SEC Info - PGT Innovations, Inc. - ‘10-Q’ for 7/2/22

2021

2022

2021

(unaudited)

Net sales

i 406,521

i 285,500

i 765,183

i 556,592

Cost of sales

i 241,391

i 188,491

i 465,460

i 365,621

Gross profit

i 165,130

i 97,009

i 299,723

i 190,971

Selling, general and administrative expenses

i 109,505

i 75,745

i 205,387

i 145,511

Income from operations

i 55,625

i 21,264

i 94,336

i 45,460

Interest expense, net

i 7,155

i 7,825

i 14,235

i 15,282

Income before income taxes

i 48,470

i 13,439

i 80,101

i 30,178

Income tax expense

i 12,005

i 2,726

i 19,810

i 6,670

Net income

i 36,465

i 10,713

i 60,291

i 23,508

Less: Net income attributable to redeemable
non-controlling interest ("RNCI")

( i 304

)

( i 568

)

( i 961

)

( i 979

)

Net income attributable to the Company

i 36,161

i 10,145

i 59,330

i 22,529

Calculation of net income per common share attributable
to common shareholders:

Net income attributable to the Company

i 36,161

i 10,145

i 59,330

i 22,529

Decrease (increase) in redemption value of RNCI

i 351

( i 3,563

)

( i 1,785

)

( i 3,563

)

Net income attributable to common shareholders

i 36,512

i 6,582

i 57,545

i 18,966

Net income per common share attributable to common shareholders:

Basic

i 0.61

i 0.11

i 0.96

i 0.32

Diluted

i 0.61

i 0.11

i 0.96

i 0.32

Weighted average number of common shares outstanding:

Basic

i 59,928

i 59,551

i 59,880

i 59,418

Diluted

i 60,257

i 60,051

i 60,241

i 59,977

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

- 3 -

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

(unaudited)

Net income

i 36,465

i 10,713

i 60,291

i 23,508

Other comprehensive income (loss) before tax:

Increase (decrease) in fair value of derivatives

( i 12,929

)

i 9,073

( i 6,854

)

i 17,361

Reclassification to earnings

( i 3,698

)

( i 4,133

)

( i 5,760

)

( i 5,908

)

Other comprehensive income
(loss) before tax

( i 16,627

)

i 4,940

( i 12,614

)

i 11,453

Income tax expense (benefit) related to
other comprehensive income (loss)

( i 4,270

)

i 1,225

( i 3,240

)

i 2,843

Other comprehensive income
(loss), net of tax

( i 12,357

)

i 3,715

( i 9,374

)

i 8,610

Comprehensive income

i 24,108

i 14,428

i 50,917

i 32,118

Less: Comprehensive income attributable to
redeemable non-controlling interest

( i 304

)

( i 568

)

( i 961

)

( i 979

)

Comprehensive income attributable to the Company

i 23,804

i 13,860

i 49,956

i 31,139

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

- 4 -

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)


	July 2,			January 1,
	2022			2022
ASSETS
Current assets:
Cash and cash equivalents	$	i 159,261		$	i 96,146
Accounts receivable, net		i 178,185			i 141,221
Inventories		i 110,245			i 91,440
Contract assets, net		i 59,309			i 55,239
Prepaid expenses		i 13,455			i 8,727
Other current assets		i 15,386			i 28,985
Total current assets		i 535,841			i 421,758

Property, plant and equipment, net		i 185,597			i 185,266
Operating lease right-of-use asset, net		i 95,511			i 91,162
Intangible assets, net		i 374,801			i 394,525
Goodwill		i 372,652			i 364,598
Other assets, net		i 1,963			i 3,301

Total assets	$	i 1,566,365		$	i 1,460,610

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	i 175,129		$	i 122,681
Current portion of operating lease liability		i 14,883			i 13,180
Total current liabilities		i 190,012			i 135,861

Long-term debt, net		i 626,266			i 625,655
Operating lease liability, less current portion		i 87,514			i 83,903
Deferred income taxes		i 34,249			i 37,489
Other liabilities		i 7,910			i 11,742

Total liabilities		i 945,951			i 894,650

Commitments and contingencies		—			—

Redeemable non-controlling interest		i 39,609			i 36,863

Shareholders' equity:
Preferred stock; par value $ i i .01 / per share; i i 10,000 / shares authorized; i i no / shares outstanding		—			—
Common stock; par value $ i i .01 / per share; i i 200,000 / shares authorized; i 63,927 and i 63,516 shares issued and i 59,947 and i 58,696 shares outstanding at July 2, 2022 and January 1, 2022, respectively		i 639			i 635
Additional paid-in-capital		i 437,207			i 433,347
Accumulated other comprehensive income (loss)		( i 2,368	)		i 7,006
Retained earnings		i 163,616			i 106,398
Treasury stock at cost		( i 18,289	)		( i 18,289	)
Total shareholders' equity		i 580,805			i 529,097

Total liabilities, redeemable non-controlling interest and shareholders' equity	$	i 1,566,365		$	i 1,460,610

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

- 5 -

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended
	July 2,			July 3,
	2022			2021
	(unaudited)
Cash flows from operating activities:
Net income	$	i 60,291		$	i 23,508
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		i 17,064			i 14,358
Amortization		i 13,924			i 9,890
Provision for credit losses		i 6,048			i 2,882
Stock-based compensation		i 4,909			i 3,494
Amortization of deferred financing costs, debt discount and premium		i 611			i 446
Asset impairment charges		i 2,131			—
(Gain) loss on sales of assets		( i 39	)		i 70
Change in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable		( i 44,148	)		( i 40,763	)
Inventories		( i 18,539	)		( i 10,586	)
Contract assets, net, prepaid expenses, other current and other assets		i 5,713			( i 13,262	)
Accounts payable, accrued and other liabilities		i 36,958			i 18,428

Net cash provided by operating activities		i 84,923			i 8,465

Cash flows from investing activities:
Purchases of property, plant and equipment		( i 17,328	)		( i 16,107	)
Investment in and acquisitions of business		( i 787	)		( i 106,480	)
Proceeds from sales of assets		i 41			i 142

Net cash used in investing activities		( i 18,074	)		( i 122,445	)

Cash flows from financing activities:
Proceeds from issuance of senior notes		—			i 63,300
Payments of contingent consideration in Anlin Acquisition		( i 2,362	)		—
Payments of financing costs		—			( i 1,363	)
Purchases of common stock relating to tax withholdings on employee equity awards		( i 1,663	)		( i 1,005	)
Proceeds from exercise of stock options		—			i 138
Proceeds from issuance of common stock under employee stock purchase plan (ESPP)		i 291			i 177

Net cash (used in) provided by financing activities		( i 3,734	)		i 61,247

Net increase (decrease) in cash and cash equivalents		i 63,115			( i 52,733	)
Cash and cash equivalents at beginning of period		i 96,146			i 100,320
Cash and cash equivalents at end of period	$	i 159,261		$	i 47,587

Non-cash activity:
Issuance of common stock in Eco Acquisition	$	—		$	i 6,108
Additions to right-of-use asset	$	i 12,262		$	i 46,905
Additions to operating lease liability	$	( i 12,262	)	$	( i 46,905	)
Property, plant and equipment additions in accounts payable	$	i 543		$	i 1,533

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

- 6 -

PGT INNOVATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except shares)(unaudited)

PGT Innovations, Inc. Shareholders' Equity

Accumulated

Additional

Other

Common stock

Paid-in

Comprehensive

Retained

Treasury

Amount

Capital

Income (Loss)

Earnings

Stock

Total

THREE MONTHS ENDED JULY 3, 2021

Balance at April 3, 2021

i 59,461,200

i 631

i 427,210

i 7,615

i 92,119

( i 18,309

)

i 509,266

Vesting of restricted stock

i 42,360

—

Issuance of treasury stock

i 4,600

—

( i 20

)

i 20

—

Stock-based compensation

—

i 1,744

—

i 1,744

Exercise of stock options

i 67,797

i 1

i 137

—

i 138

Common stock issued under ESPP

i 11,171

—

i 177

—

i 177

Net income attributable to the Company

—

i 10,145

—

i 10,145

Increase in value of RNCI

—

( i 3,563

)

—

( i 3,563

)

Other comprehensive income,
net of taxes of $ i 1,225

—

i 3,715

—

i 3,715

Balance at July 3, 2021

i 59,587,128

i 632

i 429,268

i 11,330

i 98,681

( i 18,289

)

i 521,622

SIX MONTHS ENDED JULY 3, 2021

Balance at January 2, 2021

i 58,998,711

i 625

i 420,202

i 2,720

i 79,896

( i 18,309

)

i 485,134

Vesting of restricted stock

i 189,466

—

Grants of restricted stock

—

i 3

( i 3

)

—

Forfeitures of restricted stock

—

( i 1

)

i 1

—

Purchases of treasury stock

( i 42,414

)

—

( i 1,005

)

( i 1,005

)

Retirement of treasury stock

—

( i 844

)

—

( i 161

)

i 1,005

—

Issuance of treasury stock

i 4,600

—

( i 20

)

i 20

—

Stock-based compensation

—

i 3,494

—

i 3,494

Exercise of stock options

i 67,797

i 1

i 137

—

i 138

Common stock issued under ESPP

i 11,171

—

i 177

—

i 177

Issuance in acquisition of Eco

i 357,797

i 4

i 6,104

—

i 6,108

Net income attributable to the Company

—

i 22,529

—

i 22,529

Increase in value of RNCI

—

( i 3,563

)

—

( i 3,563

)

Other comprehensive income,
net of taxes of $ i 2,843

—

i 8,610

—

i 8,610

Balance at July 3, 2021

i 59,587,128

i 632

i 429,268

i 11,330

i 98,681

( i 18,289

)

i 521,622

THREE MONTHS ENDED JULY 2, 2022

Balance at April 2, 2022

i 59,900,587

i 639

i 434,212

i 9,989

i 127,104

( i 18,289

)

i 553,655

Vesting of restricted stock

i 28,140

—

Grants of restricted stock

—

i 1

( i 1

)

—

Forfeitures of restricted stock

—

( i 1

)

i 1

—

Stock-based compensation

—

i 2,704

—

i 2,704

Common stock issued under ESPP

i 17,964

—

i 291

—

i 291

Net income attributable to the Company

—

i 36,161

—

i 36,161

Decrease in value of RNCI

—

i 351

—

i 351

Other comprehensive loss,
net of tax benefit of $ i 4,270

—

( i 12,357

)

—

( i 12,357

)

Balance at July 2, 2022

i 59,946,691

i 639

i 437,207

( i 2,368

)

i 163,616

( i 18,289

)

i 580,805

SIX MONTHS ENDED JULY 2, 2022

Balance at January 1, 2022

i 59,696,117

i 635

i 433,347

i 7,006

i 106,398

( i 18,289

)

i 529,097

Vesting of restricted stock

i 317,102

—

Grants of restricted stock

—

i 6

( i 6

)

—

Forfeitures of restricted stock

—

( i 1

)

i 1

—

Purchases of treasury stock

( i 84,492

)

—

( i 1,663

)

( i 1,663

)

Retirement of treasury stock

—

( i 1

)

( i 1,335

)

—

( i 327

)

i 1,663

—

Stock-based compensation

—

i 4,909

—

i 4,909

Common stock issued under ESPP

i 17,964

—

i 291

—

i 291

Net income attributable to the Company

—

i 59,330

—

i 59,330

Increase in value of RNCI

—

( i 1,785

)

—

( i 1,785

)

Other comprehensive loss,
net of tax benefit of $ i 3,240

—

( i 9,374

)

—

( i 9,374

)

Balance at July 2, 2022

i 59,946,691

i 639

i 437,207

( i 2,368

)

i 163,616

( i 18,289

)

i 580,805

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

- 7 -

PGT INNOVATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

About PGT Innovations, Inc.

PGT Innovations, Inc. (“PGTI,” “we,” or the “Company”) is a leading manufacturer of impact-resistant aluminum and vinyl-framed windows and doors and offers a broad range of fully customizable window and door products. The majority of our sales are to customers in the state of Florida; however, we also sell products in many other states. Our acquisition of Eco Enterprises (“Eco Acquisition”) in February 2021 expanded our range of product offerings in our major market of southeast Florida. We also have sales of products that are designed to unify indoor and outdoor living spaces, through our Western Windows Systems’ (“WWS”) division, and most of its sales are in the western United States. Our acquisition of Anlin Windows and Doors in October 2021 expanded our presence in the west. Products are sold primarily through an authorized dealer and distributor network. However, with our acquisition of NewSouth Window Solutions in February 2020, we also sell window products in the direct-to-consumer channel through a “factory-direct” sales model.

We were incorporated in the state of Delaware on December 16, 2003, as JLL Window Holdings, Inc., with primary operations in North Venice, Florida. On February 15, 2006, our Company was renamed PGT, Inc. On December 14, 2016, we announced that we changed our name to PGT Innovations, Inc. and, effective on December 28, 2016, the listing of our common stock was transferred to the New York Stock Exchange (“NYSE”) from the NASDAQ Global Market, and began trading on the NYSE under its existing ticker symbol of “PGTI”. As of July 2, 2022, we had major manufacturing operations in Florida, in North Venice, Tampa, and in the greater Miami area. We also have manufacturing operations in Phoenix, Arizona and Clovis, California. Additionally, we have i two glass tempering and laminating plants, i one in North Venice, Florida and i one in Medley, Florida, and i one insulation glass plant located in North Venice, Florida.

All references to PGTI or our Company apply to the consolidated financial statements of PGT Innovations, Inc. unless otherwise noted.

COVID-19 Pandemic

During March 2020, a global pandemic (the “Pandemic”) was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The Pandemic has resulted in a significant number of infections, hospitalizations and deaths around the world, including in the United States, and in several of our key markets.

The extent to which the circumstances the Pandemic, and its aftermath, could affect our future business, operations and financial results will depend upon numerous factors that we are not able to accurately predict. As such, we continue to be unable to accurately predict the impact the Pandemic and the challenges it has created for the U.S. and global economies in its aftermath. The impact to our customers’ and suppliers’ businesses and other factors are identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K/A, filed with the United States Securities and Exchange Commission on June 10, 2022. We will continue to evaluate the nature and extent of any changes in the aftermath of the Pandemic and any impact those changes may have to our business, consolidated results of operations, and financial condition.

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Our condensed consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods. The Company’s fiscal three and six months ended July 2, 2022, and July 3, 2021 consisted of 13 and 26 weeks, respectively.

- 8 -

The condensed consolidated balance sheet as of January 1, 2022, is derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of January 1, 2022, and the unaudited condensed consolidated financial statements as of and for the periods ended July 2, 2022 and July 3, 2021, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended January 1, 2022, included in the Company’s most recent Annual Report on Form 10-K/A. The accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

We have i two reportable segments: the Southeast segment and the Western segment. The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida. The Western reporting segment, also an operating segment, is composed of sales from our facilities in Arizona and California. See Note 16 for segment disclosures.

Recently Adopted Accounting Pronouncements

Business Combinations - Contracts Assets and Liabilities

On October 28, 2021, the FASB issued ASU 2021-08, which amends ASC 805-20 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. This standard was i effective beginning i January 1, 2022. i Early adoption was permitted and was adopted by the Company in the period beginning January 3, 2021. The adoption of this standard did i not have any impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in March 2021, subsequent amendment to the initial guidance, ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We have not elected adoption of this optional guidance and do not intend to elect this guidance before the sunset date of December 31, 2022, as there is no material impact on our consolidated financial statements.

- 9 -

NOTE 2. REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

Revenue Recognition Accounting Policy

The Company primarily manufactures fully customized windows and doors based on design specifications, measurements, colors, finishes, framing materials, glass-types, and other options selected by the customer at the point in time an order is received. The Company has an enforceable right to payment at the time an order is received and accepted at the agreed-upon sales prices contained in our agreements with our customers for all manufacturing efforts expended on behalf of its customers. Due to the customized build-to-order nature of these products, the Company’s assessment is that the substantial portion of its finished goods and certain unused glass components have no alternative use, and that control of these products and components passes to the customer over time during the manufacturing of the products in an order, or upon our receipt of certain pre-cut glass components from our supplier attributed to specific customer orders.

Based on these factors, the Company recognizes a substantial portion of revenue over time during the manufacturing process once customization begins, and for certain unused glass components on hand, at the end of a reporting period. Revenue on work-in-process at the end of a reporting period is recognized in proportion to costs incurred to total estimated cost of the product being manufactured. Except for the Western segment’s volume products, discussed in the section titled Disaggregation of Revenue from Contracts with Customers below, revenue recognized at a point in time is immaterial.

Disaggregation of Revenue from Contracts with Customers

As discussed in Note 1, we have i two reportable segments: our Southeast segment and our Western segment. See Note 16 for more information. i The following table provides information about our net sales by reporting segment, product category and market for the three and six months ended July 2, 2022 and July 3, 2021:

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,

July 3,

Disaggregation of revenue (in millions):

2022

2021

2022

2021

Reporting segment:

Southeast

i 307.5

i 242.4

i 579.3

i 476.1

Western

i 99.0

i 43.1

i 185.9

i 80.5

Total net sales

i 406.5

i 285.5

i 765.2

i 556.6

Product category:

Impact-resistant window and door products

i 243.0

i 197.5

i 460.8

i 388.9

Non-impact window and door products

i 163.5

i 88.0

i 304.4

i 167.7

Total net sales

i 406.5

i 285.5

i 765.2

i 556.6

Market:

New construction

i 173.3

i 124.5

i 323.4

i 244.5

Repair and remodel

i 233.2

i 161.0

i 441.8

i 312.1

Total net sales

i 406.5

i 285.5

i 765.2

i 556.6

The Company’s Western segment includes both custom and volume products. This segment’s volume products are not made-to-order and are of standardized sizes and design specifications. Therefore, the Company’s assessment is that the Western segment’s volume products have alternative uses, and that control of these products passes to the customer at a point in time, which is typically when the product has been delivered to the customer. For the three months ended July 2, 2022 and July 3, 2021, the Western segment’s net sales of its volume products were $ i 29.7 million and $ i 20.9 million, respectively. For the six months ended July 2, 2022 and July 3, 2021, the Western segment’s net sales of its volume products were $ i 56.0 million and $ i 40.6 million, respectively.

- 10 -

Contract Balances

Contract assets represent sales recognized in excess of billings related to finished goods not yet shipped and certain unused glass components not yet placed into the production process for which revenue is recognized over time as noted above. Contract liabilities relate to customer deposits at the end of reporting periods. At July 2, 2022 and January 1, 2022, those contract liabilities totaled $ i 46.8 million and $ i 45.2 million, respectively, of which $ i 37.1 million and $ i 37.0 million, respectively, are classified within accrued liabilities, and $ i 9.7 million and $ i 8.2 million, respectively, are classified as a reduction to the contract assets to which they relate. Contract assets, net, totaled $ i 59.3 million at July 2, 2022 and $ i 55.2 million at January 1, 2022, in the accompanying condensed consolidated balance sheets.

Because of the short-term nature of our performance obligations, as discussed below, substantially all of our performance obligations are satisfied within the quarter following the end of a reporting period. As such, we expect substantially all of the contract liabilities at January 1, 2022 were satisfied in the first quarter of 2022, and contract assets at January 1, 2022 were transferred to accounts receivable in the first quarter of 2022. We expect substantially all of the contract liabilities at July 2, 2022 will be satisfied in the third quarter of 2022, and contract assets at July 2, 2022 will be transferred to accounts receivable in the third quarter of 2022. Contract liabilities at July 2, 2022 represents cash received during the three-month period ended July 2, 2022, excluding amounts recognized as revenue during that period. Contract assets at July 2, 2022 represents revenue recognized during the three-month period ended July 2, 2022, excluding amounts transferred to accounts receivable during that period. Contract liabilities at January 1, 2022 represents cash received during the three-month period ended January 1, 2022, excluding amounts recognized as revenue during that period. Contract assets at January 1, 2022 represents revenue recognized during the three-month period ended January 1, 2022, excluding amounts transferred to accounts receivable during that period.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue as the performance obligation is satisfied. Our contracts with our customers generally represent an approved purchase order together with our standard terms and conditions. Our custom product contracts include distinct goods that are substantially the same and have the same pattern of transfer to the customer over time, and therefore represent a series of distinct goods accounted for as a single performance obligation. For volume products, we allocate the contract’s transaction price to each distinct performance obligation based on the estimated relative standalone selling price of each distinct good. Observable standalone sales are used to determine the standalone selling price. Certain customers are eligible for rebates based on their volume or purchases during an annual period. Rebates are recorded as a reduction to sales and were immaterial in all periods presented.

Performance obligations are satisfied over time, generally for our custom products, and as of a point in time for our volume products. Performance obligations are supported by contracts with customers, and we have elected not to disclose our unsatisfied performance obligations as of July 2, 2022 under the short-term contract exemption as we expect such performance obligations will be satisfied within the quarter following the end of a reporting period.

Policies Regarding Shipping and Handling Costs and Commissions on Contract Assets

The Company has made a policy election to continue to recognize shipping and handling costs as a fulfillment activity. Treating shipping and handling as a fulfillment activity requires estimated shipping and handling costs for undelivered products and certain glass components on which we have recognized revenue and created a contract asset, to be accrued to match this cost with the recognized revenue. Sales taxes collected from customers are recorded on a net basis.

The Company utilizes the i practical expedient which permits the current expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to employees. We expense sales commissions paid to employees as sales are recognized, including sales from the creation of contract assets, as the expected amortization period is less than one year.

- 11 -

Allowance for Credit Losses

The Company i adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”) on i December 29, 2019 (the first day of our 2020 fiscal year). Topic 326 requires us to measure all expected credit losses for financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. In the ordinary course of business, we extend credit to qualified dealers and distributors, generally on a non-collateralized basis. The Company maintains an allowance for credit losses which is based on management’s assessments of the amount which may become uncollectible in the future and is determined through consideration of our write-off history, specific identification of uncollectible accounts based in part on the customer’s past due balance (based on contractual terms), and consideration of prevailing economic and industry conditions, and may include anticipated unfavorable impacts of the COVID-19 pandemic on the businesses of our customers, such as dealers and distributors.

As of July 2, 2022 and January 1, 2022, we had gross accounts receivable of $ i 187.5 million and $ i 145.9 million, respectively, and an allowance for credit losses of $ i 9.3 million and $ i 4.7 million, respectively. During the second quarter of 2022, a customer with whom we have had a long-term relationship experienced financial difficulties. As such, we determined to cease taking orders and provide additional reserves of approximately $ i 3.0 million against our existing exposure to this customer. During the three- and six-months ended July 2, 2022, we recorded provisions for credit losses totaling $ i 4.6 million and $ i 6.0 million, respectively, including the provision relating to this customer.

NOTE 3. WARRANTY

Most of our manufactured products are sold with warranties. Warranty periods, which vary by product components, generally range from i 1 to i 10 years; however, the warranty period for a limited number of specifically identified components in certain applications is a lifetime. The majority of the products sold have warranties on components which range from i 1 to i 3 years. The amount charged to expense for warranties is based on management’s assessment of the cost per service call and the number of service calls expected to be incurred to satisfy warranty obligations on the current net sales.

During the three months ended July 2, 2022, we recorded warranty expense at a rate of approximately i 1.7% of sales, which was slightly lower than the rate during the three months ended July 3, 2021 of i 1.9% of sales. i Our warranty expense rate in the three months ended July 2, 2022 is a result of a decrease in the use of higher-cost contract labor we had used in the first quarter of 2022 to respond to warranty claims due to a currently tight labor market, whereas in the three months ended July 3, 2021, the wind-down of certain commercial business in the first quarter of 2021 resulted in warranty costs higher than those we would incur in the normal course of business.

During the six months ended July 2, 2022, we recorded warranty expense at a rate of approximately i 2.1% of sales, which was about level with the six months ended July 3, 2021 of i 2.2% of sales. Our warranty expense rate in the six months ended July 2, 2022 is a result of an increase in the use of higher-cost contract labor during the first quarter of 2022 to respond to warranty claims due to a currently tight labor market, whereas in the six months ended July 3, 2021, the wind-down of certain commercial business in the first quarter of 2021 resulted in warranty costs higher than those we would incur in the normal course of business.

i The following table summarizes current period charges, adjustments to previous estimates, as well as settlements, which represent actual costs incurred during the period for the three and six months ended July 2, 2022 and July 3, 2021. The reserve is determined through specific identification and assessing our history. Of the accrued warranty reserve of $ i 16.2 million at July 2, 2022, $ i 13.8 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at July 2, 2022, with the remainder classified within other liabilities as non-current liabilities. Of the accrued warranty reserve of $ i 13.5 million at January 1, 2022, $ i 11.8 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at January 1, 2022, with the remainder classified within other liabilities as non-current liabilities.

Beginning

Acquisition-

Charged

End of

Accrued Warranty

of Period

to Expense

Adjustments

Settlements

Period

(in thousands)

Three months ended July 2, 2022

i 16,321

—

i 6,844

( i 237

)

( i 6,777

)

i 16,151

Three months ended July 3, 2021

i 9,643

i 189

i 5,343

( i 748

)

( i 4,968

)

i 9,459

Six months ended July 2, 2022

i 13,504

—

i 15,992

i 513

( i 13,858

)

i 16,151

Six months ended July 3, 2021

i 8,001

i 189

i 12,309

( i 359

)

( i 10,681

)

i 9,459

- 12 -

NOTE 4. INVENTORIES

Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited finished goods inventory since the substantial majority of our products are custom, made-to-order and the revenue on these products, as well as the related cost, has been fully recognized upon completion of the manufacturing process. Finished goods inventory and work-in-progress costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. i Inventories consisted of the following:


	July 2,		January 1,
	2022		2022
	(in thousands)
Raw materials	$	i 106,083	$	i 87,164
Work-in-progress		i 3,385		i 3,248
Finished goods		i 777		i 1,028

Inventories	$	i 110,245	$	i 91,440

NOTE 5. STOCK BASED-COMPENSATION

Stock-Based Compensation Expense

We record stock compensation expense over an equity award’s vesting period based on the award’s fair value at the date of grant. We recorded compensation expense for stock-based awards of $ i 2.7 million for the three months ended July 2, 2022 and $ i 1.7 million for the three months ended July 3, 2021. We recorded compensation expense for stock-based awards of $ i 4.9 million for the six months ended July 2, 2022 and $ i 3.5 million for the six months ended July 3, 2021. As of July 2, 2022, there was $ i 15.4 million in total unrecognized compensation cost related entirely to restricted share awards. These costs are expected to be recognized in earnings on an accelerated basis over the weighted average remaining vesting period of i 1.9 years at July 2, 2022.

Of the $ i 2.7 million and $ i 1.7 million in stock-based compensation expense in the three months ended July 2, 2022 and July 3, 2021, respectively, $ i 2.3 million and $ i 1.5 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales. Of the $ i 4.9 million and $ i 3.5 million in stock-based compensation expense in the six months ended July 2, 2022 and July 3, 2021, respectively, $ i 4.2 million and $ i 3.0 million, respectively, are classified within selling, general and administrative expense in the accompanying condensed consolidated statements of operations, with the remainders classified within cost of sales.

Issuance

On February 14, 2022, we issued i 468,518 shares of restricted stock to certain executive and non-executive employees of the Company, under the Company’s 2022 long-term incentive plan (“2022 LTIP”). Half of the shares awarded under the 2022 LTIP, or i 234,259 shares, are subject to adjustment based on the performance of the Company for the 2022 fiscal year. A portion of the i 234,259 performance shares issued under the 2022 LTIP are also subject to a total shareholder return ("TSR") component, which will not be finalized until the third anniversary of the February 14, 2022 grant date. Specifically, i 37.5% of the one-half of the restricted stock awarded in the 2022 LTIP are performance restricted shares which will not be earned unless certain financial performance metrics are met by the Company for the 2022 fiscal year. The performance criteria, as defined in the share awards, provide for a graded awarding of shares based on the percentage by which the Company meets earnings before interest, taxes, depreciation and amortization ("EBITDA") as defined in our 2022 business plan. i The percentages, ranging from less than i 80% to greater than i 120% of the target amount of that EBITDA metric, provide for the awarding of shares ranging from i 0% to i 200% of the target amount of shares with respect to i 37.5% of half of the i 234,259 shares, or i 87,849 shares. / The remaining i 62.5% of the one-half of the restricted stock awarded in the 2022 LTIP, or i 146,410 shares, are subject to the same EBITDA metric, but are also subject to a TSR component which stratifies the performance of the Company's common stock price compared to a defined peer group of companies over the three-year period subsequent to February 14, 2022, such that if the Company's TSR falls at the 75th percentile or higher compared to the peer group, grantees will receive an additional i 25% of performance shares. If the Company's TSR falls at the 25th percentile or lower compared to the peer group, grantees will forfeit i 25% of performance shares. If the Company's TSR falls within the 75th and 25th percentiles, there will be no additional adjustment and grantees will receive their performance shares as per the EBITDA metric previously discussed. The final award is also affected by forfeitures upon the termination of a grantee’s employment with the Company. The remaining i 234,259 shares from the 2022 LTIP are not subject to adjustment based on any performance or other criteria, but rather, vest in three equal installments on each of the first, second and third anniversaries of the grant date, assuming the grantee is employed by the Company on those vesting dates.

- 13 -

The grant date fair value of the 2022 LTIP was $ i 18.27 per share for those shares not subject to adjustment based on any performance or other criteria except the passage of time, and the i 37.5% of shares subject only to the EBITDA criteria of Company performance. For the i 62.5% of performance shares subject to both the EBITDA criteria of Company performance and the TSR component, the grant date fair value was $ i 20.79 per share as determined by a third-party valuation specialist engaged by the Company, which used Monte Carlo simulation techniques to determine the fair value of such shares, which we consider to be a Level 3 input. As such, the weighted-average fair value of the i 234,259 shares subject to the performance of the Company for the 2022 fiscal year, including those shares subject to the TSR, is $ i 19.84 per share.

NOTE 6. ACQUISITIONS

ANLIN WINDOWS & DOORS

On i October 25, 2021, we completed the acquisition of Anlin Windows & Doors. The acquisition was done by Western Window Holding LLC, a Delaware limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired substantially all of the assets, properties and rights owned, used or held for use in the business, as operated by Anlin Industries, a California corporation, of manufacturing vinyl windows and doors for the replacement market and the new construction market, and all activities conducted in connection therewith (the "Anlin Acquisition"), pursuant to that certain Asset Purchase Agreement dated as of September 1, 2021 (the “Anlin Purchase Agreement”), by and among the Company, and Anlin Industries. The fair value of consideration transferred in the Anlin Acquisition was $ i 121.7 million, composed of $ i 115.0 million in cash, including $ i 113.5 million for purchase price and $ i 1.5 million in working capital adjustments, including $ i 0.8 million paid during the three months ended July 2, 2022, and fair value of contingent consideration of $ i 6.7 million, discussed in greater detail below.

The cash portion of the Anlin Acquisition of $ i 115.0 million was financed with borrowings under the fourth amendment of our 2016 Credit Agreement due 2024 of $ i 60.0 million, which resulted in net proceeds after fees of $ i 59.4 million, with the remaining $ i 55.6 million from cash on hand. Cash on hand for the Anlin Acquisition was ultimately provided by the issuance of $ i 575.0 million of i 4.375% senior notes due 2029 and related transactions, further explained in Note 9, Long-Term Debt, as well as cash generated through operations.

The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Anlin Acquisition, are as follows:

Initial
Allocation

Adjustments to
Allocation

Preliminary
Allocation

Accounts receivable

i 10,803

—

i 10,803

Inventories

i 7,633

( i 327

)

i 7,306

Contract assets, net

i 7,027

—

i 7,027

Prepaid expenses and other assets

i 1,626

( i 954

)

i 672

Property and equipment

i 22,800

i 1,509

i 24,309

Operating lease right-of-use asset

i 3,450

i 14

i 3,464

Intangible assets

i 77,800

( i 5,800

)

i 72,000

Total assets acquired

i 131,139

( i 5,558

)

i 125,581

Accounts payable

( i 5,175

)

i 593

( i 4,582

)

Accrued and other liabilities

( i 7,993

)

—

( i 7,993

)

Operating lease liability

( i 3,450

)

( i 14

)

( i 3,464

)

Total liabilities assumed

( i 16,618

)

i 579

( i 16,039

)

Net assets acquired

i 114,521

( i 4,979

)

i 109,542

Goodwill

i 5,596

i 6,554

i 12,150

Fair value of consideration transferred

i 120,117

i 1,575

i 121,692

Consideration:

Cash

i 114,196

i 786

i 114,982

Contingent consideration

i 5,921

i 789

i 6,710

Fair value of consideration transferred

i 120,117

i 1,575

i 121,692

The fair value of certain working capital related items, including Anlin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities, approximated their book values at the date of the Anlin Acquisition. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Inventories at the acquisition date was primarily composed of raw materials. Further review during the first quarter of 2022 resulted in an adjustment to decrease the estimated net realizable value of inventory. The fair value of property and equipment and remaining useful lives were estimated by management, with the assistance of a third-party valuation firm, using the cost approach. During the first quarter of 2022, additional value was assigned to acquired property and equipment, primarily due to an increase in the estimate of the fair value of acquired land.

- 14 -

Valuations of the intangible assets were done using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. During the first quarter of 2022, we made several adjustments to the estimated fair value of the initial valuation of certain intangible assets, given the preliminary nature of several of the valuation inputs. Additionally, we determined that a portion of the customer relationship asset we acquired related to Anlin's backlog, which had an estimated useful life of less than three months, resulting in its estimated fair value of $ i 2.2 million becoming fully amortized in the first quarter of 2022, discussed below, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the six-month period ended July 2, 2022.

We incurred acquisition costs totaling $ i 1.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Anlin Acquisition, incurred during the year ended January 1, 2022, primarily during the third and fourth quarters.

The Anlin Purchase Agreement provides for the potential for earn-out contingency payments to sellers should Anlin achieve a certain level of earnings before interest, taxes, depreciation and amortization, ("Anlin EBITDA"), as defined in the Anlin Purchase Agreement, for its fiscal years of 2021 and 2022, of up to $ i 3.2 million to be paid out by March 31, 2022, and of up to $ i 9.5 million to be paid out by March 31, 2023, respectively. We had recorded a preliminary earn-out contingent liability of $ i 5.9 million as of our year ended January 1, 2022, which represented its then estimated fair value based on probability adjusted levels of estimated Anlin EBITDA. Estimated Anlin EBITDA is a significant input that is not observable in the market, which ASC 820 considers to be a Level 3 input. In the first quarter of 2022, we finalized the fair value of the earn-out contingency, which we adjusted by an additional $ i 0.8 million, to a total of $ i 6.7 million of estimated fair value of contingent consideration as of the effective date of the Anlin Acquisition. This amount included $ i 2.4 million for the contingent consideration relating to 2021 Anlin EBITDA and $ i 4.3 million for the contingent consideration relating to the 2022 Anlin EBITDA.

The first contingent consideration payment was agreed to be $ i 2.7 million, which exceeded its estimated fair value by $ i 0.3 million. This excess is classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the six months ended July 2, 2022. The payment was made during the second quarter of 2022 after both parties agreed to extended the deadline for the first payment past the March 31, 2022 due date stated in the Anlin Purchase Agreement.

During the second quarter of 2022, we updated our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA, which was estimated to be $ i 8.8 million. As such, we recognized an expense of approximately $ i 4.5 million, representing the difference between the actual and estimated fair value of the contingent consideration relating to the 2022 Anlin EBITDA, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the six months ended July 2, 2022. We will continue to update our estimate of the fair value of the contingent consideration relating to 2022 Anlin EBITDA each reporting period, as required by ASC 805, and record any adjustments within operating income until finalized by March 31, 2023.

For tax purposes, contingent consideration does not become part of tax goodwill until paid. As such, the amount of goodwill deductible for tax purposes will not be finalized until the outcome of both earn-out contingency payments are known. As discussed, as of July 2, 2022, the initial estimated fair value of the contingent consideration in the preliminary allocation relating to the remaining payment was $ i 4.3 million, and goodwill according to the current allocation of consideration is $ i 12.2 million. As such, as of July 2, 2022, the amount of goodwill estimated to be tax deductible is the difference of $ i 7.9 million. Anlin's goodwill is included as part of the Western reporting. We believe Anlin's goodwill relates to the expansion of our footprint in a key, strategic market we have identified as a geographic area of growth for our Company. Our estimate of the amount of tax deductible goodwill may change as the amounts of the payments of contingent consideration are finalized.

As discussed above, we made changes to the initial estimated fair values of the trade name and customer relationships assets in the Anlin Acquisition, and we determined that a portion of our customer relationships intangible asset relates to the backlog acquired in the acquisition, which we estimated to be $ i 2.2 million. Due to the short useful life of the customer-related backlog, its estimated fair value of $ i 2.2 million was fully amortized by the end of the first quarter of 2022, which is classified within selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the six-month period ended July 2, 2022. Our purchase price allocation is preliminary, and other items are subject to change.

The Anlin Purchase Agreement has a post-closing working capital calculation we were required to prepare, and delivered to sellers during the second quarter of 2022. This resulted in an additional payment of consideration to the seller of $ i 0.8 million, made during the second quarter of 2022.

- 15 -

Valuation of Identified Intangible Assets

The valuation of the identifiable intangible assets acquired in the Anlin Acquisition and our estimate of their respective useful lives are as follows:

Initial

Adjustment to

Preliminary

Useful Life

Valuation

(in years)

(in thousands)

Trade name

i 35,400

( i 3,700

)

i 31,700

indefinite

Customer relationships

i 42,100

( i 4,300

)

i 37,800

i 15

Customer-related backlog

—

i 2,200

< i 1

Developed technology

i 300

—

i 300

i 9

Intangible assets, net

i 77,800

( i 5,800

)

i 72,000

Pro Forma Financial Information

The following unaudited pro forma financial information assumes the acquisition had occurred at the beginning of the earliest period presented that does not include Anlin's actual results for the entire period. The following unaudited pro forma financial information has been prepared by adjusting our historical results to include the results of Anlin adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the refinancing of the 2018 Senior Notes due 2026 and the third amendment of the 2016 Credit Agreement due 2024 into the 2021 Senior Notes due 2029 (the "2021 Senior Notes") and the fourth amendment of the 2016 Credit Agreement due 2024. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. i The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.


	Three Months Ended		Six Months Ended
Pro Forma Results (unaudited)	July 3, 2021		July 3, 2021
(in thousands, except per share amounts)	(unaudited)
Net sales	$	i 314,270	$	i 609,782

Net income attributable to common shareholders	$	i 8,992	$	i 21,737

Net income per common share attributable to common shareholders:
Basic	$	i 0.15	$	i 0.37
Diluted	$	i 0.15	$	i 0.36

Net sales of Anlin included in the condensed consolidated statement of operations for the three and six months ended July 2, 2022, was $ i 38.8 million and $ i 71.2 million, respectively. The net income of Anlin in the condensed consolidated statement of operations for the three and six months ended July 2, 2022, was $ i 7.3 million and $ i 10.2 million, respectively.

CRI SOCAL, INC.

On May 2, 2021, pursuant to an asset purchase agreement dated April 9, 2021, we acquired substantially all of the assets and assumed certain liabilities of CRi SoCal, Inc. (“CRi”), a California corporation doing business in California as Combined Resources (the “CRi Acquisition”). CRi is engaged in the sales, distribution and installation of window and door products, and related design services, to homebuilders in the residential new construction market from its leased facility in Rancho Santa Margarita, California. Until its acquisition by the Company, CRi was a customer of the Company’s western business unit.

The fair value of consideration transferred in the acquisition of CRi totaled $ i 12.5 million, and included $ i 12.1 million in cash, funded from cash on hand, and $ i 0.4 million in accounts receivable owed by CRi to the Company’s western business unit relating to sales prior to the acquisition, which are considered settled as a result of the acquisition. The preliminary estimated fair value of assets acquired and liabilities assumed totaled $ i 17.6 million and $ i 5.1 million, respectively, which included offsetting operating lease right of use assets and operating lease liabilities totaling $ i 2.6 million. The estimated fair value of assets acquired also included current assets totaling $ i 4.1 million, primarily accounts receivable, identifiable intangible assets totaling $ i 7.0 million, goodwill of $ i 3.7 million, all of which we believe is tax deductible, and a small amount of property and equipment. Liabilities assumed included the aforementioned operating lease liability, as well as a total of $ i 2.5 million in trade accounts payable and customer deposits. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm. We believe goodwill in the acquisition relates to the expansion of our footprint in an existing market, in a way that we believe will enhance our long-term profitability in that market of our Western business. Sales and net income from CRi included in the three and six months ended July 2, 2022 was immaterial.

- 16 -

ECO WINDOW SYSTEMS

On i February 1, 2021, we completed the acquisition of a i 75% ownership stake in Eco Enterprises and its related companies, Eco Windows Systems, LLC, Eco Glass Production, LLC, and Unity Windows, LLC (together “Eco”). Eco is a manufacturer and installer of aluminum, impact-resistant windows and doors, serving the South Florida region since 2009. Eco is headquartered in Medley, Florida, near Miami, Florida, and has i three manufacturing locations in the region, including a glass processing facility.

The fair value consideration for Eco was $ i 102.0 million, including $ i 94.4 million in cash, after favorable adjustments totaling $ i 5.6 million relating to working capital and customer deposits which were agreed to and settled in the second quarter of 2021, and estimated contingent consideration of $ i 1.5 million recorded in the second quarter of 2022, which was required by the purchase agreement. The fair value of consideration also included PGT Innovations, Inc. common stock with a then estimated fair value of $ i 6.1 million. The cash portion of the purchase price was financed by a second add-on issuance of $ i 60.0 million aggregate principal amount of i 6.75% senior notes to the 2018 Senior Notes due 2026 on January 25, 2021 (the “Additional Senior Notes”), issued at i 105.5% of their principal amount, resulting in a premium to us of $ i 3.3 million, together with cash on hand of $ i 31.1 million.

The common stock portion of the purchase price was represented by the issuance of i 357,797 shares of PGT Innovations, Inc. common stock on February 1, 2021, with a closing price value of $ i 21.34 per share on that date, or approximately $ i 7.6 million based on that price. However, the seller of Eco, who is also the holder of the i 25% redeemable non-controlling interest in Eco Enterprises, is restricted from selling these shares for a i three-year period from the date of the acquisition. As such, we estimated that there was an approximately i 20% discount for the lack of marketability of the shares. The fair value of the redeemable non-controlling interest in the acquisition has been estimated to be $ i 28.5 million, resulting in total fair value of the Eco business in the acquisition, including the redeemable non-controlling interest, of $ i 130.4 million. The fair value of the redeemable non-controlling interest has been calculated as i 25% of the initial estimated fair value of the entity at the acquisition date, less a discount for seller’s lack of control in the new entity, estimated to be i 5%, and a discount for the seller’s lack of marketability of the minority stake, estimated to be i 10%. See Note 17 for more information regarding the redeemable non-controlling interest.

The estimated fair value of assets acquired, and liabilities assumed as of the closing date of the Eco Acquisition, are as follows:

Initial
Allocation

Adjustments to
Allocation

Final
Allocation

Accounts receivable

i 5,031

( i 241

)

i 4,790

Inventories

i 7,728

( i 684

)

i 7,044

Contract assets, net

i 4,312

( i 123

)

i 4,189

Prepaid expenses and other assets

i 1,706

( i 759

)

i 947

Property and equipment

i 24,009

( i 191

)

i 23,818

Operating lease right-of-use asset

i 27,864

( i 1,049

)

i 26,815

Intangible assets

i 72,700

i 1,600

i 74,300

Total assets acquired

i 143,350

( i 1,447

)

i 141,903

Accounts payable

( i 6,809

)

( i 116

)

( i 6,925

)

Accrued and other liabilities, including customer deposits

( i 4,215

)

( i 604

)

( i 4,819

)

Operating lease liability

( i 27,864

)

i 1,049

( i 26,815

)

Total liabilities assumed

( i 38,888

)

i 329

( i 38,559

)

Net assets acquired

i 104,462

( i 1,118

)

i 103,344

Redeemable non-controlling interest

( i 34,084

)

i 5,620

( i 28,464

)

Net assets acquired, net of redeemable non-controlling interest

i 70,378

i 4,502

i 74,880

Goodwill

i 30,051

( i 2,967

)

i 27,084

Fair value of consideration transferred

i 100,429

i 1,535

i 101,964

Consideration:

Cash

i 94,321

i 35

i 94,356

PGTI common stock

i 6,108

—

i 6,108

Contingent consideration

—

i 1,500

Fair value of consideration transferred

i 100,429

i 1,535

i 101,964

- 17 -

The fair value of certain working capital related items, including Eco’s accounts receivable, prepaid and other expenses, and accounts payable and accrued liabilities, approximated their book values at the date of the Eco Acquisition. Subsequent to our initial allocation, we adjusted the fair value of certain acquired commercial receivable accounts based on a further post-acquisition assessment of their collectability. The fair value of inventory was estimated by major category, at net realizable value, which we believe approximates the price a market participant could achieve in a current sale. Substantially all of inventories at the acquisition date was composed of raw materials. The fair value of property and equipment was estimated with the assistance of a third-party valuation firm, using the indirect cost approach, which we consider to be Level 3 in the fair value hierarchy. Valuations of the intangible assets have been estimated using income and royalty relief approaches based on projections, which we consider to be Level 3 inputs, with the assistance of a third-party valuation firm.

We incurred acquisition costs totaling $ i 1.7 million relating to legal expenses, representations and warranties insurance, diligence, accounting and printing services in the Eco Acquisition, which includes $ i 1.0 million in the fourth quarter of 2020, and $ i 0.7 million in first three months of 2021, classified as selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the six months ended July 3, 2021.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, has currently been estimated to be $ i 27.1 million, classified as part of the Southeast reporting unit goodwill, which we expect the portion of goodwill relating to our i 75% investment to be deductible for tax purposes.

We believe goodwill represents the strengthening of our supply chain for glass through faster glass production, as well as diversification and expansion of product offerings in the high-growth commercial market, and an expansion of our dealer network with minimal overlap with our existing deal network.

Valuation of Identified Intangible Assets in the Eco Acquisition

The valuation of the identifiable intangible assets acquired in the Eco Acquisition and our estimate of their respective useful lives are as follows:

Initial

Adjustment to

Final

Useful Life

Valuation

(in years)

(in thousands)

Trade names

i 36,000

( i 1,100

)

i 34,900

indefinite

Customer relationships

i 36,700

i 2,700

i 39,400

i 5 - i 15

Intangible assets, net

i 72,700

i 1,600

i 74,300

- 18 -

NOTE 7. NET INCOME PER COMMON SHARE

Basic earnings per share (“EPS”) available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding during the period. Diluted EPS available to PGT Innovations, Inc. common stockholders is computed using the two-class method by dividing net income attributable to common shareholders, after deducting the redemption adjustment related to the redeemable noncontrolling interest, by the average number of common shares outstanding, including the dilutive effect of common stock equivalents computed using the treasury stock method and the average share price during the period.

There were i i i i no / / / anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three- or six-month periods ended July 2, 2022, or July 3, 2021.

The table below presents the calculation of EPS and a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS:

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

(in thousands, except per share amounts)

Net income

i 36,465

i 10,713

i 60,291

i 23,508

Less: Net income attributable to RNCI

( i 304

)

( i 568

)

( i 961

)

( i 979

)

Net income attributable to the Company

i 36,161

i 10,145

i 59,330

i 22,529

Decrease (increase) in redemption value of RNCI

i 351

( i 3,563

)

( i 1,785

)

( i 3,563

)

Net income attributable to common shareholders

i 36,512

i 6,582

i 57,545

i 18,966

Weighted-average number of common shares outstanding - Basic

i 59,928

i 59,551

i 59,880

i 59,418

Add: Dilutive shares from equity plans

i 329

i 500

i 361

i 559

Weighted-average number of common shares outstanding - Diluted

i 60,257

i 60,051

i 60,241

i 59,977

Net income per common share attributable to common shareholders:

Basic

i 0.61

i 0.11

i 0.96

i 0.32

Diluted

i 0.61

i 0.11

i 0.96

i 0.32

- 19 -

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets are as follows:


							Initial
	July 2,			January 2,			Useful Life
	2022			2021			(in years)
	(in thousands)
Goodwill	$	i 372,652		$	i 364,598		indefinite

Other intangible assets:
Trade names (indefinite-lived)	$	i 208,441		$	i 212,141		indefinite

Customer relationships and customer-related assets		i 286,947			i 289,047		< i 1- i 15
Trade name (amortizable)		i 22,200			i 22,200		i 15
Developed technology		i 5,900			i 5,900		i 6- i 10
Non-compete agreement		i 3,338			i 3,338		i 2- i 5
Software license		i 590			i 590		i 2
Less: Accumulated amortization		( i 152,615	)		( i 138,691	)

Subtotal		i 166,360			i 182,384

Other intangible assets, net	$	i 374,801		$	i 394,525

Goodwill at January 1, 2022	$	i 364,598
Increase in Anlin Acquisition contingent consideration		i 789
Decrease in Anlin Acquisition trade name		i 3,700
Decrease in Anlin Acquisition customer relationships		i 4,300
Increase in Anlin Acquisition customer-related backlog asset		( i 2,200	)
Final net working capital payment in Anlin Acquisition		i 786
Estimated contingent consideration in Eco Acquisition		i 1,500
Net other measurement period changes in Anlin Acquisition		( i 821	)

Goodwill at July 2, 2022	$	i 372,652

Trade names (indefinite-lived) at January 1, 2022	$	i 212,141
Decrease in Anlin Acquisition trade name		( i 3,700	)

Trade names (indefinite-lived) at July 2, 2022	$	i 208,441

Estimated amortization of our amortizable intangible assets for future years is as follows:


(in thousands)	Total
Remainder of 2022	$	i 10,963
2023		i 20,520
2024		i 20,474
2025		i 20,299
2026		i 16,906
Thereafter		i 77,198

Total	$	i 166,360

Amortization expense relating to amortizable intangible assets for the three months ended July 2, 2022 and July 3, 2021, was $ i 5.9 million and $ i 5.1 million, respectively. Amortization expense relating to amortizable intangible assets for the six months ended July 2, 2022 and July 3, 2021, was $ i 13.9 million and $ i 9.9 million, respectively. See Note 6 for discussion of the amortization of the customer-related backlog asset of $ i 2.2 million during the six-month period ended July 2, 2022.

- 20 -

We perform our annual goodwill and indefinite-lived intangible asset impairment testing on the first day of our fiscal fourth quarter of each year, and at interim periods if needed based on occurrence of triggering events. During the six months ended July 2, 2022, we did not identify any events which we believe would trigger the need for tests for impairments of our indefinite-lived intangibles assets. As of July 2, 2022 and January 1, 2022, the carrying value of our Southeast reporting unit goodwill is $ i 228.3 million and $ i 226.8 million, respectively. As of July 2, 2022 and January 1, 2022, the carrying value of our Western reporting unit goodwill is $ i 144.4 million and $ i 137.8 million, respectively. Goodwill of our Southeast reporting unit includes the goodwill relating to Eco. Goodwill of our Western reporting unit includes the goodwill relating to both Anlin and CRi.

NOTE 9. LONG-TERM DEBT


	July 2,			January 1,
	2022			2022
	(in thousands)

2021 Senior Notes due 2029, maturing in October 2029	$	i 575,000		$	i 575,000

2016 Credit Agreement due 2024, maturing in October 2024		i 60,000			i 60,000

Long-term debt		i 635,000			i 635,000

Deferred financing costs		( i 8,734	)		( i 9,345	)

Long-term debt, net	$	i 626,266		$	i 625,655

2021 Senior Notes due 2029

On September 24, 2021, we completed the issuance of $ i 575.0 million aggregate principal amount of i 4.375% senior notes (“2021 Senior Notes”), issued at i 100% of their principal amount. The 2021 Senior Notes are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future restricted subsidiaries, other than any restricted subsidiary of the Company that does not guarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2021 Senior Notes are senior unsecured obligations of the Company and the guarantors, respectively, and rank pari passu in right of payment with all existing and future senior debt and senior to all existing and future subordinated debt of the Company and the guarantors. The 2021 Senior Notes were offered under Rule 144A of the Securities Act, and in transactions outside the United States under Regulation S of the Securities Act, and have not been, and will not be, registered under the Securities Act.

The 2021 Senior Notes mature on i October 1, 2029. Interest on the 2021 Senior Notes is payable semi-annually, in arrears, beginning on April 1, 2022, with interest accruing at a rate of i 4.375% per annum from September 24, 2021. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2021 Senior Notes totaling $ i 8.7 million, which included a i 1.25% lender spread on the total principal value of the 2021 Senior Notes, or $ i 7.2 million, and $ i 1.5 million of other costs, all of which are being amortized under the effective interest method. See “Deferred Financing Costs” below.

As of July 2, 2022, the face value of debt outstanding under the 2021 Senior Notes was $ i 575.0 million, and interest began accruing on September 24, 2021. Proceeds from the 2021 Senior Notes were used, in part, to redeem in full the $ i 425.0 million of 2018 Senior Notes due 2026, including the related fees, costs, and the prepayment call premium of $ i 21.5 million, representing i 5.063% of the $ i 425.0 million face value then outstanding, prepay the outstanding term loan borrowings under the 2016 Credit Agreement of $ i 54.0 million and the related fees and costs, and finance the Anlin Acquisition in the fourth quarter of 2021. See Note 6, Acquisitions, for a discussion of the Anlin Acquisition.

The indenture for the 2021 Senior Notes gives us the option to redeem some or all of the 2021 Senior Notes at the redemption prices and on the terms specified in the indenture governing the 2021 Senior Notes. The indenture governing the 2021 Senior Notes does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a change of control, as defined in the indenture, the Company is required to offer to repurchase the notes at i 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. We also may make optional redemptions at various premiums including a make-whole call at the then current treasury rate plus i 50 basis points prior to October 1, 2024, then i 102.188% on or after August 1, 2024, i 101.094% on or after August 2025, then at i 100.000% on or after August 1, 2026.

- 21 -

The indenture for the 2021 Senior Notes includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) enter into agreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with affiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; and (viii) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

2016 Credit Agreement due 2024

On i February 16, 2016, we entered into the 2016 Credit Agreement due 2024, among us, the lending institutions identified in the 2016 Credit Agreement due 2024, and Truist Financial Corporation (formerly known as SunTrust Bank), as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2024 establishes senior secured credit facilities in an aggregate amount of $ i 310.0 million, consisting of a $ i 270.0 million Term B term loan facility originally maturing in February 2022 that amortizes on a basis of i 1% annually during its i six-year term, and a $ i 40.0 million revolving credit facility originally maturing in February 2021 that included a swing line facility and a letter of credit facility. Our obligations under the 2016 Credit Agreement due 2024 are, subject to exceptions, guaranteed by substantially all of our wholly-owned direct and indirect subsidiaries that are restricted subsidiaries and secured by substantially all of our assets as well as our direct and indirect restricted subsidiaries’ assets.

On March 16, 2018, we entered into an amendment of our 2016 Credit Agreement due 2024 (the “Second Amendment”). i The Second Amendment, among other things, decreased the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2024) from (i) i 3.75% to i 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2024), and (ii) i 4.75% to i 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2024). / On February 17, 2017, we entered into the first amendment to our 2016 Credit Agreement due 2024, which also resulted in decreases in the applicable margins, but which, unlike the Second Amendment, did not include any changes in lender positions.

On October 31, 2019, we entered into an amendment of our 2016 Credit Agreement due 2024 (“Third Amendment”). The Third Amendment provided for, among other things, (i) a i three-year Term A loan in the then aggregate principal amount of $ i 64.0 million (the “Initial Term A Loan”), maturing in October 2022, which refinanced in full our existing Term B term loan facility under the 2016 Credit Agreement, and had no regularly scheduled amortization, and (ii) a new i five-year revolving credit facility in an aggregate principal amount of up to $ i 80.0 million (the “Revolving Facility”), maturing in October 2024, which replaced our then existing $ i 40.0 million revolving credit facility under the 2016 Credit Agreement, and includes a swing-line facility and letter of credit facility. Our obligations under the 2016 Credit Agreement continue to be secured by substantially all of our assets, as well as our direct and indirect subsidiaries’ assets, and is senior in position to the 2021 Senior Notes.

On October 25, 2021, we entered into an amendment of our 2016 Credit Agreement ("Fourth Amendment"). The Fourth Amendment provides for, among other things, a i three-year Term A loan in the aggregate maximum available amount of $ i 60.0 million (the "Incremental Term A Loan"), proceeds from which were used to fund the Anlin Acquisition. The Fourth Amendment does not change any terms relating to the Revolving Facility, under which we pay quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from i 0.25% to i 0.35%) based on our first lien net leverage ratio. As of July 2, 2022, there were $ i 5.7 million in letters of credit outstanding and $ i 74.3 million available under the Revolving Facility.

The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2024 was i 3.67% as of July 2, 2022, and was i 2.10% at January 1, 2022.

Deferred Financing Costs

The activity relating to deferred financing costs, composed of third-party fees and costs, and lender fees, for the six months ended July 2, 2022, are as follows. All deferred financing costs are classified as a reduction of the carrying value of long-term debt:


(in thousands)	Total
At beginning of year	$	i 9,345
Less: Amortization expense		( i 611	)
At end of period	$	i 8,734

- 22 -

Estimated amortization expense relating to deferred financing costs for the years indicated as of July 2, 2022, is as follows:


(in thousands)	Total
Remainder of 2022	$	i 622
2023		i 1,282
2024		i 1,282
2025		i 1,083
2026		i 1,114
Thereafter		i 3,351

Total	$	i 8,734

We have no scheduled payments of outstanding debt until the contractual maturity of the 2016 Credit Agreement in October 2024. i Our contractual future maturities of long-term debt are as follows (at face value):


(in thousands)
Remainder of 2022	$	i —
2023		i —
2024		i 60,000
2025		i —
2026		i —
Thereafter		i 575,000

Total	$	i 635,000

NOTE 10. LEASES

We lease certain of our manufacturing facilities under operating leases. We also lease production equipment, vehicles, computer equipment, storage units and office equipment under operating leases. Our leases have remaining lease terms of i 1 year to i 10 years, some of which may include options to i extend the leases for up to i 5 years, and some of which may include options to i terminate the leases within i 1 year. All of our leases are operating leases. We did not recognize right-of-use assets or lease liabilities for certain short-term leases that are month-to-month leases. The lease expense relating to these leases is not significant.

The components of lease expense for the three and six months ended July 2, 2022 and July 3, 2021, are as follows (in thousands):

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

Operating lease cost

i 5,001

i 3,898

i 9,840

i 6,777

Short-term lease cost

i 2,515

i 2,216

i 4,820

i 4,416

Total lease cost

i 7,516

i 6,114

i 14,660

i 11,193

- 23 -

Other information relating to leases for the three and six months ended July 2, 2022 and July 3, 2021, are as follows (in thousands, except years and percentages):

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

Supplemental cash flows information

Cash paid for amounts included in the
measurement of lease liabilities:

Operating cash flows relating to
operating leases

( i 4,788

)

( i 3,304

)

( i 9,317

)

( i 6,068

)

Right-of-use assets obtained in exchange
for lease obligations:

Operating leases

i 10,938

i 17,415

i 12,262

i 46,905

Weighted average remaining lease term in years

Operating leases

i 6.56

i 6.74

i 6.56

i 6.74

Weighted average discount rate

Operating leases

i 5.4

i 5.5

i 5.4

i 5.5

Future maturities under operating leases were as follows at July 2, 2022 and January 1, 2022 (in thousands):


	July 2,			January 1,
	2022			2022
Remainder of 2022	$	i 9,775		$	i 17,929
2023		i 19,367			i 17,577
2024		i 18,797			i 16,990
2025		i 17,697			i 15,987
2026		i 16,584			i 15,025
2027		i 15,763			i 14,358
Thereafter		i 22,943			i 17,891

Total future minimum lease payments		i 120,926			i 115,757

Less: Imputed interest		( i 18,529	)		( i 18,674	)

Operating lease liability - total	$	i 102,397		$	i 97,083

Reported as of July 2, 2022 and January 2, 2021:
Current portion of operating lease liability	$	i 14,883		$	i 13,180
Operating lease liability, less current portion		i 87,514			i 83,903

Operating lease liability - total	$	i 102,397		$	i 97,083

As of July 2, 2022, we had i i no additional operating or finance leases that have not yet commenced / . i Our operating leases expire at various times through 2032. Lease expense was $ i 7.5 million for the three months ended July 2, 2022 and was $ i 6.1 million for the three months ended July 3, 2021. Of the $ i 7.5 million for the three months ended July 2, 2022, $ i 3.8 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses. Of the $ i 6.1 million for the three months ended July 3, 2021, $ i 4.2 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses. Lease expense was $ i 14.7 million for the six months ended July 2, 2022 and was $ i 11.2 million for the six months ended July 3, 2021. Of the $ i 14.7 million for the six months ended July 2, 2022, $ i 7.4 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses. Of the $ i 11.2 million for the six months ended July 3, 2021, $ i 6.4 million is classified as cost of sales in the accompanying condensed consolidated statement of operations, with the remainder classified within selling, general and administrative expenses.

- 24 -

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Our Company is a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of those proceedings cannot be predicted with certainty, management believes the outcome of any claim that is pending or threatened, either individually or in the aggregate, will not have a material adverse effect on our operations, financial position or cash flows.

NOTE 12. INCOME TAXES

We had income tax expense of $ i 12.0 million for the three months ended July 2, 2022, compared with income tax expense of $ i 2.7 million for the three months ended July 3, 2021. Our effective tax rate for the three months ended July 2, 2022, was an expense rate of i 24.8%, and was an expense rate of i 20.3% for the three months ended July 3, 2021. Our income tax expense for the three months ended July 2, 2022, and July 3, 2021, includes $ i 237 thousand and $ i 426 thousand, respectively, relating to our i 75% share of the pre-tax earnings of Eco. We had an income tax expense of $ i 19.8 million for the six months ended July 2, 2022, compared with income tax expense of $ i 6.7 million for the six months ended July 3, 2021. Our effective tax rate for the six months ended July 2, 2022, was an expense rate of i 24.7%, and was an expense rate of i 22.1% for the six months ended July 3, 2021. Our income tax expense for the six months ended July 2, 2022, and July 3, 2021, includes $ i 742 thousand and $ i 731 thousand, respectively, relating to our i 75% share of the pre-tax earnings of Eco.

Income tax expense in the three and six months ended July 2, 2022 includes a refund from the state of Florida, received by the Company in the second quarter of 2022, relating to excess taxes received by the state in 2021, which was $ i 584 thousand, benefiting tax expense by $ i 462 thousand, net of its Federal tax effect. Income tax expense in the three months ended July 2, 2022 and July 3, 2021 include discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $ i 40 thousand in the three months ended July 2, 2022, and $ i 605 thousand in the three months ended July 3, 2021. Income tax expense in the six months ended July 2, 2022 and July 3, 2021 include discrete items of income tax benefit relating to excess tax benefits from the lapses of restrictions on stock awards, which totaled $ i 96 thousand in the six months ended July 2, 2022, and $ i 700 thousand in the six months ended July 3, 2021. Excluding discrete items of income tax, the effective tax rates for the three months ended July 2, 2022 and July 3, 2022, would have been income tax expense rates of i 25.6% and i 24.1%, respectively. Excluding discrete items of income tax, the effective tax rates for the six months ended July 2, 2022 and July 3, 2022, would have been income tax expense rates of i 25.4% and i 24.1%, respectively.

In September 2021, the state of Florida announced that the corporate income tax rate for the 2021 tax year was being lowered from its then current level of i 4.458% to i 3.535%. However, for 2022, Florida's corporate income tax rate returned to its statutory level before the passage of the Tax Cuts and Jobs Act, which is i 5.5%. As such, we adjusted our annual effective tax rate for 2022 to include this increase in rate in Florida, where a substantial portion of our business is apportioned, to an estimated combined statutory federal and state rate of i 25.7% from our estimate in 2021 of i 24.2%. During the first quarters of 2022 or 2021, we were i i no / t required to make any payments of estimated federal or state income taxes. During the first half of 2022, we made payments of estimated taxes totaling $ i 9.6 million, which included $ i 8.8 million in Federal estimated income taxes with the remainder to various states, primarily Florida. During the first half of 2021, we made payments of estimated taxes totaling $ i 10.9 million, which included $ i 7.6 million in Federal estimated income taxes with the remainder to various states, primarily Florida.

NOTE 13. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The accounting guidance concerning fair value allows us to elect to measure financial instruments at fair value and report the changes in fair value through earnings. This election can only be made at certain specified dates and is irrevocable once made. We do not have a policy regarding specific assets or liabilities to elect to measure at fair value, but rather we make the election on an instrument-by-instrument basis as they are acquired or incurred.

- 25 -

During the three or six months ended July 2, 2022 or July 3, 2021, we did i i no / t make any transfers between Level 2 and Level 3 financial assets. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, and accounts payable and accrued liabilities, whose carrying amounts approximate their fair values due to their short-term nature. Our financial instruments also include borrowings under our 2016 Credit Agreement, as well as the 2021 Senior Notes, all classified as long-term debt. The fair value of borrowings under the 2016 Credit Agreement due 2024 approximated its carrying value due to its variable-rate nature, and was approximately $ i 60.0 million as of July 2, 2022, and January 1, 2022, compared to a principal outstanding value of $ i 60.0 million at those dates, respectively. The fair value of the 2021 Senior Notes is based on debt with similar terms and characteristics and was approximately $ i 452.1 million as of July 2, 2022, compared to a principal outstanding value of $ i 575.0 million, and the fair value was approximately $ i 578.2 million as of January 1, 2022, compared to a principal outstanding value of $ i 575.0 million.

Items Measured at Fair Value

The following are measured in the condensed consolidated financial statements at fair value on a recurring basis and are categorized in the table below based upon the lowest level of significant input to the valuation (in thousands):

Fair Value Measurements

Assets (Liabilities)

Quoted

Significant

Prices in

Other

Significant

Active

Observable

Unobservable

Markets

Inputs

July 2, 2022

Total

(Level 1)

(Level 2)

(Level 3)

Description

Aluminum contracts

( i 5,173

)

—

( i 5,173

)

—

MTP contracts

i 1,987

—

i 1,987

—

( i 3,186

)

—

( i 3,186

)

—

Fair Value Measurements

Assets (Liabilities)

Quoted

Significant

Prices in

Other

Significant

Active

Observable

Unobservable

Markets

Inputs

January 1, 2022

Total

(Level 1)

(Level 2)

(Level 3)

Description

Aluminum contracts

i 4,829

—

i 4,829

—

MTP contracts

i 4,599

—

i 4,599

—

i 9,428

—

i 9,428

—

See Note 14 for a description of the methods and assumptions used in the determination of the fair values of our aluminum forward and Midwest Transaction Premium (“MTP”) contracts, as well as the basis for classifying these assets and liabilities as Level 2.

- 26 -

NOTE 14. DERIVATIVES

Aluminum Contracts and Midwest Transaction Premium

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. In early 2020, we began entering into forward contracts to hedge the fluctuations in the price of the delivery component of our aluminum extrusion purchases, known as the Midwest Transaction Premium, or MTP. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum and the related MTP.

We record our aluminum hedge contracts at fair value, based on trading values for aluminum forward contracts. Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”). The LME provides a transparent forum and is the world’s largest center for the trading of futures contracts for non-ferrous metals. The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle. Based on this high degree of volume and liquidity in the LME, we believe the valuation price at any measurement date for contracts with identical terms as to prompt date, trade date and trade price as those we hold at any time represents a contract’s exit price to be used for purposes of determining fair value.

We record our MTP hedge contracts at fair value, based on the Platts MW US Transaction price per pound assessment, which has been a benchmark for decades in the North American aluminum industry. Platts surveys the North American market daily to capture trades, bids and offers on a delivered Midwest basis. Data is normalized to reflect the typical price per pound between the largest number of market participants, for delivery within 7 to 30 days from date of publication, net- i 30-day payment terms, for typical order quantities, chemistries and freight allowances. The survey is extensive and encompasses both domestic and offshore producers, traders and brokers that are varied in scope. Based on the extensive nature of this pricing mechanism, we believe the Platts MW US Transaction price at any time represents a contract’s exit price to be used for purposes of determining fair value.

Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings. We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities. We do not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement.

At July 2, 2022, the fair value of our aluminum forward contracts was in a liability position of $ i 5.2 million. We had i 16 outstanding forward contracts for the purchase of i 24.3 million pounds of aluminum through December 2022, at an average price of $ i 1.32 per pound, which excludes the Midwest premium, with maturity dates of between one and i six months. At July 2, 2022, the fair value of our MTP contracts was in an asset position of $ i 2.0 million. We had i 4 outstanding MTP contracts to hedge the Platt US MW Transaction price per pound for the delivery of i 10.5 million pounds of aluminum through December 2022, at an average price of $ i 0.11 per pound, with maturity dates of between one and i six months. We assessed the risk of non-performance of the Company and our counterparty to these contracts, as applicable, and determined it was immaterial and, therefore, did not record any adjustment to their fair values as of July 2, 2022.

We assess the effectiveness of our aluminum forward and MTP contracts 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. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of accumulated other comprehensive income (loss) and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. We expect the amount of accumulated other comprehensive loss of approximately $ i 3.2 million in the accompanying condensed consolidated balance sheet as of July 2, 2022, to be reclassified to earnings within the next twelve months.

- 27 -

The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at July 2, 2022 and January 1, 2022, as follows (in thousands):

Derivative Assets

Derivative Liabilities

July 2, 2022

Derivatives designated as hedging

instruments under Subtopic 815-20:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivative instruments:

Aluminum contracts

Other current assets

i 152

Accrued liabilities

( i 5,325

)

MTP contracts

Other current assets

i 1,987

Accrued liabilities

—

Aluminum contracts

Other assets

—

Other liabilities

—

MTP contracts

Other assets

—

Other liabilities

—

Total derivative instruments

Total derivative assets

i 2,139

Total derivative liabilities

( i 5,325

)

Derivative Assets

Derivative Liabilities

January 1, 2022

Derivatives designated as hedging

instruments under Subtopic 815-20:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivative instruments:

Aluminum contracts

Other current assets

i 4,829

Accrued liabilities

—

MTP contracts

Other current assets

i 4,599

Accrued liabilities

—

Aluminum contracts

Other assets

—

Other liabilities

—

MTP contracts

Other assets

—

Other liabilities

—

Total derivative instruments

Total derivative assets

i 9,428

Total derivative liabilities

—

The ending accumulated balance for the aluminum forward and MTP contracts included in accumulated other comprehensive income (losses), net of tax, was an accumulated other comprehensive income of $ i 2.4 million as of July 2, 2022, and was an accumulated other comprehensive income of $ i 7.0 million at January 1, 2022. The income tax effects of accumulated comprehensive income (losses) are released as amounts are reclassified out of accumulated comprehensive income (losses) at the income tax rate used at the time those income tax effects were provided, which generally represents our blended statutory income tax rate.

The following represents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

Derivatives in Cash Flow Hedging Relationships

Amount of Gain or (Loss)
Recognized in OCI(L) on
Derivatives

Location of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

Three Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

Aluminum contracts

( i 13,022

)

i 5,108

Cost of sales

i 1,210

i 2,764

MTP contracts

i 93

i 3,965

Cost of sales

i 2,488

i 1,369

Derivatives in Cash Flow Hedging Relationships

Amount of Gain or (Loss)
Recognized in OCI(L) on
Derivatives

Location of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

Amount of Gain or (Loss)
Reclassified from Accumulated
OCI(L) into Income

Six Months Ended

July 2,

July 3,

July 2,

2021

2022

2021

Aluminum contracts

( i 7,415

)

i 9,191

Cost of sales

i 2,588

i 4,152

MTP contracts

i 561

i 8,170

Cost of sales

i 3,172

i 1,756

- 28 -

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the components of accumulated other comprehensive income (loss) for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):

Three months ended July 2, 2022

Aluminum

MTP

(in thousands)

Total

Balance at April 2, 2022

i 6,784

i 3,205

i 9,989

Increase (decrease) in fair value of derivatives

( i 13,022

)

i 93

( i 12,929

)

Amounts reclassified from accumulated other comprehensive income (loss)

( i 1,210

)

( i 2,488

)

( i 3,698

)

Tax effect

i 3,602

i 668

i 4,270

Net current-period other comprehensive loss

( i 10,630

)

( i 1,727

)

( i 12,357

)

Balance at July 2, 2022

( i 3,846

)

i 1,478

( i 2,368

)

Six months ended July 2, 2022

Aluminum

MTP

(in thousands)

Total

Balance at January 1, 2022

i 3,610

i 3,396

i 7,006

Increase (decrease) in fair value of derivatives

( i 7,415

)

i 561

( i 6,854

)

Amounts reclassified from accumulated other comprehensive income (loss)

( i 2,588

)

( i 3,172

)

( i 5,760

)

Tax effect

i 2,547

i 693

i 3,240

Net current-period other comprehensive loss

( i 7,456

)

( i 1,918

)

( i 9,374

)

Balance at July 2, 2022

( i 3,846

)

i 1,478

( i 2,368

)

Three months ended July 3, 2021

Aluminum

MTP

(in thousands)

Total

Balance at April 3, 2021

i 4,428

i 3,187

i 7,615

Increase (decrease) in fair value of derivatives

i 5,108

i 3,965

i 9,073

Amounts reclassified from accumulated other comprehensive income (loss)

( i 2,764

)

( i 1,369

)

( i 4,133

)

Tax effect

( i 581

)

( i 644

)

( i 1,225

)

Net current-period other comprehensive income

i 1,763

i 1,952

i 3,715

Balance at July 3, 2021

i 6,191

i 5,139

i 11,330

Six months ended July 3, 2021

Aluminum

MTP

(in thousands)

Total

Balance at January 2, 2021

i 2,403

i 317

i 2,720

Increase (decrease) in fair value of derivatives

i 9,191

i 8,170

i 17,361

Amounts reclassified from accumulated other comprehensive income (loss)

( i 4,152

)

( i 1,756

)

( i 5,908

)

Tax effect

( i 1,251

)

( i 1,592

)

( i 2,843

)

Net current-period other comprehensive income

i 3,788

i 4,822

i 8,610

Balance at July 3, 2021

i 6,191

i 5,139

i 11,330

- 29 -

NOTE 16. SEGMENTS

We have i two reportable segments: the Southeast segment, and the Western segment.

The Southeast reporting segment, which is also an operating segment, is composed of sales from our facilities in Florida. The Western reporting segment, also an operating segment, is composed of sales from our facilities in Arizona and California.

Centralized financial and operational oversight, including resource allocation and assessment of performance on an income from operations basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”), with oversight by the Board of Directors.

The following table represents summary financial data attributable to our operating segments for the three and six months ended July 2, 2022, and July 3, 2021. Results of the Southeast segment for the three and six months ended July 2, 2022 includes the results of Eco for the entire three- and six-month periods, whereas for the three and six months ended July 3, 2021, the three months ended July 3, 2021 includes the results of Eco for the entire three-month period, but the six months ended July 3, 2021 includes only its post-acquisition period from February 1, 2021. Results of the Western segment for the three and six months ended July 2, 2022 includes the results of CRi, acquired May 1, 2021, and Anlin, acquired October 25, 2021. Results of the Western segment for the three and six months ended July 3, 2021, includes CRi's results for the post acquisition period from May 1, 2021, and no results from Anlin. i Corporate overhead has been allocated to each segment using an allocation method we believe is reasonable (in thousands):

Three Months Ended

Six Months Ended

July 2,

July 3,

July 2,