construction and repair and remodeling window businesses from improved demand levels, higher average selling prices, and favorable material costs partially offset by a decrease for our Canadian business driven by the 17.0% net sales decrease which decreased operating leverage during the year ended December 31, 2016 as compared to the year ended December 31, 2015.
SG&A Expense
SG&A expense for the year ended December 31, 2017 increased $4.6 million or 3.2% compared to the year ended December 31, 2016. The $4.6 million SG&A expense increase primarily resulted from increased selling and marketing expenses of $2.0 million related to the net sales increase of 6.0% and higher bad debt expense of $1.3 million. In addition, we experienced a favorable $1.3 million movement for a severance accrual reversal during the year ended December 31, 2016. As a percentage of net sales, SG&A expense decreased 30 basis points from 14.3% for the year ended December 31, 2017 to 14.0% for the year ended December 31, 2017.
SG&A expense for the year ended December 31, 2016 decreased $3.9 million or 2.6% compared to the year ended December 31, 2015. The SG&A expense decrease was attributable primarily to 2015 activity for acquisition integration and restructuring activities related to our repair and remodeling window acquisition which originally occurred in September 2014 as well as combining our Canadian window manufacturing facilities into a single facility. Specifically, our U.S. window repair and remodeling business incurred lower severance expenses of $1.3 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. In addition, our U.S. window businesses experienced $5.0 million in lower management incentive compensation and lower sales and marketing expenses during the year ended December 31, 2016 compared to the year ended December 31, 2015 partially offset by increased legal fees of approximately $2.8 million primarily related to legal settlements completed in December 2016 and January 2017 as well as increased legal expense associated with the 2015 resolution of class action litigation for our new construction business of $3.2 million. Our Canadian window business experienced lower restructuring and integration charges of $2.2 million, as well as lower personnel costs of $1.7 million during the year ended December 31, 2016 compared to the year ended December 31, 2015 due to the economic slowdown with lower demand levels as well as integration activities that occurred during 2015 finalizing our combination of our Western Canadian manufacturing facilities into a single location in Alberta.
As a percentage of net sales, SG&A expense decreased from 15.1% for the year ended December 31, 2015 to 14.3% for the year ended December 31, 2016. The 80 basis point decrease primarily resulted from lower severance expense for our U.S. repair and remodeling window business, lower management compensation expense, lower selling and marketing expenses partially offset by increased legal expenses for the year ended December 31, 2016 compared to the year ended December 31, 2015. In addition, our Canadian window business incurred lower restructuring and personnel expenses during the year ended December 31, 2016 compared to the year ended December 31, 2015 from integration activities that were incurred during 2015 finalizing our combination our manufacturing operations into a single location in Alberta.
Amortization of Intangible Assets
Amortization expense for the year ended December 31, 2017 was consistent with the year ended December 31, 2016 at $12.3 million and 1.1% of net sales and $12.3 million and 1.2% of net sales, respectively. Amortization expense for the year ended December 31, 2016 was consistent with the year ended December 31, 2015 at $12.3 million and 1.2% of net sales and $12.4 million and 1.2% of net sales, respectively.
Currency Transaction Gain (Loss)
The currency transaction gain for the year ended December 31, 2017 was $1.1 million increasing $1.0 million from a gain of $0.1 million for the year ended December 31, 2016 as a result of the fluctuation in the Canadian dollar as compared to the U.S. dollar for 2017. The currency transaction gain for the year ended December 31, 2016 was $0.1 million increasing $2.3 million from a loss of $2.2 million for the year ended December 31, 2015 as a result of the fluctuation in the Canadian dollar as compared to the U.S. dollar for 2016. Our Gienow acquisition during the year ended December 31, 2013, increased our transactional exposure to the Canadian currency. Management continues to evaluate methodologies to effectively hedge this foreign currency risk.
Unallocated Operating Earnings, Interest, and (Provision) Benefit for Income Taxes |
| | | | | | | | | | | | |
| | Year ended December 31, |
(Amounts in thousands) | | 2017 | | 2016 | | 2015 |
Statement of operations data: | | | | | | |
SG&A expense | | $ | (28,930 | ) | | $ | (32,141 | ) | | $ | (30,317 | ) |
Operating loss | | (28,930 | ) | | (32,141 | ) | | (30,317 | ) |
Interest expense | | (69,363 | ) | | (72,716 | ) | | (74,863 | ) |
Interest income | | 30 |
| | 6 |
| | 5 |
|
Tax receivable agreement liability adjustment | | 10,749 |
| | (60,874 | ) | | (12,947 | ) |
Loss on modification or extinguishment of debt | | (2,106 | ) | | (11,747 | ) | | — |
|
(Provision) benefit for income taxes | | $ | (46,654 | ) | | $ | 51,995 |
| | $ | 688 |
|
Operating loss/SG&A Expense
Unallocated SG&A expense includes items which are not directly attributed to or allocated to either of our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the year ended December 31, 2017 decreased by $3.2 million or 10.0% compared to the same period in 2016 due to decreased management incentive compensation of $3.9 million and lower stock compensation expense of $0.6 million partially offset by increased centralization activities of certain functional areas such as research and development ($0.1 million) and marketing ($0.3 million), along with an increase various other professional fees and personnel expenses of ($0.9 million).
The unallocated operating loss for the year ended December 31, 2016 increased by $1.8 million or 6.0% compared to the same period in 2015 due primarily to increased centralization of certain functional areas such as research and development ($1.0 million), marketing ($1.0 million), and information technology ($0.7 million) along with increased incentive compensation of approximately $0.4 million partially offset by decreases in stock compensation expense of $0.9 million and various other professional fees and personnel expenses of $0.4 million. One element that drove the increased research and development expense within the unallocated segment was the opening of the Insight Center in Durham, NC during 2016, a facility that supports product development and innovation.
Interest expense
Interest expense for the year ended December 31, 2017 decreased by approximately $3.4 million or 4.6% compared to the year ended December 31, 2016 as a result of the reduction in the Term Loan Facility principal balance year over year. During March, August and November 2016, we made a total of $160.0 million in voluntary payments on the Term Loan Facility and another $40.0 million voluntary payment on the Term Loan Facility was made in November 2017, in addition to our normal quarterly amortization payments of $1.1 million, or $4.3 million annually, which reduced our outstanding borrowings and our annual interest expense.
Interest expense for the year ended December 31, 2016 decreased by approximately $2.1 million or 2.9% compared to the same period in 2015 as a result of the reduction in the Term Loan Facility principal balance year over year and lower average borrowings on the ABL Facility year over year. During 2016, we made $160.0 million of voluntary payments on the Term Loan Facility in addition to our normal quarterly amortization payments of $1.1 million, or $4.3 million annually, which reduced our outstanding borrowings and our annual interest expense.
Interest income
Interest income for the year ended December 31, 2017 was consistent with the years ended December 31, 2016 and December 31, 2015.
Tax receivable agreement liability adjustment
Since the inception of the TRA liability with the Company’s 2013 initial public offering, we have historically been in a full valuation allowance for federal purposes and a partial valuation allowance for certain state and Canadian jurisdictions. As a result of the Company’s tax valuation allowance position for federal and state purposes, we historically calculated the TRA liability considering (i) current year taxable income only (due to the uncertainty of future taxable income associated with our previous cumulative loss position) and (ii) future income due to the expected reversals of deferred tax liabilities. During the year ended December 31, 2016, we released our federal valuation allowance and a portion of our state valuation allowance for $55.2 million, due to positive factors outweighing negative evidence, specifically no longer being in a cumulative loss position. The factors surrounding the release of this valuation allowance thereby eliminated any uncertainty as to future taxable income. Consequently, we were able to utilize future forecasts of taxable income beyond the 2016 tax year to determine the TRA liability as of December 31, 2016. Our future taxable income estimates were used to determine the cumulative net operating loss carryforwards ("NOLs") that are expected to be utilized and the TRA liability was accordingly adjusted using the 85% TRA rate. As a result of including future taxable income beyond 2016, we recognized a $60.9 million adjustment to the TRA liability during the year ended December 31, 2016 bringing the total TRA liability to $79.7 million as of December 31, 2016.
The TRA liability as of December 31, 2017 was $69.5 million. This amount represents the originally anticipated TRA liability at the IPO date with approximately $5.2 million remaining to be expensed through operations for state purposes as we remain in a state tax valuation allowance position as of December 31, 2017 for certain states. This remaining liability will be recognized as the state valuation allowances are released in future years. The $10.2 million decrease in the TRA liability for the year ended December 31, 2017 resulted primarily from a $10.7 million decrease for the reduction in the future federal corporate tax rate from 35% to 21% due to the enactment of the Tax Act on December 22, 2017, which reduces the value of the NOLs to be utilized in future periods. The $10.7 million was partially offset by $0.5 million of imputed interest accrual related to the 2016 TRA payment.
The $47.9 million increase for the TRA liability adjustment for the year ended December 31, 2016 relative to the year ended December 31, 2015 resulted primarily from the $55.2 million discrete federal valuation allowance release along with our ability to utilize future forecasts of taxable income beyond the 2016 tax year to determine the TRA liability as of December 31, 2016, as described above.
The $12.9 million TRA liability adjustment for the year ended December 31, 2015 resulted from increases in taxable income estimates resulting from the reversal of deferred tax liabilities as well as increases in our 2015 taxable income compared to the 2014 period. The $115.9 million increase in our 2015 taxable income can be attributed to the following factors (i) the continued U.S. housing recovery which is estimated to have had a 10.0% year over year increase in single family housing starts according to the U.S. Census Bureau, (ii) improvements in the repair and remodeling market evidenced by the 5.6% increase in homeowner improvements during 2015 versus 2014 according to LIRA, (iii) the positive income contributions from our acquisition of Simonton which was completed in September 2014, and (iv) continued improvements in our existing operations specifically for our U.S. windows business which increased its operating earnings by approximately $45.9 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. All of these items increased our taxable income estimate for the year ended December 31, 2015 and, as a result, our estimate of the TRA liability.
Loss on modification or extinguishment of debt
During November 2017, we voluntarily paid $40.0 million on the Term Loan Facility to reduce our outstanding indebtedness as allowable under the terms of the agreement governing the Term Loan Facility. We performed an analysis to determine the proper accounting treatment for this voluntary payment by evaluating the change in cash flows and determining that there were no changes in the creditors as a result of the payment. Consequently, we recognized a loss on debt modification or extinguishment of approximately $2.1 million for the year ended December 31, 2017 consisting of the proportionate write off of the related debt issuance costs and debt discount.
During 2016, we voluntarily paid $160.0 million on the Term Loan Facility to reduce our outstanding indebtedness as allowable under the terms of the agreement governing the Term Loan Facility. We performed an analysis to determine the proper accounting treatment for these voluntary payments by evaluating the change in cash flows and determining that there were no changes in the creditors as a result of the payment. Consequently, we recognized a loss on debt modification or extinguishment of approximately $11.7 million for the year ended December 31, 2016 consisting of the proportionate write off of the related debt issuance costs and debt discount.
Income taxes
The income tax provision for the year ended December 31, 2017 increased $98.6 million compared to the year ended December 31, 2016. The increase is primarily related to an increase in pre-tax income for the year ended December 31, 2017 and the reversal of the valuation allowance for federal and certain state jurisdictions during the year ended December 31, 2016. The income tax provision of approximately $46.7 million is comprised of $40.7 million of federal tax expense, $6.5 million of state tax expense, and a $0.5 million foreign income tax benefit. Our pre-tax income for the year ended December 31, 2017 was approximately $115.0 million including the $10.7 million Tax Receivable Agreement liability adjustment compared to pre-tax income of $23.5 million including the $60.9 million Tax Receivable Agreement liability adjustment for the year ended December 31, 2016. As of December 31, 2017, we remain in a valuation allowance position for certain state and Canadian jurisdictions.
The income tax benefit for the year ended December 31, 2016 increased to an approximate $52.0 million tax benefit compared to an approximate $0.7 million tax benefit for the year ended December 31, 2015. The income tax benefit of approximately $52.0 million is comprised of $53.6 million of federal tax benefit, $2.6 million state tax expense, and $1.0 million foreign income tax benefit. The increase in tax benefit is primarily due to the release of the discrete valuation allowance of $55.2 million partially offset by state income tax, remaining valuation allowances, and foreign income taxes. Our pre-tax income for the year ended December 31, 2016 was approximately $23.5 million including the $60.9 million tax receivable agreement liability adjustment compared to pre-tax income of $31.6 million including the $12.9 million tax receivable agreement liability adjustment for the year ended December 31, 2015.
The Tax Act enacted on December 22, 2017, makes broad and complex changes to 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, requiring 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.
As of 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, we 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 we will realize associated with these assets. This expense has been recognized in income taxes within our consolidated statement of operations.
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 we include in our financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, we have 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. We are continuing to assess the impact from the Tax Act and may record further adjustments in 2018.
Liquidity and Capital Resources
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.
General cash flow movements
During the year ended December 31, 2017, cash and cash equivalents increased to $71.4 million compared to approximately $51.6 million as of December 31, 2016. The increase in cash was driven by a $5.8 million improvement in operating earnings, $5.0 million lower TRA payments and $120.0 million less in voluntary payments on the Term Loan Facility in 2017 versus 2016 partially offset by $43.1 million lower operating cash flow. The improved operating performance was offset by a $38.1 million increase in working capital during the year ended December 31, 2017 relative to the year ended December 31, 2016. Accounts receivable increased $24.7 million and inventory increased $22.9 million offset by a $9.5 million improvement in trade payables during the year ended December 31, 2017 compared to year ended December 31, 2016. The approximate $24.7 million accounts receivable increase from December 31, 2016 to December 31, 2017 resulted primarily from the increase in December sales year over year. The net sales for December 2017 were approximately $177.4 million and the net sales for December 2016 were approximately $152.2 million. The approximate $22.9 million inventory increase from December 31, 2016 to December 31, 2017 resulted from higher raw material costs in 2017 combined with higher inventory levels at December 31, 2017 in anticipation of higher sales volumes in 2018. During the year ended December 31, 2016, cash and cash equivalents decreased approximately $57.8 million to $51.6 million as of December 31, 2016.
Our business is seasonal because inclement weather during the winter months reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors, especially in the Northeast and Midwest regions of the United States and Canada. As a result, our liquidity typically increases during the second and third quarters as our borrowing base increases under the ABL Facility reaching a peak early in the fourth quarter, and decreases late in the fourth quarter and throughout the first quarter.
Our primary cash needs are for working capital, capital expenditures and debt service. Our annual cash interest charges for debt service under the current organizational structure, including the ABL Facility, are estimated to be approximately $54.0 million for fiscal year 2018. As of December 31, 2017, we did not have any scheduled debt maturities until 2020. The specific debt instruments and their corresponding terms and due dates are described in the following sections. Our capital expenditures have historically averaged approximately 1.5% to 2.0% of net sales on an annual basis. For the year ending December 31, 2018, we estimate that our capital expenditures will be in a range from 2.00% to 2.25% of net sales. We finance these cash requirements through internally generated cash flow and funds borrowed under Ply Gem Industries’ ABL Facility.
Ply Gem’s specific cash flow movement for the year ended December 31, 2017 is summarized below:
Cash provided by operating activities
Net cash provided by operating activities for the year ended December 31, 2017 was approximately $101.9 million. Net cash provided by operating activities for the year ended December 31, 2016 was approximately $145.0 million, and net cash provided by operating activities for the year ended December 31, 2015 was approximately $139.4 million. The decrease in cash provided by operating activities in 2017 was driven by improved housing conditions that drove the 7.6% net sales increase offset by decreases in cash flows related to our working capital increase as a result of the net sales increase, rising commodity costs, and our aggressiveness in taking early pay discounts. These conditions resulted in an unfavorable $38.1 million impact in our primary working capital for the year ended December 31, 2017 compared to the year ended December 31, 2016.
The relative consistency in net cash provided by operating activities between 2016 and 2015 was primarily driven by the $43.2 million increase in net income during the year ended December 31, 2016 compared to the year ended December 31, 2015 partially offset by the $40.1 million working capital increase.
Cash used in investing activities
Net cash used in investing activities for the years ended December 31, 2017, 2016, and 2015 was approximately $37.9 million, $35.8 million, and $54.7 million, respectively. The cash used in investing activities during 2017 was primarily for capital expenditures which were approximately 2.0%, consistent with our historical average. Additionally, during the year ended December 31, 2017, the Company sold a building in Saskatoon, Canada for approximately $2.1 million. The Company moved to another leased facility within the Saskatoon area that more closely aligns with the Company's needs in that area.
The cash used in investing activities during 2016 was primarily for capital expenditures on numerous ongoing capital projects across all business segments. Capital expenditures for 2016 were approximately 1.9% of net sales, consistent with our historical average.
The cash used in investing activities in 2015 was primarily for the acquisition of Canyon Stone and capital expenditures on various ongoing capital projects. The Canyon Stone acquisition was approximately $21.0 million net of cash acquired. Capital expenditures for 2015 were approximately 1.8% of net sales, consistent with our historical average.
Cash used in financing activities
Net cash used in financing activities for the year ended December 31, 2017 was approximately $44.3 million, primarily from the $40.0 million voluntary Term Loan Facility payment made in November 2017, the 1.0% principal repayment of $4.3 million required by the Term Loan Facility, and $1.2 million in tax withholding related to employee stock grant issuances. These payments were offset by $1.2 million in cash provided by the exercise of stock options.
Net cash used in financing activities for the year ended December 31, 2016 was approximately $168.2 million, primarily from the three separate voluntary Term Loan Facility payments that totaled $160.0 million and the 1.0% principal repayment of $4.3 million required by the Term Loan Facility and the Tax Receivable Agreement payment of $5.0 million. These payments were offset by $1.1 million in cash provided by the exercise of stock options.
Net cash used in financing activities for the year ended December 31, 2015 was approximately $3.6 million, primarily related to the 1.0% principal repayment of $4.3 million required by the Term Loan Facility and the payment of $1.4 million in debt issuance costs. These payments were offset by $2.2 million in cash provided by the exercise of stock options.
Ply Gem’s specific debt instruments and terms are described below:
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 our consolidated senior secured debt ratio is equal or less than 2.50 to 1.00 but greater than 2.00 to 1.00 and to 0% if our consolidated senior secured debt ratio is equal to or less than 2.00 to 1.00) of our annual excess cash flow (as defined in the credit agreement), to the extent such excess cash flow exceeds $15.0 million, 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, we elected on November 3, 2017 to voluntarily prepay $40.0 million on the Term Loan Facility to reduce our outstanding indebtedness bringing our cumulative voluntary 2016 and 2017 Term Loan Facility payments to $200.0 million as we 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, our 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, we made a voluntarily payment of $40.0 million on the Term Loan Facility to reduce our outstanding indebtedness as allowable under the terms of the agreement governing the Term Loan Facility. We 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, we 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, we recognized a loss on debt modification or extinguishment of approximately $2.1 million, $11.7 million and $0.0 million for the years ended December 31, 2017, 2016, and 2015, 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 | ) | |
Liquidity requirements
We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under our ABL Facility. We believe that we will continue to meet our liquidity requirements over the next 12 months. We believe that our operating units are positive cash flow generating units and will continue to sustain their operations without any significant liquidity concerns. The performance of these operating units is significantly impacted by the performance of the housing industry, specifically single family housing starts and the repair and remodeling activity. Any unforeseen or unanticipated downturn in the housing industry could have a negative impact on our liquidity position.
Management anticipates that our current liquidity position, as well as expected cash flows from our operations should be sufficient to meet ongoing operational cash flow needs, capital expenditures, debt service obligations, and other fees payable under other contractual obligations for the foreseeable future. As of December 31, 2017, we had cash and cash equivalents of approximately $71.4 million, approximately $340.3 million of contractual availability under the ABL Facility and approximately $261.5 million of borrowing base availability.
In order to further supplement the Company's operating cash flow, the Company has from time to time opportunistically accessed capital markets based on prevailing economic and financial conditions. Based on market conditions, the Company may elect to pursue additional financing alternatives in the future.
Contractual Obligations
The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2017. Interest on the 6.50% Senior Notes is fixed. Interest on the Term Loan Facility is variable and has been presented at the average rate of approximately 4.8% based on the current LIBOR rate plus 1.0% structure of the instrument with consideration toward anticipated interest rate increases over the applicable term. Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.6% using the average principal balance during 2017 as a projection for future years' average balances. Actual interest rates for future periods may differ from those presented here.
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less Than | | | | | | More than |
(Amounts in thousands) | | Amount | | 1 Year | | 1 - 3 Years | | 3 - 5 Years | | 5 Years |
Long-term debt (1) | | $ | 883,875 |
| | $ | 4,300 |
| | $ | 28,600 |
| | $ | 850,975 |
| | $ | — |
|
Interest payments (2) | | 225,142 |
| | 53,841 |
| | 105,489 |
| | 65,812 |
| | — |
|
Non-cancelable lease commitments (3) | | 140,048 |
| | 31,590 |
| | 49,578 |
| | 33,449 |
| | 25,431 |
|
Purchase obligations (4) | | 120,600 |
| | 120,600 |
| | — |
| | — |
| | — |
|
Other long-term liabilities (5) | | 13,581 |
| | 1,358 |
| | 2,716 |
| | 2,716 |
| | 6,791 |
|
| | $ | 1,383,246 |
| | $ | 211,689 |
| | $ | 186,383 |
| | $ | 952,952 |
| | $ | 32,222 |
|
| |
(1) | Long-term debt is shown before discount, and consists of our 6.50% Senior Notes, Term Loan Facility, and ABL Facility. This amount excludes any estimate for excess cash flow payments that may be required under the Term Loan Facility. For more information concerning the long-term debt, see “Liquidity and Capital Resources” above. |
| |
(2) | Interest payments for variable interest debt are based on current interest rates. |
| |
(3) | Non-cancelable lease commitments represent lease payments for facilities and equipment. |
| |
(4) | Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. These obligations are related primarily to inventory purchases under two 2018 contracts that were finalized during 2017. |
| |
(5) | Other long-term liabilities include pension obligations which are estimated based on our 2017 annual funding requirements. Because we are unable to reliably estimate the timing of future tax payments related to uncertain tax positions, certain tax related obligations of approximately $4.5 million, including interest and penalties of approximately $1.9 million, have been excluded from the table above. Additionally, because we are unable to reliably estimate the timing of future tax payments related to the Tax Receivable Agreement, certain tax related obligations of approximately $69.5 million, have been excluded from the table above. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation; Seasonality
Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment. We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.
The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and Canada where inclement weather conditions during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors. Our sales in both segments are usually lower during the first and fourth quarters. Since a portion of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. In addition, the demand for cash to fund our working capital is greater from late in the fourth quarter through the first quarter.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for recent accounting pronouncements, which are hereby incorporated by reference into this Part II, Item 7.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our principal interest rate exposures relate to the loans outstanding under our Term Loan Facility and our ABL Facility, which provides for borrowings of up to $430.0 million on the Term Loan and up to $350.0 million on the ABL, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin. Assuming the Term Loan Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $1.1 million per year. Assuming the ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.9 million per year. At December 31, 2017, we were not party to any interest rate swaps to manage our interest rate risk. In the future, we may enter into interest rate swaps, involving the exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.
Foreign Currency Risk
Our results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of the Canadian dollar. In 2017, the net impact of foreign currency changes to our results of operations was a gain of $1.4 million. The impact of foreign currency changes related to translation resulted is an increase in stockholders' equity of approximately $3.8 million during the year ended December 31, 2017. In addition to the translation impact, the Company’s Canadian operations purchased approximately $49.4 million in U.S. dollars during 2017 to pay U.S. suppliers. As a result, a 10% deterioration in the Canadian dollar relative to the U.S. dollar would have increased the Company’s cost of goods sold by approximately $4.9 million during the year ended December 31, 2017. During the year ended December 31, 2017, the Company realized $0.3 million of losses on the 2017 derivative contracts that were reclassified from accumulated other comprehensive income or loss to current period earnings and were included in cost of goods sold. During the years ended December 31, 2017 and 2016, we entered into a hedging contracts in order to mitigate the 2017 exposure risk of currency fluctuation against the Canadian dollar and hedged approximately $38.4 million of our 2017 non-functional currency inventory purchases. During August 2017, we entered into a hedging contract in order to mitigate the 2018 exposure risk of currency fluctuation against the Canadian dollar and hedged approximately $40.4 million of our 2018 non-functional currency inventory purchases. At December 31, 2017, our foreign currency hedging contract had a market value of approximately $0.0 million and is recorded as an increase to stockholders' equity for the year ended December 31, 2017.
Commodity Pricing Risk
We are subject to significant market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum, and wood. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly. We manage the exposure to commodity pricing risk by continuing to diversify our product mix, strategic buying programs and vendor partnering. The Midwest ingot price of aluminum increased approximately 22.2% for the year ended December 31, 2017 compared to the year ended December 31, 2016. Additionally, according to market indices, the average market price for PVC resin was estimated to have increased approximately 10.3% for 2017 compared to 2016.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Our lease payments related to our sale/leaseback agreement include an annual increase based on the Consumer Price Index ("CPI"), which could expose us to potential higher costs in years with high inflation. The CPI increase for 2017 was approximately 2.1%.
Labor Force Risk
Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize, and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the U.S. housing market continues to recover and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired. Historically, we have believed that the lag period between breaking ground on a new housing start and the utilization of our products on the exterior of a home is between 90 to 120 days.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
of Ply Gem Holdings, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Ply Gem Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity (deficit), and cash flows for the years in the three-year period ended December 31, 2017 and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 5, 2018 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Raleigh, North Carolina
March 5, 2018
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | |
(Amounts in thousands, except share and per share data) | | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net sales | | $ | 2,056,303 |
| | $ | 1,911,844 |
| | $ | 1,839,726 |
|
Cost of products sold | | 1,587,790 |
| | 1,449,570 |
| | 1,420,014 |
|
Gross profit | | 468,513 |
| | 462,274 |
| | 419,712 |
|
Operating expenses: | | |
| | |
| | |
|
Selling, general and administrative expenses | | 272,984 |
| | 268,714 |
| | 271,874 |
|
Amortization of intangible assets | | 21,271 |
| | 25,064 |
| | 25,306 |
|
Total operating expenses | | 294,255 |
| | 293,778 |
| | 297,180 |
|
Operating earnings | | 174,258 |
| | 168,496 |
| | 122,532 |
|
Foreign currency gain (loss) | | 1,363 |
| | 299 |
| | (3,166 | ) |
Interest expense | | (69,361 | ) | | (72,718 | ) | | (74,876 | ) |
Interest income | | 78 |
| | 36 |
| | 57 |
|
Tax receivable agreement liability adjustment | | 10,749 |
| | (60,874 | ) | | (12,947 | ) |
Loss on modification or extinguishment of debt | | (2,106 | ) | | (11,747 | ) | | — |
|
Income before provision (benefit) for income taxes | | 114,981 |
| | 23,492 |
| | 31,600 |
|
Provision (benefit) for income taxes | | 46,654 |
| | (51,995 | ) | | (688 | ) |
Net income | | $ | 68,327 |
| | $ | 75,487 |
| | $ | 32,288 |
|
| | | | | | |
Net income attributable to common shareholders: | | | | | | |
Basic | | $ | 1.00 |
| | $ | 1.11 |
| | $ | 0.47 |
|
Diluted | | $ | 0.99 |
| | $ | 1.10 |
| | $ | 0.47 |
|
| | | | | | |
Weighted average shares outstanding: | | | | | | |
Basic | | 68,443,480 |
| | 68,176,801 |
| | 68,003,564 |
|
Diluted | | 69,006,968 |
| | 68,324,146 |
| | 68,106,493 |
|
See accompanying notes to consolidated financial statements.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | |
(Amounts in thousands) | | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net income | | $ | 68,327 |
| | $ | 75,487 |
| | $ | 32,288 |
|
Other comprehensive income (loss), net of tax: | | | | | | |
Currency translation | | 3,765 |
| | 2,950 |
| | (14,690 | ) |
Unrealized gain (loss) on derivative instruments | | (853 | ) | | 29 |
| | (465 | ) |
Minimum pension liability for actuarial gain (loss) | | 610 |
| | 295 |
| | (1,436 | ) |
Other comprehensive income (loss) | | 3,522 |
| | 3,274 |
| | (16,591 | ) |
Comprehensive income | | $ | 71,849 |
| | $ | 78,761 |
| | $ | 15,697 |
|
See accompanying notes to consolidated financial statements.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
(Amounts in thousands, except share amounts) | | December 31, 2017 | | December 31, 2016 |
ASSETS | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 71,416 |
| | $ | 51,597 |
|
Accounts receivable, less allowances of $3,137 and $2,663, respectively | | 249,533 |
| | 209,919 |
|
Inventories: | | | | |
|
Raw materials | | 79,330 |
| | 69,639 |
|
Work in process | | 36,440 |
| | 24,621 |
|
Finished goods | | 80,721 |
| | 67,696 |
|
Total inventory | | 196,491 |
| | 161,956 |
|
Prepaid expenses and other current assets | | 45,900 |
| | 26,850 |
|
Total current assets | | 563,340 |
| | 450,322 |
|
Property and Equipment, at cost: | | |
| | |
|
Land | | 8,229 |
| | 8,249 |
|
Buildings and improvements | | 68,005 |
| | 67,951 |
|
Machinery and equipment | | 450,554 |
| | 413,565 |
|
Total property and equipment | | 526,788 |
| | 489,765 |
|
Less accumulated depreciation | | (352,256 | ) | | (324,209 | ) |
Total property and equipment, net | | 174,532 |
| | 165,556 |
|
Other Assets: | | |
| | |
|
Intangible assets, net | | 83,675 |
| | 104,159 |
|
Goodwill | | 480,563 |
| | 478,514 |
|
Deferred income taxes | | 10,523 |
| | 50,347 |
|
Other | | 6,934 |
| | 8,843 |
|
Total other assets | | 581,695 |
| | 641,863 |
|
| | $ | 1,319,567 |
| | $ | 1,257,741 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| | |
|
Current Liabilities: | | |
| | |
|
Accounts payable | | $ | 85,720 |
| | $ | 75,398 |
|
Accrued expenses | | 185,857 |
| | 169,015 |
|
Current portion of payable to related parties pursuant to tax receivable agreement | | 51,356 |
| | 25,383 |
|
Current portion of long term debt | | 4,300 |
| | 4,300 |
|
Total current liabilities | | 327,233 |
| | 274,096 |
|
Deferred income taxes | | 1,530 |
| | 2,722 |
|
Long-term portion of payable to related parties pursuant to tax receivable agreement | | 18,125 |
| | 54,336 |
|
Other long-term liabilities | | 83,424 |
| | 86,395 |
|
Long-term debt | | 807,334 |
| | 836,086 |
|
Commitments and contingencies | |
|
| |
|
|
| | | | |
Stockholders' Equity | | |
| | |
|
Preferred stock $0.01 par, 50,000,000 shares authorized, none issued and outstanding | | — |
| | — |
|
Common stock $0.01 par, 250,000,000 shares authorized, 68,515,697 and 68,269,749 issued and outstanding, respectively | | 685 |
| | 683 |
|
Additional paid-in-capital | | 756,096 |
| | 751,452 |
|
Accumulated deficit | | (645,090 | ) | | (714,737 | ) |
Accumulated other comprehensive loss | | (29,770 | ) | | (33,292 | ) |
Total stockholders' equity | | 81,921 |
| | 4,106 |
|
| | $ | 1,319,567 |
| | $ | 1,257,741 |
|
See accompanying notes to consolidated financial statements.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
(Amounts in thousands) | | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 68,327 |
| | $ | 75,487 |
| | $ | 32,288 |
|
Adjustments to reconcile net income to cash | | |
| | |
| | |
|
provided by operating activities | | |
| | |
| | |
|
Depreciation and amortization expense | | 53,247 |
| | 56,403 |
| | 58,400 |
|
Fair-value premium on purchased inventory | | — |
| | — |
| | 54 |
|
Non-cash restructuring costs | | 1,321 |
| | 427 |
| | 704 |
|
Non-cash interest expense, net | | 14,044 |
| | 13,710 |
| | 13,380 |
|
(Gain) loss on foreign currency transactions | | (1,363 | ) | | (299 | ) | | 3,166 |
|
Non-cash litigation expense | | 650 |
| | 1,875 |
| | — |
|
Loss on modification or extinguishment of debt | | 2,106 |
| | 11,747 |
| | — |
|
Stock based compensation | | 1,345 |
| | 1,067 |
| | 1,960 |
|
Deferred income taxes | | 39,623 |
| | (57,989 | ) | | (4,901 | ) |
Tax receivable agreement liability adjustment | | (10,749 | ) | | 60,874 |
| | 12,947 |
|
Increase (reduction) in tax uncertainty, net of valuation allowance | | 604 |
| | 1,059 |
| | (199 | ) |
(Gain) loss on sale of building | | (1,880 | ) | | — |
| | — |
|
Other | | (175 | ) | | (190 | ) | | (28 | ) |
Changes in operating assets and liabilities: | | |
| | |
| | |
|
Accounts receivable, net | | (39,431 | ) | | (14,709 | ) | | (4,562 | ) |
Inventories | | (34,483 | ) | | (11,542 | ) | | 29,921 |
|
Prepaid expenses and other assets | | (2,066 | ) | | (2,967 | ) | | 6,729 |
|
Accounts payable | | 10,473 |
| | 945 |
| | (10,563 | ) |
Accrued expenses | | (8,450 | ) | | 9,037 |
| | 3,336 |
|
Cash payments on restructuring liabilities | | (983 | ) | | (540 | ) | | (1,645 | ) |
Insurance proceeds in advance of settlement | | 8,725 |
| | — |
| | — |
|
Other | | 1,043 |
| | 647 |
| | (1,624 | ) |
Net cash provided by operating activities | | 101,928 |
| | 145,042 |
| | 139,363 |
|
Cash flows from investing activities: | | |
| | |
| | |
|
Acquisitions, net of cash acquired and outstanding checks assumed | | — |
| | — |
| | (21,000 | ) |
Capital expenditures | | (40,386 | ) | | (36,001 | ) | | (33,860 | ) |
Proceeds from sale of assets | | 2,514 |
| | 183 |
| | 122 |
|
Net cash used in investing activities | | (37,872 | ) | | (35,818 | ) | | (54,738 | ) |
Cash flows from financing activities: | | |
| | |
| | |
|
Payments on long-term debt | | (44,300 | ) | | (164,300 | ) | | (4,300 | ) |
Payments to tax authority for employee stock based compensation | | (1,186 | ) | | — |
| | — |
|
Proceeds from exercises of employee stock options | | 1,203 |
| | 1,091 |
| | 2,198 |
|
Cash payments on tax receivable agreement | | — |
| | (4,971 | ) | | (48 | ) |
Debt issuance costs paid | | — |
| | — |
| | (1,412 | ) |
Net cash used in financing activities | | (44,283 | ) | | (168,180 | ) | | (3,562 | ) |
Impact of exchange rate movements on cash | | 46 |
| | 1,128 |
| | (4,800 | ) |
Net cash increase (decrease) in cash and cash equivalents | | 19,819 |
| | (57,828 | ) | | 76,263 |
|
Cash and cash equivalents at the beginning of the period | | 51,597 |
| | 109,425 |
| | 33,162 |
|
Cash and cash equivalents at the end of the period | | $ | 71,416 |
| | $ | 51,597 |
| | $ | 109,425 |
|
Supplemental Information | | |
| | |
| | |
|
Interest paid | | $ | 54,677 |
| | $ | 58,745 |
| | $ | 60,070 |
|
Income taxes paid, net | | $ | 7,169 |
| | $ | 7,024 |
| | $ | 2,607 |
|
See accompanying notes to consolidated financial statements.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Common Stock | | Additional Paid-in- | | Accumulated | | Accumulated Other Comprehensive | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Deficit | | Income (Loss) | | Equity (Deficit) |
Balance, December 31, 2014 | | 67,877,587 |
| | $ | 679 |
| | $ | 745,140 |
| | $ | (822,512 | ) | | $ | (19,975 | ) | | $ | (96,668 | ) |
Comprehensive loss: | | | | |
| | |
| | |
| | |
| | |
|
Net income | | — |
| | — |
| | — |
| | 32,288 |
| | — |
| | 32,288 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (16,591 | ) | | (16,591 | ) |
Stock compensation | | — |
| | — |
| | 1,960 |
| | — |
| | — |
| | 1,960 |
|
Stock option exercises | | 249,904 |
| | 2 |
| | 2,196 |
| | — |
| | — |
| | 2,198 |
|
Balance, December 31, 2015 | | 68,127,491 |
| | $ | 681 |
| | $ | 749,296 |
| | $ | (790,224 | ) | | $ | (36,566 | ) | | $ | (76,813 | ) |
Comprehensive income: | | | | | | |
| | |
| | |
| | |
|
Net income | | — |
| | — |
| | — |
| | 75,487 |
| | — |
| | 75,487 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 3,274 |
| | 3,274 |
|
Stock compensation | | — |
| | — |
| | 1,067 |
| | — |
| | — |
| | 1,067 |
|
Stock option exercises | | 142,258 |
| | 2 |
| | 1,089 |
| | — |
| | — |
| | 1,091 |
|
Balance, December 31, 2016 | | 68,269,749 |
| | $ | 683 |
| | $ | 751,452 |
| | $ | (714,737 | ) | | $ | (33,292 | ) | | $ | 4,106 |
|
Comprehensive income: | | | | | | |
| | |
| | |
| | |
|
Net income | | — |
| | — |
| | — |
| | 68,327 |
| | — |
| | 68,327 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 3,522 |
| | 3,522 |
|
Stock compensation | | — |
| | — |
| | 1,345 |
| | — |
| | — |
| | 1,345 |
|
Cumulative-effect adjustment from adoption of ASU 2016-09 | | — |
| | — |
| | — |
| | 1,320 |
| | — |
| | 1,320 |
|
Stock issued pursuant to the Long-Term Incentive Plan | | 129,176 |
| | 1 |
| | 2,097 |
| | — |
| | — |
| | 2,098 |
|
Stock option exercises | | 116,772 |
| | 1 |
| | 1,202 |
| | — |
| | — |
| | 1,203 |
|
Balance, December 31, 2017 | | 68,515,697 |
| | $ | 685 |
| | $ | 756,096 |
| | $ | (645,090 | ) | | $ | (29,770 | ) | | $ | 81,921 |
|
See accompanying notes to consolidated financial statements.
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
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:
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| | | | | | | | | |
| | 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:
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| | | | | | | | | |
| | 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:
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| | | | | | | | | | | | | | | | |
(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.
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| | | | |
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 |
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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:
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| | | | | | | | |
| | 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:
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| | | | | | | | | | | | |
| | 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.
11. STOCK-BASED COMPENSATION
Stock option plan
On February 12, 2004, Ply Gem Investment Holdings’ Board of Directors adopted the Ply Gem Investment Holdings 2004 Stock Option Plan (the “Plan”) allowing for grants of options to purchase shares of Ply Gem Investment Holdings common stock under nonqualified stock options or incentive stock options. Obligations under this Plan were subsequently assumed by Ply Gem Prime Holdings in 2006. Immediately prior to the closing of the IPO on May 23, 2013, Ply Gem Prime merged with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. As a result, all obligations under the Plan were converted at a ratio based on the IPO price of the common stock and the liquidation value of and the maximum dividend amount in respect of the Ply Gem Prime preferred stock and all subsequent grants were in Ply Gem Holdings' stock.
Employees, directors and consultants of Ply Gem Holdings or any of its majority-owned subsidiaries are eligible for options, as specified in the Plan. Ply Gem Holdings Board of Directors may, among other things, select recipients of options grants, determine whether options will be nonqualified or incentive stock options, set the number of shares that may be purchased pursuant to option exercise, and determine other terms and conditions of options. The exercise price of an option must be at least the estimated fair market value of a share of common stock as of the grant date. Options generally vest over 3 to 5 years from the date of grant, unless specified otherwise in any individual option agreement. Generally, options will expire on the tenth anniversary of the grant date or in connection with termination of employment. The Board of Directors has the discretion to accelerate the vesting and exercisability of outstanding options.
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing method. The assumptions used in the model for the years ended December 31, 2015 (there were no option grants in 2016 or 2017) are outlined in the following table:
|
| | | | |
| | December 31, 2015 |
Weighted average fair value of options granted | | $ | 2.62 |
|
Weighted average assumptions used: | | |
|
Expected volatility | | 34 | % |
Expected term (in years) | | 7.00 |
|
Risk-free interest rate | | 1.82 | % |
Expected dividend yield | | — | % |
A summary of changes in stock options outstanding during the years ended December 31, 2017 and December 31, 2016 is presented below:
|
| | | | | | | | | | | | | |
| | Stock Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term (Years) | | Aggregate Intrinsic Value |
| | | | | | | | (in thousands) |
Balance at January 1, 2016 | | 2,613,793 |
| | $ | 13.75 |
| | 5.22 |
| | 617 |
|
Granted | | — |
| | $ | — |
| | — |
| | |
Exercised | | (116,594 | ) | | $ | 9.35 |
| | — |
| | |
Forfeited or expired | | (1,666 | ) | | $ | 12.35 |
| | — |
| | |
Balance at December 31, 2016 | | 2,495,533 |
| | $ | 13.96 |
| | 4.35 |
| | 5,729 |
|
Granted | | — |
| | $ | — |
| | — |
| | |
Exercised | | (97,352 | ) | | $ | 12.35 |
| | — |
| | |
Forfeited or expired | | — |
| | $ | — |
| | — |
| | |
Balance at December 31, 2017 | | 2,398,181 |
| | $ | 14.02 |
| | 3.43 |
| | 10,671 |
|
As of December 31, 2017, 2,349,957 options were 100% vested with a weighted average exercise price of $14.04. As of December 31, 2016, 2,324,059 options were 100% vested with a weighted average exercise price of $13.95. The total intrinsic value of options exercised during the years ended December 31, 2017, and 2016 was $0.5 million and $0.6 million, respectively. At December 31, 2017, the Company had approximately $0.1 million of total unrecognized compensation expense that will be recognized over a weighted average period of 0.71 years. At December 31, 2016, the Company had approximately $0.5 million of total unrecognized compensation expense that will be recognized over a weighted average period of 1.09 years. The Company recorded compensation expense of $0.5 million, $0.8 million, and $1.7 million for the years ended December 31, 2017, 2016, and 2015, respectively, related to the vesting of these options.
Restricted stock
During December 2014, the Company issued an aggregate of 23,944 restricted shares of common stock in an equal number to each of the four independent members of the Board of Directors. These shares vested over the 2015 calendar period and the Company expensed $0.3 million as compensation expense in selling, general, and administrative expenses within the consolidated statement of operations.
During December 2015, the Company issued an aggregate of 25,664 restricted shares of common stock in an equal number to each of the four independent members of the Board of Directors. These shares vested over the 2016 calendar year and the Company expensed $0.3 million as compensation expense in selling, general, and administrative expenses within the consolidated statement of operations.
During December 2016, the Company issued an aggregate of 19,420 restricted shares of common stock in an equal number to each of the four independent members of the Board of Directors. These shares vested over the 2017 calendar year and the Company expensed $0.3 million as compensation expense in selling, general, and administrative expenses within the consolidated statement of operations.
During December 2017, the Company issued an aggregate of 16,440 restricted shares of common stock in an equal number to each of the four independent members of the Board of Directors. These shares will vest over the 2018 calendar year and the Company will expense these items as compensation expense during 2018.
12. SEGMENT INFORMATION
The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Company has two reportable segments: 1) Siding, Fencing, and Stone and 2) Windows and Doors.
The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses. Unallocated income and expenses include items which are not directly attributed to or allocated to either of the Company’s reporting segments. Such items include interest, legal costs, corporate payroll, and unallocated finance, accounting expenses, and gain (loss) on modification or extinguishment of debt. Unallocated corporate assets include cash and certain receivables. Interest expense is presented net of interest income.
Following is a summary of the Company’s segment information:
|
| | | | | | | | | | | | |
(Amounts in thousands) | | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net sales | | | | | | |
Siding, Fencing, and Stone | | $ | 970,198 |
| | $ | 886,851 |
| | $ | 840,118 |
|
Windows and Doors | | 1,086,105 |
| | 1,024,993 |
| | 999,608 |
|
| | $ | 2,056,303 |
| | $ | 1,911,844 |
| | $ | 1,839,726 |
|
Operating earnings (loss) | | |
| | |
| | |
|
Siding, Fencing, and Stone | | $ | 146,753 |
| | $ | 157,058 |
| | $ | 134,654 |
|
Windows and Doors | | 56,435 |
| | 43,579 |
| | 18,195 |
|
Unallocated | | (28,930 | ) | | (32,141 | ) | | (30,317 | ) |
| | $ | 174,258 |
| | $ | 168,496 |
| | $ | 122,532 |
|
Interest (income) expense, net | | |
| | |
| | |
|
Siding, Fencing, and Stone | | $ | (29 | ) | | $ | (16 | ) | | $ | (22 | ) |
Windows and Doors | | (21 | ) | | (12 | ) | | (17 | ) |
Unallocated | | 69,333 |
| | 72,710 |
| | 74,858 |
|
| | $ | 69,283 |
| | $ | 72,682 |
| | $ | 74,819 |
|
Depreciation and amortization | | |
| | |
| | |
|
Siding, Fencing, and Stone | | $ | 22,562 |
| | $ | 25,723 |
| | $ | 26,539 |
|
Windows and Doors | | 30,369 |
| | 30,516 |
| | 31,549 |
|
Unallocated | | 316 |
| | 164 |
| | 312 |
|
| | $ | 53,247 |
| | $ | 56,403 |
| | $ | 58,400 |
|
Income tax provision (benefit) | | |
| | |
| | |
|
Unallocated | | $ | 46,654 |
| | $ | (51,995 | ) | | $ | (688 | ) |
| | | | | | |
Capital expenditures | | |
| | |
| | |
|
Siding, Fencing, and Stone | | $ | 17,243 |
| | $ | 16,472 |
| | $ | 11,816 |
|
Windows and Doors | | 20,613 |
| | 17,780 |
| | 19,196 |
|
Unallocated | | 2,530 |
| | 1,749 |
| | 2,848 |
|
| | $ | 40,386 |
| | $ | 36,001 |
| | $ | 33,860 |
|
| | | | | | |
| | As of December 31, | | |
|
| | 2017 | | 2016 | | |
|
Total assets | | |
| | |
| | |
|
Siding, Fencing, and Stone | | $ | 728,502 |
| | $ | 691,930 |
| | |
|
Windows and Doors | | 500,278 |
| | 509,055 |
| | |
|
Unallocated | | 90,787 |
| | 56,756 |
| | |
|
| | $ | 1,319,567 |
| | $ | 1,257,741 |
| | |
|
Our Canadian subsidiaries, which had sales of approximately $223.4 million for the year ended December 31, 2017, represent the majority of our sales to foreign customers. Other subsidiaries’ sales outside the United States are less than 1% of our total sales.
13. RELATED PARTY TRANSACTIONS
During March 2015, the Company entered into new retention agreements with the Company's Chief Executive Officer and Chief Financial Officer for $3.0 million and $1.3 million, respectively. These retention agreements incentivize these individuals for three years and require the Company to make cumulative payments of $4.3 million on December 31, 2017 if both individuals remain employed in their current positions on that date. The Company paid these retention amounts during the year ended December 31, 2017. As of December 31, 2016, these retention payments were accrued at $2.8 million in accrued expenses and other long-term liabilities, respectively, in the Company's consolidated balance sheets.
In January 2018, the Company made an approximate $26.5 million payment to PG ITR Holdco, L.P. (the “Tax Receivable Entity”) for the Tax Receivable Agreement in satisfaction of the amount due on this agreement related to the 2016 activity. During the fourth quarter of 2016, the Company made an approximate $5.0 million payment to the Tax Receivable Entity for the Tax Receivable Agreement in satisfaction of the amount due on this agreement related to the 2015 activity. During the fourth quarter of 2015, the Company made an approximate $48,000 payment to the Tax Receivable Entity for the Tax Receivable Agreement in satisfaction of the amount due on this agreement related to the 2014 activity.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations:
|
| | | | | | | | | | | | | | | | | |
(Amounts in thousands, except per share data) | | Quarter
Ended
December 31, | | Quarter
Ended
September 30, | | Quarter
Ended
July 1, | | Quarter
Ended
April 1, | |
| | 2017 | | 2017 | | 2017 | | 2017 | |
Net sales | | $ | 516,858 |
| | $ | 564,663 |
| | $ | 544,767 |
| | $ | 430,015 |
| |
| | | | | | | | | |
Gross profit | | 110,134 |
| | 131,966 |
| | 136,888 |
| | 89,525 |
| |
| | | | | | | | | |
Net income (loss) | | 14,571 |
| (2), (3) | 27,534 |
| | 29,859 |
| | (3,637 | ) |
|
Net income (loss) per share attributable to common shareholders: | | | | | | | | | |
Basic (1) | | $ | 0.21 |
| | $ | 0.40 |
| | $ | 0.44 |
| | $ | (0.05 | ) | |
Diluted (1) | | $ | 0.21 |
| | $ | 0.40 |
| | $ | 0.43 |
| | $ | (0.05 | ) | |
| | | | | | | | | |
(Amounts in thousands, except per share data) | | Quarter
Ended
December 31, | | Quarter
Ended
October 1, | | Quarter
Ended
July 2, | | Quarter
Ended
April 2, | |
| | 2016 | | 2016 | | 2016 | | 2016 | |
Net sales | | $ | 462,293 |
| | $ | 530,392 |
| | $ | 510,545 |
| | $ | 408,614 |
| |
| | | | | | | | | |
Gross profit | | 103,484 |
| | 136,800 |
| | 135,289 |
| | 86,701 |
| |
| | | | | | | | | |
Net income (loss) | | 6,663 |
| (4), (5) | 54,755 |
| (4) | 41,646 |
| | (27,577 | ) | (4) |
Net income (loss) per share attributable to common shareholders: | | | | | | | | | |
Basic (1) | | $ | 0.10 |
| | $ | 0.80 |
| | $ | 0.61 |
| | $ | (0.40 | ) | |
Diluted (1) | | $ | 0.10 |
| | $ | 0.80 |
| | $ | 0.61 |
| | $ | (0.40 | ) | |
| |
(1) | The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period. |
| |
(2) | The net income for the quarter ended December 31, 2017 includes an approximate $2.1 million loss on modification or extinguishment of debt. See Note 5 Long-Term Debt for description of loss on debt modification and extinguishment. |
| |
(3) | The net income for the quarter ended December 31, 2017 includes a benefit of approximately $10.7 million for the TRA liability and a $4.3 million income tax expense related to the reduction in deferred tax assets, both due to the passage of the Tax Act in December 2017. See Note 10 Income Taxes for further description of these adjustments. |
| |
(4) | The net income for the quarters ended April 2, 2016, October 1, 2016 and December 31, 2016 include an approximate $2.4 million, $2.3 million, and $7.1 million, loss on modification or extinguishment of debt, respectively. See Note 5 Long-Term Debt for description of loss on debt modification and extinguishment. |
| |
(5) | During the three months ended December 31, 2016, the Company recognized a $5.1 million income tax benefit from the discrete release of the deferred income tax valuation allowance. See Note 10 Income Taxes for further description of the valuation allowance release. |
15. SUBSEQUENT EVENT
On January 31, 2018, the Company entered into the Merger Agreement with Parent and Merger Sub, each a wholly owned subsidiary of funds sponsored by CD&R. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with Ply Gem Holdings surviving the Merger as a wholly owned subsidiary of Parent (the “Acquisition”). At the Effective Time, each of the Company's issued and outstanding shares of common stock, par value $0.01 per share, will be cancelled and extinguished and converted into the right to receive $21.64 in cash, without interest (the “Merger Consideration”), less any applicable withholding taxes. The consummation of the Merger remains subject to customary closing conditions. As a result of the Merger, the Company will cease to be a publicly traded company.
On January 31, 2018, the date the Merger Agreement was executed, Ply Gem entered into transaction bonus letter agreements with each of its chief executive officer and chief financial officer, granting each a right to a one-time payment of $7.0 million and $1.8 million, respectively, subject to the consummation of the Merger (each bonus, a “Transaction Bonus”). Payment of each Transaction Bonus will be made within 30 days following the date of the closing of the Merger (the "Closing"), subject to each executive’s continued employment with Ply Gem through the date of the closing. If the executive’s employment is terminated prior to the date of the closing (x) by the executive following a material adverse change or (y) by Ply Gem without cause, the executive will remain eligible to receive a Transaction Bonus, paid within 30 days following the date of the Closing, subject to the executive’s execution of a release of claims. If the Closing does not occur by December 31, 2018, the transaction bonus letters will become void, and the executives will no longer be entitled to a Transaction Bonus.
16. GUARANTOR/NON-GUARANTOR
The 6.50% Senior Notes were issued by our direct 100% owned subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries. Ply Gem Industries is a 100% owned subsidiary of Ply Gem Holdings. Accordingly, the following guarantor and non-guarantor information is presented as of December 31, 2017 and December 31, 2016, and for the years ended December 31, 2017, 2016, and 2015. The non-guarantor information presented represents our Canadian subsidiaries: Gienow and Mitten.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
For the year ended December 31, 2017 |
| | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
(Amounts in thousands) | | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Net sales | | $ | — |
| | $ | — |
| | $ | 1,832,925 |
| | $ | 223,378 |
| | $ | — |
| | $ | 2,056,303 |
|
Cost of products sold | | — |
| | — |
| | 1,419,980 |
| | 167,810 |
| | — |
| | 1,587,790 |
|
Gross profit | | — |
| | — |
| | 412,945 |
| | 55,568 |
| | — |
| | 468,513 |
|
Operating expenses: | | |
| | |
| | |
| | |
| | |
| | |
|
Selling, general and | | |
| | |
| | |
| | |
| | |
| | |
|
administrative expenses | | — |
| | 28,930 |
| | 196,622 |
| | 47,432 |
| | — |
| | 272,984 |
|
Intercompany administrative | | |
| | |
| | |
| | |
| | |
| | |
|
charges | | — |
| | — |
| | 37,437 |
| | 3,999 |
| | (41,436 | ) | | — |
|
Amortization of intangible assets | | — |
| | — |
| | 16,872 |
| | 4,399 |
| | — |
| | 21,271 |
|
Total operating expenses | | — |
| | 28,930 |
| | 250,931 |
| | 55,830 |
| | (41,436 | ) | | 294,255 |
|
Operating earnings (loss) | | — |
| | (28,930 | ) | | 162,014 |
| | (262 | ) | | 41,436 |
| | 174,258 |
|
Foreign currency gain | | — |
| | — |
| | — |
| | 1,363 |
| | — |
| | 1,363 |
|
Intercompany interest | | — |
| | 56,888 |
| | (52,995 | ) | | (3,893 | ) | | — |
| | — |
|
Interest expense | | — |
| | (69,361 | ) | | — |
| | — |
| | — |
| | (69,361 | ) |
Interest income | | — |
| | 28 |
| | 27 |
| | 23 |
| | — |
| | 78 |
|
Tax receivable agreement liability adjustment | | — |
| | 10,749 |
| | — |
| | — |
| | — |
| | 10,749 |
|
Loss on modification or | | |
| | |
| | |
| | |
| | |
| | |
|
extinguishment of debt | | — |
| | (2,106 | ) | | — |
| | — |
| | — |
| | (2,106 | ) |
Intercompany administrative income | | — |
| | 41,436 |
| | — |
| | — |
| | (41,436 | ) | | — |
|
Income (loss) before equity in | | |
| | |
| | |
| | |
| | |
| | |
|
subsidiaries' income | | — |
| | 8,704 |
| | 109,046 |
| | (2,769 | ) | | — |
| | 114,981 |
|
Equity in subsidiaries' income | | 68,327 |
| | 59,623 |
| | — |
| | — |
| | (127,950 | ) | | — |
|
Income (loss) before provision | | |
| | |
| | |
| | |
| | |
| | |
|
(benefit) for income taxes | | 68,327 |
| | 68,327 |
| | 109,046 |
| | (2,769 | ) | | (127,950 | ) | | 114,981 |
|
Provision (benefit) for income taxes | | — |
| | — |
| | 47,144 |
| | (490 | ) | | — |
| | 46,654 |
|
Net income (loss) | | $ | 68,327 |
| | $ | 68,327 |
| | $ | 61,902 |
| | $ | (2,279 | ) | | $ | (127,950 | ) | | $ | 68,327 |
|
| | | | | | | | | | | | |
Other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | — |
| | — |
| | — |
| | 3,765 |
| | — |
| | 3,765 |
|
Unrealized loss on derivative instruments | | — |
| | — |
| | — |
| | (853 | ) | | — |
| | (853 | ) |
Minimum pension liability for | | |
| | |
| | |
| | |
| | |
| | |
|
actuarial gain | | — |
| | — |
| | 610 |
| | — |
| | — |
| | 610 |
|
Total comprehensive income (loss) | | $ | 68,327 |
| | $ | 68,327 |
| | $ | 62,512 |
| | $ | 633 |
| | $ | (127,950 | ) | | $ | 71,849 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
For the year ended December 31, 2016 |
| | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
(Amounts in thousands) | | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Net sales | | $ | — |
| | $ | — |
| | $ | 1,713,112 |
| | $ | 198,732 |
| | $ | — |
| | $ | 1,911,844 |
|
Cost of products sold | | — |
| | — |
| | 1,298,281 |
| | 151,289 |
| | — |
| | 1,449,570 |
|
Gross profit | | — |
| | — |
| | 414,831 |
| | 47,443 |
| | — |
| | 462,274 |
|
Operating expenses: | | |
| | |
| | |
| | |
| | |
| | |
|
Selling, general and | | |
| | |
| | |
| | |
| | |
| | |
|
administrative expenses | | — |
| | 32,141 |
| | 190,444 |
| | 46,129 |
| | — |
| | 268,714 |
|
Intercompany administrative | | |
| | |
| | |
| | |
| | |
| | |
|
charges | | — |
| | — |
| | 32,487 |
| | 5,180 |
| | (37,667 | ) | | — |
|
Amortization of intangible assets | | — |
| | — |
| | 20,707 |
| | 4,357 |
| | — |
| | 25,064 |
|
Total operating expenses | | — |
| | 32,141 |
| | 243,638 |
| | 55,666 |
| | (37,667 | ) | | 293,778 |
|
Operating earnings (loss) | | — |
| | (32,141 | ) | | 171,193 |
| | (8,223 | ) | | 37,667 |
| | 168,496 |
|
Foreign currency gain | | — |
| | — |
| | — |
| | 299 |
| | — |
| | 299 |
|
Intercompany interest | | — |
| | 63,716 |
| | (59,859 | ) | | (3,857 | ) | | — |
| | — |
|
Interest expense | | — |
| | (72,716 | ) | | — |
| | (2 | ) | | — |
| | (72,718 | ) |
Interest income | | — |
| | 6 |
| | 13 |
| | 17 |
| | — |
| | 36 |
|
Tax receivable agreement liability adjustment | | — |
| | (60,874 | ) | | — |
| | — |
| | — |
| | (60,874 | ) |
Loss on modification or | | |
| | |
| | |
| | |
| | |
| | |
|
extinguishment of debt | | — |
| | (11,747 | ) | | — |
| | — |
| | — |
| | (11,747 | ) |
Intercompany administrative income | | — |
| | 37,667 |
| | — |
| | — |
| | (37,667 | ) | | — |
|
Income (loss) before equity in | | |
| | |
| | |
| | |
| | |
| | |
|
subsidiaries' income (loss) | | — |
| | (76,089 | ) | | 111,347 |
| | (11,766 | ) | | — |
| | 23,492 |
|
Equity in subsidiaries' income (loss) | | 75,487 |
| | 151,576 |
| | — |
| | — |
| | (227,063 | ) | | — |
|
Income (loss) before | | |
| | |
| | |
| | |
| | |
| | |
|
benefit for income taxes | | 75,487 |
| | 75,487 |
| | 111,347 |
| | (11,766 | ) | | (227,063 | ) | | 23,492 |
|
Benefit for income taxes | | — |
| | — |
| | (50,995 | ) | | (1,000 | ) | | — |
| | (51,995 | ) |
Net income (loss) | | $ | 75,487 |
| | $ | 75,487 |
| | $ | 162,342 |
| | $ | (10,766 | ) | | $ | (227,063 | ) | | $ | 75,487 |
|
| | | | | | | | | | | | |
Other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | — |
| | — |
| | — |
| | 2,950 |
| | — |
| | 2,950 |
|
Unrealized gain on derivative instruments | | — |
| | — |
| | — |
| | 29 |
| | — |
| | 29 |
|
Minimum pension liability for | | |
| | |
| | |
| |
|
| | |
| |
|
|
actuarial gain | | — |
| | — |
| | 295 |
| | — |
| | — |
| | 295 |
|
Total comprehensive income (loss) | | $ | 75,487 |
| | $ | 75,487 |
| | $ | 162,637 |
| | $ | (7,787 | ) | | $ | (227,063 | ) | | $ | 78,761 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS |
For the year ended December 31, 2015 |
| | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
(Amounts in thousands) | | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Net sales | | $ | — |
| | $ | — |
| | $ | 1,616,407 |
| | $ | 223,319 |
| | $ | — |
| | $ | 1,839,726 |
|
Cost of products sold | | — |
| | — |
| | 1,249,887 |
| | 170,127 |
| | — |
| | 1,420,014 |
|
Gross profit | | — |
| | — |
| | 366,520 |
| | 53,192 |
| | — |
| | 419,712 |
|
Operating expenses: | | |
| | |
| | |
| | |
| | |
| | |
|
Selling, general and | | |
| | |
| | |
| | |
| | |
| | |
|
administrative expenses | | — |
| | 30,317 |
| | 189,477 |
| | 52,080 |
| | — |
| | 271,874 |
|
Intercompany administrative | | |
| | |
| | |
| | |
| | |
| | |
|
charges | | — |
| | — |
| | 28,704 |
| | 5,943 |
| | (34,647 | ) | | — |
|
Amortization of intangible assets | | — |
| | — |
| | 20,737 |
| | 4,569 |
| | — |
| | 25,306 |
|
Total operating expenses | | — |
| | 30,317 |
| | 238,918 |
| | 62,592 |
| | (34,647 | ) | | 297,180 |
|
Operating earnings (loss) | | — |
| | (30,317 | ) | | 127,602 |
| | (9,400 | ) | | 34,647 |
| | 122,532 |
|
Foreign currency loss | | — |
| | — |
| | — |
| | (3,166 | ) | | — |
| | (3,166 | ) |
Intercompany interest | | — |
| | 63,391 |
| | (59,641 | ) | | (3,750 | ) | | — |
| | — |
|
Interest expense | | — |
| | (74,863 | ) | | (4 | ) | | (9 | ) | | — |
| | (74,876 | ) |
Interest income | | — |
| | 5 |
| | 28 |
| | 24 |
| | — |
| | 57 |
|
Tax receivable agreement liability adjustment | | — |
| | (12,947 | ) | | — |
| | — |
| | — |
| | (12,947 | ) |
Intercompany administrative income | | — |
| | 34,647 |
| | — |
| | — |
| | (34,647 | ) | | — |
|
Income (loss) before equity in | | | | | | | | | | | | |
subsidiaries' income (loss) | | — |
| | (20,084 | ) | | 67,985 |
| | (16,301 | ) | | — |
| | 31,600 |
|
Equity in subsidiaries' income (loss) | | 32,288 |
| | 52,372 |
| | — |
| | — |
| | (84,660 | ) | | — |
|
Income (loss) before benefit | | | | | | | | | | | | |
for income taxes | | 32,288 |
| | 32,288 |
| | 67,985 |
| | (16,301 | ) | | (84,660 | ) | | 31,600 |
|
Benefit for income taxes | | — |
|
| — |
|
| (232 | ) |
| (456 | ) |
| — |
|
| (688 | ) |
Net income (loss) | | $ | 32,288 |
| | $ | 32,288 |
| | $ | 68,217 |
| | $ | (15,845 | ) | | $ | (84,660 | ) | | $ | 32,288 |
|
| | | | | | | | | | | | |
Other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | | — |
| | — |
| | — |
| | (14,690 | ) | | — |
| | (14,690 | ) |
Unrealized loss on derivative instruments | | — |
| | — |
| | — |
| | (465 | ) | | — |
| | (465 | ) |
Minimum pension liability for | | |
| | |
| | |
| | |
| | |
| | |
|
actuarial loss | | — |
| | — |
| | (1,436 | ) | | — |
| | — |
| | (1,436 | ) |
Total comprehensive income (loss) | | $ | 32,288 |
| | $ | 32,288 |
| | $ | 66,781 |
| | $ | (31,000 | ) | | $ | (84,660 | ) | | $ | 15,697 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING BALANCE SHEET |
As of December 31, 2017 |
(Amounts in thousands) | | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
ASSETS | | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Current Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 65,451 |
| | $ | (12,905 | ) | | $ | 18,870 |
| | $ | — |
| | $ | 71,416 |
|
Accounts receivable, net | | — |
| | — |
| | 222,847 |
| | 26,686 |
| | — |
| | 249,533 |
|
Inventories: | | |
| | |
| | |
| | |
| | |
| | |
|
Raw materials | | — |
| | — |
| | 72,688 |
| | 6,642 |
| | — |
| | 79,330 |
|
Work in process | | — |
| | — |
| | 34,050 |
| | 2,390 |
| | — |
| | 36,440 |
|
Finished goods | | — |
| | — |
| | 65,975 |
| | 14,746 |
| | — |
| | 80,721 |
|
Total inventory | | — |
| | — |
| | 172,713 |
| | 23,778 |
| | — |
| | 196,491 |
|
Prepaid expenses and other | | |
| | |
| | |
| | |
| | |
| | |
|
current assets | | — |
| | 19,741 |
| | 22,905 |
| | 3,254 |
| | — |
| | 45,900 |
|
Total current assets | | — |
| | 85,192 |
| | 405,560 |
| | 72,588 |
| | — |
| | 563,340 |
|
Investments in subsidiaries | | 81,921 |
| | (212,967 | ) | | — |
| | — |
| | 131,046 |
| | — |
|
Property and Equipment, at cost: | | |
| | |
| | |
| | |
| | |
| | |
|
Land | | — |
| | — |
| | 7,553 |
| | 676 |
| | — |
| | 8,229 |
|
Buildings and improvements | | — |
| | 518 |
| | 63,058 |
| | 4,429 |
| | — |
| | 68,005 |
|
Machinery and equipment | | — |
| | 4,173 |
| | 422,255 |
| | 24,126 |
| | — |
| | 450,554 |
|
| | — |
| | 4,691 |
| | 492,866 |
| | 29,231 |
| | — |
| | 526,788 |
|
Less accumulated depreciation | | — |
| | (981 | ) | | (337,546 | ) | | (13,729 | ) | | — |
| | (352,256 | ) |
Total property and equipment, net | | — |
| | 3,710 |
| | 155,320 |
| | 15,502 |
| | — |
| | 174,532 |
|
Other Assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Intangible assets, net | | — |
| | — |
| | 74,943 |
| | 8,732 |
| | — |
| | 83,675 |
|
Goodwill | | — |
| | — |
| | 449,366 |
| | 31,197 |
| | — |
| | 480,563 |
|
Deferred income taxes | | — |
| | — |
| | 10,523 |
| | — |
| | — |
| | 10,523 |
|
Intercompany note receivable | | — |
| | 1,139,073 |
| | — |
| | — |
| | (1,139,073 | ) | | — |
|
Other | | — |
| | 1,885 |
| | 5,049 |
| | — |
| | — |
| | 6,934 |
|
Total other assets | | — |
| | 1,140,958 |
| | 539,881 |
| | 39,929 |
| | (1,139,073 | ) | | 581,695 |
|
| | $ | 81,921 |
| | $ | 1,016,893 |
| | $ | 1,100,761 |
| | $ | 128,019 |
| | $ | (1,008,027 | ) | | $ | 1,319,567 |
|
| | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
Current Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Accounts payable | | $ | — |
| | $ | 257 |
| | $ | 69,439 |
| | $ | 16,024 |
| | $ | — |
| | $ | 85,720 |
|
Accrued expenses | | — |
| | 47,114 |
| | 120,335 |
| | 18,408 |
| | — |
| | 185,857 |
|
Current portion of payable to related | | | | | | | | | | | | |
parties pursuant to tax receivable agreement | | — |
| | 51,356 |
| | — |
| | — |
| | — |
| | 51,356 |
|
Current portion of long-term debt | | — |
| | 4,300 |
| | — |
| | — |
| | — |
| | 4,300 |
|
Total current liabilities | | — |
| | 103,027 |
| | 189,774 |
| | 34,432 |
| | — |
| | 327,233 |
|
Deferred income taxes | | — |
| | — |
| | — |
| | 1,530 |
| | — |
| | 1,530 |
|
Intercompany note payable | | — |
| | — |
| | 1,022,988 |
| | 116,085 |
| | (1,139,073 | ) | | — |
|
Long-term portion of payable to related | | | | | | | | | | | | |
parties pursuant to tax receivable agreement | | — |
| | 18,125 |
| | — |
| | — |
| | — |
| | 18,125 |
|
Other long-term liabilities | | — |
| | 6,486 |
| | 71,011 |
| | 5,927 |
| | — |
| | 83,424 |
|
Long-term debt | | — |
| | 807,334 |
| | — |
| | — |
| | — |
| | 807,334 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
| |
|
| | |
Stockholders' Equity (Deficit): | | |
| | |
| | |
| | |
| | |
| | |
|
Preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Common stock | | 685 |
| | 685 |
| | — |
| | — |
| | (685 | ) | | 685 |
|
Additional paid-in-capital | | 756,096 |
| | 756,096 |
| | 192,777 |
| | 23,336 |
| | (972,209 | ) | | 756,096 |
|
(Accumulated deficit) retained earnings | | (645,090 | ) | | (645,090 | ) | | (360,720 | ) | | (38,591 | ) | | 1,044,401 |
| | (645,090 | ) |
Accumulated other | | |
| | |
| | |
| | |
| | |
| | |
|
comprehensive loss | | (29,770 | ) | | (29,770 | ) | | (15,069 | ) | | (14,700 | ) | | 59,539 |
| | (29,770 | ) |
Total stockholder's equity (deficit) | | 81,921 |
| | 81,921 |
| | (183,012 | ) | | (29,955 | ) | | 131,046 |
| | 81,921 |
|
| | $ | 81,921 |
| | $ | 1,016,893 |
| | $ | 1,100,761 |
| | $ | 128,019 |
| | $ | (1,008,027 | ) | | $ | 1,319,567 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING BALANCE SHEET |
As of December 31, 2016 |
(Amounts in thousands) | | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
| | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
ASSETS | | |
Current Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 50,035 |
| | $ | (10,918 | ) | | $ | 12,480 |
| | $ | — |
| | $ | 51,597 |
|
Accounts receivable, net | | — |
| | — |
| | 189,983 |
| | 19,936 |
| | — |
| | 209,919 |
|
Inventories: | | |
| | |
| | |
| | |
| | |
| | |
|
Raw materials | | — |
| | — |
| | 63,829 |
| | 5,810 |
| | — |
| | 69,639 |
|
Work in process | | — |
| | — |
| | 23,007 |
| | 1,614 |
| | — |
| | 24,621 |
|
Finished goods | | — |
| | — |
| | 54,346 |
| | 13,350 |
| | — |
| | 67,696 |
|
Total inventory | | — |
| | — |
| | 141,182 |
| | 20,774 |
| | — |
| | 161,956 |
|
Prepaid expenses and other | | |
| | |
| | |
| | |
| | |
| | |
|
current assets | | — |
| | 1,276 |
| | 21,940 |
| | 3,634 |
| | — |
| | 26,850 |
|
Total current assets | | — |
| | 51,311 |
| | 342,187 |
| | 56,824 |
| | — |
| | 450,322 |
|
Investments in subsidiaries | | 4,106 |
| | (231,236 | ) | | — |
| | — |
| | 227,130 |
| | — |
|
Property and Equipment, at cost: | | |
| | |
| | |
| | |
| | |
| | |
|
Land | | — |
| | — |
| | 7,487 |
| | 762 |
| | — |
| | 8,249 |
|
Buildings and improvements | | — |
| | 510 |
| | 63,000 |
| | 4,441 |
| | — |
| | 67,951 |
|
Machinery and equipment | | — |
| | 1,675 |
| | 392,068 |
| | 19,822 |
| | — |
| | 413,565 |
|
| | — |
| | 2,185 |
| | 462,555 |
| | 25,025 |
| | — |
| | 489,765 |
|
Less accumulated depreciation | | — |
| | (665 | ) | | (312,759 | ) | | (10,785 | ) | | — |
| | (324,209 | ) |
Total property and equipment, net | | — |
| | 1,520 |
| | 149,796 |
| | 14,240 |
| | — |
| | 165,556 |
|
Other Assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Intangible assets, net | | — |
| | — |
| | 91,748 |
| | 12,411 |
| | — |
| | 104,159 |
|
Goodwill | | — |
| | — |
| | 449,366 |
| | 29,148 |
| | — |
| | 478,514 |
|
Deferred income taxes | | — |
| | — |
| | 50,347 |
| | — |
| | — |
| | 50,347 |
|
Intercompany note receivable | | — |
| | 1,135,073 |
| | — |
| | — |
| | (1,135,073 | ) | | — |
|
Other | | — |
| | 3,925 |
| | 4,918 |
| | — |
| | — |
| | 8,843 |
|
Total other assets | | — |
| | 1,138,998 |
| | 596,379 |
| | 41,559 |
| | (1,135,073 | ) | | 641,863 |
|
| | $ | 4,106 |
| | $ | 960,593 |
| | $ | 1,088,362 |
| | $ | 112,623 |
| | $ | (907,943 | ) | | $ | 1,257,741 |
|
| | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
Current Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Accounts payable | | — |
| | $ | 377 |
| | $ | 64,206 |
| | $ | 10,815 |
| | $ | — |
| | $ | 75,398 |
|
Accrued expenses | | — |
| | 29,812 |
| | 124,723 |
| | 14,480 |
| | — |
| | 169,015 |
|
Current portion of payable to related | | | | | | | | | | | | |
parties pursuant to tax receivable agreement | | — |
| | 25,383 |
| | — |
| | — |
| | — |
| | 25,383 |
|
Current portion of long-term debt | | — |
| | 4,300 |
| | — |
| | — |
| | — |
| | 4,300 |
|
Total current liabilities | | — |
| | 59,872 |
| | 188,929 |
| | 25,295 |
| | — |
| | 274,096 |
|
Deferred income taxes | | — |
| | — |
| | — |
| | 2,722 |
| | — |
| | 2,722 |
|
Intercompany note payable | | — |
| | — |
| | 1,026,657 |
| | 108,416 |
| | (1,135,073 | ) | | — |
|
Payable to related parties pursuant to | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
tax receivable agreement | | — |
| | 54,336 |
| | — |
| | — |
| | — |
| | 54,336 |
|
Other long-term liabilities | | — |
| | 6,193 |
| | 74,835 |
| | 5,367 |
| | — |
| | 86,395 |
|
Long-term debt | | — |
| | 836,086 |
| | — |
| | — |
| | — |
| | 836,086 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Stockholders' Equity (Deficit): | | |
| | |
| | |
| | |
| | |
| | |
|
Preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Common stock | | 683 |
| | 683 |
| | — |
| | — |
| | (683 | ) | | 683 |
|
Additional paid-in-capital | | 751,452 |
| | 751,452 |
| | 236,242 |
| | 26,464 |
| | (1,014,158 | ) | | 751,452 |
|
Accumulated deficit | | (714,737 | ) | | (714,737 | ) | | (422,622 | ) | | (36,312 | ) | | 1,173,671 |
| | (714,737 | ) |
Accumulated other | | |
| | |
| | |
| | |
| | |
| | |
|
comprehensive loss | | (33,292 | ) | | (33,292 | ) | | (15,679 | ) | | (19,329 | ) | | 68,300 |
| | (33,292 | ) |
Total stockholder's (deficit) equity | | 4,106 |
| | 4,106 |
| | (202,059 | ) | | (29,177 | ) | | 227,130 |
| | 4,106 |
|
| | $ | 4,106 |
| | $ | 960,593 |
| | $ | 1,088,362 |
| | $ | 112,623 |
| | $ | (907,943 | ) | | $ | 1,257,741 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
For the year ended December 31, 2017 |
(Amounts in thousands) | | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
| | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Cash flows from operating | | | | | | | | | | | | |
activities: | | | | | | | | | | | | |
Net income (loss) | | $ | 68,327 |
| | $ | 68,327 |
| | $ | 61,902 |
| | $ | (2,279 | ) | | $ | (127,950 | ) | | $ | 68,327 |
|
Adjustments to reconcile net income (loss) | | |
| | |
| | |
| | |
| | |
|
to cash provided by (used in) operating activities: | | |
| | |
| | |
| | |
| | |
|
Depreciation and amortization expense | | — |
| | 316 |
| | 45,892 |
| | 7,039 |
| | — |
| | 53,247 |
|
Non-cash restructuring costs | | — |
| | — |
| | 1,321 |
| | — |
| | — |
| | 1,321 |
|
Non-cash interest expense, net | | — |
| | 14,044 |
| | — |
| | — |
| | — |
| | 14,044 |
|
Gain on foreign currency transactions | | — |
| | — |
| | — |
| | (1,363 | ) | | — |
| | (1,363 | ) |
Non-cash litigation expense | | — |
| | 650 |
| | — |
| | — |
| | — |
| | 650 |
|
Loss on modification or | | |
| | |
| | |
| | |
| | |
| | |
|
extinguishment of debt | | — |
| | 2,106 |
| | — |
| | — |
| | — |
| | 2,106 |
|
Stock based compensation | | — |
| | 1,345 |
| | — |
| | — |
| | — |
| | 1,345 |
|
Deferred income taxes | | — |
| | — |
| | 40,951 |
| | (1,328 | ) | | — |
| | 39,623 |
|
Tax receivable agreement liability adjustment | | — |
| | (10,749 | ) | | — |
| | — |
| | — |
| | (10,749 | ) |
Increase in tax uncertainty, | | |
| | |
| | |
| | |
| | |
| | |
|
net of valuation allowance | | — |
| | — |
| | 604 |
| | — |
| | — |
| | 604 |
|
Equity in subsidiaries' net income | | (68,327 | ) | | (59,623 | ) | | — |
| | — |
| | 127,950 |
| | — |
|
Gain on sale of building | | — |
| | — |
| | — |
| | (1,880 | ) | | — |
| | (1,880 | ) |
Other | | — |
| | — |
| | (175 | ) | | — |
| | — |
| | (175 | ) |
Changes in operating assets and | | |
| | |
| | |
| | |
| | |
| | |
|
liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable, net | | — |
| | — |
| | (34,212 | ) | | (5,219 | ) | | — |
| | (39,431 | ) |
Inventories | | — |
| | — |
| | (32,989 | ) | | (1,494 | ) | | — |
| | (34,483 | ) |
Prepaid expenses and other | | |
| | |
| | |
| | |
| | |
| | |
|
current assets | | — |
| | (334 | ) | | (1,497 | ) | | (235 | ) | | — |
| | (2,066 | ) |
Accounts payable | | — |
| | (120 | ) | | 14,890 |
| | (4,297 | ) | | — |
| | 10,473 |
|
Accrued expenses | | — |
| | (4,762 | ) | | (985 | ) | | (2,703 | ) | | — |
| | (8,450 | ) |
Cash payments on restructuring liabilities | | — |
| | — |
| | (983 | ) | | — |
| | — |
| | (983 | ) |
Insurance proceeds in advance of settlement | | — |
| | 8,725 |
| | — |
| | — |
| | — |
| | 8,725 |
|
Other | | — |
| | — |
| | — |
| | 1,043 |
| | — |
| | 1,043 |
|
Net cash provided by | | |
| | |
| | |
| | |
| | |
| | |
|
(used in) operating activities | | — |
| | 19,925 |
| | 94,719 |
| | (12,716 | ) | | — |
| | 101,928 |
|
Cash flows from investing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | | — |
| | (2,530 | ) | | (34,687 | ) | | (3,169 | ) | | — |
| | (40,386 | ) |
Proceeds from sale of assets | | — |
| | — |
| | 236 |
| | 2,278 |
| | — |
| | 2,514 |
|
Net cash used in | | |
| | |
| | |
| | |
| | |
| | |
|
investing activities | | — |
| | (2,530 | ) | | (34,451 | ) | | (891 | ) | | — |
| | (37,872 | ) |
Cash flows from financing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Payments on long-term debt | | — |
| | (44,300 | ) | | — |
| | — |
| | — |
| | (44,300 | ) |
Proceeds from intercompany | | |
| | |
| | |
| | |
| | |
| |
|
|
investment | | — |
| | 42,304 |
| | (62,255 | ) | | 19,951 |
| | — |
| | — |
|
Proceeds from exercises of employee stock options | | — |
| | 1,203 |
| | — |
| | — |
| | — |
| | 1,203 |
|
Payments to tax authority for employee stock based compensation | | — |
| | (1,186 | ) | | — |
| | — |
| | — |
| | (1,186 | ) |
Net cash provided by | | |
| | |
| | |
| | |
| | |
| | |
|
(used in) financing activities | | — |
| | (1,979 | ) | | (62,255 | ) | | 19,951 |
| | — |
| | (44,283 | ) |
Impact of exchange rate movement | | |
| | |
| | |
| | |
| | |
| | |
|
on cash | | — |
| | — |
| | — |
| | 46 |
| | — |
| | 46 |
|
Net increase (decrease) in cash | | |
| | |
| | |
| | |
| | |
| | |
|
and cash equivalents | | — |
| | 15,416 |
| | (1,987 | ) | | 6,390 |
| | — |
| | 19,819 |
|
Cash and cash equivalents at the | | |
| | |
| | |
| | |
| | |
| | |
|
beginning of the period | | — |
| | 50,035 |
| | (10,918 | ) | | 12,480 |
| | — |
| | 51,597 |
|
Cash and cash equivalents at the end | | |
| | |
| | |
| | |
| | |
| | |
|
of the period | | $ | — |
| | $ | 65,451 |
| | $ | (12,905 | ) | | $ | 18,870 |
| | $ | — |
| | $ | 71,416 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
For the year ended December 31, 2016 |
(Amounts in thousands) | | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
| | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Cash flows from operating | | | | | | | | | | | | |
activities: | | | | | | | | | | | | |
Net income (loss) | | $ | 75,487 |
| | $ | 75,487 |
| | $ | 162,342 |
| | $ | (10,766 | ) | | $ | (227,063 | ) | | $ | 75,487 |
|
Adjustments to reconcile net income (loss) | | |
| | |
| | |
| | |
| | |
|
to cash provided by operating activities: | | |
| | |
| | |
| | |
| | |
|
Depreciation and amortization expense | | — |
| | 164 |
| | 49,484 |
| | 6,755 |
| | — |
| | 56,403 |
|
Non-cash restructuring costs | | — |
| | — |
| | — |
| | 427 |
| | — |
| | 427 |
|
Non-cash interest expense, net | | — |
| | 13,710 |
| | — |
| | — |
| | — |
| | 13,710 |
|
Gain on foreign currency transactions | | — |
| | — |
| | — |
| | (299 | ) | | — |
| | (299 | ) |
Non-cash litigation expense | | — |
| | — |
| | 1,875 |
| | — |
| | — |
| | 1,875 |
|
Loss on modification or | | |
| | |
| | |
| | |
| | |
| | |
|
extinguishment of debt | | — |
| | 11,747 |
| | — |
| | — |
| | — |
| | 11,747 |
|
Stock based compensation | | — |
| | 1,067 |
| | — |
| | — |
| | — |
| | 1,067 |
|
Deferred income taxes | | — |
| | — |
| | (56,712 | ) | | (1,277 | ) | | — |
| | (57,989 | ) |
Tax receivable agreement liability adjustment | | — |
| | 60,874 |
| | — |
| | — |
| | — |
| | 60,874 |
|
Increase in tax uncertainty, | | |
| | |
| | |
| | |
| | |
| | |
|
net of valuation allowance | | — |
| | — |
| | 1,059 |
| | — |
| | — |
| | 1,059 |
|
Equity in subsidiaries' net income | | (75,487 | ) | | (151,576 | ) | | — |
| | — |
| | 227,063 |
| | — |
|
Other | | — |
| | — |
| | (190 | ) | | — |
| | — |
| | (190 | ) |
Changes in operating assets and | | |
| | |
| | |
| | |
| | |
| | |
|
liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable, net | | — |
| | — |
| | (18,122 | ) | | 3,413 |
| | — |
| | (14,709 | ) |
Inventories | | — |
| | — |
| | (12,355 | ) | | 813 |
| | — |
| | (11,542 | ) |
Prepaid expenses and other | | |
| | |
| | |
| | |
| | |
| | |
|
current assets | | — |
| | (28 | ) | | (3,166 | ) | | 227 |
| | — |
| | (2,967 | ) |
Accounts payable | | — |
| | 142 |
| | (2,449 | ) | | 3,252 |
| | — |
| | 945 |
|
Accrued expenses | | — |
| | 201 |
| | 8,253 |
| | 583 |
| | — |
| | 9,037 |
|
Cash payments on restructuring liabilities | | — |
| | — |
| | (112 | ) | | (428 | ) | | — |
| | (540 | ) |
Other | | — |
| | — |
| | — |
| | 647 |
| | — |
| | 647 |
|
Net cash provided by | | |
| | |
| | |
| | |
| | |
| | |
|
operating activities | | — |
| | 11,788 |
| | 129,907 |
| | 3,347 |
| | — |
| | 145,042 |
|
Cash flows from investing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | | — |
| | (1,749 | ) | | (31,070 | ) | | (3,182 | ) | | — |
| | (36,001 | ) |
Proceeds from sale of assets | | — |
| | — |
| | 55 |
| | 128 |
| | — |
| | 183 |
|
Net cash used in | | |
| | |
| | |
| | |
| | |
| | |
|
investing activities | | — |
| | (1,749 | ) | | (31,015 | ) | | (3,054 | ) | | — |
| | (35,818 | ) |
Cash flows from financing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Payments on long-term debt | | — |
| | (164,300 | ) | | — |
| | — |
| | — |
| | (164,300 | ) |
Proceeds from intercompany | | |
| | |
| | |
| | |
| | |
| | |
|
investment | | — |
| | 113,484 |
| | (104,866 | ) | | (8,618 | ) | | — |
| | — |
|
Proceeds from exercises of employee stock options | | — |
| | 1,091 |
| | — |
| | — |
| | — |
| | 1,091 |
|
Cash payments on tax receivable agreement | | — |
| | (4,971 | ) | | — |
| | — |
| | — |
| | (4,971 | ) |
Net cash used in | | |
| | |
| | |
| | |
| | |
| | |
|
financing activities | | — |
| | (54,696 | ) | | (104,866 | ) | | (8,618 | ) | | — |
| | (168,180 | ) |
Impact of exchange rate movement | | |
| | |
| | |
| | |
| | |
| | |
|
on cash | | — |
| | — |
| | — |
| | 1,128 |
| | — |
| | 1,128 |
|
Net decrease in cash | | |
| | |
| | |
| | |
| | |
| | |
|
and cash equivalents | | — |
| | (44,657 | ) | | (5,974 | ) | | (7,197 | ) | | — |
| | (57,828 | ) |
Cash and cash equivalents at the | | |
| | |
| | |
| | |
| | |
| | |
|
beginning of the period | | — |
| | 94,692 |
| | (4,944 | ) | | 19,677 |
| | — |
| | 109,425 |
|
Cash and cash equivalents at the end | | |
| | |
| | |
| | |
| | |
| | |
|
of the period | | $ | — |
| | $ | 50,035 |
| | $ | (10,918 | ) | | $ | 12,480 |
| | $ | — |
| | $ | 51,597 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
For the year ended December 31, 2015 |
(Amounts in thousands) | | Guarantor | | Issuer | | | | Non- | | | | |
| | Ply Gem | | Ply Gem | | Guarantor | | Guarantor | | Consolidating | | |
| | Holdings, Inc. | | Industries, Inc. | | Subsidiaries | | Subsidiary | | Adjustments | | Consolidated |
Cash flows from operating | | | | | | | | | | | | |
activities: | | | | | | | | | | | | |
Net income (loss) | | $ | 32,288 |
| | $ | 32,288 |
| | $ | 68,217 |
| | $ | (15,845 | ) | | $ | (84,660 | ) | | $ | 32,288 |
|
Adjustments to reconcile net income | | |
| | |
| | |
| | |
| | |
| | |
|
(loss) to cash provided by | | |
| | |
| | |
| | |
| | |
| | |
|
operating activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Depreciation and amortization expense | | — |
| | 312 |
| | 51,079 |
| | 7,009 |
| | — |
| | 58,400 |
|
Fair-value premium on purchased inventory | | — |
| | — |
| | 54 |
| | — |
| | — |
| | 54 |
|
Non-cash restructuring costs | | — |
| | — |
| | — |
| | 704 |
| | — |
| | 704 |
|
Non-cash interest expense, net | | — |
| | 13,380 |
| | — |
| | — |
| | — |
| | 13,380 |
|
Loss on foreign currency transactions | | — |
| | — |
| | — |
| | 3,166 |
| | — |
| | 3,166 |
|
Stock based compensation | | — |
| | 1,960 |
| | — |
| | — |
| | — |
| | 1,960 |
|
Deferred income taxes | | — |
| | — |
| | (3,612 | ) | | (1,289 | ) | | — |
| | (4,901 | ) |
Tax receivable agreement liability adjustment | | — |
| | 12,947 |
| | — |
| | — |
| | — |
| | 12,947 |
|
Reduction in tax uncertainty, | | |
| | |
| | |
| | |
| | |
| | |
|
net of valuation allowance | | — |
| | — |
| | (199 | ) | | — |
| | — |
| | (199 | ) |
Equity in subsidiaries' net income (loss) | | (32,288 | ) | | (52,372 | ) | | — |
| | — |
| | 84,660 |
| | — |
|
Other | | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Changes in operating assets and | | |
| | |
| | |
| | |
| | |
| | |
|
liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable, net | | — |
| | — |
| | (10,949 | ) | | 6,387 |
| | — |
| | (4,562 | ) |
Inventories | | — |
| | — |
| | 27,963 |
| | 1,958 |
| | — |
| | 29,921 |
|
Prepaid expenses and other | | |
| | |
| | |
| | |
| | |
| | |
|
current assets | | — |
| | 1,165 |
| | 5,348 |
| | 216 |
| | — |
| | 6,729 |
|
Accounts payable | | — |
| | (4 | ) | | (11,712 | ) | | 1,153 |
| | — |
| | (10,563 | ) |
Accrued expenses | | — |
| | 1,682 |
| | 2,452 |
| | (798 | ) | | — |
| | 3,336 |
|
Cash payments on restructuring liabilities | | — |
| | — |
| | (201 | ) | | (1,444 | ) | | — |
| | (1,645 | ) |
Other | | — |
| | — |
| | (1,624 | ) | | — |
| | — |
| | (1,624 | ) |
Net cash provided by | | |
| | |
| | |
| | |
| | |
| | |
|
operating activities | | — |
| | 11,358 |
| | 126,788 |
| | 1,217 |
| | — |
| | 139,363 |
|
Cash flows from investing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Acquisitions, net of cash acquired | | — |
| | — |
| | (21,000 | ) | | — |
| | — |
| | (21,000 | ) |
Capital expenditures | | — |
| | (2,848 | ) | | (28,181 | ) | | (2,831 | ) | | — |
| | (33,860 | ) |
Proceeds from sale of assets | | — |
| | — |
| | 85 |
| | 37 |
| | — |
| | 122 |
|
Net cash used in | | |
| | |
| | |
| | |
| | |
| | |
|
investing activities | | — |
| | (2,848 | ) | | (49,096 | ) | | (2,794 | ) | | — |
| | (54,738 | ) |
Cash flows from financing | | |
| | |
| | |
| | |
| | |
| | |
|
activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Payments on long-term debt | | — |
| | (4,300 | ) | | — |
| | — |
| | — |
| | (4,300 | ) |
Proceeds from intercompany | | |
| | |
| | |
| | |
| | |
| | |
investment | | — |
| | 66,189 |
| | (76,791 | ) | | 10,602 |
| | — |
| | — |
|
Proceeds from exercises of employee stock options | | — |
| | 2,198 |
| | — |
| | — |
| | — |
| | 2,198 |
|
Cash payments on tax receivable agreement | | — |
| | (48 | ) | | — |
| | — |
| | — |
| | (48 | ) |
Debt issuance costs paid | | — |
| | (1,412 | ) | | — |
| | — |
| | — |
| | (1,412 | ) |
Net cash provided by (used in) | | |
| | |
| | |
| | |
| | |
| | |
|
financing activities | | — |
| | 62,627 |
| | (76,791 | ) | | 10,602 |
| | — |
| | (3,562 | ) |
Impact of exchange rate movement | | |
| | |
| | |
| | |
| | |
| | |
|
on cash | | — |
| | — |
| | — |
| | (4,800 | ) | | — |
| | (4,800 | ) |
Net increase in cash | | |
| | |
| | |
| | |
| | |
| | |
|
and cash equivalents | | — |
| | 71,137 |
| | 901 |
| | 4,225 |
| | — |
| | 76,263 |
|
Cash and cash equivalents at the | | |
| | |
| | |
| | |
| | |
| | |
|
beginning of the period | | — |
| | 23,555 |
| | (5,845 | ) | | 15,452 |
| | — |
| | 33,162 |
|
Cash and cash equivalents at the end | | |
| | |
| | |
| | |
| | |
| | |
|
of the period | | $ | — |
| | $ | 94,692 |
| | $ | (4,944 | ) | | $ | 19,677 |
| | $ | — |
| | $ | 109,425 |
|
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
Item 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of December 31, 2017 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and the information required to be disclosed by us is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management has concluded that the Company's consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K are fairly stated in all material respects in accordance with generally accepted accounting principles.
Management’s Report on Internal Control over Financial Reporting
Management of the Company (Ply Gem Holdings) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, the Company’s management used the criteria set forth in the framework in the Internal Control - Integrated Framework ("2013 Framework") issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation conducted under the framework in “Internal Control-Integrated Framework,” the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report, which is included in this Annual Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2017 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Ply Gem Holdings, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Ply Gem Holdings, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”), and our report dated March 5, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Raleigh, North Carolina
March 5, 2018
Item 9B. OTHER INFORMATION
Not Applicable
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is contained under the following headings, "Corporate Governance", "Nominees for the Board of Directors", "Class II Directors", "Class III Directors", "Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for our 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”), to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, which is incorporated herein by reference. To the extent our 2018 Annual Meeting of Stockholders is delayed or canceled, the information required by this Item 10 will be filed in an amendment to this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is contained under the heading “Executive Compensation” in our 2018 Proxy Statement, which is incorporated herein by reference. To the extent our 2018 Annual Meeting of Stockholders is delayed or canceled, the information required by this Item 10 will be filed in an amendment to this Annual Report on Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is contained under the headings “Security Ownership of Certain Beneficial Owners and Management” and "Securities Authorized for Issuance Under equity Compensation Plans" in our 2018 Proxy Statement, which is incorporated herein by reference. To the extent our 2018 Annual Meeting of Stockholders is delayed or canceled, the information required by this Item 10 will be filed in an amendment to this Annual Report on Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is contained under the headings “Certain Relationships and Related Party Transactions” and “Board of Directors and Committees” in our 2018 Proxy Statement, which is incorporated herein by reference. To the extent our 2018 Annual Meeting of Stockholders is delayed or canceled, the information required by this Item 10 will be filed in an amendment to this Annual Report on Form 10-K.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is contained under the headings “Audit and Non-Audit Fees” and “Pre-Approval Policies and Procedures” in our 2018 Proxy Statement, which is incorporated herein by reference. To the extent our 2018 Annual Meeting of Stockholders is delayed or canceled, the information required by this Item 10 will be filed in an amendment to this Annual Report on Form 10-K.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
|
|
1. Consolidated Financial Statements |
The list of consolidated financial statements and related notes, together with the report of KPMG LLP, appear in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K and are hereby incorporated by reference.
|
| |
2. Schedule II Valuation and Qualifying Accounts - | |
All other schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the consolidated financial statements or notes thereto.
|
|
3. Exhibits files - See Exhibit Index |
EXHIBIT INDEX
|
| | |
Exhibit Number | | Description |
2.1 | |
|
2.2 | | |
2.3 | | |
3.1 | |
|
3.2 | | |
3.3 | | |
3.4 | | |
4.1 | | |
4.2 | | |
10.1 | * | |
10.2 | * | |
10.3 | * | |
10.4 | * | |
10.5 | * |
|
10.6 | * | |
10.7 | * |
|
|
| | |
10.8 | * | |
10.9 | * | |
10.10 | * | |
10.11 | * | |
10.12 | * | |
10.13 | * | |
10.14 | * | |
10.15 | * | |
10.16 | * | |
10.17 | * |
|
10.18 | * | |
10.19 | * | |
10.20 | * |
|
10.21 | * | |
10.22 | * | |
10.23 | * | |
10.24 | | Second Amended and Restated Stockholders’ Agreement, dated as of May 22, 2013, by and among Ply Gem Holdings, Inc., Ply Gem Prime Holdings, Inc., Caxton-Iseman (Ply Gem), L.P., Caxton-Iseman (Ply Gem) II, L.P., the management stockholders named therein and for purposes of certain sections only, Rajaconda Holdings, Inc. (incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K, dated May 29, 2013 (File No. 001-35930)). |
10.25 | | |
10.26 | | |
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| | |
10.27 | | |
10.28 | | |
10.29 | | |
10.30 | | Amended and Restated Credit Agreement dated as of November 1, 2013, by and among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Inc., Gienow Canada, Inc., Mitten, Inc., the other borrowers named therein, each Lender from time to time party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, as U.S. Collateral Agent, as U.S. Swing Line Lender and a U.S. L/C Issuer, Wells Fargo Capital Finance, LLC, as Co-Collateral Agent, Wells Fargo Bank, National Association, as a U.S. L/C Issuer, UBS AG Canada Branch, as Canadian Administrative Agent, as Canadian Collateral Agent, as Canadian Swing Line Lender, and as a Canadian L/C Issuer, Credit Suisse AG Cayman Islands Branch, as a U.S. L/C Issuer, Credit Suisse AG, Toronto Branch, as a Canadian L/C Issuer, UBS Securities LLC, as Joint Lead Arranger and Joint Bookrunner, and Wells Fargo Capital Finance, LLC, as Syndication Agent, Joint Lead Arranger and Joint Bookrunner (incorporated by reference from Exhibit 10.47 to the Company's Form 10-K/A dated March 14, 2014 (File No. 001-35930)). |
10.31 | | Amendment to Amended and Restated Credit Agreement, dated as of April 7, 2014, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Gienow Canada Inc. and Mitten Inc., UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent. (incorporated by reference from Exhibit 10.2 to the Company's Form 10-Q dated May 12, 2014 (File No. 001-35930)). |
10.32 | | Amendment No. 2 and Incremental Assumption Agreement to Amended and Restated Credit Agreement, dated as of November 6, 2014, by and among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Gienow Canada Inc. and Mitten Inc., each other Loan Party signatory thereto, each Lender providing an increase to its Revolving Credit Commitment or a new Revolving Credit Commitment, as the case may be, and UBS AG, Stamford Branch, as U.S. Administrative Agent (incorporated by reference from Exhibit 10.1 to the Company’s Registration Statement on Form S-4, dated November 25, 2014 (File No. 333-200567)). |
10.33 | | Credit Agreement, dated as of January 30, 2014, by and among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., the Lenders party thereto and Credit Suisse AG, as Administrative Agent and Collateral Agent (incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K, dated January 30, 2014 (File No. 001-35930)). |
10.34 | | Second Amended and Restated Credit Agreement, dated as of November 5, 2015, by and among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Gienow Canada, Inc., Mitten, Inc., the other borrowers named therein, each Lender from time to time party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, as U.S. Collateral Agent, as U.S. Swing Line Lender and a U.S. L/C Issuer, Wells Fargo Capital Finance, LLC, as Co-Collateral Agent, Wells Fargo Bank, National Association, as a U.S. L/C Issuer, UBS AG Canada Branch, as Canadian Administrative Agent, as Canadian Collateral Agent, as Canadian Swing Line Lender, and as a Canadian L/C Issuer, Credit Suisse AG Cayman Islands Branch, as a U.S. L/C Issuer, Credit Suisse AG, Toronto Branch, as a Canadian L/C Issuer, UBS Securities LLC, as Joint Lead Arranger and Joint Bookrunner, and Wells Fargo Capital Finance, LLC, as Syndication Agent, Joint Lead Arranger and Joint Bookrunner (incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K, dated November 5, 2015 (File No. 001-35930)). |
21.1 | | |
23.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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101 | | The following financial statements from the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, were formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Cash Flows; (v) Consolidated Statements of Stockholder's Equity (Deficit); and (vi) Notes to Consolidated Financial Statements.
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* Management Agreement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
| PLY GEM HOLDINGS, INC. | |
| (Registrant) | |
Date: March 5, 2018 | | |
| | |
| By: | /s/ Gary E. Robinette |
| | Gary E. Robinette |
| | President, Chief Executive Officer, and Chairman of the Board |
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | |
Signature | Title | Date |
| | |
/s/ Gary E. Robinette | President, Chief Executive Officer, and Chairman of the Board | March 5, 2018 |
Gary E. Robinette | (Principal Executive Officer) | |
| | |
/s/ Shawn K. Poe | Executive Vice President, Chief Financial Officer, | March 5, 2018 |
Shawn K. Poe | and Secretary (Principal Financial and Accounting Officer) | |
| | |
/s/ Frederick J. Iseman | Lead Director | March 5, 2018 |
Frederick J. Iseman | | |
| | |
/s/ Michael P. Haley | Director | March 5, 2018 |
Michael P. Haley | | |
| | |
/s/ Jeffrey T. Barber | Director | March 5, 2018 |
Jeffrey T. Barber | | |
| | |
/s/ Mary K. Rhinehart | Director | March 5, 2018 |
Mary K. Rhinehart | | |
| | |
/s/ Janice E. Stipp | Director | March 5, 2018 |
Janice E. Stipp | | |
| | |
/s/ Timothy T. Hall | Director | March 5, 2018 |
Timothy T. Hall | | |
| | |
/s/ John Forbes | Director | March 5, 2018 |
John Forbes | | |
| | |
/s/ Joost F. Thesseling | Director | March 5, 2018 |
Joost F. Thesseling | | |
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Balance at
Beginning
of Year | | Charged to
Costs and
Expenses | | Charged to
Other
Accounts | | Uncollectible accounts
written off, net of
recoveries | | Balance at
End of
Year |
Year ended December 31, 2017 | | | | | | | | | | |
Allowance for doubtful accounts and sales allowances............ | | $ | 2,663 |
| | $ | 1,500 |
| | $ | — |
| | $ | (1,026 | ) | | $ | 3,137 |
|
| | | | | | | | | | |
Year ended December 31, 2016 | | |
| | |
| | |
| | |
| | |
|
Allowance for doubtful accounts and sales allowances............ | | $ | 3,588 |
| | $ | 573 |
| | $ | — |
| | $ | (1,498 | ) | | $ | 2,663 |
|
| | | | | | | | | | |
Year ended December 31, 2015 | | |
| | |
| | |
| | |
| | |
|
Allowance for doubtful accounts and sales allowances............ | | $ | 4,164 |
| | $ | 1,419 |
| | $ | 19 |
| | $ | (2,014 | ) | | $ | 3,588 |
|
See accompanying reports of independent registered public accounting firms.
