SEC Info - PGT Innovations, Inc. - ‘10-Q’ for 9/30/23

2022

2023

2022

(unaudited)

Net sales

i 399,931

i 385,837

i 1,161,694

i 1,151,020

Cost of sales

i 238,159

i 236,035

i 696,740

i 701,495

Gross profit

i 161,772

i 149,802

i 464,954

i 449,525

Selling, general and administrative expenses

i 101,872

i 102,399

i 297,790

i 307,786

Restructuring costs and charges, net

( i 794

)

—

i 1,722

—

Income from operations

i 60,694

i 47,403

i 165,442

i 141,739

Interest expense, net

i 7,772

i 6,889

i 23,642

i 21,124

Income before income taxes

i 52,922

i 40,514

i 141,800

i 120,615

Income tax expense

i 13,715

i 10,100

i 36,412

i 29,910

Net income

i 39,207

i 30,414

i 105,388

i 90,705

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

—

( i 373

)

( i 1,101

)

( i 1,334

)

Net income attributable to the Company

i 39,207

i 30,041

i 104,287

i 89,371

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

Net income attributable to the Company

i 39,207

i 30,041

i 104,287

i 89,371

Decrease (increase) in redemption value of RNCI

—

i 271

( i 1,637

)

( i 1,514

)

Net income attributable to common shareholders

i 39,207

i 30,312

i 102,650

i 87,857

Net income per common share attributable to common shareholders:

Basic

i 0.68

i 0.51

i 1.75

i 1.47

Diluted

i 0.67

i 0.50

i 1.74

i 1.46

Weighted average number of common shares outstanding:

Basic

i 58,012

i 59,964

i 58,796

i 59,908

Diluted

i 58,291

i 60,402

i 59,092

i 60,201

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

Nine Months Ended

September 30,

October 1,

September 30,

2022

2023

2022

(unaudited)

Net income

i 39,207

i 30,414

i 105,388

i 90,705

Other comprehensive income (loss) before tax:

Increase (decrease) in fair value of derivatives

i 892

( i 2,633

)

( i 11

)

( i 9,487

)

Reclassification to earnings

i 289

i 2,416

i 130

( i 3,344

)

Other comprehensive income (loss) before tax

i 1,181

( i 217

)

i 119

( i 12,831

)

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

i 304

( i 56

)

i 31

( i 3,296

)

Other comprehensive income (loss), net of tax

i 877

( i 161

)

i 88

( i 9,535

)

Comprehensive income

i 40,084

i 30,253

i 105,476

i 81,170

Less: Comprehensive income attributable to
redeemable non-controlling interest

—

( i 373

)

( i 1,101

)

( i 1,334

)

Comprehensive income attributable to the Company

i 40,084

i 29,880

i 104,375

i 79,836

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)


	September 30,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	i 37,675		$	i 66,548
Accounts receivable, net		i 149,288			i 160,107
Inventories		i 117,942			i 112,672
Contract assets, net		i 53,948			i 47,919
Prepaid expenses		i 15,441			i 11,763
Other current assets		i 15,096			i 16,532
Total current assets		i 389,390			i 415,541

Property, plant and equipment, net		i 216,466			i 208,354
Operating lease right-of-use asset, net		i 103,087			i 104,121
Intangible assets, net		i 427,250			i 447,052
Goodwill		i 462,630			i 460,415
Other assets, net		i 9,839			i 4,766

Total assets	$	i 1,608,662		$	i 1,640,249

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	i 150,428		$	i 168,961
Current portion of operating lease liability		i 18,108			i 16,393
Total current liabilities		i 168,536			i 185,354

Long-term debt, net		i 631,768			i 642,134
Operating lease liability, less current portion		i 93,414			i 95,159
Deferred income taxes		i 47,438			i 47,407
Other liabilities		i 6,135			i 7,459

Total liabilities		i 947,291			i 977,513

Commitments and contingencies

Redeemable non-controlling interest		—			i 34,721

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 64,512 and i 63,940 shares issued and i 57,262 and i 59,912 shares outstanding at September 30, 2023 and December 31, 2022, respectively		i 645			i 639
Additional paid-in capital		i 449,617			i 442,116
Accumulated other comprehensive income		i 311			i 223
Retained earnings		i 306,452			i 204,891
Treasury stock at cost ( i 5,800 shares and i 2,760 shares at September 30, 2023 and December 31, 2022, respectively)		( i 95,654	)		( i 19,854	)
Total shareholders' equity		i 661,371			i 628,015

Total liabilities, redeemable non-controlling interest and shareholders' equity	$	i 1,608,662		$	i 1,640,249

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)


	Nine Months Ended
	September 30,			October 1,
	2023			2022
	(unaudited)
Cash flows from operating activities:
Net income	$	i 105,388		$	i 90,705
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		i 26,607			i 25,359
Amortization		i 19,802			i 19,725
Provision for credit losses		i 2,213			i 7,395
Stock-based compensation expense		i 9,054			i 7,638
Amortization of deferred financing costs		i 986			i 921
Asset impairment charges		—			i 2,131
Non-cash portion of restructuring costs and charges, net		i 1,679			—
Loss (gain) on sales of assets		i 84			( i 166	)
Change in operating assets and liabilities:
Accounts receivable		i 1,005			( i 35,166	)
Inventories		( i 5,635	)		( i 21,145	)
Contract assets, net, prepaid expenses, other current and other assets		i 6,970			i 6,213
Accounts payable, accrued and other liabilities		( i 28,322	)		i 48,531

Net cash provided by operating activities		i 139,831			i 152,141

Cash flows from investing activities:
Purchases of property, plant and equipment		( i 38,205	)		( i 24,741	)
Business combinations		( i 744	)		( i 787	)
Proceeds from sales of assets		i 1,171			i 41

Net cash used in investing activities		( i 37,778	)		( i 25,487	)

Cash flows from financing activities:
Payment of fair value of contingent consideration in Anlin Acquisition		( i 4,348	)		( i 2,362	)
Redemption of redeemable non-controlling interest		( i 37,459	)		—
Proceeds of amounts drawn from revolving credit facility		i 50,000			—
Payments of borrowing under revolving credit facility		( i 61,352	)		—
Purchases of treasury stock under share repurchase program		( i 75,131	)		—
Income taxes paid from stock withheld relating to vesting of equity awards		( i 3,362	)		( i 1,888	)
Proceeds from issuance of common stock under employee stock purchase plan (ESPP)		i 726			i 291

Net cash used in financing activities		( i 130,926	)		( i 3,959	)

Net (decrease) increase in cash and cash equivalents		( i 28,873	)		i 122,695
Cash and cash equivalents at beginning of period		i 66,548			i 96,146
Cash and cash equivalents at end of period	$	i 37,675		$	i 218,841

Non-cash activity:
Accrual of excise tax liability in treasury stock	$	( i 669	)	$	—
Additions to right-of-use asset	$	i 15,912		$	i 13,625
Additions to operating lease liability	$	( i 15,912	)	$	( i 13,625	)
Property, plant and equipment additions in accounts payable	$	i 590		$	i 79

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

QUARTER ENDED OCTOBER 1, 2022

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

Vesting of restricted stock

i 42,258

—

Stock withheld in lieu of taxes

( i 10,509

)

—

( i 225

)

( i 225

)

Retirement of stock withheld in lieu of taxes

—

( i 163

)

—

( i 62

)

i 225

—

Stock-based compensation

—

i 2,729

—

i 2,729

Net income attributable to the Company

—

i 30,041

—

i 30,041

Decrease in value of RNCI

—

i 271

—

i 271

Other comprehensive loss,
net of tax benefit of $ i 56

—

( i 161

)

—

( i 161

)

Balance at October 1, 2022

i 59,978,440

i 639

i 439,773

( i 2,529

)

i 193,866

( i 18,289

)

i 613,460

NINE MONTHS ENDED OCTOBER 1, 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 359,360

—

Grants of restricted stock

—

i 6

( i 6

)

—

Forfeitures of restricted stock

—

( i 1

)

i 1

—

Stock withheld in lieu of taxes

( i 95,001

)

—

( i 1,888

)

( i 1,888

)

Retirement of stock withheld in lieu of taxes

—

( i 1

)

( i 1,498

)

—

( i 389

)

i 1,888

—

Stock-based compensation

—

i 7,638

—

i 7,638

Common stock issued under ESPP

i 17,964

—

i 291

—

i 291

Net income attributable to the Company

—

i 89,371

—

i 89,371

Increase in value of RNCI

—

( i 1,514

)

—

( i 1,514

)

Other comprehensive loss,
net of tax benefit of $ i 3,296

—

( i 9,535

)

—

( i 9,535

)

Balance at October 1, 2022

i 59,978,440

i 639

i 439,773

( i 2,529

)

i 193,866

( i 18,289

)

i 613,460

QUARTER ENDED SEPTEMBER 30, 2023

Balance at July 1, 2023

i 58,337,327

i 641

i 446,222

( i 566

)

i 267,250

( i 65,740

)

i 647,807

Vesting of restricted stock

i 1,422

—

Grants of restricted stock

—

i 4

( i 4

)

—

Purchases of treasury stock

( i 1,090,119

)

—

( i 29,914

)

( i 29,914

)

Stock withheld in lieu of taxes

( i 422

)

—

( i 12

)

( i 12

)

Retirement of stock withheld in lieu of taxes

—

( i 7

)

—

( i 5

)

i 12

—

Stock-based compensation

—

i 3,085

—

i 3,085

Common stock issued under ESPP

i 14,013

—

i 321

—

i 321

Net income attributable to the Company

—

i 39,207

—

i 39,207

Other comprehensive income,
net of tax expense of $ i 304

—

i 877

—

i 877

Balance at September 30, 2023

i 57,262,221

i 645

i 449,617

i 311

i 306,452

( i 95,654

)

i 661,371

NINE MONTHS ENDED SEPTEMBER 30, 2023

Balance at December 31, 2022

i 59,911,556

i 639

i 442,116

i 223

i 204,891

( i 19,854

)

i 628,015

Vesting of restricted stock

i 502,758

—

Grants of restricted stock

—

i 10

( i 10

)

—

Forfeitures of restricted stock

—

( i 3

)

i 3

—

Purchases of treasury stock

( i 3,040,280

)

—

( i 75,800

)

( i 75,800

)

Stock withheld in lieu of taxes

( i 146,500

)

—

( i 3,362

)

( i 3,362

)

Retirement of stock withheld in lieu of taxes

—

( i 1

)

( i 2,272

)

—

( i 1,089

)

i 3,362

—

Stock-based compensation

—

i 9,054

—

i 9,054

Common stock issued under ESPP

i 34,687

—

i 726

—

i 726

Net income attributable to the Company

—

i 104,287

—

i 104,287

Increase in value of RNCI

—

( i 1,637

)

—

( i 1,637

)

Other comprehensive income,
net of tax expense of $ i 31

—

i 88

—

i 88

Balance at September 30, 2023

i 57,262,221

i 645

i 449,617

i 311

i 306,452

( i 95,654

)

i 661,371

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”), formerly named PGT, Inc., 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, as well as fully custom overhead garage doors. The majority of our sales are to customers in the state of Florida; however, we also sell products in many other states, the Caribbean, Canada, and in South and Central America. Our acquisition of Eco Enterprises ("Eco Acquisition") in February 2021 expands 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 acquisitions of Anlin Windows and Doors ("Anlin") in October 2021 and Martin Door Holdings, Inc. ("Martin") in October 2022 expanded our presence in the west. The acquisition of Martin, which produces residential and commercial garage doors, expands the Company into building products adjacent to its portfolio of window and door brands. Products are sold primarily through an authorized dealer and distributor network. We began selling window and door products in the direct-to-consumer channel, a “factory-direct” sales model, through our acquisition of NewSouth Windows Solutions ("NewSouth") in February 2020.

We were incorporated in the state of Delaware on December 16, 2003, as JLL Window Holdings, Inc. 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 the ticker symbol of “PGTI”.

We are headquartered in North Venice, Florida, where we have manufacturing operations, as well as i two glass tempering and laminating plants and i one insulated glass plant. We also have Florida-based manufacturing operations in Ft. Myers, Tampa, and the greater Miami area. Outside of Florida, we have manufacturing operations in Arizona, California and, more recently, Utah, with the acquisition of Martin.

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

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 periods 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 nine months ended September 30, 2023 and October 1, 2022 consisted of 13 and 39 weeks, respectively.

The condensed consolidated balance sheet as of December 31, 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 December 31, 2022, and the unaudited condensed consolidated financial statements as of and for the periods ended September 30, 2023, and October 1, 2022, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2022, included in the Company’s most recent Annual Report on Form 10-K. 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.

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, Utah and California. See Note 15 for segment disclosures.

- 8 -

NOTE 2. REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

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. i The following table provides information about our net sales by reporting segment, product category and market for the three and nine months ended September 30, 2023 and October 1, 2022:

Three Months Ended

Nine Months Ended

September 30,

October 1,

September 30,

October 1,

Disaggregation of revenue (in millions):

2023

2022

2023

2022

Reporting segment:

Southeast

i 302.9

i 288.2

i 873.0

i 867.5

Western

i 97.0

i 97.6

i 288.7

i 283.5

Total net sales

i 399.9

i 385.8

i 1,161.7

i 1,151.0

Product category:

Impact-resistant

i 251.8

i 227.7

i 716.6

i 688.5

Nonimpact-resistant

i 148.1

i 158.1

i 445.1

i 462.5

Total net sales

i 399.9

i 385.8

i 1,161.7

i 1,151.0

Market:

New construction

i 149.9

i 160.9

i 453.8

i 484.3

Repair and remodel

i 250.0

i 224.9

i 707.9

i 666.7

Total net sales

i 399.9

i 385.8

i 1,161.7

i 1,151.0

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 September 30, 2023 and October 1, 2022, the Western segment’s net sales of its volume products were $ i 20.9 million and $ i 26.6 million, respectively. For the nine months ended September 30, 2023 and October 1, 2022, the Western segment’s net sales of its volume products were $ i 61.7 million and $ i 82.6 million, respectively.

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. Contract liabilities relate to customer deposits at the end of reporting periods. At September 30, 2023 and December 31, 2022, those contract liabilities totaled $ i 27.0 million and $ i 39.1 million, respectively, of which $ i 20.7 million and $ i 33.4 million, respectively, are classified within accrued liabilities, and $ i 6.3 million and $ i 5.7 million, respectively, are classified as a reduction to the contract assets to which they relate. Contract assets, net, totaled $ i 53.9 million at September 30, 2023 and $ i 47.9 million at December 31, 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, substantially all of the contract liabilities at December 31, 2022 were satisfied in the first quarter of 2023, and contract assets at December 31, 2022 were transferred to accounts receivable in the first quarter of 2023. Also, substantially all of the contract liabilities at September 30, 2023 will be satisfied in the fourth quarter of 2023, and contract assets at September 30, 2023 will be transferred to accounts receivable in the fourth quarter of 2023. Contract liabilities at September 30, 2023 represents cash received during the three-month period ended September 30, 2023, excluding amounts recognized as revenue during that period. Contract assets at September 30, 2023 represents revenue recognized during the three-month period ended September 30, 2023, excluding amounts transferred to accounts receivable during that period. Contract liabilities at December 31, 2022 represents cash received during the three-month period ended December 31, 2022, excluding amounts recognized as revenue during that period. Contract assets at December 31, 2022 represents revenue recognized during the three-month period ended December 31, 2022, excluding amounts transferred to accounts receivable during that period.

- 9 -

Allowance for Credit Losses

We 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 current macro-economic conditions on the businesses of our customers, such as dealers and distributors.

As of September 30, 2023 and December 31, 2022, we had gross accounts receivable of $ i 163.8 million and $ i 173.8 million, respectively, and an allowance for credit losses of $ i 14.5 million and $ i 13.7 million, respectively.

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 September 30, 2023, we recorded warranty expense at a rate of approximately i 2.5% of sales, which was higher than the rate during the three months ended October 1, 2022 of i 1.8% of sales. i The increase in the warranty expense rate in the three months ended September 30, 2023, compared with the rate during the three months ended October 1, 2022, is a result of servicing a higher number of overall warranty claims in the third quarter of 2023, resulting in a higher level of service warranty expense, whereas the rate in the third quarter of 2022 was lower on average as there was a decrease in the use of higher-cost contract labor. During the nine months ended September 30, 2023, we recorded warranty expense at a rate of approximately i 2.3% of sales, which was slightly higher than the rate during the nine months ended October 1, 2022 of i 2.0% of sales.

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 nine months ended September 30, 2023 and October 1, 2022. The reserve is determined through assessing our claims history. Of the accrued warranty reserve of $ i 16.0 million at September 30, 2023, $ i 12.5 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at September 30, 2023, with the remainder classified within other liabilities as non-current liabilities. Of the accrued warranty reserve of $ i 15.4 million at December 31, 2022, $ i 12.4 million is classified within accrued expenses as current liabilities on the condensed consolidated balance sheet at December 31, 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 September 30, 2023

i 16,113

—

i 10,045

( i 524

)

( i 9,601

)

i 16,033

Three months ended October 1, 2022

i 16,151

( i 2,537

)

i 6,880

i 750

( i 5,763

)

i 15,481

Nine months ended September 30, 2023

i 15,388

—

i 27,050

i 420

( i 26,825

)

i 16,033

Nine months ended October 1, 2022

i 13,504

( i 2,537

)

i 22,872

i 1,263

( i 19,621

)

i 15,481

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

- 10 -

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:


	September 30,		December 31,
	2023		2022
	(in thousands)
Raw materials	$	i 112,893	$	i 109,679
Work-in-progress		i 3,281		i 916
Finished goods		i 1,768		i 2,077

Inventories	$	i 117,942	$	i 112,672

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 3.1 million for the three months ended September 30, 2023, of which $ i 2.7 million is classified within selling, general and administrative expenses, and $ i 2.7 million for the three months ended October 1, 2022, of which $ i 2.3 million is classified within selling, general and administrative expenses. We recorded compensation expense for stock-based awards of $ i 9.1 million for the nine months ended September 30, 2023, of which $ i 7.8 million is classified within selling, general and administrative expenses, and $ i 7.6 million for the nine months ended October 1, 2022, of which $ i 6.6 million is classified within selling, general and administrative expenses. Portions of stock compensation expense not classified within selling, general and administrative expenses are classified within cost of sales.

As of September 30, 2023, there was $ i 22.6 million in total unrecognized compensation cost related entirely to restricted share awards, including time-vesting and those with performance conditions. These costs are expected to be recognized in earnings on an accelerated basis over the weighted average remaining vesting period of i 2.2 years at September 30, 2023.

All-Employee Grant

On September 1, 2023, we issued i 347,475 shares of restricted stock to all employees of the Company (the "All-Employee Grant") who do not participate in the Company’s long-term incentive plan. These shares are not subject to adjustment based on any performance or other criteria, but rather, cliff-vest on September 1, 2026, the third anniversary of the grant date, assuming the grantee is employed by the Company on that date. Employees were granted an amount of shares based on their years-of-service as of September 1, 2023, which included i 50 shares to those employees who reached at least their one-year anniversary, i 75 shares to those who reached at least their two-year anniversary, and i 100 shares to those who reached at least their five-year anniversary. Any employee who had not yet reached their one-year anniversary as of September 1, 2023, will be eligible to receive a grant of i 50 shares in a second grant to be made on September 1, 2024. The grant date fair value of the All-Employee Grant was $ i 28.19 per share.

NOTE 6. ACQUISITION

MARTIN DOORS

On i October 14, 2022, we completed the acquisition of the Martin Doors brand. The acquisition was done by WWS Acquisition, LLC, a Missouri limited liability company, indirectly wholly-owned by PGT Innovations, Inc., which acquired all of the shares of stock of Martin Door Holdings, Inc., a Utah corporation, headquartered in Salt Lake City, Utah, a custom manufacturer of overhead garage doors and hardware serving the Western U.S. (the "Martin Acquisition"), pursuant to that certain Share Purchase Agreement dated as of October 14, 2022 (the “Martin Purchase Agreement”). The fair value of consideration transferred in the Martin Acquisition was $ i 188.5 million, composed entirely of cash, including $ i 185.0 million for purchase price and $ i 3.5 million in working capital adjustments, of which $ i 2.8 million was estimated and paid at closing, and approximately $ i 0.7 million was paid in the first quarter of 2023 upon finalization of the net working capital calculation.

The cash portion of the Martin Acquisition was financed with borrowings under the revolving credit facility ("New Revolving Credit Facility") established under fifth amendment ("Fifth Amendment") to the 2016 Credit Agreement ("2016 Credit Agreement due 2027") of $ i 98.4 million, with the remaining $ i 90.1 million, which includes the approximately $ i 0.7 million final net working capital adjustment paid in the first quarter of 2023, funded with cash on hand. Generally, cash on hand for the Martin Acquisition was provided by cash generated through operations.

- 11 -

Purchase Price Allocation

The preliminary estimated fair value of assets acquired, liabilities assumed and subsequent adjustments to that allocation as of our reporting date, are as follows i :

Initial
Allocation

Adjustments to
Allocation

Preliminary
Allocation

Accounts receivable

i 6,653

( i 194

)

i 6,459

Inventories

i 9,543

( i 364

)

i 9,179

Contract assets, net

i 5,242

—

i 5,242

Prepaid expenses and other assets

i 90

—

i 90

Property and equipment

i 11,422

( i 1,196

)

i 10,226

Operating lease right-of-use asset

i 12,259

—

i 12,259

Intangible assets

i 91,900

—

i 91,900

Total assets acquired

i 137,109

( i 1,754

)

i 135,355

Accounts payable

( i 2,482

)

—

( i 2,482

)

Accrued and other liabilities

( i 1,270

)

i 283

( i 987

)

Deferred tax liabilities

( i 23,604

)

—

( i 23,604

)

Operating lease liability

( i 12,259

)

—

( i 12,259

)

Total liabilities assumed

( i 39,615

)

i 283

( i 39,332

)

Net assets acquired

i 97,494

( i 1,471

)

i 96,023

Goodwill

i 90,300

i 2,215

i 92,515

Fair value of consideration transferred

i 187,794

i 744

i 188,538

Consideration:

Cash

i 187,794

i 744

i 188,538

Fair value of consideration transferred

i 187,794

i 744

i 188,538

The fair value of certain working capital related items, including Martin’s accounts receivable, prepaid expenses and other assets, and accounts payable and accrued and other liabilities, approximated their book values at the date of the Martin 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. The substantial majority of inventories at the acquisition date was comprised of raw materials. 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. 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 nine months of 2023, we made immaterial adjustments to our purchase allocation relating to accounts receivable, inventories, property and equipment, and accrued and other liabilities.

We incurred acquisition costs totaling $ i 4.8 million relating to legal expenses, representations and warranties insurance, diligence, accounting and other services in the Martin Acquisition in the year ended December 31, 2022.

Because the Martin Acquisition was an acquisition of stock, Martin's assets and liabilities retain their tax bases at the time of the acquisition. Therefore, none of the identifiable intangible assets or goodwill acquired in the Martin Acquisition are deductible for tax purposes. As of September 30, 2023, goodwill is estimated to be $ i 92.5 million. Martin's goodwill is included as part of the Western reporting unit. We believe Martin'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, as well as being a key component of our strategy to expand into adjacent building material products, other than windows and doors.

Pro forma results of operations, as well as net sales and income attributable to the Martin Acquisition are not presented as it did not have a material impact on our results of operations.

- 12 -

Valuation of Identified Intangible Assets

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


			Initial
	Preliminary		Useful Life
	Valuation		(in years)
(in thousands)
Trade name	$	i 24,000	indefinite
Customer relationships		i 52,700	i 15
Customer-related backlog (amortized in 2022)		i 400	< i 1
Developed technology		i 14,600	i 3 - i 14
Non-compete-related intangible		i 200	i 5

Intangible assets	$	i 91,900

NOTE 7. NET INCOME PER COMMON SHARE

Basic earnings per share (“EPS”) attributable to PGT Innovations, Inc. common stockholders for the nine months ended September 30, 2023, and the three and nine months ended October 1, 2022, 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 attributable to PGT Innovations, Inc. common stockholders for the nine months ended September 30, 2023, and the three and nine months ended October 1, 2022, 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.

Basic EPS for the three months ended September 30, 2023, is computed by dividing net income attributable to common shareholders by the average number of common shares outstanding during the period. Diluted EPS for the three months ended September 30, 2023, is computed by dividing net income attributable to common shareholders 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.

Anti-dilutive securities excluded from the calculation of weighted average shares outstanding for the three and nine months ended September 30, 2023 and October 1, 2022 were insignificant.

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

Nine Months Ended

September 30,

October 1,

September 30,

2022

2023

2022

(in thousands, except per share amounts)

Net income

i 39,207

i 30,414

i 105,388

i 90,705

Less: Net income attributable to RNCI

—

( i 373

)

( i 1,101

)

( i 1,334

)

Net income attributable to the Company

i 39,207

i 30,041

i 104,287

i 89,371

Decrease (increase) in redemption value of RNCI

—

i 271

( i 1,637

)

( i 1,514

)

Net income attributable to common shareholders

i 39,207

i 30,312

i 102,650

i 87,857

Weighted-average number of common shares outstanding - Basic

i 58,012

i 59,964

i 58,796

i 59,908

Add: Dilutive shares from equity plans

i 279

i 438

i 296

i 293

Weighted-average number of common shares outstanding - Diluted

i 58,291

i 60,402

i 59,092

i 60,201

Net income per common share attributable to common shareholders:

Basic

i 0.68

i 0.51

i 1.75

i 1.47

Diluted

i 0.67

i 0.50

i 1.74

i 1.46

- 13 -

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets are as follows:


							Initial
	September 30,			December 31,			Useful Life
	2023			2022			(in years)
	(in thousands)
Goodwill	$	i 462,630		$	i 460,415		indefinite

Other intangible assets:
Trade names (indefinite-lived)	$	i 225,018		$	i 225,018		indefinite

Customer relationships and customer-related assets		i 340,047			i 340,047		< i 1- i 15
Trade name (amortizable)		i 22,200			i 22,200		i 15
Developed technology		i 20,500			i 20,500		i 3- i 14
Non-compete agreement		i 3,538			i 3,538		i 2- i 5
Software license		i 590			i 590		i 2
Less: Accumulated amortization		( i 184,643	)		( i 164,841	)

Subtotal		i 202,232			i 222,034

Other intangible assets, net	$	i 427,250		$	i 447,052

Goodwill at December 31, 2022	$	i 460,415
Increase relating to Martin Acquisition net working capital payment		i 744
Net other measurement period changes in Martin Acquisition		i 1,471

Goodwill at September 30, 2023	$	i 462,630

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


(in thousands)	Total
Remainder of 2023	$	i 6,505
2024		i 25,971
2025		i 25,640
2026		i 21,241
2027		i 20,987
Thereafter		i 101,888

Total	$	i 202,232

Amortization expense relating to amortizable intangible assets for the three months ended September 30, 2023 and October 1, 2022, was $ i 6.5 million and $ i 5.8 million, respectively. Amortization expense relating to amortizable intangible assets for the nine months ended September 30, 2023 and October 1, 2022, was $ i 19.8 million and $ i 19.7 million, respectively.

We perform our annual goodwill and indefinite-lived intangible asset impairment testing as of 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 three and nine months ended September 30, 2023, we did not identify any events which we believe would trigger the need for tests for impairments of our indefinite-lived intangibles assets prior to our annual assessment date. However, in 2023, we have experienced challenging macro-economic conditions in the markets for our products of our Western segment. Although experiencing some improvement in the third quarter of 2023, should these conditions persist, when combined with potential increases in discount rates due to the rising interest rate environment in 2023, no assurances can be given that any future tests for impairment will indicate that it is more likely than not that the fair values of our indefinite-lived intangible assets will exceed their carrying values for the remainder of 2023.

As of September 30, 2023 and December 31, 2022, the carrying value of our Southeast reporting unit goodwill is $ i 228.3 million and $ i 228.3 million, respectively. As of September 30, 2023 and December 31, 2022, the carrying value of our Western reporting unit goodwill is $ i 234.3 million and $ i 232.1 million, respectively.

- 14 -

NOTE 9. LONG-TERM DEBT


	September 30,			December 31,
	2023			2022
	(in thousands)

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

2016 Credit Agreement due 2027, maturing in October 2027		i 65,000			i 76,352

Long-term debt		i 640,000			i 651,352

Deferred financing costs		( i 8,232	)		( i 9,218	)

Long-term debt, net	$	i 631,768		$	i 642,134

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 due 2029”), issued at i 100% of their principal amount. The 2021 Senior Notes due 2029 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 due 2029 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 due 2029 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 due 2029 mature on i October 1, 2029. Interest on the 2021 Senior Notes due 2029 is payable semi-annually, in arrears, which began 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 due 2029 totaling $ i 8.7 million, which included a i 1.25% lender spread on the total principal value of the 2021 Senior Notes due 2029, or $ i 7.2 million, and $ i 1.5 million of other costs, all of which are being amortized under the effective interest method.

As of September 30, 2023, the face value of debt outstanding under the 2021 Senior Notes due 2029 was $ i 575.0 million, and accrued interest was $ i 12.6 million. Proceeds from the 2021 Senior Notes due 2029 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 then existing 2016 Credit Agreement of $ i 60.0 million and the related fees and costs, and finance our acquisition of Anlin (the "Anlin Acquisition") in the fourth quarter of 2021.

The indenture for the 2021 Senior Notes due 2029 gives us the option to redeem some or all of the 2021 Senior Notes due 2029 at the redemption prices and on the terms specified in the indenture governing the 2021 Senior Notes due 2029. The indenture governing the 2021 Senior Notes due 2029 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.

The indenture for the 2021 Senior Notes due 2029 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.

- 15 -

2016 Credit Agreement due 2027

On i February 16, 2016, we entered into the 2016 Credit Agreement. From 2016 to 2022, we entered into various amendments to the 2016 Credit Agreement, including the amendment in October 2022, as described below.

On October 13, 2022, the Company entered into the Fifth Amendment of the 2016 Credit Agreement due 2027. The Fifth Amendment provides for, among other things, the New Revolving Credit Facility, which is a new i five-year revolving credit facility in an aggregate principal amount of $ i 250.0 million. The New Revolving Credit Facility refinances and replaces the previously existing $ i 80.0 million revolving credit facility under the 2016 Credit Agreement due 2027. The Company’s obligations under the 2016 Credit Agreement due 2027 continue to be secured by substantially all of its and its direct and indirect subsidiaries’ assets, and is senior in position to the 2021 Senior Notes due 2029.

Contemporaneously with the Fifth Amendment, the Company drew down $ i 160.0 million of funds available under the New Revolving Credit Facility. Proceeds totaling $ i 61.6 million from the $ i 160.0 million drawdown were used to repay then existing term loan borrowings under the 2016 Credit Agreement totaling $ i 60.0 million, plus accrued interest and fees totaling $ i 1.6 million. As discussed below, the remaining $ i 98.4 million of proceeds were used to fund the cash portion of the Martin Acquisition. The Company has made net repayments of the $ i 160.0 million of initial borrowings under the New Revolving Credit Facility totaling $ i 95.0 million through September 30, 2023.

Interest on borrowings under the New Revolving Credit Facility is payable either quarterly or at the expiration of any Secured Overnight Financing Rate ("SOFR") interest period applicable thereto. Borrowings under the New Revolving Credit Facility accrue interest at a rate equal to, at our option, a base rate (with a floor of i 100 basis points) plus a percentage spread (ranging from i 0.75% to i 1.75%) based on our first lien net leverage ratio or SOFR (with a floor of i 0 basis points) plus a percentage spread (ranging from i 1.75% to i 2.75%) based on our first lien net leverage ratio. After giving effect to the Fifth Amendment, we pay a quarterly commitment fee on the unused portion of the New 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. The Fifth Amendment also modifies the application of the financial covenant under the 2016 Credit Agreement such that testing will occur on a quarterly basis, and requires we maintain a first lien net leverage ratio of not more than i 4.00 to i 1.00. We were in compliance with this covenant as of September 30, 2023.

The 2016 Credit Agreement due 2027 includes certain covenants limiting i 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) sell or otherwise dispose of assets; (iv) enter into transactions with affiliates; (v) create or incur liens; (vi) 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; (viii) make investments and (ix) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

As of September 30, 2023, borrowings outstanding under the $ i 250.0 million New Revolving Credit Facility totaled $ i 65.0 million, and accrued interest was $ i 252 thousand. There were $ i 8.5 million in letters of credit outstanding. Availability under the New Revolving Credit Facility at September 30, 2023 totaled $ i 176.5 million. The weighted average all-in interest rate for borrowings under the existing revolving credit facility of the 2016 Credit Agreement due 2027 was i 7.01% at September 30, 2023, and i 6.07% at December 31, 2022.

The Martin Acquisition was financed in part with the $ i 250.0 million available under the New Revolving Credit Facility provided by the Fifth Amendment of our 2016 Credit Agreement due 2027, under which we drew $ i 160.0 million on October 14, 2022, the proceeds of which were used to pay $ i 98.4 million of the $ i 187.8 million total fair value of consideration transferred at closing, and $ i 61.6 million to prepay our $ i 60.0 million existing term loans under the Fourth Amendment of our 2016 Credit Agreement due 2027, plus $ i 1.6 million in fees, costs and accrued interest. The remainder of the total fair value of consideration transferred at closing, totaling $ i 89.4 million, was funded with cash on hand previously generated through operations.

Deferred Financing Costs

Activity relating to deferred financing costs, which is classified as a reduction of the carrying value of long-term debt, for the nine months ended September 30, 2023, is as follows:


(in thousands)	Total
At beginning of year	$	i 9,218
Less: Amortization expense		( i 986	)
At end of period	$	i 8,232

- 16 -

Estimated amortization expense relating to deferred financing costs for the years indicated as of September 30, 2023, is as follows:


(in thousands)	Total
Remainder of 2023	$	i 334
2024		i 1,366
2025		i 1,442
2026		i 1,466
2027		i 1,440
Thereafter		i 2,184

Total	$	i 8,232

The contractual future maturities of long-term debt outstanding, as of September 30, 2023, are as follows (at face value):


(in thousands)
Remainder of 2023	$	i —
2024		i —
2025		i —
2026		i —
2027		i 65,000
Thereafter		i 575,000

Total	$	i 640,000

NOTE 10. 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 11. INCOME TAXES

The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We estimate the annual effective tax rate quarterly based on the forecasted annual pre-tax results of our operations. The tax effects of items that are unrelated to current year ordinary income are recognized entirely as discrete items in the period identified, including share-based compensation, changes in tax laws and adjustments to the actual liability determined upon filing tax returns.

We had income tax expense of $ i 13.7 million for the three months ended September 30, 2023, compared with income tax expense of $ i 10.1 million for the three months ended October 1, 2022. Our effective tax rate for the three months ended September 30, 2023, was i 25.9%, compared with i 24.9% for the three months ended October 1, 2022. We had income tax expense of $ i 36.4 million for the nine months ended September 30, 2023, compared with income tax expense of $ i 29.9 million for the nine months ended October 1, 2022. Our effective tax rate for the nine months ended September 30, 2023, was i 25.7%, compared with i 24.8% for the nine months ended October 1, 2022. Our income tax expense for the five months ended May 26, 2023, the date we acquired the i 25% share of Eco we previously did not own, and the nine months ended October 1, 2022, includes income tax expenses of $ i 0.9 million and $ i 1.0 million, respectively, relating to our i 75% share of the pre-tax earnings of Eco.

Income tax expense in the three and nine months ended September 30, 2023, and October 1, 2022, includes discrete items of income tax expense relating to excess taxes from the lapses of restrictions on stock awards and adjustments to tax expense relating to research credit true-ups we made during the third quarter of each period. Income tax expense in the nine months ended October 1, 2022 also 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. Excluding discrete items of income tax, the effective tax rates for the three months ended September 30, 2023 and October 1, 2022, would have been an income tax expense rate of i 26.7% and i 26.2%, respectively. Excluding discrete items of income tax, the effective tax rates for the nine months ended September 30, 2023 and October 1, 2022, would have been an income tax expense rate of i 26.2% and i 25.7%, respectively.

- 17 -

During the first nine months of 2023, we made payments of estimated taxes totaling $ i 39.7 million. During the first nine months of 2022, we made payments of estimated taxes, net of refunds, totaling $ i 20.9 million.

NOTE 12. 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.

During the three or nine months ended September 30, 2023 or October 1, 2022, we did i i 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 the 2016 Credit Agreement due 2027, as well as the 2021 Senior Notes due 2029, all classified as long-term debt. The fair value of borrowings under the 2016 Credit Agreement due 2027 approximated its carrying value due to its variable-rate nature, and were approximately $ i 65.0 million and $ i 76.4 million as of September 30, 2023, and December 31, 2022, respectively. The fair value of the 2021 Senior Notes due 2029 is based on debt with similar terms and characteristics and was approximately $ i 531.9 million as of September 30, 2023, compared to a principal outstanding value of $ i 575.0 million, and the fair value was approximately $ i 480.8 million as of December 31, 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

September 30, 2023

Total

(Level 1)

(Level 2)

(Level 3)

Description

Aluminum contracts

i 443

—

i 443

—

MTP contracts

( i 24

)

—

( i 24

)

—

i 419

—

i 419

—

- 18 -

Fair Value Measurements

Assets (Liabilities)

Quoted

Significant

Prices in

Other

Significant

Active

Observable

Unobservable

Markets

Inputs

December 31, 2022

Total

(Level 1)

(Level 2)

(Level 3)

Description

Aluminum contracts

—

MTP contracts

i 300

—

i 300

—

i 300

—

i 300

—

See Note 13 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.

NOTE 13. 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, and 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 September 30, 2023, the fair value of our aluminum forward contracts was in an asset position of $ i 0.4 million. We had i 18 outstanding forward contracts for the purchase of i 13.2 million pounds of aluminum through June 2024, at an average price of $ i 1.04 per pound, which excludes the Midwest premium, with maturity dates of between i one month and i nine months. At September 30, 2023, the fair value of our MTP contracts was de minimis. We had i 1 outstanding MTP contract to hedge the Platts US MW Transaction price per pound for the delivery of i 2.5 million pounds of aluminum through December 2023, at an average price of $ i 0.21 per pound, with a maturity date of i three 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 September 30, 2023.

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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 income of approximately $ i 0.4 million in the accompanying condensed consolidated balance sheet as of September 30, 2023, to be reclassified to earnings within the next twelve months.

The fair values of our aluminum hedges and MTP contracts are classified in the accompanying condensed consolidated balance sheets at September 30, 2023 and December 31, 2022, as follows (in thousands):

Derivative Assets

Derivative Liabilities

September 30, 2023

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 473

Accrued liabilities

( i 30

)

MTP contracts

Other current assets

—

Accrued liabilities

( i 24

)

Aluminum contracts

Other assets

—

Other liabilities

—

MTP contracts

Other assets

—

Other liabilities

—

Total derivative instruments

Total derivative assets

i 473

Total derivative liabilities

( i 54

)

Derivative Assets

Derivative Liabilities

December 31, 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

—

Accrued liabilities

—

MTP contracts

Other current assets

i 300

Accrued liabilities

—

Aluminum contracts

Other assets

—

Other liabilities

—

MTP contracts

Other assets

—

Other liabilities

—

Total derivative instruments

Total derivative assets

i 300

Total derivative liabilities

—

The ending accumulated balance for the aluminum forward and MTP contracts included in accumulated other comprehensive income, net of tax, was an accumulated other comprehensive income of $ i 0.3 million as of September 30, 2023, and was an accumulated other comprehensive income of $ i 0.2 million at December 31, 2022. The income tax effects of accumulated comprehensive income are released as amounts are reclassified out of accumulated comprehensive income 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 nine months ended September 30, 2023 and October 1, 2022 (in thousands):

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	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							Three Months Ended
	September 30,			October 1,				September 30,			October 1,
	2023			2022				2023			2022

Aluminum contracts	$	i 1,027		$	( i 2,012	)	Cost of sales	$	( i 302	)	$	( i 3,185	)

MTP contracts	$	( i 135	)	$	( i 621	)	Cost of sales	$	i 13		$	i 769

	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
	Nine Months Ended							Nine Months Ended
	September 30,			October 1,				September 30,			October 1,
	2023			2022				2023			2022

Aluminum contracts	$	i 78		$	( i 9,427	)	Cost of sales	$	( i 365	)	$	( i 597	)

MTP contracts	$	( i 89	)	$	( i 60	)	Cost of sales	$	i 235		$	i 3,941

We classify cash flows related to derivative instruments as operating activities in the condensed consolidated statements of cash flows.

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the components of accumulated other comprehensive income for the three and nine months ended September 30, 2023 and October 1, 2022 (in thousands):

Three months ended September 30, 2023

Aluminum

MTP

(in thousands)

Total

Balance at July 1, 2023

( i 658

)

i 92

( i 566

)

Increase (decrease) in fair value of derivatives

i 1,027

( i 135

)

i 892

Amounts reclassified from accumulated other comprehensive income

i 302

( i 13

)

i 289

Tax effect

( i 342

)

i 38

( i 304

)

Net current-period other comprehensive income (loss)

i 987

( i 110

)

i 877

Balance at September 30, 2023

i 329

( i 18

)

i 311

Nine months ended September 30, 2023

Aluminum

MTP

(in thousands)

Total

Balance at December 31, 2022

—

i 223

Increase (decrease) in fair value of derivatives

i 78

( i 89

)

( i 11

)

Amounts reclassified from accumulated other comprehensive income

i 365

( i 235

)

i 130

Tax effect

( i 114

)

i 83

( i 31

)

Net current-period other comprehensive income (loss)

i 329

( i 241

)

i 88

Balance at September 30, 2023

i 329

( i 18

)

i 311

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Three months ended October 1, 2022

Aluminum

MTP

(in thousands)

Total

Balance at July 2, 2022

( i 3,846

)

i 1,478

( i 2,368

)

Decrease in fair value of derivatives

( i 2,012

)

( i 621

)

( i 2,633

)

Amounts reclassified from accumulated other comprehensive income (loss)

i 3,185

( i 769

)

i 2,416

Tax effect

( i 279

)

i 335

i 56

Net current-period other comprehensive income (loss)

i 894

( i 1,055

)

( i 161

)

Balance at October 1, 2022

( i 2,952

)

i 423

( i 2,529

)

Nine months ended October 1, 2022

Aluminum

MTP

(in thousands)

Total

Balance at January 1, 2022

i 3,610

i 3,396

i 7,006

Decrease in fair value of derivatives

( i 9,427

)

( i 60

)

( i 9,487

)

Amounts reclassified from accumulated other comprehensive income (loss)

i 597

( i 3,941

)

( i 3,344

)

Tax effect

i 2,268

i 1,028

i 3,296

Net current-period other comprehensive loss

( i 6,562

)

( i 2,973

)

( i 9,535

)

Balance at October 1, 2022

( i 2,952

)

i 423

( i 2,529

)

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NOTE 15. 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, Utah 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 nine months ended September 30, 2023, and October 1, 2022. Results of the Western segment for the three and nine months ended September 30, 2023 include the results of Martin, acquired October 14, 2022, whereas such results are not included for the three and nine month ended October 1, 2022. Corporate overhead has been allocated to each segment using an allocation method we believe is reasonable (in thousands):

Three Months Ended

Nine Months Ended

September 30,

October 1,

September 30,