Attached files

file filename
EX-32.1 - CEO AND CFO SECTION 906 CERTIFICATION - PGT, Inc.ex32.htm
EX-3.1 - AMENDED AND RESTATED CERTIFICATE OF INCORPORATION - PGT, Inc.ex3_1.htm
EX-3.2 - AMENDED AND RESTATED BY-LAWS OF PGT, INC. - PGT, Inc.ex3_2.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - PGT, Inc.ex31_1.htm
EX-10.7 - AMENDED AND RESTATED 2006 EQUITY INCENTIVE PLAN - PGT, Inc.ex10_7.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - PGT, Inc.ex31_2.htm
EX-21.1 - LIST OF SUBSIDIARIES - PGT, Inc.ex21_1.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT - PGT, Inc.ex23_1.htm
EX-10.17 - FORM OF 2006 EQUITY INCENTIVE PLAN REPLACEMENT NON-QUALIFIED STOCK OPTION AGREEMENT - PGT, Inc.ex10_17.htm

 
 
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
  
   
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended January 2, 2010
OR
o
 
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: 000-52059

PGT, Inc.
(Exact name of registrant as specified in its charter)
  
   
Delaware
 
20-0634715
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1070 Technology Drive
 North Venice, Florida
 (Address of principal executive offices)
 
 
34275
 (Zip Code)

 
 
Registrant’s telephone number, including area code:
(941) 480-1600

Former name, former address and former fiscal year, if changed since last report:  Not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Exchange on Which Registered
Common stock, par value $0.01 per share
 
NASDAQ Global Market

 
Securities registered pursuant to Section 12 (g) of the Act:  None
.
       Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No þ

       Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  o      No  þ

       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  þ      No  o

       Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.   o

       Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    Large accelerated filer  o                  Accelerated filer  o                   Non-accelerated filer  þ                   Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o      No  þ


       The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of July 2, 2009 was approximately $23,261,535 based on the closing price per share on that date of $1.54 as reported on the NASDAQ Global Market.

       The number of shares of the registrant’s common stock, par value $0.01, outstanding as of March 16, 2010 was 54,005,439.

DOCUMENTS INCORPORATED BY REFERENCE
       Portions of the Company’s Proxy Statement for the Company’s 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.


 
 
 

 



 
 
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PART I
 
 
Item 1.   
BUSINESS
 
 
GENERAL DEVELOPMENT OF BUSINESS

Description of the Company

We are the leading U.S. manufacturer and supplier of residential impact-resistant windows and doors and pioneered the U.S. impact-resistant window and door industry. Our impact-resistant products, which are marketed under the WinGuard®, PremierVue ™ and PGT Architectural Systems brand names, combine heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris by maintaining their structural integrity and preventing penetration by impacting objects. Impact-resistant windows and doors satisfy increasingly stringent building codes in hurricane-prone coastal states and provide an attractive alternative to shutters and other “active” forms of hurricane protection that require installation and removal before and after each storm. Combining the impact resistance of WinGuard with our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.  We also manufacture non-impact resistant products in both aluminum and vinyl frames including our new SpectraGuard ™ line of products launched over the past two years.  Our current market share in Florida, which is the largest U.S. impact-resistant window and door market, is significantly greater than that of any of our competitors.

The geographic regions in which we currently operate include the Southeastern U.S., the Gulf Coast, the Caribbean, Central America and Canada. We distribute our products through multiple channels, including over 1,300 window distributors, building supply distributors, window replacement dealers and enclosure contractors. This broad distribution network provides us with the flexibility to meet demand as it shifts between the residential new construction and repair and remodeling end markets.

We operate manufacturing facilities in North Venice, Florida and in Salisbury, North Carolina, which produce fully-customized windows and doors. We are vertically integrated with glass tempering and laminating facilities in both states, which provide us with a consistent source of impact-resistant laminated glass, shorter lead times, and lower costs relative to third-party sourcing. Our facility in Lexington, North Carolina is vacant and subsequent to January 2, 2010 is being marketed for sale.

History

Our subsidiary, PGT Industries, Inc., was founded in 1980 as Vinyl Technology, Inc. The PGT brand was established in 1987, and we introduced our WinGuard branded product line in the aftermath of Hurricane Andrew in 1992.

PGT, Inc. is a Delaware corporation formed on December 16, 2003, as JLL Window Holdings, Inc. by an affiliate of JLL Partners, our largest stockholder, in connection with its acquisition of PGT Holding Company on January 29, 2004.  On February 15, 2006, we changed our name to PGT, Inc., and on June 27, 2006 we became a publicly listed company on the NASDAQ National Market under the symbol “PGTI”.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The FASB has issued guidance under the Segment Reporting topic of the Codification which defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Under this definition, we have concluded that we operate as one segment, the manufacture and sale of windows and doors.  Additional required information is included in Item 8.


 

NARRATIVE DESCRIPTION OF BUSINESS

Our Products

We manufacture complete lines of premium, fully customizable aluminum and vinyl windows and doors and porch enclosure products targeting both the residential new construction and repair and remodeling end markets. All of our products carry the PGT brand, and our consumer-oriented products carry an additional, trademarked product name, including WinGuard, Eze-Breeze, SpectraGuard, and, introduced in late 2009, PremierVue.

Window and door products

WinGuard. WinGuard is an impact-resistant product line and combines heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris that satisfy increasingly stringent building codes and primarily target hurricane-prone coastal states in the U.S., as well as the Caribbean and Central America. Combining the impact resistance of WinGuard with our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.

Aluminum. We offer a complete line of fully customizable, non-impact-resistant aluminum frame windows and doors. These products primarily target regions with warmer climates, where aluminum is often preferred due to its ability to withstand higher temperatures and humidity. Adding our insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs.

Vinyl. We offer a complete line of fully customizable, non-impact-resistant vinyl frame windows and doors primarily targeting regions with colder climates, where the energy-efficient characteristics of vinyl frames are critical. In early 2008, we introduced SpectraGuard, a new line of vinyl windows for new construction with insulating glass and unsurpassed wood-like aesthetics, such as brick-mould frames, wood-like trim detail and simulated divided lights. In early 2009, we added to the SpectraGuard line with new vinyl replacement windows combining superior energy performance and protection with unsurpassed wood-like detail and character.

PremierVue.  Introduced in the Fall of 2009, PremierVue is a complete line of impact-resistant vinyl window products that are tailored for the mid to high end of the replacement market, primarily targeting single and multi-family homes and low to mid-rise condominiums in Florida and other coastal regions of the Southeastern U.S.. Combining structural strength and energy efficiency, these products are designed for flexibility in today’s market, offering both laminated and laminated-insulated impact-resistant glass options. PremierVue’s large test sizes and high design pressures, combined with vinyl’s inherent thermal efficiency, make these products truly unique in the window industry.

Architectural Systems. Similar to WinGuard, Architectural Systems products are impact-resistant, offering protection from hurricane-force winds and wind-borne debris for mid- and high-rise buildings rather than single family homes.

Porch-enclosure products

Eze-Breeze. Eze-Breeze sliding panels for porch enclosures are vinyl-glazed, aluminum-framed products used for enclosing screened-in porches that provide protection from inclement weather.

Sales and Marketing

Our sales strategy primarily focuses on attracting and retaining distributors and dealers by consistently providing exceptional customer service, leading product quality, and competitive pricing and using our advanced knowledge of building code requirements and technical expertise.
 
Our marketing strategy is designed to reinforce the high quality of our products and focuses on both coastal and inland markets. We support our markets through print and web based advertising, consumer and builder promotions, and selling and collateral materials. We also work with our dealers and distributors to educate consumers and homebuilders on the advantages of using impact-resistant and energy efficient products. We market our products based on quality, building code compliance, outstanding service, shorter lead times, and on-time delivery using our fleet of trucks and trailers.


 

Our Customers

We have a highly diversified customer base that is comprised of over 1,300 window distributors, building supply distributors, window replacement dealers and enclosure contractors.  Our largest customer accounts for approximately 4.8% of net sales and our top ten customers account for approximately 18.2% of net sales. Our sales are composed of residential new construction and home repair and remodeling end markets, which represented approximately 27% and 73% of our sales, respectively, during 2009.  This compares to 37% and 63% in 2008.

We do not supply our products directly to homebuilders but believe demand for our products is also a function of our relationships with a number of national homebuilders, which we believe are strong.

Materials and Supplier Relationships

Our primary manufacturing materials include aluminum and vinyl extrusions, glass, and polyvinyl butyral. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice.  All of our materials are typically readily available from other sources. Aluminum and vinyl extrusions accounted for approximately 44% of our material purchases during fiscal year 2009. Sheet glass, which is sourced from two major national suppliers, accounted for approximately 17% of our material purchases during fiscal year 2009. Sheet glass that we purchase comes in various sizes, tints, and thermal properties. Polyvinyl butyral and ionoplast, which are both used as inner layer in laminated glass, accounted for approximately 17% of our material purchases during fiscal year 2009. We are in the process of renegotiating our agreement, which ended in December 2009, with our supplier for the purchase of polyvinyl butyral.  We have an agreement with this same supplier for the purchase of ionoplast, which is in effect until 2012.

Backlog

As of January 2, 2010, backlog was $8.5 million compared to $9.3 million at January 3, 2009.  Our backlog consists of orders that we have received from customers that have not yet shipped, and we expect that substantially all of our current backlog will be recognized as sales in the first quarter of 2010.  The decrease in our backlog resulted from the continuation of the downturn in the housing market and the overall economy, which has had a negative impact on order intake, but also due to a decrease in lead time between order intake and product shipment.  Future period to period comparisons of backlog may be negatively affected if sales and the level of order intake decrease further.

Intellectual Property

We own and have registered trademarks in the United States. In addition, we own several patents and patent applications concerning various aspects of window assembly and related processes.  We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks and patents.  As long as we continue to renew our trademarks when necessary, the trademark protection provided by them is perpetual.

Manufacturing

Our manufacturing facilities, located in Florida and North Carolina, are capable of producing fully-customized products. The manufacturing process typically begins in one of our glass plants where we cut, temper and laminate sheet glass to meet specific requirements of our customers’ orders.

Glass is transported to our window and door assembly lines in a make-to-order sequence where it is combined with an aluminum or vinyl frame. These frames are also fabricated to order, as we start with a piece of extruded material that we cut and shape into a frame that fits our customers’ specifications. After an order has been completed, it is immediately staged for delivery and shipped within an average of 48 hours of completion.

 

Competition

The window and door industry is highly fragmented and the competitive landscape is based on geographic scope. The competition falls into one of two categories: local and regional manufacturers, and national window and door manufacturers.

Local and Regional Window and Door Manufacturers: This group of competitors consists of numerous local job shops and small manufacturing facilities that tend to focus on selling products to local or regional dealers and wholesalers. Competitors in this group typically lack marketing support and the service levels and quality controls demanded by larger distributors, as well as the ability to offer a full complement of products.

National Window and Door Manufacturers: This group of competitors tends to focus on selling branded products nationally to dealers and wholesalers and has multiple locations.

The principal methods of competition in the window and door industry are the development of long-term relationships with window and door dealers and distributors, and the retention of customers by delivering a full range of high-quality products on time while offering competitive pricing and flexibility in transaction processing. Trade professionals such as contractors, homebuilders, architects and engineers also engage in direct interaction and look to the manufacturer for training and education of product and code. Although some of our competitors may have greater geographic scope and access to greater resources and economies of scale than do we, our leading position in the U.S. impact-resistant window and door market and the high quality of our products position us well to meet the needs of our customers and retain an advantage over our competitors.

Environmental Considerations
       
Although our business and facilities are subject to federal, state, and local environmental regulation, environmental regulation does not have a material impact on our operations, and we believe that our facilites are in material compliance with such laws and regulations.

Employees

As of February 28, 2010, we employed approximately 1,150 people, none of whom were represented by a union. We believe that we have good relations with our employees.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Our net sales to customers in the United States were $156.5 million in 2009, $205.9 million in 2008, and $263.2 million in 2007.   Our net foreign sales, including sales into the Caribbean, Central America and Canada, were $9.5 million in 2009, $12.7 million in 2008, and $15.2 million in 2007.

AVAILABLE INFORMATION

Our Internet address is www.pgtindustries.com. Through our Internet website under “Financial Information” in the Investors section, we make available free of charge, as soon as reasonably practical after such information has been filed with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet website under “Corporate Governance” in the Investors section is our Code of Ethics for Senior Financial Officers. We are not including this or any other information on our website as a part of, nor incorporating it by reference into this Form 10-K, or any of our other SEC filings. The SEC maintains an Internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.



 


  Item 1A.   RISK FACTORS

 
We are subject to regional and national economic conditions. The unprecedented decline in the economy in Florida and throughout the United States could continue to negatively affect demand for our products which has had, and which could continue to have, an adverse  impact on our sales and results of operations.

A continuation of the downturn in our markets could adversely impact our credit agreement. As of January 2, 2010, we had $68.3 million of outstanding indebtedness. As noted elsewhere in this report, we have experienced a significant deterioration in the various markets in which we compete. A sustained and continued significant deterioration in these markets may adversely impact our ability to meet certain covenants under our credit agreement. Management continues to evaluate what, if any, action or actions may be available or necessary to maintain compliance with these various covenants, including cost saving actions and the prepayment of debt.

The new home construction and repair and remodeling markets have declined. Beginning in the second half of 2006, we saw a significant slowdown in the Florida housing market.  This slowdown continued during 2007, 2008, and 2009, and we expect this trend to continue through 2010 and possibly further.  Like many building material suppliers in the industry, we have been and will continue to be faced with a challenging operating environment due to this decline in the housing market.  Specifically, new single family housing permits in Florida decreased by 49% in 2007, 47% in 2008, and 30% in 2009, each as compared to the prior year.  Beginning in the third quarter of 2008, we began to see a decrease in consumer spending for repair and remodeling projects as credit tightened and many homeowners lost substantial equity in their homes. The resulting decline in new home and repair and remodeling construction levels by our customers has decreased demand for our products which has had, and which could continue to have, an adverse impact on our sales and results of operations.

Current economic and credit market conditions have increased the risk that we may not collect a greater percentage of our receivables. Economic and credit conditions have negatively impacted our bad debt expense which has adversely impacted our results of operations.  If these conditions persist, our results of operations may continue to be adversely impacted by bad debts. We monitor our customers’ credit profiles carefully and make changes in our terms when necessary in response to this heightened risk.

We are subject to fluctuations in the prices of our raw materials. We experience significant fluctuations in the cost of our raw materials, including aluminum extrusion, polyvinyl butyral and glass. A variety of factors over which we have no control, including global demand for aluminum, fluctuations in oil prices, speculation in commodities futures and the creation of new laminates or other products based on new technologies impact the cost of raw materials we purchase for the manufacture of our products. While we attempt to minimize our risk from severe price fluctuations by entering into aluminum forward contracts to hedge these fluctuations in the purchase price of aluminum extrusion we use in production, substantial, prolonged upward trends in aluminum prices could significantly increase the cost of the unhedged portions of our aluminum needs and have an adverse impact on our results of operations. We anticipate that these fluctuations will continue in the future. While we have entered into a three-year supply agreement through early 2012 with a major producer of ionoplast inner layer that we believe provides us with a reliable, single source for ionoplast with stable pricing on favorable terms, if one or both parties to the agreement do not satisfy the terms of the agreement it may be terminated which could result in our inability to obtain ionoplast on commercially reasonable terms having an adverse impact on our results of operations. Additionally, ionoplast accounted for approximately 22% of our inner layer purchases in 2009, and we are currently negotiating for the purchase of polyvinyl butyral (which accounted for approximately 78% of our inner layer purchases in 2009).  If we are unable to negotiate a long-term agreement for the supply of polyvinyl butyral on commercially reasonable terms, it may have an adverse impact on our results of operations.  While historically we have to some extent been able to pass on significant cost increases to our customers, our results between periods may be negatively impacted by a delay between the cost increases and price increases in our products.
 
We depend on third-party suppliers for our raw materials. Our ability to offer a wide variety of products to our customers depends on receipt of adequate material supplies from manufacturers and other suppliers. Generally, our raw materials and supplies are obtainable from various sources and in sufficient quantities. However, it is possible that our competitors or other suppliers may create laminates or products based on new technologies that are not available to us or are more effective than our products at surviving hurricane-force winds and wind-borne debris or that they may have access to products of a similar quality at lower prices. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Moreover, other than with our suppliers of polyvinyl butyral and aluminum, we do not have long-term contracts with the suppliers of our raw materials.

Transportation costs represent a significant part of our cost structure. Although prices decreased significantly in the fourth quarter of 2008 and stabilized somewhat in 2009, the increase in fuel prices earlier in 2008 had a negative effect on our distribution costs.  Another rapid and prolonged increase in fuel prices may significantly increase our costs and have an adverse impact on our results of operations.
 
The home building industry and the home repair and remodeling sector are regulated. The homebuilding industry and the home repair and remodeling sector are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, and similar matters, including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. Increased regulatory restrictions could limit demand for new homes and home repair and remodeling products and could negatively affect our sales and results of operations.

Our operating results are substantially dependent on sales of our WinGuard branded line of products. A majority of our net sales are, and are expected to continue to be, derived from the sales of our WinGuard branded line of products. Accordingly, our future operating results will depend on the demand for WinGuard products by current and future customers, including additions to this product line that are subsequently introduced. If our competitors release new products that are superior to WinGuard products in performance or price, or if we fail to update WinGuard products with any technological advances that are developed by us or our competitors or introduce new products in a timely manner, demand for our products may decline. A decline in demand for WinGuard products as a result of competition, technological change or other factors could have a material adverse effect on our ability to generate sales, which would negatively affect our sales and results of operations.

Changes in building codes could lower the demand for our impact-resistant windows and doors. The market for our impact-resistant windows and doors depends in large part on our ability to satisfy state and local building codes that require protection from wind-borne debris. If the standards in such building codes are raised, we may not be able to meet their requirements, and demand for our products could decline. Conversely, if the standards in such building codes are lowered or are not enforced in certain areas, demand for our impact-resistant products may decrease. Further, if states and regions that are affected by hurricanes but do not currently have such building codes fail to adopt and enforce hurricane protection building codes, our ability to expand our business in such markets may be limited.

Our industry is competitive, and competition may increase as our markets grow or as more states adopt or enforce building codes that require impact-resistant products. The window and door industry is highly competitive. We face significant competition from numerous small, regional producers, as well as a small number of national producers. Some of these competitors make products from alternative materials, including wood. Any of these competitors may (i) foresee the course of market development more accurately than do we, (ii) develop products that are superior to our products, (iii) have the ability to produce similar products at a lower cost, (iv) develop stronger relationships with window distributors, building supply distributors, and window replacement dealers, or (v) adapt more quickly to new technologies or evolving customer requirements than do we. As a result, we may not be able to compete successfully with them.

In addition, while we are skilled at creating finished impact-resistant and other window and door products, the materials we use can be purchased by any existing or potential competitor. New competitors can enter our industry, and existing competitors may increase their efforts in the impact-resistant market. Furthermore, if the market for impact-resistant windows and doors continues to expand, larger competitors could enter, or expand their presence in the market and may be able to compete more effectively. Finally, we may not be able to maintain our costs at a level sufficiently low for us to compete effectively. If we are unable to compete effectively, demand for our products and our profitability may decline.

Our business is currently concentrated in one state. Our business is concentrated geographically in Florida. In fiscal year 2009, approximately 81% of our sales were generated in Florida, and new single family housing permits in Florida decreased by 30% in 2009 compared to the prior year. A further or prolonged decline in the economy of the state of Florida or of the coastal regions of Florida, a change in state and local building code requirements for hurricane protection, or any other adverse condition in the state could cause a decline in the demand for our products in Florida, which could have an adverse impact on our sales and results of operations.
 
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under our debt instruments. As of January 2, 2010, our indebtedness under our first lien term loan was $68.0 million. All of our debt was at a variable interest rate. In the event that interest rates rise, our interest expense would increase. A 1.0% increase in interest rates would result in approximately $0.7 million of additional interest expense annually.

The level of our debt could have certain consequences, including:

 
· increasing our vulnerability to general economic and industry conditions;
 
· requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
 
· exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our credit facilities, will be at variable rates of interest;
 
· limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and
 
· limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.
 
 

We may incur additional indebtedness. We may incur additional indebtedness under our credit facilities, which provide for up to $25 million of revolving credit borrowings, under the current Third Amendment which became effective on March 17, 2010. In addition, we and our subsidiary may be able to incur substantial additional indebtedness in the future, including secured debt, subject to the restrictions contained in the agreements governing our credit facilities. If new debt is added to our current debt levels, the related risks that we now face could intensify.

Our debt instruments contain various covenants that limit our ability to operate our business. Our credit facility contains various provisions that limit our ability to, among other things, transfer or sell assets, including the equity interests of our subsidiary, or use asset sale proceeds; pay dividends or distributions on our capital stock or repurchase our capital stock; make certain restricted payments or investments; create liens to secure debt; enter into transactions with affiliates; merge or consolidate with another company; and engage in unrelated business activities.

In addition, our credit facilities require us to meet specified financial ratios. These covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with these and other provisions of our credit facilities may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. The breach of any of these covenants, including those contained in our credit facilities, could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.

We may be adversely affected by any disruption in our information technology systems. Our operations are dependent upon our information technology systems, which encompass all of our major business functions. A disruption in our information technology systems for any prolonged period could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships.

We may be adversely affected by any disruptions to our manufacturing facilities or disruptions to our customer, supplier, or employee base. Any disruption to our facilities resulting from hurricanes and other weather-related events, fire, an act of terrorism, or any other cause could damage a significant portion of our inventory, affect our distribution of products, and materially impair our ability to distribute our products to customers. 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. In addition, if there are disruptions to our customer and supplier base or to our employees caused by hurricanes, our business could be temporarily adversely affected by higher costs for materials, increased shipping and storage costs, increased labor costs, increased absentee rates, and scheduling issues. Furthermore, some of our direct and indirect suppliers have unionized work forces, and strikes, work stoppages, or slowdowns experienced by these suppliers could result in slowdowns or closures of their facilities. Any interruption in the production or delivery of our supplies could reduce sales of our products and increase our costs.


 

The nature of our business exposes us to product liability and warranty claims. We are involved in product liability and product warranty claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. In addition, we may be exposed to potential claims arising from the conduct of homebuilders and home remodelers and their sub-contractors. Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, we may not be able to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company.

We are subject to potential exposure to environmental liabilities and are subject to environmental regulation. We are subject to various federal, state, and local environmental laws, ordinances, and regulations. Although we believe that our facilities are in material compliance with such laws, ordinances, and regulations, as owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances, without regard to whether we knew of or were responsible for such contamination. Remediation may be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of unknown environmental conditions, or more stringent standards regarding existing residual contamination. More burdensome environmental regulatory requirements may increase our general and administrative costs and may increase the risk that we may incur fines or penalties or be held liable for violations of such regulatory requirements.

We conduct all of our operations through our subsidiary, and rely on payments from our subsidiary to meet all of our obligations. We are a holding company and derive all of our operating income from our subsidiary, PGT Industries, Inc. All of our assets are held by our subsidiary, and we rely on the earnings and cash flows of our subsidiary to meet our debt service obligations. The ability of our subsidiary to make payments to us will depend on its respective operating results and may be restricted by, among other things, the laws of its jurisdiction of organization (which may limit the amount of funds available for distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiary, including our credit facilities, and the covenants of any future outstanding indebtedness we or our subsidiary incur.

We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002. We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have concluded that at January 2, 2010, we have no material weaknesses in our internal controls over financial reporting, we cannot assure you that we will not have a material weakness in the future. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to maintain a system of internal controls over financial reporting that meets the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or by the NASDAQ Stock Market LLC. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may not have access to the capital markets, and our stock price may be adversely affected.

The controlling position of an affiliate of JLL Partners limits the ability of our minority stockholders to influence corporate matters. An affiliate of JLL Partners owned 52.6% of our outstanding common stock as of January 2, 2010. Accordingly, such affiliate of JLL Partners has significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership may have the effect of delaying or preventing a transaction such as a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a transaction or change of control would benefit minority stockholders. In addition, this concentrated control limits the ability of our minority stockholders to influence corporate matters, and such affiliate of JLL Partners, as a controlling stockholder, could approve certain actions, including a going-private transaction, without approval of minority stockholders, subject to obtaining any required approval of our board of directors for such transaction. As a result, the market price of our common stock could be adversely affected.
 
The controlling position of an affiliate of JLL Partners exempts us from certain Nasdaq corporate governance requirements. Although we have satisfied all applicable Nasdaq corporate governance rules, for so long as an affiliate of JLL Partners continues to own more than 50% of our outstanding shares, we will continue to avail ourselves of the Nasdaq Rule 4350(c) “controlled company” exemption that applies to companies in which more than 50% of the stockholder voting power is held by an individual, a group, or another company. This rule grants us an exemption from the requirements that we have a majority of independent directors on our board of directors and that we have independent directors determine the compensation of executive officers and the selection of nominees to the board of directors. However, we intend to comply with such requirements in the event that such affiliate of JLL Partners’ ownership falls to or below 50%.

Our directors and officers who are affiliated with JLL Partners do not have any obligation to report corporate opportunities to us. Because some individuals may serve as our directors or officers and as directors, officers, partners, members, managers, or employees of JLL Partners or its affiliates or investment funds and because such affiliates or investment funds may engage in similar lines of business to those in which we engage, our amended and restated certificate of incorporation allocates corporate opportunities between us and JLL Partners and its affiliates and investment funds. Specifically, for so long as JLL Partners and its affiliates and investment funds own at least 15% of our shares of common stock, none of JLL Partners, nor any of its affiliates or investment funds, or their respective directors, officers, partners, members, managers, or employees has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as do we. In addition, if any of them acquires knowledge of a potential transaction that may be a corporate opportunity for us and for JLL Partners or its affiliates or investment funds, subject to certain exceptions, we will not have any expectancy in such corporate opportunity, and they will not have any obligation to communicate such opportunity to us.

None.
Item 2.   
PROPERTIES
 
We own facilities in one location in Florida and two locations in North Carolina that are capable of producing all of our product lines. In North Venice, Florida, we own a 363,000 square foot facility that contains our corporate headquarters and main manufacturing plant. We also own an adjacent 80,000 square foot facility used for glass tempering and laminating, a 42,000 square foot facility for producing Architectural System products and simulated wood-finished products, and a 3,590 square foot facility used for employee and customer training. In Salisbury, North Carolina, we own a 393,000 square foot manufacturing facility including glass tempering and laminating capabilities. We also own a 225,000 square foot facility in Lexington, North Carolina which is currently vacant and in January 2010 we entered into an agreement to market that location for sale.

We lease four properties in North Venice, Florida. The leases for the fleet maintenance building, glass plant line maintenance building, fleet parking lot, and facility maintenance/test lab in North Venice, Florida expire in January 2012, November 2011, June 2014 and November 2010, respectively.  Each of the leases provides for a fixed annual rent. The leases require us to pay taxes, insurance and common area maintenance expenses associated with the properties.

All of our owned properties secure borrowings under our first lien credit agreement. We believe all of these operating facilities are adequate in capacity and condition to service existing customer locations.
 
 
LEGAL PROCEEDINGS
 
We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our financial position, cash flows or results of operations.


 
RESERVED
 
 
 

PART II
 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock has been traded on the NASDAQ Global Market ® under the symbol “PGTI”. On February 8, 2010, the closing price of our Common Stock as reported on the NASDAQ Global Market was $1.72. The approximate number of stockholders of record of our Common Stock on that date was 128, although we believe that the number of beneficial owners of our Common Stock is substantially greater.
 
 
The table below sets forth the price range of our Common Stock during the periods indicated.
 
 
                 
   
High
 
Low
2009
     1st Quarter
 
$
1.50
   
$
0.80
 
     2nd Quarter
 
$
2.88
   
$
1.20
 
     3rd Quarter
 
$
3.19
   
$
1.50
 
     4th Quarter
 
$
2.85
   
$
2.00
 
                 
2008
     1st Quarter
 
$
5.00
   
$
2.59
 
     2nd Quarter
 
$
4.25
   
$
2.18
 
     3rd Quarter
 
$
5.95
   
$
3.00
 
     4th Quarter
 
$
3.98
   
$
0.85
 


Dividends
      
We do not pay a regular dividend. Any determination relating to dividend policy will be made at the discretion of our board of directors. The tems of our senior secured credit facility governing our notes currently restrict our ability to pay dividends.
 
Unregistered Sales of Equity Securities

None.

Performance Graph

The following graphs compare the percentage change in PGT, Inc.’s cumulative total stockholder return on its Common Stock with the cumulative total stockholder return of the Standard & Poor’s Building Products Index and the NASDAQ Composite Index over the period from June 27, 2006 (the date we became a public company) to January 2, 2010.

COMPARISON OF 42 MONTH CUMULATIVE TOTAL RETURN*
AMONG PGT, INC., THE NASDAQ COMPOSITE INDEX,
AND THE S&P BUILDING PRODUCTS INDEX

PERFORMANCE GRAPH

   
6/27/2006
      6/06       9/06       12/06       3/07       6/07       9/07       12/07  
PGT, Inc.
    100.00       112.86       100.43       90.36       85.71       78.07       56.64       34.50  
S&P Building Products
    100.00       102.51       96.65       105.41       106.85       114.67       95.04       103.78  
NASDAQ Composite
    100.00       103.42       107.53       115.00       115.30       123.95       128.63       126.28  
                                                                 
      3/08       6/08       9/08    
01/03/09
      3/09       6/09       9/09    
01/02/10
 
PGT, Inc.
    21.21       22.71       23.29       8.43       10.71       11.71       19.71       14.93  
S&P Building Products
    98.60       83.05       94.71       58.76       40.44       46.04       63.88       72.91  
NASDAQ Composite
    108.52       109.18       99.60       75.09       76.61       86.83       97.17       109.17  


* $100 invested on 06/27/2006 in stock or in index-including reinvestment of dividends for 42 months ending January 2, 2010.
 
 

SELECTED FINANCIAL DATA
 
The following table sets forth selected historical consolidated financial information and other data as of and for the periods indicated and have been derived from our audited consolidated financial statements.

    All information included in the following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7, and with the consolidated financial statements and related notes in Item 8. All years consisted of 52 weeks except for the year ended January 3, 2009 which consisted of 53 weeks. We do not believe the impact on comparability of results is significant.
 

   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
Consolidated Selected Financial Data
 
January 2,
   
January 3,
   
December 29,
   
December 30,
   
December 31,
 
(in thousands except per share data)
 
2010
   
2009
   
2007
   
2006
   
2005
 
                               
 Net sales
  $ 166,000     $ 218,556     $ 278,394     $ 371,598     $ 332,813  
 Cost of sales
    121,622       150,277       187,389       229,867       209,475  
                                         
 Gross margin
    44,378       68,279       91,005       141,731       123,338  
     Impairment charges(1)
    742       187,748       826       1,151       7,200  
     Stock compensation expense(2)
    -       -       -       26,898       7,146  
     Selling, general and administrative
                                       
       expenses
    51,902       63,109       77,004       86,219       83,634  
                                         
 (Loss) income from operations
    (8,266 )     (182,578 )     13,175       27,463       25,358  
 Interest expense
    6,698       9,283       11,404       28,509       13,871  
 Other (income) expense, net(3)
    37       (40 )     692       (178 )     (286 )
                                         
 (Loss) income before income taxes
    (15,001 )     (191,821 )     1,079       (868 )     11,773  
 Income tax (benefit) expense
    (5,584 )     (28,789 )     456       101       3,910  
                                         
 Net (loss) income
  $ (9,417 )   $ (163,032 )   $ 623     $ (969 )   $ 7,863  
                                         
 Net (loss) income per common share:
                                       
     Basic
  $ (0.26 )   $ (5.08 )   $ 0.02     $ (0.04 )   $ 0.47  
     Diluted
  $ (0.26 )   $ (5.08 )   $ 0.02     $ (0.04 )   $ 0.43  
 Weighted average shares outstanding:
                                       
     Basic(4)
    36,451       32,104       29,247       22,673       16,800  
     Diluted(4)
    36,451       32,104       30,212       22,673       18,376  
                                         
 Other financial data:
                                       
     Depreciation
  $ 10,435     $ 11,518     $ 10,418     $ 9,871     $ 7,503  
     Amortization
    5,731       5,570       5,570       5,742       8,020  
                                         
   
As Of
   
As Of
   
As Of
   
As Of
   
As Of
 
   
January 2,
   
January 3,
   
December 29,
   
December 30,
   
December 31,
 
      2010       2009       2007       2006       2005  
 Balance Sheet data:
                                       
     Cash and cash equivalents
  $ 7,417     $ 19,628     $ 19,479     $ 36,981     $ 3,270  
     Total assets
    173,630       200,617       407,865       442,794       425,553  
     Total debt, including current portion
    68,268       90,366       130,000       165,488       183,525  
     Shareholders’ equity
    68,209       74,185       210,472       205,206       156,571  

(1)  
In 2009, 2007 and 2006, amount relates to write-down of the value of our Lexington, North Carolina property. In 2008, amount relates to intangible asset impairment charges. See Note 7 in Item 8.   In 2005, amount relates to write-down of a trademark in connection with the sale of the related product line.

(2)  
Represents compensation expense paid to stock option holders (including applicable payroll taxes) in lieu of adjusting exercise prices in connection with the dividends paid to shareholders in September 2005 and February 2006 of $7.1 million, including expenses, and $26.9 million, respectively. These amounts include amounts paid to stock option holders whose other compensation is a component of cost of sales of $1.3 million and $5.1 million, respectively.

(3)  
Relates to derivative financial instruments.

(4)  
Weighted average common shares outstanding for all periods have been restated to give effect to the bonus element in the 2010 rights offering.
 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
We advise you to read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in Item 8. We also advise you read the risk factors in Item 1A.  You should consider the information in these items, along with other information included in this Annual Report on Form 10-K.


RECENT DEVELOPMENTS

In the first quarter of 2010, we entered into an agreement with a broker to list our Lexington, NC, plant facility.  In the second quarter of 2009, we ceased operating out of that facility and do not expect a potential sale to have a material impact on our operations in the future.

On March 12, 2010, we completed our rights offering which generated net proceeds of $27.5 million used to repay a portion of the outstanding indebtedness under our amended credit agreement in the amount of $15.0 million, and for general corporate purposes in the amount of $12.5 million.  See “Liquidity and Capital Resources” for further information.
 
On March 18, 2010 our Board of Directors approved the Amended and Restated 2006 Equity Incentive Plan, and authorized an Equity Exchange.  Also, on March 8, 2010, our Board of Directors authorized a stock option exchange to eligible employees.  These three items are subject to approval at our annual stockholders' meeting.  Additional information appears in our definitive proxy statement for our annual meeting of stockholders under the captions “Amended and Restated 2006 Equity Incentive Plan”, “Issuer Tender Offer”, and “Equity Exchange”.
 

EXECUTIVE OVERVIEW


Sales and Operations

On February 11, 2010, we issued a press release and held a conference call on Friday, February 19, 2010 to review the results of operations for our fiscal year ended January 2, 2010.  During the call, we also discussed current market conditions, and progress made regarding certain of our growth initiatives. The overview and estimates contained in this report are consistent with those given in our press release. We are neither updating nor confirming that information.

There have been some positive signs in our industry lately, but certain statistics such as housing starts are still at record lows.  Single-Family housing starts in Florida remained at approximately 6,000 per quarter in 2009, compared to 60,000 during the housing boom and a realistic average of 25,000 based on Florida population.  Other economic indicators such as continuing high unemployment are likely to hamper the rate of growth for the immediate future.

The slowdown that we first experienced in fiscal 2007 has continued through fiscal 2009. Our 2009 net revenue was 40% lower than net revenue in 2007 and 24% lower than net revenue in 2008. We believe over inflation in the housing market, followed by a significant drop in consumer confidence and a lack of liquidity in the credit markets, slowed the economy to a pace not experienced since the Great Depression. As such, we believe the return of consumer confidence and a sustained stabilization in the housing market are important aspects in the recovery of our business.  However, despite these conditions, we maintained a positive cash flow while executing our strategic vision of gaining market share in our core market of Florida and expanding our out-of-state presence.

We continue to believe in our ability to expand our sales into out-of-state markets, which increased 24% during 2009 driven by the introduction of new products and the expansion of our distribution base. Launched in 2008, our SpectraGuard vinyl product line sales grew to $8.0 million in 2009 compared to $1.4 million in 2008.

Our sales into the new construction and repair and remodeling markets are down 45% and 12% respectively in 2009. However, our mix of sales between these two end markets has notably shifted over the past two years. Sales into the repair and remodeling market represented 73% in 2009 compared to 54% in 2007 and 63% in 2008. This prominent shift has helped our company somewhat off-set the significant decline in the new home construction market.

We sought to balance between short-term cash flow goals and long-term strategic goals, during the difficult market conditions described above.  We consistently re-evaluated our cost structure, identifying opportunities to drive efficiencies and savings initiatives while remaining aware of the resources needed to effectively serve our customers and exceed their expectations.

 As a result, we implemented various initiatives to take cost out of our system including reductions in our workforce, reductions in pay, renegotiating supply agreements and cutting discretionary spending. We recorded $5.4 million in restructuring costs in 2009 and $2.1 million in 2008 related to our efforts. When combined, these actions are estimated to drive substantial cost savings that will exceed $25 million annually. These efforts have helped off-set the decline in sales volume which causes an unfavorable deleveraging of our fixed costs.

Liquidity and Cash Flow

We began 2007 with a total net debt balance of $128 million and ended fiscal 2009 with a net debt of $61 million. Over the past three years we were able to reduce our debt by combining our ability to generate cash from operations totaling $54 million, with net proceeds from the fully subscribed 2008 rights offering of $29.3 million.  Due to the focus on reducing debt, our net debt level is currently at its lowest point since 2004.

As we entered into 2010 we announced another rights offering which closed on March 12, 2010.  This rights offering was 90% subscribed and generated $27.5 million of additional capital for our Company, bringing our net debt levels down further to $34 million.

We used $15.0 million of the proceeds to further pay down our term debt and make our Third amendment to our credit facility, which we entered into on December 24, 2009, effective.  This amendment further secures our position and provides more flexibility to focus on long-term strategic goals.
 
Acquisition

Pursuant to an asset purchase agreement by and between Hurricane Window and Door Factory, LLC (“Hurricane”) of Ft. Myers, Florida, and our operating subsidiary, PGT Industries, Inc., effective on August 14, 2009, we acquired certain operating assets of Hurricane for approximately $1.5 million in cash.  Hurricane designed and manufactured high-end vinyl impact products for the single- and multi-family residential markets. The products provide long-term energy and structural benefits, while qualifying homeowners for the government’s energy tax credits through the American Recovery and Reinvestment Act of 2009.  This product line was developed specifically for the hurricane protection market and combines some of the highest structural ratings in the industry with excellent energy efficiency.  The acquisition of this business expands our presence in the energy efficient vinyl impact-resistant market, increases our ability to serve the multi-story condominium market, and enhances our ability to offer a complete line of impact products to the customer.

The purchase price paid was allocated to the assets acquired based on their estimated fair value on August 14, 2009.  The assets acquired included Hurricane’s inventory, comprised almost entirely of raw materials, and property and equipment, primarily comprised of machinery and other manufacturing equipment.  We also acquired the right to use Hurricane’s design technology through the end of 2010 and the option to purchase the technology at any time through the end of 2010 and, if desired, we can extend the right to use and the option to purchase Hurricane’s design technology for an additional one year period through the end of 2011.  The allocation of the $1.5 million cash purchase price to the fair value of the assets acquired as of the August 14, 2009 acquisition date is as follows:


(in thousands)
 
Fair Values
 
Inventory
  $ 254  
Property and equipment
    623  
Identifiable intangibles
    575  
     Net assets acquired
    1,452  
Purchase price
    1,452  
     Goodwill
  $ -  

The value of inventory was established based on then current purchase prices of identical materials available from Hurricane’s existing vendors.  The value of property and equipment was established based on Hurricane’s net carrying values which we determined to approximate fair value due to, among other things, their having been in service for less than one year.  We engaged a third-party valuation specialist to assist us in estimating the fair value of the identifiable intangible assets consisting of the right to use Hurricane’s design technology and the related purchase option.  The fair value of the identifiable intangible assets was estimated using an income approach based on projections provided by management. The carrying value of the intangible assets of $0.4 million is included in other intangible assets, net, in the accompanying condensed consolidated balance sheet at January 2, 2010.  The intangible assets are being amortized on the straight-line basis over their estimated lives of approximately 1.4 years through the end of 2010.  Amortization expense of $0.2 million is included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the year ended January 2, 2010.  Acquisition costs of less than $0.1 million are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended January 2, 2010.  Hurricane’s operating results prior to the acquisition were insignificant.

Restructurings

On October 25, 2007, we announced a restructuring as a result of an in-depth analysis of our target markets, internal structure, projected run-rate, and efficiency.  The restructuring resulted in a decrease in our workforce of approximately 150 employees and included employees in both Florida and North Carolina.  The restructuring was undertaken in an effort to streamline operations, as well as improve processes to drive new product development and sales.  As a result of the restructuring, we recorded a restructuring charge of $2.4 million in 2007, of which $0.7 million was classified within cost of goods sold and $1.7 million was classified within selling, general and administrative expenses.  The charge related primarily to employee separation costs.  Of the $2.4 million charge, $1.5 million was disbursed in 2007 and $0.9 million was disbursed in 2008.

On March 4, 2008, we announced a second restructuring as a result of continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  The restructuring resulted in a decrease in our workforce of approximately 300 employees and included employees in both Florida and North Carolina.  As a result of the restructuring, we recorded a restructuring charge of $2.1 million in 2008, of which $1.1 million is classified within cost of goods sold and $1.0 million is classified within selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended January 3, 2009.  The charge related primarily to employee separation costs.  Of the $2.1 million, $1.8 million was disbursed in the first quarter of 2008.  The remaining $0.3 million is classified within accrued liabilities in the accompanying consolidated balance sheet as of January 3, 2009 (Note 8) and was disbursed in 2009.

On January 13, 2009, March 10, 2009, September 24, 2009 and November 12, 2009, we announced restructurings as a result of continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  The restructuring resulted in a decrease in our workforce of approximately 260 in the first quarter, 80 in the second quarter and 140 in the fourth quarter for a total of 480 employees in both Florida and North Carolina.  As a result of the restructurings, we recorded restructuring charges of $5.4 million in the accompanying consolidated statement of operations for the year ended January 2, 2010, of which $3.1 million is classified within cost of goods sold with $1.4 million charged in the first quarter, $0.5 million in the third quarter and $1.2 million in the fourth. The remaining $2.3 million is classified within selling, general and administrative expenses of which $1.6 million is charged in the first quarter, $0.4 million in the second quarter and $0.3 million in the fourth quarter in the accompanying consolidated statement of operations for the year ended January 2, 2010.  The charge related primarily to employee separation costs.  Of the $5.4 million, $2.6 million was disbursed in the first quarter of 2009, $0.3 million in the second quarter, $0.4 million in the third quarter and $1.2 million in the fourth quarter.  The remaining $0.9 million is classified within accrued liabilities in the accompanying consolidated balance sheet as of January 2, 2010 (Note 8) and is expected to be disbursed in 2010.

The following table provides information with respect to the accrual for restructuring costs:



   
Beginning of Year
   
Charged to Expense
   
Disbursed in Cash
   
End of Year
 
(in thousands)
                       
     Year ended January 2, 2010:
                       
2008 Restructuring
  $ 332     $ -     $ (332 )   $ -  
2009 Restructurings
    -       5,395       (4,497 )     898  
     For the year ended January 2, 2010
  $ 332     $ 5,395     $ (4,829 )   $ 898  
                                 
     Year ended January 3, 2009:
                               
2007 Restructuring
  $ 850     $ -     $ (850 )   $ -  
2008 Restructuring
    -       2,131       (1,799 )     332  
     For the year ended January 3, 2009
  $ 850     $ 2,131     $ (2,649 )   $ 332  
                                 
     Year ended December 29, 2007:
                               
2007 Restructuring
  $ -     $ 2,375     $ (1,525 )   $ 850  
 

Non-GAAP Financial Measures – Items Affecting Comparability

Below is a presentation of EBITDA, a non-GAAP measure, which we believe is useful information for investors (in thousands):

   
Year Ended
 
   
January 2,
   
January 3,
   
December 29,
 
   
2010
   
2009
   
2007
 
                   
Net (loss) income
  $ (9,417 )   $ (163,032 )   $ 623  
Interest expense
    6,698       9,283       11,404  
Income tax (benefit) expense
    (5,584 )     (28,789 )     456  
Depreciation
    10,435       11,518       10,418  
Amortization
    5,731       5,570       5,570  
                         
EBITDA (1)(2)
  $ 7,863     $ (165,450 )   $ 28,471  
                         
                         
(1) Includes the impact of the following expenses:
                       
     Restructuring charges (a)
  $ (5,395 )   $ (2,131 )   $ (2,375 )
     Impairment charges (b)
    (742 )     (187,748 )     (826 )


(a)  
Represents charges related to restructuring actions taken in 2009, 2008 and 2007.  These charges relate primarily to employee separation costs.
(b)  
In 2009 and in 2007, represents the write-down of the value of the Lexington, North Carolina property. In 2008, represents goodwill and indefinite lived asset impairment charges.

 
(2) EBITDA is defined as net income plus interest expense (net of interest income), income taxes, depreciation, and amortization. EBITDA is a measure commonly used in the window and door industry, and we present EBITDA to enhance your understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets among otherwise comparable companies. While we believe EBITDA is a useful measure for investors, it is not a measurement presented in accordance with United States generally accepted accounting principles, or GAAP. You should not consider EBITDA in isolation or as a substitute for net income, cash flows from operations, or any other items calculated in accordance with GAAP.

 



RESULTS OF OPERATIONS

Analysis of Selected Items from our Consolidated Statements of Operations

 

                               
   
Year Ended
   
Percent Change
 
   
January 2,
   
January 3,
   
December 29,
   
Increase / (Decrease)
 
   
2010
   
2009
   
2007
      2009-2008       2008-2007  
                             
(in thousands, except per share amounts)
                                 
Net sales
  $ 166,000     $ 218,556     $ 278,394       (24.0%)       (21.5%)  
Cost of sales
    121,622       150,277       187,389       (19.1%)       (19.8%)  
                                         
     Gross margin
    44,378       68,279       91,005       (35.0%)       (25.0%)  
     As a percentage of sales
    26.7%       31.2%       32.7%                  
                                         
Impairment charges
    742       187,748       826                  
SG&A expenses
    51,902       63,109       77,004       (17.8%)       (18.0%)  
SG&A expenses as a percentage of sales
    31.3%       28.9%       27.7%                  
                                         
     (Loss) income from operations
    (8,266 )     (182,578 )     13,175                  
                                         
Interest expense, net
    6,698       9,283       11,404                  
Other expense (income), net
    37       (40 )     692                  
Income tax (benefit) expense
    (5,584 )     (28,789 )     456                  
                                         
     Net (loss) income
  $ (9,417 )   $ (163,032 )   $ 623                  
                                         
     Net (loss) income per common share:
                                       
Diluted
  $ (0.26 )   $ (5.08 )   $ 0.02                  
 

 

2009 Compared with 2008

The year ended January 2, 2010 consisted of 52 weeks. The year ended January 3, 2009 consisted of 53 weeks.   We do not believe the impact on comparability of results is significant.

Net sales

Net sales for 2009 were $166.0 million, a $52.6 million, or 24.0%, decrease in sales from $218.6 million in the prior year.

The following table shows net sales classified by major product category (in millions):


   
Year Ended
       
   
January 2, 2010
   
January 3, 2009
       
   
Sales
   
% of sales
   
Sales
   
% of sales
   
% change
 
Product category:
                             
     WinGuard Windows and Doors
  $ 108.2       65.2%     $ 151.8       69.4%       (28.7%)  
     Other Window and Door Products
    57.8       34.8%       66.8       30.6%       (13.5%)  
                                         
     Total net sales
  $ 166.0       100.0%     $ 218.6       100.0%       (24.0%)  
 
Net sales of WinGuard Windows and Doors were $108.2 million in 2009, a decrease of $43.6 million, or 28.7%, from $151.8 million in net sales for the prior year.  Volume attributed to $36.5 million of the decline, while the remaining $7.1 million decline is mainly a result of a shift in mix towards vinyl WinGuard products which carry a lower selling price than aluminum WinGuard products.  During 2009, sales of vinyl WinGuard products were up 12% compared to 2008, while sales of aluminum WinGuard were down 33%.  The decrease in sales of our WinGuard products was driven mainly by the impact of the credit crisis affecting the consumers’ ability and desire to remodel their homes as well as the decline in new home construction.  Finally, the decline is also a result, to some extent, of the lack of storm activity during the three most recent hurricane seasons in the coastal markets of Florida we serve.

Net sales of Other Window and Door Products were $57.8 million in 2009, a decrease of $9.0 million, or 13.5%, from $66.8 million for the prior year. The decrease was mainly due to a reduction in aluminum non-impact and commercial products sales of 33%, offset by an increase in vinyl non-impact and other sales which were up 46%.  The increase in vinyl non-impact sales is a result of our continued strategy to grow in markets outside the state of Florida.  To further that goal, we have introduced several new vinyl non-impact products over the past two years, whose sales have exceeded expectations.  These new products accounted for $8.0 million in sales in 2009, and $1.4 million in sales in 2008.

Gross margin

Gross margin was $44.4 million in 2009, a decrease of $23.9 million, or 35.0%, from $68.3 million in the prior year. The gross margin percentage was 26.7% in 2009 compared to 31.2% in the prior year. This decrease was largely due to lower overall sales volumes which reduced our ability to leverage fixed costs, a shift in mix towards non-impact products which carry a lower margin, as well as an increase in restructuring charges of $2.0 million in 2009.   Offsetting these items in part is a decrease in the average cost of aluminum of approximately $0.26 per pound, and overhead cost reductions from the cost savings initiatives.  Cost of goods sold includes charges of $3.1 million in 2009 and $1.1 million in 2008 related to the restructuring actions taken in each year.

In 2008, we recognized a business interruption insurance recovery of $0.7 million, classified as a reduction of cost of goods sold in the accompanying consolidated statement of operations for the year ended January 3, 2009, of incremental expenses we incurred relating to a November 2005 fire that idled a major laminated glass manufacturing asset and which required us to purchase laminated glass from an outside vendor at a price exceeding our cost to manufacture.  Such amount is included in other current assets in the accompanying consolidated balance sheet at January 3, 2009 and was received in cash shortly thereafter.  The proceeds were used for general corporate purposes.

Impairment Charges

In 2009, there was an impairment charge of $0.7 million related to a manufacturing facility for which we entered into an agreement to list the property for sale in January 2010. Impairment charges totaled $187.7 million in 2008, of which $169.6 million related to goodwill and $18.1 million related to our trademarks.

Due to the continued decline in the housing markets, during the second quarter of 2008, we determined that the carrying value of goodwill exceeded its fair value, indicating that it was impaired.  Having made this determination, we then began performing the second step of the goodwill impairment test which involves calculating the implied fair value of our goodwill by allocating the fair value to all of our assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing it to the carrying amount of goodwill.  We recorded a $92.0 million estimated goodwill impairment charge in the second quarter of 2008.  During the third quarter of 2008, we finalized the second step of the goodwill impairment test and, as a result, recorded an additional $1.3 million goodwill impairment charge.

During the third quarter of 2008, as part of finalizing our goodwill impairment test discussed above, we made certain changes to the assumptions that affected the previous estimate of fair value and, when compared to the carrying value of our trademarks, resulted in a $0.3 million impairment charge in the third quarter of 2008.

We performed our annual assessment of goodwill impairment as of January 3, 2009. Given a further decline in housing starts and the overall tightening of the credit markets, our revised forecasts indicated additional impairment of our goodwill.  After allocating the fair value to our assets and liabilities other than goodwill, we concluded that goodwill had no implied fair value and the remaining carrying value was written-off.  After recognizing these charges, we do not have any goodwill remaining on the accompanying consolidated balance sheet as of January 3, 2009.

 We also performed our annual assessment of our trademarks as of January 3, 2009, which indicated that further impairment was present resulting in an additional impairment charge of $17.8 million in the fourth quarter of 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $51.9 million, a decrease of $11.2 million, or 17.8%, from $63.1 million in the prior year.  This decrease was mainly due to decreases of $6.7 million in personnel related costs due to lower employment levels, $1.4 million in marketing costs due to decreased levels of general advertising and promotional costs, $1.8 million in fuel costs related to lower sales and lower prices for diesel.  The remaining $1.3 million decrease in selling, general and administrative expenses is volume related as the general level of spending in this area has declined with sales.  As a percentage of sales, selling, general and administrative expenses increased to 31.3% in 2009 compared to 28.9% for the prior year. This increase was due to the fact that our ability to leverage certain fixed portions of support and administrative costs did not decrease at the same rate as the decrease in net sales.

Charges of $2.3 million in 2009 and $1.0 million in 2008 related to the restructuring actions taken in each year are included in selling, general and administrative expenses.

Interest expense

Interest expense was $6.7 million in 2009, a decrease of $2.6 million from $9.3 million in the prior year. During 2009, we prepaid $22.0 million of debt resulting in a lower average level of debt when compared to 2008. The interest rate on our debt increased from 6.25% at the end of 2008 to 7.25% at the end of 2009 due to an increase in our leverage ratio which increased our interest rates in accordance with our tiered interest rate structure.

Other expenses (income), net

There was other expense of less than $0.1 million in 2009 compared to other income of less than $0.1 million in 2008.  In both years, the other expense (income) relates to effective over-hedges of aluminum.

Income tax benefit

Our effective combined federal and state tax rate was a benefit of 37.2% and 15.0% for the years ended January 2, 2010 and January 3, 2009, respectively.  The 37.2% tax rate in 2009 relates primarily to a loss carry-back receivable of approximately $3.7 million related to the recently passed legislation allowing companies to carry-back 2009 or 2008 losses up to 5 years, as well as an income tax allocation of $1.8 million between current operations and other comprehensive income. All other deferred tax assets created in 2009 were fully reserved with additional valuation allowances.  The 15.0%  effective tax rate in 2008 resulted from the tax effects totaling $41.3 million related to the write-off of the non-deductible portion of goodwill and $4.6 million related to the valuation allowance on deferred tax assets recorded in the fourth quarter of 2008. Excluding the effects of these items, our 2009 and 2008 effective tax rates would have been 34.6% and 39.0%, respectively.
 
2008 Compared with 2007

The year ended January 3, 2009 consisted of 53 weeks. The year ended December 29, 2007 consisted of 52 weeks. We do not believe the impact on comparability of results is significant.

Net sales

Net sales for 2008 were $218.6 million, a $59.8 million, or 21.5%, decrease in sales from $278.4 million in the prior year.

The following table shows net sales classified by major product category (in millions):

   
Year Ended
       
   
January 3, 2009
   
December 29, 2007
       
   
Sales
   
% of sales
   
Sales
   
% of sales
   
% change
 
Product category:
                             
     WinGuard Windows and Doors
  $ 151.8       69.4%     $ 189.7       68.1%       (20.0%)  
     Other Window and Door Products
    66.8       30.6%       88.7       31.9%       (24.7%)  
                                         
     Total net sales
  $ 218.6       100.0%     $ 278.4       100.0%       (21.5%)  
Net sales of WinGuard Windows and Doors were $151.8 million in 2008, a decrease of $37.9 million, or 20.0%, from $189.7 million in net sales for the prior year.  Demand for WinGuard branded products is driven by, among other things, increased enforcement of strict building codes mandating the use of impact-resistant products, increased consumer and homebuilder awareness of the advantages provided by impact-resistant windows and doors over “active” forms of hurricane protection, and our successful marketing efforts. The decrease in sales of our WinGuard branded products was driven mainly by the decline in new home construction but also, to some extent, by the lack of storm activity during the two most recent hurricane seasons in the coastal markets of Florida we serve.

Net sales of Other Window and Door Products were $66.8 million in 2008, a decrease of $21.9 million, or 24.7%, from $88.7 million for the prior year. The decrease was mainly due to the decline in new home construction.  New housing demand has historically impacted sales of our Other Window and Door Products more than our WinGuard Window and Door Products.

The decline in the housing industry began in the second half of 2006 and continued and intensified throughout 2007 and 2008.

Gross margin

Gross margin was $68.3 million in 2008, a decrease of $22.7 million, or 25.0%, from $91.0 million in the prior year. The gross margin percentage was 31.2% in 2008 compared to 32.7% in the prior year. This decrease was largely due to lower sales volumes of all of our products, but most significantly of our WinGuard branded windows and doors, sales of which decreased 20.0% compared to the prior year. The decrease in sales as a result of the housing downturn has negatively impacted our gross margin in total and as a percentage of sales and reduced our ability to leverage fixed costs. Cost of goods sold includes charges of $1.1 million in 2008 and $0.7 million in 2007 related to the restructuring actions taken in each year.

In 2008, we recognized a business interruption insurance recovery of $0.7 million, classified as a reduction of cost of goods sold in the accompanying consolidated statement of operations for the year ended January 3, 2009, of incremental expenses we incurred relating to a November 2005 fire that idled a major laminated glass manufacturing asset and which required us to purchase laminated glass from an outside vendor at a price exceeding our cost to manufacture.  Such amount is included in other current assets in the accompanying consolidated balance sheet at January 3, 2009 and was received in cash shortly thereafter.  The proceeds were used for general corporate purposes.

Impairment Charges

Impairment charges totaled $187.7 million in 2008, of which $169.6 million related to goodwill and $18.1 million related to our trademarks.  In 2007, there was an impairment charge of $0.8 million related to a then-idle manufacturing facility which was held for sale and subsequently returned to use.

Due to the continued decline in the housing markets, during the second quarter of 2008, we determined that the carrying value of goodwill exceeded its fair value, indicating that it was impaired.  Having made this determination, we then began performing the second step of the goodwill impairment test which involves calculating the implied fair value of our goodwill by allocating the fair value to all of our assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing it to the carrying amount of goodwill.  We recorded a $92.0 million estimated goodwill impairment charge in the second quarter of 2008.  During the third quarter of 2008, we finalized the second step of the goodwill impairment test and, as a result, recorded an additional $1.3 million goodwill impairment charge.

During the third quarter of 2008, as part of finalizing our goodwill impairment test discussed above, we made certain changes to the assumptions that affected the previous estimate of fair value and, when compared to the carrying value of our trademarks, resulted in a $0.3 million impairment charge in the third quarter of 2008.

We performed our annual assessment of goodwill impairment as of January 3, 2009. Given a further decline in housing starts and the overall tightening of the credit markets, our revised forecasts indicated additional impairment of our goodwill.  After allocating the fair value to our assets and liabilities other than goodwill, we concluded that goodwill had no implied fair value and the remaining carrying value was written-off.  After recognizing these charges, we do not have any goodwill remaining on the accompanying consolidated balance sheet as of January 3, 2009.

We also performed our annual assessment of our trademarks as of January 3, 2009, which indicated that further impairment was present resulting in an additional impairment charge of $17.8 million in the fourth quarter of 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $63.1 million, a decrease of $13.9 million, or 18.0% from $77.0 million in the prior year.  This decrease was mainly due to decreases of $7.1 million in personnel related costs due to lower employment levels, $3.9 million in marketing costs due to decreased levels of general advertising and promotional costs, $1.4 million in warranty expense primarily due to the lower sales volume, $0.8 million in public company costs, primarily related to our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), $0.7 million in non-cash stock-based compensation expense and $0.6 million in operating lease expense.  These decreases were partially offset by a $1.4 million increase in bad debt expense primarily related to collection issues with two customers and a $1.3 million increase in distribution costs related to the increase in fuel prices during 2008.  The remaining $2.2 million decrease in selling, general and administrative expenses is volume related as the general level of spending in this area has declined with sales.  As a percentage of sales, selling, general and administrative expenses increased to 28.9% in 2008 compared to 27.7% for the prior year. This increase was due to the fact that our ability to leverage certain fixed portions of support and administrative costs did not decrease at the same rate as the decrease in net sales.

Charges of $1.0 million in 2008 and $1.7 million in 2007 related to the restructuring actions taken in each year are included in selling, general and administrative expenses.

Interest expense

Interest expense was $9.3 million in 2008, a decrease of $2.1 million from $11.4 million in the prior year.  During 2008, we prepaid $40.0 million of debt resulting in a lower average level of debt when compared to 2007 and the interest rate on our debt decreased from 8.38% at the end of 2007 to 6.25% at the end of 2008 due to a decrease in interest rates.

Other expenses (income), net

There was other income of less than $0.1 million in 2008 compared to other expenses of $0.7 million in 2007.  For 2008, the other income relates to effective over-hedges of aluminum.  The other expenses in 2007 relate to the ineffective portions of interest and aluminum hedges.

Income tax expense

Our effective combined federal and state tax rate was 15.0% and 42.3% for the years ended January 3, 2009 and December 29, 2007, respectively.  The 15.0% effective tax rate resulted from the tax effects totaling $41.3 million related to the write-off of the non-deductible portion of goodwill and $4.6 million related to the valuation allowance on deferred tax assets recorded in the fourth quarter of 2008. Excluding the effects of these items, our 2008 effective tax rate would have been 39.0%.  The 42.3% tax rate in 2007 relates primarily to non-deductible expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 
Our principal source of liquidity is cash flow generated by operations, supplemented by borrowings under our credit facility.  This cash generating capability provides us with financial flexibility in meeting operating and investing needs.  Our primary capital requirements are to fund working capital needs, and to meet required debt payments, including debt service payments on our credit facilities and fund capital expenditures.
 
2010 Rights Offering

On January 29, 2010, the Company filed Amendment No. 1 to the Registration Statement on Form S-1 filed on December 24, 2009 relating to a previously announced offering of rights to purchase 20,382,326 shares of the Company’s common stock with an aggregate value of approximately $30.6 million.  The registration statement relating to the rights offering was declared effective by the United States Securities and Exchange Commission on February 10, 2010, and the Company distributed to each holder of record of the Company’s common stock as of close of business on February 8, 2010, at no charge, one (1) non-transferable subscription right for every one and three-quarters (1.75) shares of common stock held by such holder under the basic subscription privilege.  Each whole subscription right entitled its holder to purchase one share of PGT’s common stock at the subscription price of $1.50 per share.  The rights offering also contained an over-subscription privilege that permitted all basic subscribers to purchase additional shares of the Company’s common stock up to an amount equal to the amount available to each such holder under the basic subscription privilege.  Shares issued to each participant in the over-subscription were determined by calculating each subscriber’s percentage of the total shares over-subscribed, multiplied by the number of shares available in the over-subscription privilege.  The rights offering expired on March 12, 2010.

The rights offering was 90.0% subscribed resulting in the Company distributing 18,336,368 shares of its common stock, including 15,210,184 shares under the basic subscription privilege and 3,126,184 under the over-subscription privilege, representing a 74.6% basic subscription participation rate.  There were requests for 3,126,184 shares under the over-subscription privilege representing an allocation rate of 100% to each over-subscriber.  Of the 18,336,368 shares issued, 13,333,332 shares were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder, including 10,719,389 shares issued under the basic subscription privilege and 2,613,943 shares issued under the over-subscription privilege.  Prior to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s outstanding common stock.  With the completion of the rights offering, the Company has 54,005,439 total shares of common stock outstanding of which JLL holds 59.4%.

Net proceeds of $27.5 million from the rights offering were used to repay a portion of the outstanding indebtedness under our amended credit agreement in the amount of $15.0 million, and for general corporate purposes in the amount of $12.5 million.

2008 Rights Offering

On August 1, 2008, the Company filed Amendment No. 1 to the Registration Statement on Form S-3 filed on March 28, 2008 relating to a previously announced offering of rights to purchase 7,082,687 shares of the Company’s common stock with an aggregate value of approximately $30 million.  The registration statement relating to the rights offering was declared effective by the United States Securities and Exchange Commission on August 4, 2008 and the Company distributed to each holder of record of the Company’s common stock as of close of business on August 4, 2008, at no charge, one non-transferable subscription right for every four shares of common stock held by such holder under the basic subscription privilege.  Each whole subscription right entitled its holder to purchase one share of PGT’s common stock at the subscription price of $4.20 per share.  The rights offering also contained an over-subscription privilege that permitted all basic subscribers to purchase additional shares of the Company’s common stock up to an amount equal to the amount available to each under the basic subscription privilege.  Shares issued to each participant in the over-subscription were determined by calculating each subscribers’ percentage of the total shares over-subscribed, multiplied by the number of shares available in the over-subscription privilege.  The rights offering expired on September 4, 2008.

The rights offering was fully subscribed resulting in the Company distributing all 7,082,687 shares of its common stock available, including 6,157,586 shares under the basic subscription privilege and 925,101 under the over-subscription privilege, representing an 86.9% basic subscription participation rate.  There were requests for 4,721,763 shares under the over-subscription privilege representing an allocation rate of 19.6% to each over-subscriber for the 925,101 shares available in the over subscription.  Of the 7,082,687 shares issued, 4,295,158 shares were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder, including 3,615,944 shares issued under the basic subscription privilege and 679,214 shares issued under the over-subscription privilege.  Prior to the rights offering, JLL held 14,463,776 shares, or 51.1%, of the Company’s outstanding common stock.  With the completion of the rights offering, the Company has 35,413,438 total shares of common stock outstanding of which JLL holds 53.0%.

Net proceeds of $29.3 million from the rights offering were used to repay a portion of the outstanding indebtedness under our amended credit agreement.

Consolidated Cash Flows

Operating activities.  Cash provided by operating activities was $9.5 million for 2009, compared to cash provided by operating activities of $19.9 million for the prior year. In 2008, cash provided by operating activities was down $4.9 million from $24.8 million in 2007.  Both year over year declines are due mainly to the impact of lower sales, offset somewhat by cost savings initiatives. Direct cash flows from operations for 2009, 2008 and 2007 are as follows:


   
Direct Operating Cash Flows
(in millions)
 
2009
   
2008
   
2007
 
Collections from customers
  $ 170.2     $ 224.5     $ 288.5  
Other collections of cash
    2.8       3.4       4.6  
Disbursements to vendors
    (94.7 )     (122.5 )     (156.0 )
Personnel related disbursements
    (63.6 )     (80.2 )     (100.0 )
Debt service costs
    (6.2 )     (9.1 )     (12.0 )
Other cash activity, net
    1.0       3.8       (0.3 )
                         
Cash from operations
  $ 9.5     $ 19.9     $ 24.8  

The majority of other cash collections is from scrap aluminum sales. Other cash activity, net, includes $1.1 million and $3.3 million in state and federal tax refunds the years ended January 2, 2010 and January 3, 2009, respectively.

Days sales outstanding (DSO), which we calculate as accounts receivable divided by average daily sales, was 41 days at January 2, 2010, compared to 39 days at January 3, 2009.   DSO was 39 days at January 3, 2009 compared to 37 days at December 29, 2007.  This increase in DSO over the past two years was primarily due to collection issues with three customers, as well as the effect on our customer base of the decline in the housing market in Florida and the overall economy.
 
 
Investing activities. Cash from investing activities was $0.4 million for 2009, compared to cash used of $8.5 million for 2008. The increase in cash from investing activities was due to the impact of net cash received from excess margin returns for settlements of forward contracts related to our aluminum hedging program.  In 2009, we settled $3.4 million in contracts that were funded by margin calls in 2008, as well as received a return of $0.7 million in excess margin as a result of the increase in aluminum prices, especially during the fourth quarter of 2009.   Capital spending, including the acquisition of Hurricane Window and Door Factory assets totaled $3.8 million in 2009, which is $0.7 million lower than total capital spending of $4.5 million in 2008 due to continued efforts to reduce capital spending.

  Cash used in investing activities was $8.5 million for 2008, compared to $10.5 million for 2007. The decrease in cash used in investing activities was due to our focused efforts to reduce capital spending in 2008, which resulted in a decrease in capital expenditures of $6.1 million, to $4.5 million in 2008 from $10.6 million in 2007.  This decrease in capital spending was partially offset by $4.1 million of net cash used for margin calls on forward contracts on aluminum hedges as of January 3, 2009.

Financing activities. Cash used in financing activities was $22.1 million in 2009.  With cash generated from operations during 2009 and cash on hand we prepaid $8.0 million of our long-term debt in June, $12.0 million in September and another $2.0 million in December, for a total of $22 million in debt prepayments in 2009.  In December 2009, we also repaid the $12.0 million of revolver borrowing that occurred in October 2009.

 Cash used in financing activities was $11.2 million in 2008. In June 2008, we prepaid $10.0 million of our long-term debt with cash generated from operations.  Using proceeds from the rights offering, which resulted in $29.3 million in net cash proceeds, we prepaid an additional $20.0 million of our long-term debt in August 2008 and another $10.0 million in September 2008, for a total of $40 million in debt prepayments in 2008.  Cash proceeds from stock option exercises in 2008 totaled $0.2 million.  Payment of deferred financing costs related to the effectiveness of the amendment of our credit agreement totaled $0.6 million.

Cash used in financing activities was $31.8 million in 2007. In 2007, we made a total of $35.5 million of debt payments including prepayments of $20.0 million in February 2007, $5.0 million in June 2007, $4.5 million in July 2007 and $6.0 million in September 2007, using cash generated by operations.  These financing cash uses were partially offset by proceeds from option exercises of $1.9 million and the classification of $1.8 million of related excess tax benefits within financing activities.

 Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.  For 2009, capital expenditures were $2.3 million, compared to $4.5 million for 2008.  In 2008 and 2009, we reduced certain discretionary capital spending to conserve cash.  We anticipate that cash flows from operations and liquidity from the revolving credit facility will be sufficient to execute our business plans.

Capital Resources. On February 14, 2006, we entered into a second amended and restated $235 million senior secured credit facility and a $115 million second lien term loan due August 14, 2012, with a syndicate of banks. The senior secured credit facility is composed of a $30 million revolving credit facility and, initially, a $205 million first lien term loan. As of January 2, 2010, there was $26.0 million available under the revolving credit facility.

On April 30, 2008, we announced that we entered into an amendment to the credit agreement.  The amendment, among other things, relaxes certain financial covenants through the first quarter of 2010, increases the applicable rate on loans and letters of credit, and sets a LIBOR floor.  The effectiveness of the amendment was conditioned, among other things, on the repayment of at least $30 million of loans under the credit agreement no later than August 14, 2008, of which no more than $15 million was permitted to come from cash on hand.  In June 2008, we used cash generated from operations to prepay $10 million of outstanding borrowings under the credit agreement.  Using proceeds from the rights offering, we made an additional prepayment of $20 million on August 11, 2008, bringing total prepayments of debt at that time to $30 million as required under the amended credit agreement.  Having made the total required prepayment and having satisfied all other conditions to bring the amendment into effect, including the payment of the fees and expenses of the administrative agent and a consent fee to participating lenders of 25 basis points of the then outstanding balance under the credit agreement of $100 million, the amendment became effective on August 11, 2008.

Under the amendment, the first lien term loan bears interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our option.  The margin in either case is dependent on our leverage ratio.  The loans under the revolving credit facility bear interest at a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage ratio ranging from 3.0% per annum to 4.75% per annum or a base rate plus a margin ranging from 2.0% per annum to 3.75% per annum, at our option.  The amendment established a floor of 3.25% for adjusted LIBOR.  Prior to the effectiveness of the amendment, the first lien term loan bore interest at a rate equal to an adjusted LIBOR rate plus 3.0% per annum or a base rate plus 2.0% per annum, at our option. The loans under the revolving credit facility bore interest initially, at our option, at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a base rate plus 1.75% per annum, and the margins above LIBOR and base rate could have declined to 2.00% for LIBOR loans and 1.00% for base rate loans if certain leverage ratios were met.

On December 24, 2009, we announced that we entered into a third amendment to the credit agreement.  The amendment, among other things, provides a leverage covenant holiday for 2010, increases the maximum leverage amount for the first quarter of 2011 to 6.25 times (then dropping 0.25X per quarter from the second quarter until the end of the term), extends the due date on the revolver loan until the end of 2011, increases the applicable rate on any outstanding revolver loan by 25 basis points, and sets a base rate floor of 4.25%.  The effectiveness of the amendment was conditioned, among other things, on the repayment of at least $17 million of term loan under the credit agreement no later than March 31, 2010, of which no more than $2 million was permitted to come from cash on hand.  In December 2009, the Company used cash generated from operations to prepay $2 million of outstanding borrowings under the credit agreement.  Using proceeds from the second rights offering, the Company made an additional prepayment of $15 million on March 17, 2010, bringing total prepayments of debt at that time to $17 million as required under the amended credit agreement. See Note 16 for a discussion of the second rights offering. Having made the total required prepayment and having satisfied all other conditions to bring the amendment into effect, including the payment of the fees and expenses of the administrative agent and a consent fee to participating lenders of 50 basis points of the then outstanding balance of the term loan and the revolving commitment under the credit agreement of $100 million, the amendment became effective on March 17, 2010.  Fees paid to the administrative agent and lenders totaled $1.0 million.  Such fees are being amortized using the effective interest method over the remaining term of the credit agreement.

Under the third amendment, the first lien term loan bears interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our option, which is equivalent to the rates in the second amendment.  The margin in either case is dependent on our leverage ratio.  The loans under the revolving credit facility bear interest at a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage ratio ranging from 3.00% per annum to 5.00% per annum or a base rate plus a margin ranging from 2.00% per annum to 4.00% per annum, at our option.  The amendment established a floor of 4.25% for base rate loans and continued the 3.25% floor for adjusted LIBOR established in the previous amendment.

Based on our ability to generate cash flows from operations and our borrowing capacity under the revolver and under the senior secured credit facility, we believe we will have sufficient capital to meet our short-term and long-term needs, including our capital expenditures and our debt obligations in 2010.

Long-term debt consisted of the following:
 

               
   
January 2,
     
January 3,
 
   
2010
     
2009
 
      (in thousands)  
 Tranche A2 term note payable to a bank in quarterly installments of $231,959
             
   beginning November 14, 2009 through November 14, 2011. A lump sum payment
             
   of $87.9 million is due on February 14, 2012. Interest is payable quarterly at
             
   LIBOR or the prime rate plus an applicable margin. At January 3, 2009, the
             
   rate was 4.00% plus a margin of 2.25%.
  $ -       $ 90,000  
                   
 Tranche A2 term note payable to a bank in quarterly installments of $177,546
                 
   beginning February 14, 2011 through November 14, 2011. A lump sum payment
                 
   of $67.3 million is due on February 14, 2012. Interest is payable quarterly at
                 
   LIBOR or the prime rate plus an applicable margin. At January 2, 2010, the
                 
   rate was 3.25% plus a margin of 4.00%.
    68,000         -  
                   
    $ 68,000       $ 90,000  
 
 
DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
 
The following summarizes the contractual obligations as of January 2, 2010 (in thousands):
 

                                     
   
Payments Due by Period
 
Contractual Obligations
 
Total
   
Current
   
2-3 Years
   
4 Years
   
5 Years
   
Thereafter
 
                                     
Long-term debt and capital leases (1)
  $ 79,045     $ 5,351     $ 73,694     $ -     $ -     $ -  
Operating leases
    2,689       1,511       1,034       96       48       -  
Supply agreements
    1,388       1,388       -       -       -       -  
Equipment purchase commitments
    51       51       -       -       -       -  
                                                 
Total contractual cash obligations
  $ 83,173     $ 8,301     $ 74,728     $ 96     $ 48     $ -  
                                                 
(1) - Includes estimated future interest expense on our long-term debt assuming the weighted average interest rate of 7.25% as of January 2, 2010 does not change.
 
 

 
 The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year at January 2, 2010. Purchase orders entered into in the ordinary course of business are excluded from the above table. Amounts for which we are liable under purchase orders are reflected on our consolidated balance sheet as accounts payable and accrued liabilities.

We are obligated to purchase certain raw materials used in the production of our products from certain suppliers pursuant to stocking programs.  If these programs were cancelled by our Company, we would be required to pay $1.4 million for various materials.

At January 2, 2010, we had $4.0 million in standby letters of credit related to its worker’s compensation insurance coverage.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
In preparing our consolidated financial statements, we follow U.S. generally accepted accounting principles. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

Revenue recognition

We recognize sales when all of the following criteria have been met: a valid customer order with a fixed price has been received; the product has been delivered and accepted by the customer; and collectibility is reasonably assured. All sales recognized are net of allowances for discounts and estimated returns, which are estimated using historical experience.  We record provisions against gross revenues for estimated returns in the period when the related revenue is recorded. These estimates are based on factors that include, but are not limited to, analysis of credit memorandum activity, and customer demand.

Allowances for doubtful accounts and notes receivable and related reserves

We evaluate the allowances for doubtful accounts and notes receivable based on specific identification of troubled balances and historical collection experience adjusted for current conditions such as the economic climate. Actual collections can differ from our estimates, requiring adjustments to the allowances.

Goodwill

The impairment evaluation of goodwill is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The annual goodwill impairment test is a two-step process.  First, we determine if the carrying value of our related reporting unit exceeds fair value determined using a discounted cash flow model, which might indicate that goodwill may be impaired.  Second, if we determine that goodwill may be impaired, we compare the implied fair value of the goodwill determined by allocating our reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) to its carrying amount to determine if there is an impairment loss.  As of January 2, 2010, and January 3, 2009, we had no goodwill on our consolidated balance sheet.

Other intangibles

The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted projected cost savings attributable to ownership of the intangible assets with indefinite lives which, for us, are our trademarks. The fair values of trademarks are highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used. Estimates made by management are subject to change and include such things as future growth assumptions and the rate of projected estimated cost savings, and other factors, changes in which could materially impact the results of the impairment test.

Long-lived assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated, based on management estimates. Estimates made by management are subject to change and include such things as future growth assumptions, operating and capital expenditure requirements, asset useful lives and other factors, changes in which could materially impact the results of the impairment test. If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell, and depreciation is no longer recorded.

       Warranties

We have warranty obligations with respect to most of our manufactured products. Obligations vary by product components. The reserve for warranties is based on our assessment of the costs that will have to be incurred to satisfy warranty obligations on recorded net sales. The reserve is determined after assessing our warranty history and specific identification of our estimated future warranty obligations. Changes to actual warranty claims incurred and interest rates could have a material impact on our estimated warranty obligations.

Self-Insurance Reserves

We are primarily self-insured for employee health benefits and workers’ compensation. Our workers’ compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities. Health benefits are self-insured by us up to pre-determined stop loss limits. These reserves, including incurred but not reported claims, are based on internal computations. These computations consider our historical claims experience, independent statistics, and trends. Changes to actual workers’ compensation or health benefit claims incurred and interest rates could have a material impact on our estimated self-insurance reserves.
 
Derivative financial instruments

We utilize derivative financial instruments from time-to-time to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is reported as a component of other comprehensive income and reclassified into earnings in the same period which the transaction affects earnings. The remaining gain or loss, if any, is recognized in earnings currently.

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production.  These contracts were in an asset position as of January 2, 2010 and are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum.  We also consider the credit risk of our counter-party in order to measure the fair value of our financial instruments in an asset position.

  As of January 2, 2010, we did not have cash on deposit with our commodities broker related to funding of margin calls on open forward contracts for the purchase of aluminum in a liability position.  We net cash collateral from payments of margin calls on deposit with our commodities broker against the liability position of open contracts for the purchase of aluminum on a first-in, first-out basis.  In 2008 and 2009 we maintained a line of credit with our commodities broker.  Beginning in 2010, we no longer maintain a line of credit to cover the liability position of open contracts for the purchase of aluminum in the event that the price of aluminum falls.  Should the price of aluminum fall to a level which causes us to switch to a liability position for open aluminum contracts we would be required to fund daily margin calls to cover the excess.  We believe this mitigates non-performance risk as it places a limit on the amount of the liability for open contracts such that an impact, if any, on the fair value of the liability due to consideration of non-performance risk would not be significant. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities.  In addition, we entered into a master netting arrangement (MNA) with our commodities broker that provides for, among other things, the close-out netting of exchange-traded transactions in the event of the insolvency of either party to the MNA.

Our aluminum hedges qualify as highly effective for reporting purposes.  Effectiveness of aluminum forward contracts is determined by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item.  Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”).  The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle.

Stock-Based Compensation

We utilize a fair-value based approach for measuring stock-based compensation to recognize the cost of employee services received in exchange for our Company’s equity instruments. We record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Our awards vest based only on service conditions and compensation expense is recognized on a straight-line basis for each separately vesting portion of an award. Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

Income and Other Taxes

We account for income taxes utilizing the liability method. Deferred income taxes are recorded to reflect consequences on future years of differences between financial reporting and the tax basis of assets and liabilities measured using the enacted statutory tax rates and tax laws applicable to the periods in which differences are expected to affect taxable earnings. We have no material liability for unrecognized tax benefits. However, should we accrue for such liabilities when and if they arise in the future we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.

In assessing the realizability of deferred tax assets, we consider 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

In 2008, we established a valuation allowance with respect to our net deferred tax assets, excluding the deferred tax liability related to trademarks.  Driven by the goodwill and other intangible impairment charges recorded in 2008, our cumulative losses over the last three fiscal years, in addition to the significant downturn in our primary industry of home construction, lead us to conclude that sufficient negative evidence exists that it is deemed more likely than not future taxable income will not be sufficient to realize the related income tax benefits.  We also established a valuation allowance for net deferred tax assets created in 2009.

Sales taxes collected from customers have been recorded on a net basis.


     RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 3 in the notes to the consolidated financial statements in Item 8.

 
FORWARD OUTLOOK

The following section contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on the beliefs and assumptions of management, together with information available to us when the statements were made. Future results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors set forth in Item 1A., “Risk Factors” and certain economic and business factors which may be beyond our control. Investors are cautioned that all forward-looking statements involve risks and uncertainties.

Net sales

During this housing downturn which started in 2007, and the economic credit crisis, which started in 2008, we have experienced sales decreases across most of our product lines both in the new construction and repair and remodeling markets we serve. However, our decrease in sales has been lower than the decrease in single family housing starts over the same period.  This is a result of two main factors:

·  
Our historical ability to outperform the new construction market due to our strong repair and remodel presence.

·  
The success of our recent initiatives to grow in vinyl products and in markets outside the state of Florida.  In 2009, our out-of-state sales were 19% of total sales, as opposed to less than 10% in 2006.  Also we expect our sales of new non-impact as well as impact vinyl products to continue to gain traction in 2010.

  Certain agencies that report housing start information project that single family housing starts in the U.S. will be up 10% or more in 2010.  However we will continue to operate with a more conservative view until a stable and predictable growth in the marketplace is achieved.

Gross margin

We believe the following factors, which are not all inclusive, may impact our gross margin in 2010:

  •  
Our gross margin percentages are heavily influenced by total sales due to operating leverage of fixed costs, as well as product mix, due to the fact that our non-impact products carry a lower margin than our impact products.
 
  •  
During the third and fourth quarters of 2008, we entered into forward contracts for the purchase of aluminum as prices fell to levels not seen since 2002.  Some of these contracts will mature in 2010.  For contracts that mature in 2010, our hedged price of aluminum on average is $0.94 per pound, which is currently near the cash price for aluminum.  However, since we are only approximately 57% covered in 2010, the fluctuation of aluminum prices, up or down, will impact the price we pay for our cash purchases.
 
  •  
The savings generated from cost reduction initiatives implemented throughout 2009, most of which will benefit cost of goods, are designed to improve profitability and lessen the negative effect on operating results of decreasing sales.

Selling, general and administrative expenses

Planned cost reductions announced throughout 2009, are designed to improve profitability and lessen the effect of decreasing sales. However, certain costs such as diesel fuel can fluctuate greatly at times.  If the cost of diesel fuel were to increase again, our selling, general and administrative costs would increase. In addition, economic and credit conditions may significantly impact our bad debt expense. We continue to monitor our customer’s credit profiles carefully and make changes in our terms where necessary in response to this heightened risk.

Interest expense

We prepaid $22 million in outstanding borrowings during 2009.  We believe this decrease in debt levels for the full year of 2010, coupled with the $15 million repayment made on March 17, 2010 will result in our paying less interest in 2010 than in 2009.

Liquidity and capital resources

We had $7.4 million of cash on hand as of January 2, 2010. While we are confident in our ability to continue to generate cash flow in this unprecedented downturn in the housing market and the economy, it is possible that we may use this cash to fund margin calls related to our forward contracts for aluminum if the price of aluminum falls to levels less than our positions.  Our credit facility includes a $25 million revolving credit facility of which $21.0 million was available as of March 17, 2010.

Management expects to spend nearly $4.6 million on capital expenditures in 2010, including capital expenditures related to product line expansions targeted at increasing sales.  We expect depreciation to be approximately $9.0 million and amortization to be approximately $6.0 million in 2010.  On January 2, 2010, we had outstanding purchase commitments on capital projects of approximately $0.1 million.

Summary

There have been some positive signs in our industry lately, but certain statistics such as housing starts are still at record lows.  Single-Family housing starts in Florida continue to stay around 6,000 per quarter, compared to 60,000 during the housing boom and a realistic average of 25,000 based on Florida population.  Other economic indicators such as unemployment will hamper the rate of growth for the immediate future.  We are currently staffed appropriately for our sales levels, and accordingly, we are cautiously optimistic about 2010.

   
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We experience changes in interest expense when market interest rates change.  We are exposed to changes in LIBOR or the base rate of our credit facility’s administrative agent.  We do not currently use interest rate swaps, caps or futures contracts to mitigate this risk. Changes in our debt could also increase these risks. Based on debt outstanding at January 2, 2010, a 1% increase in interest rates would result in approximately $0.7 million of additional interest expense annually.

We utilize derivative financial instruments to hedge price movements in our aluminum materials.  We are exposed to changes in the price of aluminum as set by the trades on the London Metal Exchange. We have entered into aluminum hedging instruments that settle at various times through the end of 2010 that cover approximately 57% of our anticipated needs during 2010 at an average price of $0.94 per pound.  Short-term changes in the cost of aluminum, which can be significant, are sometimes passed on to our customers through price increases, however, there can be no guarantee that we will be able to continue to pass on such price increases to our customers or that price increases will not negatively impact sales volume, thereby adversely impacting operating margins.

For forward contracts for the purchase of aluminum at January 2, 2010, a 10% decrease in the price of aluminum would decrease the fair value of our forward contacts of aluminum by $0.6 million.

 

 
   
Item 8.   
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
The Board of Directors and Shareholders of
 PGT, Inc.

We have audited the accompanying consolidated balance sheets of PGT, Inc. as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended January 2, 2010, January 3, 2009 and December 29, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PGT, Inc. at January 2, 2010 and January 3, 2009, and the consolidated results of their operations and their cash flows for each of the three years ended January 2, 2010, January 3, 2009 and December 29, 2007, 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), PGT. Inc.’s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2010 expressed an unqualified opinion thereon.


 
 
 
 /s/ ERNST & YOUNG LLP
 
 
 
 
 
Certified Public Accountants
 
Tampa, Florida
March 18, 2010

 

 

 

 


 
PGT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 

   
Year Ended
 
   
January 2,
   
January 3,
   
December 29,
 
   
2010
   
2009
   
2007
 
             
Net sales
  $ 166,000     $ 218,556     $ 278,394  
Cost of sales
    121,622       150,277       187,389  
                         
     Gross margin
    44,378       68,279       91,005  
                         
Impairment charges
    742       187,748       826  
Selling, general and administrative expenses
    51,902       63,109       77,004  
                         
     (Loss) income from operations
    (8,266 )     (182,578 )     13,175  
                         
Interest expense, net
    6,698       9,283       11,404  
Other expense (income), net
    37       (40 )     692  
                         
     (Loss) income before income taxes
    (15,001 )     (191,821 )     1,079  
                         
Income tax (benefit) expense
    (5,584 )     (28,789 )     456  
                         
     Net (loss) income
  $ (9,417 )   $ (163,032 )   $ 623  
                         
     Net (loss) income per common share:
                       
Basic
  $ (0.26 )   $ (5.08 )   $ 0.02  
                         
Diluted
  $ (0.26 )   $ (5.08 )   $ 0.02  
                         
     Weighted average shares outstanding:
                       
Basic
    36,451       32,104       29,247  
                         
Diluted
    36,451       32,104       30,212  
 


The accompanying notes are an integral part of these consolidated financial statements.

 

 
PGT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 

 
 
 
   
January 2,
   
January 3,
 
   
2010
   
2009
 
             
ASSETS
           
Current assets:
           
     Cash and cash equivalents
  $ 7,417     $ 19,628  
     Accounts receivable, net
    14,213       17,321  
     Inventories
    9,874       9,441  
     Deferred income taxes, net
    622       1,158  
     Income tax receivable
    3,782       1,074  
     Other current assets
    4,078       4,868  
                 
          Total current assets
    39,986       53,490  
                 
     Property, plant and equipment, net
    65,104       73,505  
     Other intangible assets, net
    67,522       72,678  
     Other assets, net
    1,018       944  
                 
          Total assets
  $ 173,630     $ 200,617  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
     Accounts payable
  $ 6,759     $ 5,730  
     Accrued liabilities
    9,848       8,852  
     Current portion of long-term debt and capital lease obligations
    105       330