10-Q 1 a20157410q.htm PLY GEM 10-Q 2015.7.4 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2015
or
[   ]      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________.

Commission File Number:   001-35930


 

PLY GEM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
3089
 
20-0645710
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
5020 Weston Parkway, Suite 400
Cary, North Carolina 27513
 
 

Registrant's telephone number, including area code: 919-677-3900
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes [X]                 No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]   No [  ]
 
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   [   ]                                                                       Accelerated filer                    [X]   
Non-accelerated filer     [ ]                                                                       Smaller reporting company   [   ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]   No [X]
 
As of August 10, 2015, there were 67,984,626 shares of common stock, $0.01 par value, outstanding.
 





PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY PERIOD ENDED July 4, 2015


TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


PART II – OTHER INFORMATION




PART I

Item 1.      FINANCIAL STATEMENTS


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)




(Amounts in thousands, except shares and per share data)
For the three months ended
 
July 4, 2015
 
June 28, 2014
Net sales
$
502,334

 
$
409,211

Cost of products sold
377,591

 
321,806

Gross profit
124,743

 
87,405

Operating expenses:


 
 

Selling, general and administrative expenses
72,796

 
50,956

Amortization of intangible assets
6,283

 
5,212

Total operating expenses
79,079

 
56,168

Operating earnings
45,664

 
31,237

Foreign currency gain (loss)
(98
)
 
477

Interest expense
(18,699
)
 
(17,247
)
Interest income
17

 
22

Tax receivable agreement liability adjustment
2,006

 
3,942

Income before provision (benefit) for income taxes
28,890

 
18,431

Provision (benefit) for income taxes
(1,482
)
 
7,051

Net income
$
30,372

 
$
11,380

Comprehensive income
$
29,517

 
$
15,103

 
 
 
 
Net income attributable to common shareholders per share:
 
 
 
Basic
$
0.45

 
$
0.17

Diluted
$
0.45

 
$
0.17

Weighted average shares outstanding:
 
 
 
Basic
67,946,895

 
67,831,467

Diluted
68,056,591

 
67,943,223




See accompanying notes to condensed consolidated financial statements.


2


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)




(Amounts in thousands, except shares and per share data)
For the six months ended
 
July 4, 2015
 
June 28, 2014
Net sales
$
878,382

 
$
678,676

Cost of products sold
693,358

 
551,458

Gross profit
185,024

 
127,218

Operating expenses:
 

 
 

Selling, general and administrative expenses
140,928

 
105,036

Amortization of intangible assets
12,482

 
10,534

Total operating expenses
153,410

 
115,570

Operating earnings
31,614

 
11,648

Foreign currency gain (loss)
(1,032
)
 
249

Interest expense
(37,792
)
 
(35,765
)
Interest income
26

 
46

Tax receivable agreement liability adjustment
(15,179
)
 
(431
)
Loss on modification or extinguishment of debt
—

 
(21,364
)
Loss before benefit for income taxes
(22,363
)
 
(45,617
)
Benefit for income taxes
(3,876
)
 
(5,419
)
Net loss
$
(18,487
)
 
$
(40,198
)
Comprehensive loss
$
(24,686
)
 
$
(41,492
)
 
 
 
 
Basic and diluted net loss per share attributable to common shareholders
(0.27
)
 
(0.59
)
 
 
 
 
Basic and diluted weighted average shares outstanding
67,935,114

 
67,789,121




See accompanying notes to condensed consolidated financial statements.


3


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands, except share amounts)
 
July 4, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
35,866

 
$
33,162

Accounts receivable, less allowances of $4,795 and $4,164, respectively
 
259,740

 
187,679

Inventories:
 
 

 
 

Raw materials
 
70,680

 
76,467

Work in process
 
25,905

 
34,378

Finished goods
 
73,559

 
69,068

Total inventory
 
170,144

 
179,913

Prepaid expenses and other current assets
 
31,461

 
31,808

Deferred income taxes
 
8,195

 
7,680

Total current assets
 
505,406

 
440,242

Property and Equipment, at cost:
 
 

 
 

Land
 
8,201

 
7,967

Buildings and improvements
 
66,220

 
65,658

Machinery and equipment
 
369,916

 
368,719

Total property and equipment
 
444,337

 
442,344

Less accumulated depreciation
 
(286,114
)
 
(281,377
)
Total property and equipment, net
 
158,223

 
160,967

Other Assets:
 
 

 
 

Intangible assets, net
 
142,703

 
147,709

Goodwill
 
478,794

 
476,112

Other
 
27,709

 
29,545

Total other assets
 
649,206

 
653,366

 
 
$
1,312,835

 
$
1,254,575

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
94,146

 
$
84,164

Accrued expenses
 
148,835

 
147,325

Current portion of long-term debt
 
4,300

 
4,300

Total current liabilities
 
247,281

 
235,789

Deferred income taxes
 
21,030

 
20,806

Payable to related parties pursuant to tax receivable agreement
 
26,096

 
10,917

Other long-term liabilities
 
86,119

 
94,814

Long-term debt, less current portion
 
1,051,895

 
988,917

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders' Deficit:
 
 

 
 

Preferred stock $0.01 par, 50,000,000 shares authorized, none issued and outstanding
 
—

 
—

Common stock $0.01 par, 250,000,000 shares authorized, 67,977,722 and 67,877,587 issued and outstanding, respectively
 
680

 
679

Additional paid-in-capital
 
746,914

 
745,140

Accumulated deficit
 
(840,999
)
 
(822,512
)
Accumulated other comprehensive loss
 
(26,181
)
 
(19,975
)
Total stockholders' deficit
 
(119,586
)
 
(96,668
)
 
 
$
1,312,835

 
$
1,254,575


See accompanying notes to condensed consolidated financial statements.

4

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(Amounts in thousands)
 
For the six months ended
 
 
July 4, 2015
 
June 28, 2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(18,487
)
 
$
(40,198
)
Adjustments to reconcile net loss to cash
 
 

 
 

used in operating activities:
 
 

 
 

Depreciation and amortization expense
 
29,397

 
22,538

Fair-value premium on purchased inventory
 
54

 
—

Fair-value decrease of contingent acquisition liability
 
—

 
(264
)
Non-cash restructuring costs
 
805

 
2,193

Non-cash interest expense, net
 
6,661

 
8,390

Loss (gain) on foreign currency transactions
 
1,032

 
(249
)
Non-cash litigation expense
 
—

 
4,670

Loss on modification or extinguishment of debt
 
—

 
21,364

Stock based compensation
 
1,145

 
973

Deferred income taxes
 
(3,256
)
 
430

Tax receivable agreement liability adjustment
 
15,179

 
431

Increase in tax uncertainty, net of valuation allowance
 
147

 
185

Other
 
(57
)
 
(189
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
(68,565
)
 
(97,746
)
Inventories
 
10,368

 
(19,388
)
Prepaid expenses and other assets
 
1,714

 
(2,208
)
Accounts payable
 
9,142

 
17,874

Accrued expenses
 
(2,935
)
 
(1,274
)
Cash payments on restructuring liabilities
 
(1,450
)
 
(3,407
)
Other
 
(284
)
 
(641
)
Net cash used in operating activities
 
(19,390
)
 
(86,516
)
Cash flows from investing activities:
 
 

 
 

Acquisitions
 
(21,000
)
 
—

Capital expenditures
 
(13,366
)
 
(9,987
)
Proceeds from sale of assets
 
92

 
734

Net cash used in investing activities
 
(34,274
)
 
(9,253
)
Cash flows from financing activities:
 
 

 
 

Proceeds from long-term debt
 
—

 
927,850

Net revolver borrowings
 
60,000

 
40,000

Payments on long-term debt
 
(2,150
)
 
(852,000
)
Payment of tender and early call premiums
 
—

 
(61,142
)
Proceeds from exercises of employee stock options
 
648

 
1,073

Debt issuance costs paid
 
—

 
(14,625
)
Net cash provided by financing activities
 
58,498

 
41,156

Impact of exchange rate movements on cash
 
(2,130
)
 
(200
)
Net increase (decrease) in cash and cash equivalents
 
2,704

 
(54,813
)
Cash and cash equivalents at the beginning of the period
 
33,162

 
69,801

Cash and cash equivalents at the end of the period
 
$
35,866

 
$
14,988




See accompanying notes to condensed consolidated financial statements.

5

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ply Gem Holdings, Inc. and its subsidiaries (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with U.S. generally accepted accounting principles as described in the consolidated financial statements and related notes included in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2015.  These statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles and should be read in conjunction with our 2014 Annual Report on Form 10-K.  In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the period from January 1, 2015 through July 4, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements of Ply Gem Holdings at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

The Company’s fiscal quarters are based on periods ending on the Saturday of the last week in the quarter.  Therefore, the financial results of certain fiscal quarters will not be comparable to the prior and subsequent fiscal quarters.  The accompanying financial statements include the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended July 4, 2015 and June 28, 2014, the condensed consolidated statements of cash flows for the six months ended July 4, 2015 and June 28, 2014, and the condensed consolidated balance sheets as of July 4, 2015 and December 31, 2014.
    
Ply Gem is a diversified manufacturer of residential and commercial building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets.  The demand for the Company’s products is seasonal, particularly in the Northeast and Midwest regions of the United States and Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors.  The Company’s sales are usually lower during the first and fourth quarters.

To a significant extent our performance is dependent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence, unemployment, and availability of consumer credit.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned.  All intercompany accounts and transactions have been eliminated.


6

Accounting Policies and Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods.  Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable.  Such estimates include the allowance for doubtful accounts receivable, rebates, pensions, valuation of inventories, warranty reserves, insurance reserves, legal contingencies, assumptions used in the calculation of income taxes and the tax receivable agreement liability, projected cash flows used in the goodwill and intangible asset impairment tests, and environmental accruals and other contingencies.  These judgments are based on the Company’s historical experience, current trends and information available from other sources, and are based on management’s best estimates and judgments.  The Company adjusts such estimates and assumptions when facts and circumstances dictate.  Volatile equity markets, foreign currency, and litigation risk have combined to increase the uncertainty inherent in such estimates and assumptions.  If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.

Cash and Cash Equivalents

Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less and which are readily convertible into cash.

Accounts Receivable

Accounts receivable-trade are recorded at their net realizable value.  The allowance for doubtful accounts was $4.8 million at July 4, 2015 and $4.2 million at December 31, 2014.  The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, the financial health of its customers, unusual macroeconomic conditions and historical experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible trade accounts receivable against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.

Inventories

Inventories in the accompanying condensed consolidated balance sheets are valued at the lower of cost or market and are determined primarily by the first-in, first-out (FIFO) method.  The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold. As of July 4, 2015, the Company had inventory purchase commitments related to supply agreements for aluminum and glass of approximately $67.5 million.

Inventory reserves were approximately $9.3 million at July 4, 2015, decreasing during the six months ended July 4, 2015 by $(1.3) million compared to the December 31, 2014 reserve balance of approximately $10.6 million.

Property and Equipment
 
Property and equipment are presented at cost.  Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows: 
Buildings and improvements
10-37 years
Machinery and equipment, including leases
3-15 years
Leasehold improvements
Term of lease or useful life, whichever is shorter
 

7

Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized.  When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations.  

Intangible Assets, Goodwill and Other Long-lived Assets

Long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.  The Company performs an undiscounted operating cash flow analysis to determine if impairment exists.  If an impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flow.

The Company tests for long-lived asset impairment at the following asset group levels: (i) the combined U.S. Siding, Fencing and Stone companies in the Siding, Fencing and Stone segment (“Siding”), (ii) the combined U.S. Windows companies in the Windows and Doors segment (“U.S. Windows”), (iii) the combined Simonton windows companies in the Windows and Doors segment, (iv) Gienow Canada Inc. ("Gienow Canada") (a combined Western Canadian company created by the January 2014 amalgamation of the Company's legacy Western Canadian business and the Gienow entity acquired in April 2013) in the Windows and Doors segment, and (v) Mitten in the Siding, Fencing and Stone segment. For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities.  There were no indicators of impairment during the three and six months ended July 4, 2015.

Goodwill and other intangible assets
    
The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant.  All other intangible assets are amortized over their estimated useful lives and are assessed for impairment as necessary.  The Company assesses goodwill for impairment at the November month end each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings, which would lead to a reduction in future cash flows, could indicate potential impairment.  There were no indicators of impairment during the three and six months ended July 4, 2015 that would trigger an interim impairment test.  The Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets could result in goodwill impairments.

Debt Issuance Costs

Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt financing, are amortized over the contractual term of the related agreement using the effective interest method.  Net debt issuance costs totaled approximately $22.3 million and $23.8 million as of July 4, 2015 and December 31, 2014, respectively, and have been recorded in other long term assets in the accompanying condensed consolidated balance sheets. Amortization of debt issuance costs for the three months ended July 4, 2015 and June 28, 2014 was approximately $0.8 million and $1.1 million, respectively. Amortization of debt issuance costs for the six months ended July 4, 2015 and June 28, 2014 was approximately $1.5 million and $2.1 million, respectively. Amortization of debt issuance costs is recorded in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

Income Taxes
 
The Company utilizes the asset and liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs.  A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

8

Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  The Company along with its U.S. subsidiaries file a consolidated federal income tax return, separate state income tax returns, combined state returns, and unitary state returns. Gienow Canada and Mitten both file separate Canadian federal income tax returns and separate provincial returns. Simonton will join the filing of the consolidated U.S. federal returns. Simonton will also join the filings of certain combined and unitary state income tax returns as well as continue to file certain state returns on a separate company basis.

Tax receivable agreement ("TRA") liability

As a result of the Company’s full tax valuation allowance position, the Company’s methodology for calculating the TRA liability considers expectations regarding (i) current year taxable income only (due to the uncertainty of future taxable income associated with the Company’s cumulative loss position) and (ii) future income due to the expected reversals of deferred tax liabilities. During the three months ended July 4, 2015, the Company estimated its projected taxable income for the full year ending December 31, 2015 based on the Company’s 2015 estimates. However, the Company’s methodology to estimate the TRA liability excludes forecasts for fiscal years subsequent to 2015 because such future forecasts and projections cannot be relied upon based on the negative evidence from the Company’s three year cumulative loss position. For fiscal year 2015, the Company estimated to be in a taxable income position; however, this taxable income estimate was not sufficient to outweigh the negative evidence or alleviate the Company’s three year cumulative loss position. In addition to projecting the Company’s current year taxable income estimate, the Company considered the reversals of deferred tax assets and deferred tax liabilities. The resulting taxable income (loss) from deferred taxes was then combined with the Company’s current year taxable income estimate to determine the cumulative NOLs that are expected to be utilized in 2015 and the TRA liability was accordingly adjusted using the 85% TRA rate.

Environmental

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Environmental remediation obligation accruals are adjusted as further information develops or circumstances change.  Costs of future expenditures for environmental remediation obligations are not discounted to their present value.  Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Commitments and Contingencies

The Company accrues for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated.  Costs accrued have been estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes. Insurance recoveries are recorded as assets when their receipt is deemed probable.

Foreign Currency

Gienow Canada and Mitten, the Company’s Canadian subsidiaries, utilize the Canadian dollar as their functional currency.  For reporting purposes, the Company translates the assets and liabilities of its foreign entities at the exchange rates in effect at period-end.  Net sales and expenses are translated using average exchange rates in effect during the period.  Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying condensed consolidated balance sheets.
 
The Company recorded a loss from foreign currency transactions of approximately $(0.1) million for the three months ended July 4, 2015 and a gain of approximately $0.5 million for the three months ended June 28, 2014. The Company recorded a loss from foreign currency transactions of approximately $(1.0) million for the six months ended July 4, 2015 and a gain of approximately $0.2 million for the six months ended June 28, 2014. During the six months ended July 4, 2015 and June 28, 2014, accumulated other comprehensive loss included a currency translation adjustment of approximately $(7.2) million and $(0.4) million, respectively.

9

Derivative Financial Instruments
During the year ended December 31, 2014, the Company entered into a foreign currency forward contract agreement to hedge approximately $49.7 million of its 2015 non-functional currency inventory purchases to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar.
The Company has designated this forward contract as a cash flow hedge. As a cash flow hedge, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The forward contract agreement is highly correlated to the changes in foreign currency rates to which the Company is exposed. Unrealized gains and losses on this agreement are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income or loss to cost of goods sold.

The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instrument and the underlying exposures being hedged, fluctuations in the value of the derivative instrument are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings.
The gains and losses on the derivative contract that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As of July 4, 2015, approximately $2.3 million of the deferred net asset on derivative instruments included in accumulated other comprehensive loss is expected to be reclassified against cost of goods sold during the next six months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions. During the three and six months ended July 4, 2015, the Company recognized $1.1 million and $2.2 million within earnings as a reduction of cost of goods sold in the condensed consolidated statement of operations. During the three and six months ended June 28, 2014, the Company recognized $(0.2) million and $(0.2) million within earnings as an increase to cost of goods sold in the condensed consolidated statement of operations.
The fair value of the foreign currency forward contract agreement is estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs (Level 2). A summary of the recorded asset included in the accompanying condensed consolidated balance sheets is as follows:
(Amounts in thousands)
 
 
 
 
July 4, 2015
 
December 31, 2014
Foreign currency hedge (included in other current assets)
$
2,265

 
$
1,294


Fair Value Measurement

The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

•
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3: Inputs that reflect the reporting entity’s own assumptions.

10

The hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:
 
 
 
 
 
 
Quoted Prices
in Active Markets
 
Significant
Other
 
Significant
(Amounts in thousands)
 
 
 
Fair
 
for Identical
 
Observable
 
Unobservable
 
 
Carrying
 
Value
 
Assets
 
Inputs
 
Inputs
Description
 
Value
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Senior Notes-6.50%
 
$
650,000

 
$
628,063

 
$
628,063

 
$
—

 
$
—

Term Loan Facility
 
424,625

 
419,848

 
—

 
419,848

 
—

As of July 4, 2015
 
$
1,074,625

 
$
1,047,911

 
$
628,063

 
$
419,848

 
$
—

Liabilities:
 
 

 
 

 
 

 
 

 
 

Senior Notes-6.50%
 
$
650,000

 
$
617,500

 
$
617,500

 
$
—

 
$
—

Term Loan Facility
 
426,775

 
404,369

 
—

 
404,369

 
—

As of December 31, 2014
 
$
1,076,775

 
$
1,021,869

 
$
617,500

 
$
404,369

 
$
—


The fair value of the long-term debt instruments was determined by utilizing available market information.  The carrying value of the Company’s other assets and liabilities approximates their fair value.  

Earnings (Loss) Per Common Share

Basic earnings (loss) per share ("EPS") is computed based upon weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Ply Gem Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.
    
The Company was in a net loss position for the six months ended July 4, 2015 and June 28, 2014 and therefore the impact of stock options and unvested restricted stock were excluded from the computation of diluted earnings (loss) per share for those specific periods, as the inclusion of such amounts would be anti-dilutive.
    
The computation of the dilutive effect of other potential common shares included options and unvested restricted stock representing approximately 0.1 million shares of common stock for the three months ended July 4, 2015 and excluded approximately 0.1 million shares of common stock for the six months ended July 4, 2015. The computation of the dilutive effect of other potential common shares included options and unvested restricted stock representing approximately 0.1 million shares of common stock for the three months ended June 28, 2014 and excluded approximately 0.2 million shares of common stock for the six months ended June 28, 2014, respectively. Under the treasury stock method, the inclusion of these stock awards would have been anti-dilutive.
    
New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of Ply Gem's fiscal year 2015, with early adoption permitted. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The adoption of this new guidance did not affect the Company's consolidated financial position, results of operations or cash flows.

11

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB finalized a one-year deferral of the effective date of the new revenue recognition standard. The new standard will become effective for Ply Gem beginning with the first quarter of 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The method of adoption has not been determined yet by the Company. The Company is currently reviewing the revised guidance and assessing the potential impact on the consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items, which eliminates from GAAP the concept of extraordinary items and the requirement that an entity separately classify, present and disclose extraordinary events and transactions. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015, which means the first quarter of Ply Gem's fiscal year 2016. The guidance can be applied retrospectively or prospectively. This new guidance is not expected to affect the Company's consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation, which adjusts the determination of whether an entity is a variable interest entity ("VIE") through various assessment criteria including fees paid to the decision maker within the entity or service provider, related party tests regarding indirect interests, among other others. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015, which means the first quarter of Ply Gem's fiscal year 2016, with early adoption permitted. The guidance can be applied with a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or retrospectively. This new guidance is not expected to affect the Company's consolidated financial position, results of operations or cash flows.    

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015, which means the first quarter of Ply Gem's fiscal year 2016, with early adoption permitted. The guidance applies retrospectively to all debt issuance costs. This new guidance is expected to change classification in the Company's consolidated financial position with no impact on the results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-use Software, which provides guidance on the accounting for fees paid by a customer in a cloud computing arrangement as it relates to whether the arrangement includes the sale or license of software. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015, which means the first quarter of Ply Gem's fiscal year 2016, with early adoption permitted. The guidance can be applied retrospectively or prospectively. This new guidance is expected to change classification in the Company's consolidated financial position with no impact on the results of operations or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires measurement of in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2016, which means the first quarter of Ply Gem's fiscal year 2017. The amendment should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.


12


2.   ACQUISITIONS

Simonton

On September 19, 2014, Ply Gem completed an acquisition for cash consideration of approximately $130.0 million to acquire the capital stock of Fortune Brands Windows Inc., and its direct and indirect wholly owned subsidiaries Simonton Building Products LLC, Simonton Industries, Inc., Simonton Windows, Inc., and SimEx, Inc. Fortune Brand Windows’ name has subsequently been changed to Simonton Windows & Doors, Inc. (“Simonton”). Simonton is a premier repair and remodeling window company with leading brand recognition within this market providing the Company with long-term value. Simonton manufactures top quality vinyl windows and doors and provides industry-leading customization options, delivery times, and customer service. Simonton has manufacturing plant locations in California, Illinois, and West Virginia with administrative offices in Ohio. The Simonton acquisition balances the Company's end window market mix by moving the Company's market exposure to approximately 60% and 40% for the new construction and repair and remodeling markets, respectively, as compared to the approximate 80% and 20% legacy split for the Company’s window business. By incorporating the Company’s siding net sales, the Company’s market exposure is approximately 51% and 49% for the new construction and repair and remodeling markets, respectively. Simonton strategically fits into the Company’s existing footprint and broadens our service offering to existing and new customers within the building product industry. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Simonton based upon fair values as of the acquisition date.

The final acquisition accounting allocation remains subject to further adjustments. The specific accounts subject to ongoing acquisition accounting adjustments include various income tax assets and liabilities, inventories, goodwill, intangibles, accounts payable, accrued expenses, income taxes and other liabilities. More specifically, the analysis of Simonton's warranty liability is open for further evaluation of historical claims data. Any significant changes in the cost per claim amounts to the warranty calculation, the product mix, or other inputs on which the calculation is currently based could result in additional increases or decreases to the warranty liability with a corresponding impact on goodwill and deferred income taxes. Therefore, the measurement date remains open as of July 4, 2015, and the preliminary acquisition accounting allocation detailed below is subject to further adjustment. The Company will complete these acquisition accounting adjustments during the third quarter of 2015.
During the three and six months ended July 4, 2015, purchase price adjustments with a net decrease of $2.7 million and $2.5 million to goodwill were recorded in connection with warranties and other liabilities. During the three months ended July 4, 2015, the Company decreased the warranty liability $8.0 million and the related deferred tax assets by $3.1 million based on an actuarial analysis of the liability.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair value, as follows:
(Amounts in thousands)
 
Cash
$
(856
)
Accounts receivable
37,134

Inventories
17,742

Prepaid expenses and other current assets
2,233

Property and equipment
53,655

Intangible assets
62,170

Goodwill
56,707

Other assets
426

Accounts payable and accrued expenses
(48,217
)
Deferred income taxes
(10,462
)
Other liabilities
(40,532
)
 
$
130,000

    

13

The $56.7 million of goodwill is allocated to the Windows and Doors segment and none of the goodwill is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized from the acquisition.
Canyon Stone
On May 29, 2015, Ply Gem completed an acquisition for cash consideration of approximately $21.0 million to acquire substantially all of the assets of Canyon Stone Inc. ("Canyon Stone"), a manufacturer and distributor of stone veneer and accessories in the United States. Canyon Stone has manufacturing facilities in Olathe, Kansas and Youngsville, North Carolina. The purchase agreement also includes contingent consideration in the form of potential earn-out payments of up to $1.0 million based on Canyon Stone earnings for fiscal years 2015 through 2017. This acquisition expanded the Company's stone veneer manufacturing footprint across the United States as it compliments the existing Ply Gem Stone manufacturing facility in Middleburg, Pennsylvania. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Canyon Stone based upon fair values as of the acquisition date.
Since the acquisition was recently completed on May 29, 2015, the final acquisition accounting allocation remains subject to further adjustments. The specific accounts subject to ongoing purchase accounting adjustments include accounts receivable, inventories, prepaid expenses and other current assets, property and equipment, goodwill, intangibles, accounts payable, accrued expenses, and other liabilities. Therefore, the measurement date remains open as of July 4, 2015, and the preliminary acquisition accounting allocation detailed below is subject to adjustment. The Company anticipates completing these acquisition accounting adjustments during 2015.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows:
(Amounts in thousands)
 
Accounts receivable
$
3,559

Inventories
712

Prepaid expenses and other current assets
41

Property and equipment
2,019

Intangible assets
9,300

Goodwill
7,764

Accounts payable and accrued expenses
(2,395
)
 
$
21,000

The $7.8 million of goodwill was allocated to the Siding, Fencing and Stone segment and the goodwill is expected to be deductible for tax purposes. The Company has recognized a liability of approximately $0.7 million as the estimated acquisition date fair value of the earn-out. This amount is included within accounts payable and accrued expenses in the condensed consolidated balance sheet. Any change in the fair value of the contingent consideration subsequent to the acquisition date will be recognized in earnings in the period of change.     
For the three and six months ended July 4, 2015, Canyon Stone contributed net sales of approximately $2.9 million from the acquisition date (May 29, 2015), which has been included within the Company’s condensed consolidated statement of operations and comprehensive income (loss). If the Canyon Stone acquisition would have occurred at the beginning of 2014, the Company’s consolidated net sales would have been $889.6 million and $689.9 million for the six months ended July 4, 2015 and June 28, 2014, respectively, with a net loss of $18.1 million and $38.7 million for the six months ended July 4, 2015 and June 28, 2014, respectively.
During the three and six months ended July 4, 2015, the Company incurred $0.3 million of acquisition-related costs for Canyon Stone. These expenses are included in selling, general, and administrative expense in the Company’s condensed consolidated statement of operations and comprehensive income (loss) within the Siding, Fencing and Stone segment.


14

3.   GOODWILL
 
The Company records the excess of the fair value of the acquisition consideration over the net tangible and intangible assets of acquired companies as goodwill.  The Company performs an annual test for goodwill impairment at the November month end each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level.  The Company has two reporting units: (1) Siding, Fencing and Stone and (2) Windows and Doors.  Separate valuations are performed for each of these reporting units in order to test for impairment.      

The Company uses the two-step method to determine goodwill impairment.  If the carrying amount of a reporting unit exceeds its fair value (“Step One”), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”).  The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill. The Company has elected not to utilize the qualitative Step Zero impairment assessment. There was no goodwill impairment for the year ended December 31, 2014 and no impairment indicators which would trigger an interim impairment test during the three and six months ended July 4, 2015. However, the Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets or the Company's market capitalization could result in goodwill impairments.  
 
To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies.  The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate.  The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples.  These comparable public company multiples are then applied to the reporting unit’s financial performance.  The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable.  Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.
    
The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples.  In order to accurately forecast future cash flows, the Company estimates single family housing starts and the repair and remodeling market's growth rates.  However, there is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase, or (3) the earnings, book values or projected earnings and cash flows of the Company's reporting units will not decline. 

The reporting unit goodwill balances were as follows as of July 4, 2015 and December 31, 2014:
(Amounts in thousands)
 
 
 
 
 
 
July 4, 2015
 
December 31, 2014
Siding, Fencing and Stone
 
$
350,051

 
$
344,048

Windows and Doors
 
128,743

 
132,064

 
 
$
478,794

 
$
476,112


15

The changes in the goodwill balances from December 31, 2014 to July 4, 2015 relate to currency translation, the Canyon Stone acquisition and Simonton purchase accounting adjustments. A goodwill rollforward for 2015 is included in the table below:

 
 
Windows and
 
Siding, Fencing
(Amounts in thousands)
 
Doors
 
and Stone
Balance as of December 31, 2014
 
 

 
 

Goodwill
 
$
459,837

 
$
466,275

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
132,064

 
$
344,048

Currency translation adjustments
 
(836
)
 
(1,761
)
Simonton purchase accounting adjustments
 
(2,485
)
 
—

Canyon Stone acquisition
 
—

 
7,764

Balance as of July 4, 2015
 
 

 
 

Goodwill
 
456,516

 
472,278

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
128,743

 
$
350,051


4.   INTANGIBLE ASSETS

The table that follows presents the major components of intangible assets as of July 4, 2015 and December 31, 2014:
(Amounts in thousands)
 
Average
Amortization
Period
 
 
 
Accumulated
 
Net Carrying
 
 
(in Years)
 
Cost
 
Amortization
 
Value
As of July 4, 2015:
 
 
 
 
 
 
 
 
Patents
 
14
 
$
12,770

 
$
(10,664
)
 
$
2,106

Trademarks/Tradenames
 
11
 
118,360

 
(73,839
)
 
44,521

Customer relationships
 
12
 
226,140

 
(131,958
)
 
94,182

Other
 
5
 
5,178

 
(3,284
)
 
1,894

Total intangible assets
 
12
 
$
362,448

 
$
(219,745
)
 
$
142,703

 
 
 
 
 
 
 
 
 
As of December 31, 2014:
 
 
 
 

 
 

 
 

Patents
 
14
 
$
12,770

 
$
(10,193
)
 
$
2,577

Trademarks/Tradenames
 
11
 
117,660

 
(70,797
)
 
46,863

Customer relationships
 
13
 
220,163

 
(123,299
)
 
96,864

Other
 
5
 
4,379

 
(2,974
)
 
1,405

Total intangible assets
 
12
 
$
354,972

 
$
(207,263
)
 
$
147,709


Estimated amortization expense for the fiscal years 2015 through 2019 is shown in the following table:
 
Amortization
(Amounts in thousands)
expense
 
 
2015 (remainder of year)
$
13,337

2016
25,645

2017
21,711

2018
20,925

2019
15,484



16


5.  COMPREHENSIVE INCOME (LOSS)
 
Comprehensive income (loss), net of tax is comprised of the following:

(Amounts in thousands)
 
For the three months ended
 
For the six months ended
 
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
Net income (loss)
 
$
30,372

 
$
11,380

 
$
(18,487
)
 
$
(40,198
)
Foreign currency translation adjustment
 
276

 
4,299

 
(7,170
)
 
(361
)
Unrealized gain (loss) on derivative instruments
 
(1,131
)
 
(576
)
 
971

 
(933
)
Comprehensive income (loss)
 
$
29,517

 
$
15,103

 
$
(24,686
)
 
$
(41,492
)

6.   LONG-TERM DEBT
 
Long-term debt in the accompanying condensed consolidated balance sheets at July 4, 2015 and December 31, 2014 consists of the following:
(Amounts in thousands)
 
 
 
 
 
 
July 4, 2015
 
December 31, 2014
Senior secured asset based revolving credit facility
 
$
60,000

 
$
—

Term Loan due 2021, net of unamortized early tender premium
 
 
 
 
and discount of $30,317 and $32,518, respectively
 
394,308

 
394,257

6.50% Senior notes due 2022, net of unamortized early tender premium
 
 
 
 
and discount of $48,113 and $51,040, respectively
 
601,887

 
598,960

 
 
$
1,056,195

 
$
993,217

Less current portion of long-term debt
 
(4,300
)
 
(4,300
)
 
 
$
1,051,895

 
$
988,917


2014 Debt Transactions
    
On January 30, 2014, Ply Gem Industries completed an offering of $500.0 million aggregate principal amount of 6.50% Senior Notes due 2022 (the “6.50% Senior Notes”) and also entered into a $430.0 million senior secured term loan facility due 2021 (the “Term Loan Facility”). The approximate $927.9 million of net proceeds from the issuance of the 6.50% Senior Notes and the borrowings under the Term Loan Facility were used by Ply Gem Industries to purchase all of its 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") and 9.375% Senior Notes due 2017 (the "9.375% Senior Notes") tendered in the tender offers described below, to satisfy and discharge the remaining obligations under the indentures governing the 8.25% Senior Secured Notes and 9.375% Senior Notes and to pay related fees and expenses.

On January 30, 2014, Ply Gem Industries purchased approximately $705.9 million of the outstanding 8.25% Senior Secured Notes in a tender offer at a price of $1,067.50 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries also purchased approximately $94.7 million of the outstanding 9.375% Senior Notes in a tender offer at a price of $1,108.36 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. As a result, Ply Gem Industries paid aggregate consideration of approximately $780.2 million for the tendered 8.25% Senior Secured Notes, including a tender premium of approximately $47.6 million, and paid aggregate consideration of approximately $107.6 million for the tendered 9.375% Senior Notes, including a tender premium of approximately $10.3 million.

17

On March 1, 2014, pursuant to the terms of the indenture governing the 8.25% Senior Secured Notes, Ply Gem Industries redeemed the remaining approximate $50.1 million principal amount of the outstanding 8.25% Senior Secured Notes at a redemption price equal to 106.188% of the principal amount thereof, plus accrued and unpaid interest. On February 16, 2014, pursuant to the terms of the indenture governing the 9.375% Senior Notes, Ply Gem Industries redeemed the remaining approximate $1.3 million principal amount of the outstanding 9.375% Senior Notes at a redemption price equal to 100% of the principal amount plus the “make-whole” premium required under the indenture governing the 9.375% Senior Notes (which equated to 110.179% of the principal amount thereof), plus accrued and unpaid interest. As of March 1, 2014, there were no longer outstanding any 8.25% Senior Secured Notes. As of February 16, 2014, there were no longer outstanding any 9.375% Senior Notes.

On September 19, 2014, Ply Gem Industries issued an additional $150.0 million aggregate principal amount of its 6.50% Senior Notes (“Senior Tack-on Notes”).  The net proceeds from the transaction were approximately $138.0 million after deducting $10.1 million for the debt discount and $1.9 million in transaction costs. The proceeds from the issuance of the Senior Tack-on Notes and approximately $3.1 million of cash on hand were used by Ply Gem Industries to fund Ply Gem Industries’ purchase of all the issued and outstanding shares of common stock of Simonton, to pay fees and expenses related to the offering of the Senior Tack-on Notes and the Simonton acquisition and for general corporate purposes, including the repayment of approximately $10.0 million of indebtedness under the Company’s senior secured asset-backed revolving credit facility (the "ABL Facility"). The additional $150.0 million of 6.50% Senior Tack-on Notes have the same terms and covenants as the original $500.0 million of 6.50% Senior Notes due 2022. The 6.50% Senior Notes originally issued in January 2014 and the Senior Tack-on Notes issued in September 2014 (collectively, the "6.50% Senior Notes") will mature on February 1, 2022 and bear interest at the rate of 6.50%.

In November 2014, the Company exercised a portion of the accordion feature under the ABL Facility for $50.0 million, or 50% of the eligible accordion, increasing the ABL Facility from $250.0 million to $300.0 million to account for the additional borrowing base acquired from Simonton.

6.50% Senior Notes due 2022

On January 30, 2014, Ply Gem Industries issued $500.0 million of 6.50% Senior Notes at par. On September 19, 2014, Ply Gem Industries issued an additional $150.0 million of 6.50% Senior Notes at a discount of approximately $10.1 million. Interest accrues at 6.50% per annum and is paid semi-annually on February 1 and August 1 of each year. The 6.50% Senior Notes will mature on February 1, 2022.

Prior to February 1, 2017, Ply Gem Industries may redeem up to 40% of aggregate principal amount of the 6.50% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 106.50% of the aggregate principal amount of the 6.50% Senior Notes to be redeemed, plus accrued and unpaid interest, if any, provided that at least 50% of the aggregate principal amount of the 6.50% Senior Notes remains outstanding after the redemption. Prior to February 1, 2017, Ply Gem Industries may redeem the 6.50% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium plus accrued and unpaid interest, if any. At any time on or after February 1, 2017, Ply Gem Industries may redeem the 6.50% Senior Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 6.50% Senior Notes plus, in each case, accrued and unpaid interest, if any, to the redemption date. The effective interest rate for the 6.50% Senior Notes is 8.48% after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.

The 6.50% Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Ply Gem Holdings and all of the wholly-owned domestic subsidiaries of Ply Gem Industries (the “Guarantors”).  The indenture governing the 6.50% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt (as defined in the indenture) in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00.  

18

In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt under certain circumstances, including, but not limited to, debt under credit facilities (as defined in the indenture) (x) in an amount not to exceed the greater of (a) $350.0 million and (b) the borrowing base (as defined in the indenture) and (y) in an amount not to exceed the greater of (A) $575.0 million and (B) the aggregate amount of indebtedness (as defined in the indenture) that that would cause the consolidated secured debt ratio (as defined in the indenture) to be equal to 4.00 to 1.00; purchase money indebtedness in an aggregate amount not to exceed the greater of (x) $35.0 million and (y) 10% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed the greater of (x) $60.0 million and (y) 15% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt pursuant to a general basket in an aggregate amount at any one time outstanding not to exceed the greater of (x) $75.0 million and (y) 20% of consolidated net tangible assets; and the refinancing of debt under certain circumstances.

On September 5, 2014, Ply Gem Industries completed an exchange offer with respect to the 6.50% Senior Notes issued in January 2014 to exchange $500.0 million 6.50% Senior Notes registered under the Securities Act for $500.0 million of the issued and outstanding 6.50% Senior Notes. Upon completion of the exchange offer, all $500.0 million of issued and outstanding 6.50% Senior Notes were registered under the Securities Act.  On January 23, 2015, Ply Gem Industries completed an exchange offer with respect to the Senior Tack-on Notes issued in September 2014 to exchange $150.0 million Senior Tack-on Notes registered under the Securities Act for $150.0 million of the issued and outstanding Senior Tack-on Notes. Upon completion of the exchange offer, all $150.0 million of issued and outstanding Senior Tack-on Notes were registered under the Securities Act. 
  
Term Loan Facility due 2021

On January 30, 2014, Ply Gem Industries entered into a credit agreement governing the terms of its new $430.0 million Term Loan Facility. Ply Gem Industries borrowed $430.0 million under the Term Loan Facility on January 30, 2014, with an original discount of approximately $2.2 million, yielding proceeds of approximately $427.9 million. The Term Loan Facility will mature on January 30, 2021. The Term Loan Facility requires scheduled quarterly payments in an aggregate annual amount equal to 1.00% of the original aggregate principal amount of the Term Loan Facility with the balance due at maturity. Interest on outstanding borrowings under the Term Loan Facility are paid quarterly.
  
Borrowings under the Term Loan Facility bear interest at a rate equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the highest of (i) the prime rate of the administrative agent under the credit agreement, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period plus 1.00% or (b) a LIBO rate determined by reference to the cost of funds for eurocurrency deposits in dollars for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor, plus, in each case, an applicable margin of 3.00% for any eurocurrency loan and 2.00% for any alternate base rate loan. As of July 4, 2015, the Company's interest rate on the Term Loan Facility was 4.00%. The effective interest rate for the Term Loan is 7.00% after considering each of the different interest expense components of this instrument, including the coupon payment, the deferred debt issuance costs and the original issue discount.

The Term Loan Facility allows Ply Gem Industries to request one or more incremental term loan facilities in an aggregate amount not to exceed the greater of (x) $140.0 million and (y) an amount such that Ply Gem Industries’ consolidated senior secured debt ratio (as defined in the credit agreement), on a pro forma basis, does not exceed 3.75 to 1.00, in each case, subject to certain conditions and receipt of commitments by existing or additional financial institutions or institutional lenders. Ply Gem Industries may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

The Term Loan Facility requires Ply Gem Industries to prepay outstanding term loans, subject to certain exceptions, with: (i) 50% (which percentage will be reduced to 25% if our consolidated senior secured debt ratio is equal or less than 2.50 to 1.00 but greater than 2.00 to 1.00 and to 0% if our consolidated senior secured debt ratio is equal to or less than 2.00 to 1.00) of our annual excess cash flow (as defined in the credit agreement), to the extent such excess cash flow exceeds $15.0 million, commencing with the fiscal year ending December 31, 2015; (ii) 100% of the net cash proceeds of certain non-ordinary course asset sales or certain insurance and condemnation proceeds, in each case subject to certain exceptions and reinvestment rights; and (iii) 100% of the net cash proceeds of certain issuances of debt, other than proceeds from debt permitted under the Term Loan Facility.

19

The Term Loan Facility is secured on a first-priority lien basis by the stock of Ply Gem Industries and by substantially all of the assets (other than the assets securing the obligations under the ABL Facility, which primarily consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper, contract rights, instruments, documents related thereto and proceeds of the foregoing) of Ply Gem Industries and the Guarantors that are subsidiaries of Ply Gem Industries and on a second-priority lien basis by the assets that secure the ABL Facility.

The Term Loan Facility includes negative covenants, subject to certain exceptions, that are substantially the same as the negative covenants in the 6.50% Senior Notes and also does not contain any restrictive financial covenants. The Term Loan Facility also restricts the ability of Ply Gem Industries’ subsidiaries to enter into agreements restricting their ability to grant liens to secure the Term Loan Facility and contains a restriction on changes in fiscal year.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes at par.  Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses.  A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes given that the 2011 transaction was predominately accounted for as a loan modification.  On February 15, 2012, Ply Gem Industries issued an additional $40.0 million principal amount of its 8.25% Senior Secured Notes. The 8.25% Senior Secured Notes would have matured on February 15, 2018 and bore interest at the rate of 8.25% per annum.   Interest was paid semi-annually on February 15 and August 15 of each year. The 8.25% Senior Secured Notes were fully and unconditionally and jointly and severally guaranteed on a senior secured basis by the Guarantors. The 8.25% Senior Secured Notes and the related guarantees were secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

On January 30, 2014, Ply Gem Industries purchased approximately $705.9 million of its outstanding 8.25% Senior Secured Notes in a tender offer at a price of $1,067.50 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries irrevocably deposited with the trustee for the 8.25% Senior Secured Notes an amount sufficient to satisfy and discharge its obligations under the 8.25% Senior Secured Notes and the indenture. On March 1, 2014, Ply Gem Industries redeemed the remaining outstanding principal amount of the 8.25% Senior Secured Notes at a redemption price equal to 106.188% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. Following the redemption, there were no longer any 8.25% Senior Secured Notes outstanding.

Senior Secured Asset Based Revolving Credit Facility due 2018

On November 1, 2013, Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Gienow Canada Inc., and Mitten Inc. (together with Ply Gem Canada and Gienow, the “Canadian Borrowers”) entered into an amended and restated credit agreement governing the ABL Facility. Among other things, the amendment and restatement of the credit agreement governing the ABL Facility: (i) increased the overall facility to $250.0 million from $212.5 million, (ii) increased the accordion feature to $100.0 million, (iii) reduced the applicable margin for borrowings under the ABL Facility to a range from 1.50% to 2.00% for Eurodollar rate loans, depending on availability, and (iv) increased the amount available under the ABL Facility to Ply Gem Industries' Canadian subsidiaries to $50.0 million. In November 2014, the Company exercised a portion of the accordion feature under the ABL Facility for $50.0 million, or 50% of the eligible accordion, increasing the ABL Facility from $250.0 million to $300.0 million to account for the additional borrowing base acquired from Simonton. Under the terms of the ABL Facility, the Company has the ability to further increase the revolving commitments up another $50.0 million to $350.0 million, subject to certain terms and conditions. All outstanding loans under the ABL Facility are due and payable in full on November 1, 2018. Under the ABL Facility, $250.0 million is available to Ply Gem Industries and $50.0 million is available to the Canadian Borrowers. The following summary describes the ABL Facility after giving effect to the amendment and restatement.

20

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent under the ABL Facility and (2) the federal funds rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowings under the ABL Facility was 0.75% for base rate loans and 1.75% for Eurodollar rate loans.  The applicable margin for borrowings under the ABL Facility is subject to step ups and step downs based on average excess availability under the ABL Facility.  Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the ABL Facility, Ply Gem Industries is required to pay a commitment fee in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the ABL Facility (increasing when utilization is low and decreasing when utilization is high) multiplied by a commitment fee rate determined by reference to average excess availability under the ABL Facility. The commitment fee rate during any fiscal quarter is 0.375% when average excess availability is greater than $100.0 million for the preceding fiscal quarter and 0.25% when average availability is less than or equal to $100.0 million for the preceding fiscal quarter.  Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees.   As of July 4, 2015, the Company’s interest rate on the ABL Facility was approximately 1.78% .  The ABL Facility requires that if (a) excess availability is less than the greater of (x) 10.0% of the lower of the borrowing base and the aggregate commitments and (y) $17.5 million or (b) any event of default has occurred and is continuing, Ply Gem Industries must comply with a minimum fixed charge coverage ratio test of 1.0 to 1.0.  If the excess availability under the ABL Facility is less than the greater of (a) 12.5% of the lesser of the borrowing base and the aggregate commitments and (b) $22.5 million ($20.0 million for the months of January, February, March and April) for a period of 5 consecutive days or an event of default has occurred and is continuing, all cash from Ply Gem Industries material deposit accounts (including all concentration accounts) will be swept daily into a collection account controlled by the administrative agent under the ABL Facility and used to repay outstanding loans and cash collateralize letters of credit.

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries.  All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the Term Loan Facility on a first-priority basis.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of the Canadian Borrowers, which are borrowers under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiaries, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of the Canadian Borrowers pledged only to secure the Canadian sub-facility.

The ABL Facility contains certain covenants that limit Ply Gem Industries’ ability and the ability of Ply Gem Industries’ subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries is permitted to incur additional debt in limited circumstances, including, but not limited to, permitted subordinated indebtedness in an aggregate principal amount not to exceed $112.5 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $10.0 million at any one time outstanding, indebtedness in connection with the tax receivable agreement in an aggregate principal amount not to exceed $100.0 million, and the refinancing of debt under certain circumstances.  

21

As of July 4, 2015, Ply Gem Industries had approximately $233.4 million of contractual availability and approximately $206.4 million of borrowing base availability under the ABL Facility, reflecting $60.0 million of borrowings outstanding and approximately $6.6 million of letters of credit and priority payables reserves.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes would have matured on April 15, 2017 and bore interest at the rate of 9.375% per annum. Interest was paid semi-annually on April 15 and October 15 of each year. The 9.375% Senior Notes were unsecured and fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Guarantors.

On January 30, 2014, Ply Gem Industries purchased approximately $94.7 million of the outstanding 9.375% Senior Notes at a tender price of $1,108.36 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries irrevocably deposited with the trustee for the 9.375% Senior Notes an amount sufficient to satisfy and discharge its obligations under the 9.375% Senior Notes and the indenture. On February 16, 2014, Ply Gem Industries redeemed the remaining outstanding principal amount of the 9.375% Senior Notes at a redemption price equal to 100% of the principal amount plus the “make-whole” premium required under the indenture (which equated to 110.179% of the principal amount thereof), plus accrued and unpaid interest. Following the redemption, there were no longer any 9.375% Senior Notes outstanding.

Loss on debt modification or extinguishment

As a result of the January 2014 6.50% Senior Notes and Term Loan Facility issuance and the tender, redemption, and repurchase of the 8.25% Senior Secured Notes and the 9.375% Senior Notes (the "January 2014 Refinancing") during the six months ended June 28, 2014, the Company performed an analysis to determine the proper accounting treatment for the January 2014 Refinancing. Specifically, the Company evaluated each creditor with ownership in both the new 6.50% Senior Notes and/or Term Loan Facility debt instruments and the old 8.25% Senior Secured Notes and/or 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual creditor. The Company had approximately $34.4 million of unamortized debt discount and $14.9 million of unamortized debt issuance costs associated with the 8.25% Senior Secured Notes and 9.375% Senior Notes, of which approximately $4.8 million and $2.1 million, respectively, were expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014 as a result of the January 2014 Refinancing.

The Company also incurred an early tender premium of approximately $61.1 million in conjunction with this transaction, of which approximately $52.6 million was recorded as a discount on the 6.50% Senior Notes and the Term Loan Facility and approximately $8.5 million was expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014. The Company also expensed approximately $0.3 million for the third party fees for the 8.25% Senior Secured Notes and 9.375% Senior Notes as a result of the January 2014 Refinancing for the six months ended June 28, 2014. The Company also incurred approximately $14.7 million of costs associated with the 6.50% Senior Notes and Term Loan Facility, of which approximately $9.2 million was recorded as debt issuance costs and approximately $5.5 million was expensed as a loss on modification of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014. Additionally, the Company incurred an original issue discount of approximately $2.2 million for the Term Loan Facility, of which approximately $1.9 million was recorded as a discount and approximately $0.3 million was expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014.

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Based on the January 2014 Refinancing, the Company recognized a loss on debt modification or extinguishment of approximately $21.4 million for the six months ended June 28, 2014, as summarized in the table below. There was no loss on debt modification or extinguishment in the three and six months ended July 4, 2015 or the three months ended June 28, 2014.
(Amounts in thousands)
 
For the six months ended
 
 
July 4, 2015
 
June 28, 2014
Loss on extinguishment of debt:
 
 

 
 

Tender premium
 
$
—

 
$
(8,493
)
8.25% Senior Secured Notes and 9.375% Senior Notes unamortized discount
 
—

 
(4,773
)
8.25% Senior Secured Notes and 9.375% Senior Notes unamortized debt issuance costs
 
—

 
(2,067
)
Term Loan Facility unamortized discount
 
—

 
(255
)
 
 
—

 
(15,588
)
Loss on modification of debt:
 
 
 
 
Third party fees for 8.25% Senior Secured Notes and 9.375% Senior Notes
 
—

 
(302
)
Third party fees for 6.50% Senior Notes and Term Loan Facility
 
—

 
(5,474
)
 
 
—

 
(5,776
)
Total loss on modification or extinguishment of debt
 
$
—

 
$
(21,364
)

7.   PENSION PLANS

The Company has two pension plans, the Ply Gem Group Pension Plan and the MW Manufacturers, Inc. Retirement Plan. The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components: 
(Amounts in thousands)
 
For the three months ended
 
For the six months ended
 
 
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
 
Service cost
 
$
—

 
$
—

 
$
—

 
$
—

 
Interest cost
 
502

 
476

 
1,004

 
952

 
Expected return on plan assets
 
(577
)
 
(567
)
 
(1,155
)
 
(1,135
)
 
Amortization of loss
 
296

 
116

 
593

 
232

 
Net periodic benefit expense
 
$
221

 
$
25

 
$
442

 
$
49

 


8.   COMMITMENTS AND CONTINGENCIES

Indemnifications

In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek, Inc. (“Nortek”) in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition.  In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable.  The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement.  A receivable related to this indemnification has been recorded in other long-term assets of approximately $2.4 million and $2.9 million at July 4, 2015 and December 31, 2014, respectively.  As of July 4, 2015 and December 31, 2014, the Company has recorded liabilities related to these indemnifications of approximately $0.5 million and $0.5 million, respectively, in current liabilities and $1.9 million and $2.4 million, respectively, in long-term liabilities, consisting of the following:

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(Amounts in thousands)
 
July 4, 2015
 
December 31, 2014
Product claim liabilities
 
$
138

 
$
138

Multi-employer pension plan withdrawal liability
 
1,558

 
2,094

Other
 
665

 
644

 
 
$
2,361

 
$
2,876

    
Warranty claims

The Company sells a number of products and offers a number of warranties.  The specific terms and conditions of these warranties vary depending on the product sold.  The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale.  Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction.  The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary.  As of July 4, 2015 and December 31, 2014, warranty liabilities of approximately $18.0 million and $18.3 million, respectively, have been recorded in current liabilities and approximately $59.0 million and $66.1 million, respectively, have been recorded in long term liabilities. The decrease in the warranty liabilities from December 31, 2014 relates to the Simonton purchase accounting adjustments.

Changes in the Company’s short-term and long-term warranty liabilities are as follows:
 
 
For the three months ended
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
Balance, beginning of period
 
$
84,281

 
$
40,920

 
$
84,423

 
$
42,466

Acquisition - Canyon
 
100

 
—

 
100

 
—

Acquisition adjustments - Simonton
 
(8,002
)
 
—

 
(8,002
)
 
—

Warranty expense during period
 
6,994

 
3,342

 
10,886

 
5,312

Settlements made during period
 
(6,396
)
 
(3,865
)
 
(10,430
)
 
(7,381
)
Balance, end of period
 
$
76,977

 
$
40,397

 
$
76,977

 
$
40,397



Environmental

The Company is subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety. From time to time, the Company's facilities are subject to investigation by governmental regulators. In addition, the Company has been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which it or its predecessors are alleged to have sent hazardous materials for recycling or disposal. The Company may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of the Company's properties from activities conducted by us or previous occupants. The amount of any liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

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MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, Inc., entered into an Administrative Order on Consent (the “Consent Order”), effective September 12, 2011, with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), with respect to its Rocky Mount, Virginia property.  During 2011, as part of the Consent Order, MW provided the EPA, among other things, a RCRA Facility Investigation Workplan (the “Workplan”) as well as a preliminary cost estimate of approximately $1.8 million for the predicted assessment, remediation and monitoring activities to be conducted pursuant to the Consent Order over the remediation period, which is currently estimated through 2023. During 2012, the EPA approved the Workplan, and MW is currently implementing the Workplan. The Company has recorded approximately $0.3 million of this environmental liability within current liabilities and approximately $1.2 million within other long-term liabilities in the Company’s condensed consolidated balance sheet at July 4, 2015 and December 31, 2014.  The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.

Certain liabilities with respect to this contamination relate to the previous closure of an underground storage tank and were assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to FPI Acquisition Corp. (“Fenway Partners”). As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc.  The Company’s ability to seek indemnification from U.S. Industries, Inc. is, however, limited by the terms and limits of the indemnity as well as the strength of U.S. Industries, Inc.’s financial condition, which could change in the future.  As of July 4, 2015, no recovery has been recognized on the Company’s condensed consolidated balance sheet, but the Company will actively pursue this indemnity in future periods and will recognize future recoveries in the period in which they become probable.

The State of Nebraska is investigating certain groundwater contamination in northern York, Nebraska, comprised primarily of volatile organic compounds (VOC) (predominantly trichloroethene (TCE)). In December 2013, the EPA announced its proposal to add this groundwater contamination site to the Superfund National Priorities List (NPL) after it was referred to the EPA by the State of Nebraska. Sampling was conducted at the Kroy Building Products, Inc. (“Kroy”) facility in York, Nebraska during the first quarter of 2010. In February 2015, the EPA sent a request for information pursuant to Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and Kroy has responded to this request for information. Given the preliminary stage of this matter, the Company has not recorded a liability for this matter in its condensed consolidated balance sheet as of July 4, 2015. Alcan Aluminum Corporation (“Alcan”) has assumed the obligation to indemnify the Company with respect to certain liabilities for environmental contamination of the Kroy facility occurring prior to 1994. Notwithstanding this indemnity, however, under applicable Federal and State laws, Kroy, and Ply Gem as its parent, could be held liable for all or part of the costs associated with the matter under certain circumstances. Moreover, the ability of Kroy and Ply Gem to seek indemnification may be limited by the terms and limits of the indemnity as well as the strength of Alcan’s financial condition, which could change in the future.

The Company is currently involved in environmental proceedings involving Gienow Canada Inc. (f/k/a Ply Gem Canada, Inc.) and Alberta Environment (arising from subsurface contamination discovered at our Calgary, Alberta property) for which the Company has a $0.1 million liability included in its condensed consolidated balance sheet, and the Company may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania), Mastic Home Exteriors, Inc. (“MHE”) (relating to a closed landfill site in Sidney, Ohio as well as participating as a potentially responsible party in nine contaminated sites in Indiana, Ohio and South Carolina), and Simonton (relating to closed lagoons and certain contamination in Paris, Illinois as well as certain contamination associated with certain 7-Eleven convenience food stores). Under the stock purchase agreement governing the MHE acquisition, Alcoa Securities Corporation and Alcoa, Inc. are to indemnify the Company for certain environmental liabilities in excess of $2.5 million including liabilities relating to the landfill site in Sidney, Ohio and the nine contaminated sites in Indiana, Ohio and South Carolina. Under the stock purchase agreement governing the Simonton acquisition, Fortune Brands Windows & Doors, Inc., is to indemnify the Company for any environmental claims associated with the 7-Eleven convenience food stores.  Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in an environmental proceeding with the Georgia Department of Natural Resources in connection with a contaminated landfill site in Thomson, Georgia.  While the Company had assumed an obligation to indemnify the purchaser of our former subsidiary when the Company sold Hoover Treated Wood Products, Inc., the Company's obligation has been novated and assumed by Nortek. The Company's ability to seek indemnification or enforce these and other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as the terms and limits of any such indemnities or obligations.

25

Based on current information, the Company is not aware of any compliance obligations, claims, releases or investigations that will have a material adverse effect on our results of operations, cash flows or financial position except as otherwise disclosed in the Company's condensed consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters or any inability to enforce our available indemnification rights against previous owners of the Company or its subsidiaries will not result in material costs or liabilities. While the purchase agreements governing certain of our acquisitions provide that the sellers will indemnify us, subject to certain limitations, for certain environmental liabilities, our ability to seek indemnification from the respective sellers is limited by various factors, including the financial condition of the indemnitor or responsible party as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from the sellers, and any related environmental liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
Self-insured risks

The Company maintains a broad range of insurance policies which include general liability insurance coverage and workers compensation. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a portion of the overall risk for such claims through its self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The Company's general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. The Company's insurance coverage is generally subject to a per occurrence retention.

The Company reserves for costs associated with claims, as well as incurred but not reported losses (“IBNR”), based on an outside actuarial analysis of its historical claims. These estimates make up a significant portion of the Company's liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in type of claims, claims reporting and resolution patterns, frequency and timing of claims, third party recoveries, estimates of claim values, claims management expenses (including legal fees and expert fees), insurance industry practices, the regulatory environment, and legal precedent. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

Litigation

During the past several years, the Company incurred increased litigation expense primarily related to the claims discussed below. The Company believes it has valid defenses to the claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.

In John Gulbankian v. MW Manufacturers, Inc. (“Gulbankian”), a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts (the “Court”), plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW's V-Wood windows. In Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc. (“Hartshorn”), a purported class action filed in July 2012 in the Court, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW's Freedom and Freedom 800 windows. On April 22, 2014, plaintiffs in both the Gulbankian and Hartshorn cases filed a Consolidated Amended Class Action Complaint, making similar claims against all MW vinyl clad windows, including MW’s V-Wood, Freedom, Freedom 600 and Freedom 800 windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation.

26

During 2014, MW engaged in mediation sessions with plaintiffs’ counsel for both the Gulbankian and Hartshorn cases. MW signed a settlement agreement with plaintiffs as of April 18, 2014 to settle both the Gulbankian and Hartshorn cases on a nationwide basis (the “Vinyl Clad Settlement Agreement”). The Vinyl Clad Settlement Agreement provides that this settlement applies to any and all MW vinyl clad windows manufactured from January 1, 1987 through May 23, 2014, and provides for a cash payment for eligible consumers submitting qualified claims showing, among other requirements, certain damage to their MW vinyl clad windows. The Court granted preliminary approval of this settlement on May 23, 2014, and issued a Final Approval Order, Final Judgment, and Order of Dismissal with Prejudice (the "Final Approval Order") on December 29, 2014, granting final approval of the settlement as well as MW’s payment of attorneys' fees and costs to plaintiffs' counsel in the amount of $2.5 million. On January 13, 2015, notice of appeal of the final approval (the “Appeal”) was given by certain objectors to the settlement, Karl Memari, Joelene Connor-Hethcox and Vincent Cecil Garrett, Jr. (the “Objectors”). On May 6, 2015, MW entered into a settlement agreement with, among others, the Objectors to fully and finally resolve their claims, including the dismissal of Karl Memari v. Ply Gem Prime Holdings, Inc. et al., another pending lawsuit seeking class certification discussed below, making the Vinyl Clad Settlement Agreement final and binding on the parties. The Company and MW deny all liability in the settlements and with respect to the facts and claims alleged. The Company, however, is aware of the substantial burden, expense, inconvenience and distraction of continued litigation, and therefore agreed to settle these matters.

As a result of the Vinyl Clad Settlement Agreement, the Company recognized a $5.0 million expense during the six months ended June 28, 2014 within selling, general, and administrative expenses in the Company’s condensed consolidated statement of operations and comprehensive income (loss) in the Company's Windows and Doors segment. It is possible that the Company may incur costs in excess of the recorded amounts; however, the Company currently expects that the total net cost to resolve the lawsuits will not exceed $5.0 million. As of July 4, 2015, approximately $1.6 million of this liability is currently outstanding with $0.7 million as a current liability within accrued expenses and $0.9 million as a noncurrent liability within other long-term liabilities in the Company’s condensed consolidated balance sheet.

In Karl Memari v. Ply Gem Prime Holdings, Inc. et al., a purported class action filed in March 2013 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the illegality and/or defects of MW's vinyl clad windows. The plaintiff seeks a variety of relief, including (i) actual and compensatory damages, (ii) punitive damages, and (iii) attorneys' fees and costs of litigation. Plaintiff dismissed this matter in connection with the settlement of the Appeal in the Gulbankian and Hartshorn cases as described above.

In Anthony Pagliaroni v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by Mastic Home Exteriors, Inc. (“MHE”). The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. The damages sought in this action have not yet been quantified. Discovery regarding class certification has closed and the hearing regarding class certification was held on March 10, 2015, although the Court has not yet ruled on this hearing. Deceuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify MHE for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. MHE's ability to seek indemnification from Deceuninck is, however, limited by the terms and limits of the indemnity as well as the strength of Deceuninck's financial condition, which could change in the future.

In The Muhler Company, Inc. v. Ply Gem Prime Holdings, Inc. et al., a lawsuit filed in April 2011 in the United States District Court for the District of South Carolina, Charleston Division (the “Court”), plaintiff alleges unfair competition and trade practices. The plaintiff seeks a variety of relief, including (i) consequential damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys' fees and costs of litigation. In April 2013, the Court granted the Company's motion for summary judgment with respect to the federal Lanham Act claims. In May 2013, the plaintiff filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit with respect to the summary judgment granted on the federal Lanham Act claims, and the Fourth Circuit denied interlocutory appeal. With the summary judgment granted on the federal Lanham Act claims, only state unfair competition and trade practices claims remain. In April 2015, the Court heard arguments on the Company's motion for summary judgment with respect to such claims, and on July 13, 2015, the Court granted the Company’s motion. On July 27, 2015, the plaintiff filed an appeal with the U.S. Court of Appeals for the Fourth Circuit with respect to the Court’s ruling. The U.S. Court of Appeals for the Fourth Circuit has yet to rule on the plaintiff’s appeal. The damages sought in this action have not yet been quantified.

27

In re Ply Gem Holdings, Inc. Securities Litigation is a purported federal securities class action filed on May 19, 2014 in the United States District Court for the Southern District of New York against Ply Gem Holdings, Inc., several of its directors and officers, and the underwriters associated with the Company’s IPO. It is filed on behalf of all persons or entities, other than the defendants, who purchased the common shares of the Company pursuant and/or traceable to the Company’s IPO and seeks remedies under Sections 11 and 15 of the Securities Act of 1933, alleging that the Company’s Form S-1 registration statement was negligently prepared and materially inaccurate, containing untrue statements of material fact and omitting material information which was required to be disclosed. The plaintiffs seek a variety of relief, including (i) damages together with interest thereon and (ii) attorneys’ fees and costs of litigation. On October 14, 2014, Strathclyde Pension Fund was certified as lead plaintiff, and class counsel was appointed. On February 13, 2015 the defendants filed their motion to dismiss the complaint, on April 14, 2015 the lead plaintiff filed its opposition to that motion to dismiss, and on May 14, 2015 the defendants filed their reply brief in support of their motion to dismiss. The damages sought in this action have not yet been quantified. Pursuant to the Underwriting Agreement, dated May 22, 2013, entered into in connection with the IPO, the Company has agreed to reimburse the underwriters for the legal fees and other expenses reasonably incurred by the underwriters’ law firm in its representation of the underwriters in connection with this matter. Pursuant to Indemnification Agreements, dated as of May 22, 2013, between the Company and each of the directors and officers named in this action, the Company has agreed to assume the defense of such directors and officers. The Company believes the purported federal securities class action is without merit and will vigorously defend against the lawsuit.

Other contingencies

The Company is subject to other contingencies, including legal proceedings and claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, personal injury, property damage, product liability, warranty and modification, adjustment or replacement of component parts or units sold, which may include product recalls.  Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned.  The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear.  Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.  Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made.


9.   ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
 
Accrued expenses consist of the following at July 4, 2015 and December 31, 2014:
(Amounts in thousands)
 
July 4, 2015
 
December 31, 2014
Insurance
 
$
9,021

 
$
9,144

Employee compensation and benefits
 
16,012

 
15,576

Sales and marketing
 
45,361

 
36,279

Product warranty
 
17,955

 
18,325

Accrued freight
 
3,124

 
1,278

Accrued interest
 
18,072

 
16,470

Accrued environmental liability
 
441

 
451

Accrued pension
 
1,753

 
1,753

Accrued sales returns and discounts
 
4,730

 
3,054

Accrued taxes
 
6,298

 
3,898

Litigation accrual
 
700

 
2,573

Other
 
25,368

 
38,524

 
 
$
148,835

 
$
147,325



28

Other long-term liabilities consist of the following at July 4, 2015 and December 31, 2014:

(Amounts in thousands)
 
July 4, 2015
 
December 31, 2014
Insurance
 
$
1,576

 
$
1,705

Pension liabilities
 
13,094

 
13,327

Multi-employer pension withdrawal liability
 
1,558

 
2,094

Product warranty
 
59,022

 
66,098

Long-term product claim liability
 
138

 
138

Long-term environmental liability
 
1,227

 
1,227

Liabilities for tax uncertainties
 
3,212

 
3,065

Litigation accrual
 
937

 
2,000

Other
 
5,355

 
5,160

 
 
$
86,119

 
$
94,814


Long-term incentive plan

The Company has a long-term incentive plan (“LTIP”) for certain employees. The long-term incentive plan was implemented to retain and incentivize key employees. During the three months ended July 4, 2015 and June 28, 2014, the Company recognized a LTIP expense of $0.7 million and $0.4 million, respectively, which has been recorded within selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). During the six months ended July 4, 2015 and June 28, 2014, the Company recognized a LTIP expense of $1.4 million and $1.0 million, respectively, which has been recorded within selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). The LTIP liability was $3.4 million and $4.5 million as of July 4, 2015 and December 31, 2014, respectively, of which $2.4 million and $2.5 million has been recorded within accrued expenses and $1.0 million and $2.0 million in other long-term liabilities in the condensed consolidated balance sheets as of July 4, 2015 and December 31, 2014, respectively.

Other liabilities

During the three months ended July 4, 2015 and June 28, 2014, the Company made approximately $1.0 million and $1.3 million, in cash payments on restructuring liabilities, respectively. During the six months ended July 4, 2015 and June 28, 2014, the Company made approximately $1.5 million and $3.4 million, in cash payments on restructuring liabilities, respectively. These payments were for a restructuring and integration program implemented in Western Canada and general back office centralization efforts incurred as well as product simplification costs incurred for the entire Windows and Doors segment.

10.   INCOME TAXES
Effective tax rate
Under FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date pre-tax book income (loss). In addition, we exclude jurisdictions with a projected loss for the year or the year-to-date loss where we cannot recognize a tax benefit from our estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company includes certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods in accordance with ASC 740-270.

29

For the six months ended July 4, 2015, the Company's estimated effective income tax rate was approximately 4.8%, which varied from the statutory rate primarily due to state income tax expense, valuation allowances, tax contingencies, and foreign income taxes. The effective tax rate including discrete items was 17.3%. The tax benefit for the three and six months ended July 4, 2015 is approximately $1.5 million and $3.9 million, respectively.
Valuation allowance
As of July 4, 2015, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. All of the Company's subsidiaries, excluding Mitten, are in a full valuation allowance position as of July 4, 2015.
Due to recent cumulative losses incurred by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. The Company currently has book goodwill of approximately $31.0 million that is not amortized, which results in a deferred tax liability of approximately $6.8 million at July 4, 2015. Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets. The Company continues to evaluate its ability to realize the net deferred tax assets and its estimates are subject to change.
Tax uncertainties
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the condensed consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. Certain income tax returns are currently under examination by various taxing authorities. During the six months ended July 4, 2015, the Company increased its tax contingency reserve by approximately $0.1 million as a result of interest accrued on existing uncertain tax positions.
Tax Receivable Agreement
On May 22, 2013, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with PG ITR Holdco, L.P. (the “Tax Receivable Entity”). The Tax Receivable Agreement generally provides for the payment by the Company to the Tax Receivable Entity of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes in periods ending after the IPO as a result of (i) net operating loss ("NOL") carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to the IPO and (iii) deductions related to imputed interest deemed to be paid by the Company as a result of or attributable to payments under the Tax Receivable Agreement. The term of the Tax Receivable Agreement will continue until all such benefits have been utilized or expired. The Company will retain the benefit of the remaining 15% of these tax savings. The Tax Receivable Agreement will obligate the Company to make payments to the Tax Receivable Entity generally equal to 85% of the applicable cash savings that is actually realized as a result of utilizing NOL carryovers once the tax returns are filed for that respective tax year.
The Company estimates that the total anticipated amount of future payments under the Tax Receivable Agreement will be approximately $100.0 million assuming no material changes in the relevant tax law, that the Company earns sufficient taxable income to utilize the net operating loss carrying forwards, and that utilization of such tax attributes is not subject to limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") as the result of an “ownership change”. It is possible that future transactions or events or changes in estimates could increase or decrease the actual tax benefits realized from these tax attributes and the corresponding Tax Receivable Agreement payments and liability.

As of July 4, 2015, the Company had a long-term liability of approximately $26.1 million for the amount due pursuant to the Tax Receivable Agreement related to NOL carryovers. The Company recognized a $2.0 million and $3.9 million benefit for a decrease in this liability during the three months ended July 4, 2015 and June 28, 2014, respectively. The Company recognized a $15.2 million and $0.4 million expense for the increase in this liability during the six months ended July 4, 2015 and June 28, 2014, respectively.

30

Other
As of July 4, 2015, the Company has not established U.S. deferred taxes on unremitted earnings of the Company’s foreign subsidiaries. Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently invested.
On December 23, 2011, the U.S. Treasury Department issued comprehensive temporary and proposed regulations addressing the treatment of expenditures related to tangible property for tax purposes. The final regulations were issued on September 13, 2013 and are effective for tax years beginning January 1, 2014. The Company is evaluating the changes necessary to comply with the regulations and the related administrative procedures and is not currently aware of any adjustments that would be material to the Company’s condensed consolidated financial statements.

11.   STOCK-BASED COMPENSATION

A rollforward of stock options outstanding during the six months ended July 4, 2015 is presented below: 
 
 
Stock Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
Balance at January 1, 2015
 
2,749,064

 
$
13.38

 
5.50

Granted
 
247,808

 
12.62

 
—

Exercised
 
(100,135
)
 
6.48

 
—

Forfeited or expired
 
(197,119
)
 
—

 
—

Balance at July 4, 2015
 
2,699,618

 
$
13.64

 
5.70


As of July 4, 2015, 1,974,588 options were 100% vested.  At July 4, 2015, the Company had approximately $1.7 million of total unrecognized compensation expense that will be recognized over a weighted average period of 1.75 years.  The Company recorded compensation expense of $0.5 million and $0.5 million for the three months ended July 4, 2015 and June 28, 2014, respectively, and $1.0 million and $0.9 million for the six months ended July 4, 2015 and June 28, 2014, respectively.

Restricted stock

During March 2014, the Company issued 3,523 restricted shares of common stock to each of three independent members of the Board of Directors.  These shares vested over the approximate ten-month period to December 31, 2014 and the Company expensed these items ratably over the ten-month period up to the vesting date. One issuance of these shares, or 3,523 shares, became immediately fully vested during May 2014. Additionally, during May 2014, the Company issued 5,240 restricted shares of common stock to each of the two new independent members of the Board of Directors.  These shares will vest over the approximate eight-month period to December 31, 2014 and the Company expensed these items ratably over the eight-month period up to the vesting date. During the three and six months ended June 28, 2014, the Company expensed approximately $0.1 million and $0.1 million, respectively, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).

During December 2014, the Company issued an aggregate of 23,944 restricted shares of common stock in an equal number to each of the four independent members of the Board of Directors.  These shares will vest over the 2015 calendar period and the Company will expense these items as compensation expense, ratably during 2015. During the three and six months ended July 4, 2015, the Company expensed approximately $0.1 million and $0.2 million, respectively, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).



31

12.   SEGMENT INFORMATION

The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.  The Company has two reportable segments:  (1) Siding, Fencing and Stone and (2) Windows and Doors.

The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses.  Unallocated income and expenses include items which are not directly attributed to or allocated to either of the Company’s reporting segments.  Such items include interest, legal costs, corporate payroll, and unallocated finance, and accounting expenses. Unallocated corporate assets include cash and certain receivables.  Interest expense is presented net of interest income.

Following is a summary of the Company’s segment information:
 
 
For the three months ended
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
Net sales
 
 
 
 
 
 
 
 
Siding, Fencing and Stone
 
$
238,573

 
$
227,948

 
$
395,015

 
$
365,003

Windows and Doors
 
263,761

 
181,263

 
483,367

 
313,673

 
 
$
502,334

 
$
409,211

 
$
878,382

 
$
678,676

Operating earnings (loss)
 
 

 
 

 
 

 
 

Siding, Fencing and Stone
 
$
44,687

 
$
37,766

 
$
55,008

 
$
44,729

Windows and Doors
 
9,580

 
(1,066
)
 
(6,826
)
 
(21,567
)
Unallocated
 
(8,603
)
 
(5,463
)
 
(16,568
)
 
(11,514
)
 
 
$
45,664

 
$
31,237

 
$
31,614

 
$
11,648

 
 
 
 
 
 
 
 
 
 
 
Total assets as of
 
 
 
 
 
 
July 4, 2015
 
December 31, 2014
 
 
 
 
Total assets
 
 

 
 

 
 
 
 
Siding, Fencing and Stone
 
$
736,314

 
$
673,543

 
 
 
 
Windows and Doors
 
523,053

 
528,938

 
 
 
 
Unallocated
 
53,468

 
52,094

 
 
 
 
 
 
$
1,312,835

 
$
1,254,575

 
 
 
 

  

32


13.  RELATED PARTY TRANSACTIONS
 
During March 2015, the Company entered into new retention agreements with the Company's Chief Executive Officer and Chief Financial Officer for $3.0 million and $1.3 million, respectively. These retention agreements incentivize these individuals for three years and will require the Company to make cumulative payments of $4.3 million on December 31, 2017, if both individuals remain employed in their current positions on that date.


14.   RESTRUCTURING

During 2013, the Company announced that it will realign production across two manufacturing facilities in Calgary, Alberta, Canada, in an effort to improve the Company’s overall operating efficiency. The two manufacturing facilities resulted from the Company’s acquisition of Gienow, completed in April 2013, combined with the pre-existing manufacturing facility of Ply Gem Canada. These realignment plans include shifting the majority of the vinyl window and door production into Gienow’s manufacturing facility in Calgary, Alberta, Canada, while maintaining wood window and door production in Ply Gem Canada’s manufacturing facility also located in Calgary, Alberta, Canada. In connection with this realignment, distribution was realigned across Gienow and Ply Gem Canada distribution centers in Western Canada.

Production began to be realigned during 2013, with the majority completed by March 2014. In connection with these plans, the Company originally expected to incur pre-tax exit and restructuring cash and non-cash costs totaling approximately $2.9 million, which includes approximately $0.2 million for contract termination costs, approximately $1.1 million of personnel-related costs and approximately $1.6 million of other facilities-related costs.

The following table summarizes the Company's restructuring activity for the six months ended July 4, 2015:
(Amounts in thousands)
 
Accrued as of
 
Adjustments
 
Expensed
 
Cash payments
 
Accrued as of
 
 
December 31, 2014
 
during 2015
 
during 2015
 
during 2015
 
July 4, 2015
Western Canada
 
 
 
 
 
 
 
 
 
 
Severance costs
 
$
283

 
$
(13
)
 
$
805

 
$
(1,075
)
 
$
—

Contract terminations
 
129

 
(10
)
 
—

 
—

 
119

 
 
$
412

 
$
(23
)
 
$
805

 
$
(1,075
)
 
$
119


The adjustments incurred in the six months ended July 4, 2015 are related to the foreign currency translation impact of the related balances during the period.

The Company recorded restructuring costs in selling, general and administrative expenses in the condensed consolidated statements of operations in the periods and in the segments shown in the following table:
 
 
 
For the three months ended
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
Siding, Fencing and Stone
 
$
—

 
$
—

 
$
—

 
$
—

Windows and Doors
 
759

 
934

 
805

 
2,193

 
 
$
759

 
$
934

 
$
805

 
$
2,193






33



15.   GUARANTOR/NON-GUARANTOR

The 6.50% Senior Notes were issued by our direct 100% owned subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries.  Ply Gem Industries is a 100% owned subsidiary of Ply Gem Holdings. Accordingly, the following guarantor and non-guarantor information is presented as of July 4, 2015 and December 31, 2014, and for the three and six months ended July 4, 2015 and June 28, 2014.  The non-guarantor information presented represents our Canadian subsidiaries: Gienow and Mitten.

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Three months ended July 4, 2015
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
438,259

 
$
64,075

 
$
—

 
$
502,334

Cost of products sold
 
—

 
—

 
330,130

 
47,461

 
—

 
377,591

Gross profit
 
—

 
—

 
108,129

 
16,614

 
—

 
124,743

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
8,603

 
48,875

 
15,318

 
—

 
72,796

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
6,172

 
1,572

 
(7,744
)
 
—

Amortization of intangible assets
 
—

 
—

 
5,134

 
1,149

 
—

 
6,283

Total operating expenses
 
—

 
8,603

 
60,181

 
18,039

 
(7,744
)
 
79,079

Operating earnings (loss)
 
—

 
(8,603
)
 
47,948

 
(1,425
)
 
7,744

 
45,664

Foreign currency loss
 
—

 
—

 
—

 
(98
)
 
—

 
(98
)
Intercompany interest
 
—

 
15,809

 
(14,760
)
 
(1,049
)
 
—

 
—

Interest expense
 
—

 
(18,699
)
 
—

 
—

 
—

 
(18,699
)
Interest income
 
—

 
1

 
11

 
5

 
—

 
17

Tax receivable agreement liability adjustment
 
—

 
2,006

 
—

 
—

 
—

 
2,006

Intercompany administrative income
 
—

 
7,744

 
—

 
—

 
(7,744
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
(1,742
)
 
33,199

 
(2,567
)
 
—

 
28,890

Equity in subsidiaries' income (loss)
 
30,372

 
32,114

 
—

 
—

 
(62,486
)
 
—

Income (loss) before provision
 
 
 
 
 
 
 
 
 
 
 
 
(benefit) for income taxes
 
30,372

 
30,372

 
33,199

 
(2,567
)
 
(62,486
)
 
28,890

Provision (benefit) for income taxes
 
—

 
—

 
(1,791
)
 
309

 
—

 
(1,482
)
Net income (loss)
 
$
30,372

 
$
30,372

 
$
34,990

 
$
(2,876
)
 
$
(62,486
)
 
$
30,372

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
276

 
—

 
276

Unrealized loss on derivative instrument
 
—

 
—

 
—

 
(1,131
)
 
—

 
(1,131
)
Total comprehensive income (loss)
 
$
30,372

 
$
30,372

 
$
34,990

 
$
(3,731
)
 
$
(62,486
)
 
$
29,517



34


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Three months ended June 28, 2014
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
330,469

 
$
78,742

 
$
—

 
$
409,211

Cost of products sold
 
—

 
—

 
261,417

 
60,389

 
—

 
321,806

Gross profit
 
—

 
—

 
69,052

 
18,353

 
—

 
87,405

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

  Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
5,463

 
29,351

 
16,142

 
—

 
50,956

  Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
4,057

 
1,689

 
(5,746
)
 
—

Amortization of intangible assets
 
—

 
—

 
3,917

 
1,295

 
—

 
5,212

Total operating expenses
 
—

 
5,463

 
37,325

 
19,126

 
(5,746
)
 
56,168

Operating earnings (loss)
 
—

 
(5,463
)
 
31,727

 
(773
)
 
5,746

 
31,237

Foreign currency gain
 
—

 
—

 
—

 
477

 
—

 
477

Intercompany interest
 
—

 
13,341

 
(12,911
)
 
(430
)
 
—

 
—

Interest expense
 
—

 
(17,238
)
 
(8
)
 
(1
)
 
—

 
(17,247
)
Interest income
 
—

 
2

 
12

 
8

 
—

 
22

Tax receivable agreement liability adjustment
 
—

 
3,942

 
—

 
—

 
—

 
3,942

Intercompany administrative income
 
—

 
5,746

 
—

 
—

 
(5,746
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
330

 
18,820

 
(719
)
 
—

 
18,431

Equity in subsidiaries' income (loss)
 
11,380

 
11,050

 
—

 
—

 
(22,430
)
 
—

Income (loss) before provision
 
 

 
 

 
 

 
 

 
 

 
 

(benefit) for income taxes
 
11,380

 
11,380

 
18,820

 
(719
)
 
(22,430
)
 
18,431

Provision (benefit) for income taxes
 
—

 
—

 
(1,346
)
 
8,397

 
—

 
7,051

Net income (loss)
 
$
11,380

 
$
11,380

 
$
20,166

 
$
(9,116
)
 
$
(22,430
)
 
$
11,380

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
4,299

 
—

 
4,299

Unrealized loss on derivative instrument
 
—

 
—

 
—

 
(576
)
 
—

 
(576
)
Total comprehensive income (loss)
 
$
11,380

 
$
11,380

 
$
20,166

 
$
(5,393
)
 
$
(22,430
)
 
$
15,103


35


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the six months ended July 4, 2015
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
765,650

 
$
112,732

 
$
—

 
$
878,382

Cost of products sold
 
—

 
—

 
606,574

 
86,784

 
—

 
693,358

Gross profit
 
—

 
—

 
159,076

 
25,948

 
—

 
185,024

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
16,568

 
94,779

 
29,581

 
—

 
140,928

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
14,946

 
2,722

 
(17,668
)
 
—

Amortization of intangible assets
 
—

 
—

 
10,118

 
2,364

 
—

 
12,482

Total operating expenses
 
—

 
16,568

 
119,843

 
34,667

 
(17,668
)
 
153,410

Operating earnings (loss)
 
—

 
(16,568
)
 
39,233

 
(8,719
)
 
17,668

 
31,614

Foreign currency loss
 
—

 
—

 
—

 
(1,032
)
 
—

 
(1,032
)
Intercompany interest
 
—

 
31,592

 
(29,721
)
 
(1,871
)
 
—

 
—

Interest expense
 
—

 
(37,784
)
 
1

 
(9
)
 
—

 
(37,792
)
Interest income
 
—

 
2

 
13

 
11

 
—

 
26

Tax receivable agreement liability adjustment
 
—

 
(15,179
)
 
—

 
—

 
—

 
(15,179
)
Intercompany administrative income
 
—

 
17,668

 
—

 
—

 
(17,668
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
(20,269
)
 
9,526

 
(11,620
)
 
—

 
(22,363
)
Equity in subsidiaries' income (loss)
 
(18,487
)
 
1,782

 
—

 
—

 
16,705

 
—

Income (loss) before benefit
 
 

 
 

 
 

 
 

 
 

 
 

for income taxes
 
(18,487
)
 
(18,487
)
 
9,526

 
(11,620
)
 
16,705

 
(22,363
)
Benefit for income taxes
 
—

 
—

 
(3,371
)
 
(505
)
 
—

 
(3,876
)
Net income (loss)
 
$
(18,487
)
 
$
(18,487
)
 
$
12,897

 
$
(11,115
)
 
$
16,705

 
$
(18,487
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
(7,170
)
 
—

 
(7,170
)
Unrealized gain on derivative instrument
 
—

 
—

 
—

 
971

 
—

 
971

Total comprehensive income (loss)
 
$
(18,487
)
 
$
(18,487
)
 
$
12,897

 
$
(17,314
)
 
$
16,705

 
$
(24,686
)


36

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the six months ended June 28, 2014
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
552,537

 
$
126,139

 
$
—

 
$
678,676

Cost of products sold
 
—

 
—

 
452,737

 
98,721

 
—

 
551,458

Gross profit
 
—

 
—

 
99,800

 
27,418

 
—

 
127,218

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

  Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
11,514

 
62,030

 
31,492

 
—

 
105,036

  Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
8,246

 
3,527

 
(11,773
)
 
—

Amortization of intangible assets
 
—

 
—

 
7,844

 
2,690

 
—

 
10,534

Total operating expenses
 
—

 
11,514

 
78,120

 
37,709

 
(11,773
)
 
115,570

Operating earnings (loss)
 
—

 
(11,514
)
 
21,680

 
(10,291
)
 
11,773

 
11,648

Foreign currency gain
 
—

 
—

 
—

 
249

 
—

 
249

Intercompany interest
 
—

 
32,017

 
(30,265
)
 
(1,752
)
 
—

 
—

Interest expense
 
—

 
(35,744
)
 
(19
)
 
(2
)
 
—

 
(35,765
)
Interest income
 
—

 
3

 
20

 
23

 
—

 
46

Tax receivable agreement liability adjustment
 
—

 
(431
)
 
—

 
—

 
—

 
(431
)
Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

     extinguishment of debt
 
—

 
(21,364
)
 
—

 
—

 
—

 
(21,364
)
Intercompany administrative income
 
—

 
11,773

 
—

 
—

 
(11,773
)
 
—

Loss before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income (loss)
 
—

 
(25,260
)
 
(8,584
)
 
(11,773
)
 
—

 
(45,617
)
Equity in subsidiaries' income (loss)
 
(40,198
)
 
(14,938
)
 
—

 
—

 
55,136

 
—

Loss before provision (benefit)
 
 

 
 

 
 

 
 

 
 

 
 

for income taxes
 
(40,198
)
 
(40,198
)
 
(8,584
)
 
(11,773
)
 
55,136

 
(45,617
)
Provision (benefit) for income taxes
 
—

 
—

 
(9,975
)
 
4,556

 
—

 
(5,419
)
Net income (loss)
 
$
(40,198
)
 
$
(40,198
)
 
$
1,391

 
$
(16,329
)
 
$
55,136

 
$
(40,198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
(361
)
 
—

 
(361
)
Unrealized loss on derivative instrument
 
—

 
—

 
—

 
(933
)
 
—

 
(933
)
Total comprehensive income (loss)
 
$
(40,198
)
 
$
(40,198
)
 
$
1,391

 
$
(17,623
)
 
$
55,136

 
$
(41,492
)


37


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of July 4, 2015
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
ASSETS
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
26,426

 
$
(4,494
)
 
$
13,934

 
$
—

 
$
35,866

Accounts receivable, net
 
—

 
—

 
224,632

 
35,108

 
—

 
259,740

Inventories:
 
 

 
 

 
 

 
 

 
 

 
 

Raw materials
 
—

 
—

 
64,014

 
6,666

 
—

 
70,680

Work in process
 
—

 
—

 
24,242

 
1,663

 
—

 
25,905

Finished goods
 
—

 
—

 
56,480

 
17,079

 
—

 
73,559

Total inventory
 
—

 
—

 
144,736

 
25,408

 
—

 
170,144

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
1,094

 
23,898

 
6,469

 
—

 
31,461

Deferred income taxes
 
—

 
—

 
8,195

 
—

 
—

 
8,195

Total current assets
 
—

 
27,520

 
396,967

 
80,919

 
—

 
505,406

Investments in subsidiaries
 
(119,586
)
 
(35,583
)
 
—

 
—

 
155,169

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

   Land
 
—

 
—

 
7,387

 
814

 
—

 
8,201

   Buildings and improvements
 
—

 
—

 
61,363

 
4,857

 
—

 
66,220

   Machinery and equipment
 
—

 
2,747

 
349,740

 
17,429

 
—

 
369,916

 
 
—

 
2,747

 
418,490

 
23,100

 
—

 
444,337

Less accumulated depreciation
 
—

 
(1,608
)
 
(275,788
)
 
(8,718
)
 
—

 
(286,114
)
    Total property and equipment, net
 
—

 
1,139

 
142,702

 
14,382

 
—

 
158,223

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
122,514

 
20,189

 
—

 
142,703

Goodwill
 
—

 
—

 
447,514

 
31,280

 
—

 
478,794

Intercompany note receivable
 
—

 
974,510

 
—

 
—

 
(974,510
)
 
—

Other
 
—

 
24,809

 
2,900

 
—

 
—

 
27,709

Total other assets
 
—

 
999,319

 
572,928

 
51,469

 
(974,510
)
 
649,206

 
 
$
(119,586
)
 
$
992,395

 
$
1,112,597

 
$
146,770

 
$
(819,341
)
 
$
1,312,835

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
123

 
$
74,229

 
$
19,794

 
$
—

 
$
94,146

Accrued expenses
 
—

 
22,680

 
107,229

 
18,926

 
—

 
148,835

Current portion of long-term debt
 
—

 
4,300

 
—

 
—

 
—

 
4,300

Total current liabilities
 
—

 
27,103

 
181,458

 
38,720

 
—

 
247,281

Deferred income taxes
 
—

 
—

 
15,408

 
5,622

 
—

 
21,030

Intercompany note payable
 
—

 
—

 
866,234

 
108,276

 
(974,510
)
 
—

Payable to related parties pursuant to
 
 
 
 
 
 
 
 
 
 
 
 
   tax receivable agreement
 
—

 
26,096

 
—

 
—

 
—

 
26,096

Other long-term liabilities
 
—

 
6,887

 
75,266

 
3,966

 
—

 
86,119

Long-term debt, less current portion
 
—

 
1,051,895

 
—

 
—

 
—

 
1,051,895

Commitments and contingencies
 


 


 


 


 


 


Stockholders' Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
680

 
680

 
—

 
—

 
(680
)
 
680

Additional paid-in-capital
 
746,914

 
746,914

 
629,053

 
21,783

 
(1,397,750
)
 
746,914

(Accumulated deficit) retained earnings
 
(840,999
)
 
(840,999
)
 
(640,284
)
 
(20,816
)
 
1,502,099

 
(840,999
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive loss
 
(26,181
)
 
(26,181
)
 
(14,538
)
 
(10,781
)
 
51,500

 
(26,181
)
Total stockholders' (deficit) equity
 
(119,586
)
 
(119,586
)
 
(25,769
)
 
(9,814
)
 
155,169

 
(119,586
)
 
 
$
(119,586
)
 
$
992,395

 
$
1,112,597

 
$
146,770

 
$
(819,341
)
 
$
1,312,835


38

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2014
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
ASSETS
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
23,555

 
$
(5,845
)
 
$
15,452

 
$
—

 
$
33,162

Accounts receivable, net
 
—

 
—

 
153,791

 
33,888

 
—

 
187,679

Inventories:
 
 

 
 

 
 

 
  

 
 

 
 

Raw materials
 
—

 
—

 
65,772

 
10,695

 
—

 
76,467

Work in process
 
—

 
—

 
32,653

 
1,725

 
—

 
34,378

Finished goods
 
—

 
—

 
54,415

 
14,653

 
—

 
69,068

Total inventory
 
—

 
—

 
152,840

 
27,073

 
—

 
179,913

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
1,044

 
25,840

 
4,924

 
—

 
31,808

Deferred income taxes
 
—

 
—

 
7,680

 
—

 
—

 
7,680

Total current assets
 
—

 
24,599

 
334,306

 
81,337

 
—

 
440,242

Investments in subsidiaries
 
(96,668
)
 
(64,046
)
 
—

 
—

 
160,714

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

Land
 
—

 
—

 
7,085

 
882

 
—

 
7,967

Buildings and improvements
 
—

 
—

 
60,211

 
5,447

 
—

 
65,658

Machinery and equipment
 
—

 
2,794

 
348,951

 
16,974

 
—

 
368,719

 
 
—

 
2,794

 
416,247

 
23,303

 
—

 
442,344

Less accumulated depreciation
 
—

 
(2,083
)
 
(271,156
)
 
(8,138
)
 
—

 
(281,377
)
Total property and equipment, net
 
—

 
711

 
145,091

 
15,165

 
—

 
160,967

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
123,333

 
24,376

 
—

 
147,709

Goodwill
 
—

 
—

 
442,233

 
33,879

 
—

 
476,112

Intercompany note receivable
 
—

 
953,510

 
—

 
—

 
(953,510
)
 
—

Other
 
—

 
26,784

 
2,761

 
—

 
—

 
29,545

Total other assets
 
—

 
980,294

 
568,327

 
58,255

 
(953,510
)
 
653,366

 
 
$
(96,668
)
 
$
941,558

 
$
1,047,724

 
$
154,757

 
$
(792,796
)
 
$
1,254,575

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
239

 
$
66,452

 
$
17,473

 
$
—

 
$
84,164

Accrued expenses
 
—

 
19,907

 
110,290

 
17,128

 
—

 
147,325

Current portion of long-term debt
 
—

 
4,300

 
—

 
—

 
—

 
4,300

Total current liabilities
 
—

 
24,446

 
176,742

 
34,601

 
—

 
235,789

Deferred income taxes
 
—

 
—

 
14,719

 
6,087

 
—

 
20,806

Intercompany note payable
 
—

 
—

 
844,258

 
109,252

 
(953,510
)
 
—

Payable to related parties pursuant to
 
 
 
 
 
 
 
 
 
 
 
 
   tax receivable agreement
 
—

 
10,917

 
—

 
—

 
—

 
10,917

Other long-term liabilities
 
—

 
13,946

 
76,923

 
3,945

 
—

 
94,814

Long-term debt
 
—

 
988,917

 
—

 
—

 
—

 
988,917

Commitments and contingencies
 


 


 


 


 


 


Stockholders' Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
679

 
679

 
—

 
—

 
(679
)
 
679

Additional paid-in-capital
 
745,140

 
745,140

 
602,801

 
16,010

 
(1,363,951
)
 
745,140

(Accumulated deficit) retained earnings
 
(822,512
)
 
(822,512
)
 
(653,181
)
 
(9,701
)
 
1,485,394

 
(822,512
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive income (loss)
 
(19,975
)
 
(19,975
)
 
(14,538
)
 
(5,437
)
 
39,950

 
(19,975
)
Total stockholders' (deficit) equity
 
(96,668
)
 
(96,668
)
 
(64,918
)
 
872

 
160,714

 
(96,668
)
 
 
$
(96,668
)
 
$
941,558

 
$
1,047,724

 
$
154,757

 
$
(792,796
)
 
$
1,254,575


39


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended July 4, 2015
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
 
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(18,487
)
 
$
(18,487
)
 
$
12,897

 
$
(11,115
)
 
$
16,705

 
$
(18,487
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash provided by (used in) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
200

 
25,520

 
3,677

 
—

 
29,397

Fair-value premium on purchased inventory
 
—

 
—

 
54

 
—

 
—

 
54

Non-cash restructuring costs
 
—

 
—

 
—

 
805

 
—

 
805

Non-cash interest expense, net
 
—

 
6,661

 
—

 
—

 
—

 
6,661

Loss on foreign currency transactions
 
—

 
—

 
—

 
1,032

 
—

 
1,032

Stock based compensation
 
—

 
1,145

 
—

 
—

 
—

 
1,145

Deferred income taxes
 
—

 
—

 
(3,256
)
 
—

 
—

 
(3,256
)
Tax receivable agreement liability adjustment
 
—

 
15,179

 
—

 
—

 
—

 
15,179

Increase in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
147

 
—

 
—

 
147

Equity in subsidiaries' net income (loss)
 
18,487

 
(1,782
)
 
—

 
—

 
(16,705
)
 
—

Other
 
—

 
—

 
(57
)
 
—

 
—

 
(57
)
Changes in operating assets and liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(64,652
)
 
(3,913
)
 
—

 
(68,565
)
Inventories
 
—

 
—

 
10,777

 
(409
)
 
—

 
10,368

Prepaid expenses and other assets
 
—

 
463

 
2,478

 
(1,227
)
 
—

 
1,714

Accounts payable
 
—

 
(116
)
 
12,975

 
(3,717
)
 
—

 
9,142

Accrued expenses
 
—

 
(4,360
)
 
4,787

 
(3,362
)
 
—

 
(2,935
)
Cash payments on restructuring liabilities
 
—

 
—

 
(375
)
 
(1,075
)
 
—

 
(1,450
)
Other
 
—

 
(15
)
 
(269
)
 
—

 
—

 
(284
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
(1,112
)
 
1,026

 
(19,304
)
 
—

 
(19,390
)
Cash flows from investing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Acquisitions
 
—

 
—

 
(21,000
)
 
—

 
—

 
(21,000
)
Capital expenditures
 
—

 
(539
)
 
(11,254
)
 
(1,573
)
 
—

 
(13,366
)
Proceeds from sale of assets
 
—

 
—

 
73

 
19

 
—

 
92

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(539
)
 
(32,181
)
 
(1,554
)
 
—

 
(34,274
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Net revolver borrowings
 
—

 
60,000

 
—

 
—

 
—

 
60,000

Payments on long-term debt
 
—

 
(2,150
)
 
—

 
—

 
—

 
(2,150
)
Proceeds from exercises of employee stock options
 
—

 
648

 
—

 
—

 
—

 
648

Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 


investment
 
—

 
(53,976
)
 
32,506

 
21,470

 
—

 
—

Net cash provided by
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
4,522

 
32,506

 
21,470

 
—

 
58,498

Impact of exchange rate movements on cash
 
—

 
—

 
—

 
(2,130
)
 
—

 
(2,130
)
Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
2,871

 
1,351

 
(1,518
)
 
—

 
2,704

Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
23,555

 
(5,845
)
 
15,452

 
—

 
33,162

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
26,426

 
$
(4,494
)
 
$
13,934

 
$
—

 
$
35,866


40

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 28, 2014
(Amounts in thousands)
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
 
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(40,198
)
 
$
(40,198
)
 
$
1,391

 
$
(16,329
)
 
$
55,136

 
$
(40,198
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash used in operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
274

 
18,688

 
3,576

 
—

 
22,538

Fair-value decrease of contingent acquisition liability
 
—

 
—

 
(264
)
 
—

 
—

 
(264
)
Non-cash restructuring expense
 
—

 
—

 
—

 
2,193

 
—

 
2,193

Non-cash interest expense, net
 
—

 
8,390

 
—

 
—

 
—

 
8,390

Gain on foreign currency transactions
 
—

 
—

 
—

 
(249
)
 
—

 
(249
)
Non-cash litigation expense
 
—

 
—

 
4,670

 
—

 
—

 
4,670

Loss on modification or extinguishment of debt
 
—

 
21,364

 
—

 
—

 
—

 
21,364

Stock based compensation
 
—

 
973

 
—

 
—

 
—

 
973

Deferred income taxes
 
—

 
—

 
(4,994
)
 
5,424

 
—

 
430

Tax receivable agreement liability adjustment
 
—

 
431

 
—

 
—

 
—

 
431

Increase (reduction) in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
185

 
—

 
—

 
185

Equity in subsidiaries' net loss
 
40,198

 
14,938

 
—

 
—

 
(55,136
)
 
—

Other
 
—

 
—

 
(29
)
 
(160
)
 
—

 
(189
)
Changes in operating assets and liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(79,836
)
 
(17,910
)
 
—

 
(97,746
)
Inventories
 
—

 
—

 
(13,721
)
 
(5,667
)
 
—

 
(19,388
)
Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

assets
 
—

 
(142
)
 
(2,415
)
 
349

 
—

 
(2,208
)
Accounts payable
 
—

 
128

 
9,312

 
8,434

 
—

 
17,874

Accrued expenses
 
—

 
(10,452
)
 
6,580

 
2,598

 
—

 
(1,274
)
Cash payments on restructuring liabilities
 
—

 
—

 
(427
)
 
(2,980
)
 
—

 
(3,407
)
Other
 
—

 
12

 
(433
)
 
(220
)
 
—

 
(641
)
Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
(4,282
)
 
(61,293
)
 
(20,941
)
 
—

 
(86,516
)
Cash flows from investing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(816
)
 
(8,233
)
 
(938
)
 
—

 
(9,987
)
Proceeds from sale of assets
 
—

 
—

 
99

 
635

 
—

 
734

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(816
)
 
(8,134
)
 
(303
)
 
—

 
(9,253
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from long-term debt
 
—

 
927,850

 
—

 
—

 
—

 
927,850

Net revolver borrowings
 
—

 
40,000

 
—

 
—

 
—

 
40,000

Payments on long-term debt
 
—

 
(852,000
)
 
—

 
—

 
—

 
(852,000
)
Payment of tender and early call premiums
 
—

 
(61,142
)
 
—

 
—

 
—

 
(61,142
)
Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 


investment
 
—

 
(78,547
)
 
65,150

 
13,397

 
—

 
—

Proceeds from exercises of employee stock options
 
—

 
1,073

 
—

 
—

 
—

 
1,073

Debt issuance costs paid
 
—

 
(14,625
)
 
—

 
—

 
—

 
(14,625
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
(37,391
)
 
65,150

 
13,397

 
—

 
41,156

Impact of exchange rate movement
 
 

 
 

 
 

 
 

 
 

 
 

on cash
 
—

 
—

 
—

 
(200
)
 
—

 
(200
)
Net decrease in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
(42,489
)
 
(4,277
)
 
(8,047
)
 
—

 
(54,813
)
Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
57,800

 
(4,970
)
 
16,971

 
—

 
69,801

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
15,311

 
$
(9,247
)
 
$
8,924

 
$
—

 
$
14,988


41


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The information contained in this discussion and in the unaudited condensed consolidated financial statements and accompanying notes presented in this Quarterly Report on Form 10-Q should be read in conjunction with information set forth in Ply Gem Holdings’ Annual Report on Form 10-K for the year ended December 31, 2014.  Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements”.  See “Special Note Regarding Forward-Looking Statements.”  As used in this Quarterly Report on Form 10-Q, the “Company”, “we”, “us”, and “our” refer to Ply Gem Holdings and its subsidiaries, except where the context otherwise requires or as otherwise indicated.

Overview

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 47% and 53% of our net sales, respectively, for the three months ended July 4, 2015.  These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl railing, stone veneer, roofing, and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada.  Vinyl building products have the leading share of sales volume in siding and windows in the United States.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products.  We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.  

Since Ply Gem incorporated in 2004, we have acquired ten additional businesses to complement and expand our product portfolio and geographic diversity, including one acquisition during 2014 and one during 2015.  On September 19, 2014, we acquired all of the issued and outstanding shares of common stock of Fortune Brands Windows, Inc. ("Simonton"), a manufacturer of windows, for a purchase price of $130.0 million. On May 29, 2015, we acquired substantially all of the assets of Canyon Stone, Inc. (“Canyon Stone”), a manufacturer of stone veneer, for a purchase price of $21.0 million. Simonton is included in our Windows and Doors segment while Canyon Stone is included in our Siding, Fencing, and Stone segment.

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, which was a wholly owned subsidiary of Ply Gem Prime.  On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation.  In May 2013, the Company issued 18,157,895 shares of common stock at an initial public offering price of $21.00 per share and received gross proceeds of approximately $381.3 million in an IPO of its common stock. The shares began trading on The New York Stock Exchange on May 23, 2013 under the symbol "PGEM". Immediately prior to the closing of the IPO, Ply Gem Prime merged with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the merger, all of the preferred stock of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that was converted into preferred stock in connection with the IPO) was converted into a number of shares of the Company's common stock based on the IPO price of the common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries' $300.0 million ABL Facility and the credit agreement governing the terms of its $430.0 million Term Loan Facility place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.  Further, the terms of the indenture governing Ply Gem Industries' $650.0 million 6.50% Senior Notes place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.
 

Financial statement presentation

Net Sales.  Net sales represent the fixed selling price of our products plus certain shipping charges less applicable provisions for discounts and allowances.  Allowances include cash discounts, volume rebates and returns.
 
Cost of products sold.  Cost of products sold includes direct material and manufacturing costs, manufacturing depreciation, third-party and in-house delivery costs and product warranty expense.

42


Selling, general and administrative expenses.  Selling, general and administrative expenses (“SG&A expense”) includes all non-product related operating expenses, including selling, marketing, research and development costs, information technology, and other general and administrative expenses.

Operating earnings (loss).  Operating earnings (loss) represents net sales less cost of products sold, SG&A expense and amortization of intangible assets.

Impact of commodity pricing

PVC resin and aluminum are major components in the production of our products and changes in PVC resin and aluminum prices have a direct impact on our cost of products sold.  Historically, we have been able to pass on a substantial portion of significant price increases to our customers.  The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.

Impact of weather

Since our building products are intended for exterior use, our sales and operating earnings tend to be lower during periods of inclement weather.  Weather conditions in the first and fourth quarters of each calendar year historically result in these quarters producing significantly less sales revenue than in any other period of the year.  As a result, we have historically had lower profits or higher losses in the first quarter, and reduced profits in the fourth quarter of each calendar year due to the weather.  Our results of operations for individual quarters in the future may be impacted by adverse weather conditions. In addition, favorable or unfavorable weather conditions may influence the comparability of our results from year to year or from quarter to quarter.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP.  The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.  We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  We periodically evaluate these estimates and judgments based on available information and experience.  Actual results could differ from our estimates under different assumptions and conditions.  If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.  For more information regarding our critical accounting policies and estimates please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies contained in our Annual Report on Form 10-K for the year ended December 31, 2014 and Note 1 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.

 Results of Operations

The following table summarizes net sales and operating earnings (loss) by segment and is derived from the accompanying condensed consolidated statements of operations and comprehensive income (loss) included in this report.

43


 
 
For the three months ended
 
For the six months ended
 
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
July 4, 2015
 
June 28, 2014
 
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
Net sales
 
 
 
 
 
 
 
 
 
Siding, Fencing and Stone
 
$
238,573

 
$
227,948

 
$
395,015

 
$
365,003

 
Windows and Doors
 
263,761

 
181,263

 
483,367

 
313,673

 
Operating earnings (loss)
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
44,687

 
37,766

 
55,008

 
44,729

 
Windows and Doors
 
9,580

 
(1,066
)
 
(6,826
)
 
(21,567
)
 
Unallocated
 
(8,603
)
 
(5,463
)
 
(16,568
)
 
(11,514
)
 
Foreign currency gain (loss)
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
(8
)
 
217

 
(261
)
 
74

 
Windows and Doors
 
(90
)
 
260

 
(771
)
 
175

 
Interest income (expense), net
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
9

 
7

 
3

 
1

 
Windows and Doors
 
7

 
4

 
13

 
21

 
Unallocated
 
(18,698
)
 
(17,236
)
 
(37,782
)
 
(35,741
)
 
Income tax (provision) benefit
 
 

 
 

 
 

 
 

 
Unallocated
 
1,482

 
(7,051
)
 
3,876

 
5,419

 
Tax Receivable Agreement liability adjustment
 
 
 
 
 
 
 
 
 
Unallocated
 
2,006

 
3,942

 
(15,179
)
 
(431
)
 
Loss on modification or
 
 

 
 

 
 
 
 
 
extinguishment of debt
 
 

 
 

 
 
 
 
 
Unallocated
 
—

 
—

 
—

 
(21,364
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
30,372

 
$
11,380

 
$
(18,487
)
 
$
(40,198
)
 

Our business is seasonal and the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year or any future period.
 

44


This review of performance is organized by business segment, reflecting the way we manage our business.  Each business group leader is responsible for operating results down to operating earnings.  We use operating earnings as a performance measure as it captures the income and expenses within the management control of our business leaders.  Corporate management is responsible for making all financing decisions.  Therefore, each segment discussion focuses on the factors affecting operating earnings, while interest expense and income taxes and certain other unallocated expenses are separately discussed at the corporate level.

The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated.  However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.

Siding, Fencing and Stone Segment

 
 
For the three months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
238,573

 
100.0
 %
 
$
227,948

 
100.0
%
Gross profit
 
70,700

 
29.6
 %
 
62,239

 
27.3
%
SG&A expense
 
22,821

 
9.6
 %
 
21,188

 
9.3
%
Amortization of intangible assets
 
3,192

 
1.3
 %
 
3,285

 
1.4
%
Operating earnings
 
44,687

 
18.7
 %
 
37,766

 
16.6
%
Currency transaction gain (loss)
 
(8
)
 
—
 %
 
217

 
0.1
%

Net Sales

Net sales for the three months ended July 4, 2015 increased $10.6 million or 4.7% as compared to the three months ended June 28, 2014. The net sales increase resulted predominantly from higher net sales in the United States of approximately $13.3 million partially offset by lower net sales in Canada of approximately $2.7 million. The U.S. net sales increase was driven by higher sales of our metal accessory products that resulted from new business wins as well as improved market conditions. In addition, we achieved higher sales of our PVC trim products during the three months ended July 4, 2015 relative to the three months ended June 28, 2014 as we only introduced this product into our portfolio during 2013. Finally, we experienced a net sales increase of $2.9 million during the three months ended July 4, 2015, which is related to our acquisition of Canyon Stone, which was completed on May 29, 2015. Excluding this acquisition, our Siding, Fencing, and Stone net sales increased $7.7 million or 3.4% during the three months ended July 4, 2015 as compared to the three months ended June 28, 2014. These net sales increases were also complemented by higher selling prices that were achieved during the three months ended July 4, 2015.

For the three months ended July 4, 2015 and June 28, 2014, the percentage of net sales in vinyl siding and metal accessories represented approximately 61.6% and 23.9% and 63.5% and 22.4%, respectively, of our net sales with our net sales of other products comprising approximately 14.5% and 14.1%, respectively. The 40 basis point increase in other product sales resulted from the Canyon Stone acquisition.

The U.S. new construction housing market has demonstrated measured improvement, which according to the U.S. Census Bureau single family housing starts increased by 4.6% during the first quarter of 2015 relative to the first quarter of 2014. Our building products typically are installed on a new construction residential home 90 to 120 days after the start of the home, therefore the single family housing starts in the preceding three-month period directly impacts the demand for our products in the current three month period. In addition, residential remodeling market conditions also demonstrated improvement as, according to the Leading Indicator of Remodeling Activity Index (“LIRA”), the 2015 second quarter trailing twelve months increased by 4.3% compared to the prior year period. The improvement in single family housing starts and remodeling expenditures is evidenced by the Vinyl Siding Institute reporting that U.S. vinyl siding industry shipments increased 3.7% while unit shipments in Canada were flat for the second quarter of 2015 relative to the same period in 2014.

45

The improving conditions in the U.S. housing market and the sales growth of our metal accessories and PVC trim products, were partially offset by depressed market conditions in Canada where the weakening Canadian dollar negatively impacted our net sales by approximately $4.5 million during the three months ended July 4, 2015 compared to the three months ended June 28, 2014. During the three months ended July 4, 2015, the Canadian dollar weakened 11.3% relative to the three months ended June 28, 2014. Excluding the negative foreign currency impact, our net sales in Canada would have increased $1.8 million.

Gross Profit

Gross profit for the three months ended July 4, 2015 increased $8.5 million or 13.6% as compared to the three months ended June 28, 2014. Excluding the impact of the Canyon Stone acquisition which was completed on May 29, 2015 and contributed increased gross profit of approximately $0.8 million, our gross profit increased $7.7 million or 12.3%. The gross profit increase resulted predominantly from the 4.7% net sales increase from improved sales performance as previously discussed, partially offset by the weakening of the Canadian dollar. During the three months ended July 4, 2015, we also experienced favorable raw material cost pricing relative to the three months ended June 28, 2014, specifically PVC resin and aluminum. The Midwest Ingot price of aluminum decreased approximately 8.0% during the three months ended July 4, 2015 relative to the three months ended June 28, 2014 while PVC resin decreased approximately 2.6% during the same period. This favorable material cost pricing increased gross profit by approximately $6.6 million during the three months ended July 4, 2015 relative to the three months ended June 28, 2014. In addition, our freight expense on a volume adjusted basis was favorable by approximately $1.0 million as a result of declining fuel prices.

As a percentage of net sales, gross profit increased from 27.3% for the three months ended June 28, 2014 to 29.6% for the three months ended July 4, 2015. The 230 basis point increase for the three months ended July 4, 2015 resulted from the net sales increase as well as improved selling prices, favorable material cost pricing, and favorable freight expense partially offset by the negative impact of the weakening of the Canadian dollar against the U.S. dollar.

Selling, general and administrative expenses

SG&A expense for the three months ended July 4, 2015 increased $1.6 million or 7.7% as compared to the three months ended June 28, 2014. The increase was due to higher incentive compensation expense of approximately $1.4 million and an additional $0.4 million of SG&A expense from the Canyon Stone acquisition during the three months ended July 4, 2015 relative to the three months ended June 28, 2014. As a percentage of net sales, SG&A expense primarily increased modestly from 9.3% for the three months ended June 28, 2014 to 9.6% for the three months ended July 4, 2015 from increased incentive compensation expense.

Amortization of intangible assets

Amortization expense for the three months ended July 4, 2015 decreased by $0.1 million or 2.8% consistent with the prior year period. As a percentage of net sales, amortization expense was consistent at 1.3% for the three months ended July 4, 2015 compared to 1.4% for the three months ended June 28, 2014.

Currency transaction loss

The currency transaction loss for the three months ended July 4, 2015 was a nominal $0.0 million resulting from the impact of the Canadian dollar devaluation. The currency transaction gain for the three months ended June 28, 2014 was a nominal $0.2 million resulting from the fluctuation in the Canadian dollar during the period.


46

 
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
395,015

 
100.0
 %
 
$
365,003

 
100.0
%
Gross profit
 
105,471

 
26.7
 %
 
92,307

 
25.3
%
SG&A expense
 
44,195

 
11.2
 %
 
40,943

 
11.2
%
Amortization of intangible assets
 
6,268

 
1.6
 %
 
6,635

 
1.8
%
Operating earnings
 
55,008

 
13.9
 %
 
44,729

 
12.3
%
Currency transaction gain (loss)
 
(261
)
 
(0.1
)%
 
74

 
—
%

Net Sales

Net sales for the six months ended July 4, 2015 increased $30.0 million or 8.2% as compared to the six months ended June 28, 2014. The net sales increase resulted predominantly from higher net sales in the United States of approximately $32.9 million partially offset by lower net sales in Canada of approximately $2.9 million. The U.S. net sales increase resulted primarily from improved market conditions reflected in industry metrics. Our building products typically are installed on a new construction residential home 90 to 120 days after the start of the home, therefore the single family housing starts in the preceding three-month period directly impacts the demand for our products in the current period. According to the U.S. Census Bureau single family housing starts increased 9.1% during the six months ended in the first quarter of 2015 relative to the comparable prior year period. According to the LIRA, remodeling activity summarized by homeowner improvements increased 5.4% during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. These improved U.S. industry conditions resulted in increased net sales of approximately $6.2 million, $12.1 million, and $6.6 million for vinyl siding, metal accessory products, and PVC trim, respectively. We experienced increased PVC trim net sales during the six months ended July 4, 2015 relative to the six months ended June 28, 2014 as this product was only introduced into our portfolio during 2013, while the vinyl siding and metal accessory increases resulted predominantly from new business wins and improving industry conditions. We also experienced higher selling prices during the six months ended July 4, 2015 as compared to the comparable period in 2014. Finally, our net sales for the six months ended July 4, 2015 were positively impacted by the timing of the Company’s fiscal calendar which provided four additional shipping days during the first six months of 2015 relative to the first six months of 2014.

For the six months ended July 4, 2015 and June 28, 2014, the percentage of net sales in vinyl siding and metal accessories represented approximately 61.5% and 24.4% and 63.1% and 23.1%, respectively, of our net sales with our net sales of other products comprising approximately 14.1% and 13.8%, respectively. In addition to higher sales for vinyl siding, metal accessories, and PVC trim we experienced a net sales increase of $2.9 million during the six months ended July 4, 2015 for the Canyon Stone acquisition which was completed on May 29, 2015. This acquisition contributed to the increase in our other products net sales during the six months ended July 4, 2015. Excluding this acquisition, our Siding, Fencing, and Stone net sales increased $27.1 million or 7.4% during the six months ended July 4, 2015 as compared to the six months ended June 28, 2014.

The improved U.S. market conditions are further evidenced by the Vinyl Siding Institute reporting that U.S. vinyl siding industry shipments increased 3.2% during the six months ended July 4, 2015 while shipments in Canada decreased 1.0% for the six months ended June 28, 2014. Our U.S. market position in vinyl siding for the six months ended July 4, 2015 and June 28, 2014 was 38.3% and 39.3%, respectively, while our share of the Canadian vinyl siding market increased from 25.8% to 28.1% during the first six months of 2015 relative to the same six month period in 2014. The improved U.S. market conditions were partially offset by depressed industry conditions in Canada where the deteriorating Canadian dollar negatively impacted our net sales by approximately $7.5 million during the six months ended July 4, 2015. During the six months ended July 4, 2015 the Canadian dollar deteriorated 11.2% relative to the six months ended June 28, 2014. Excluding the negative foreign currency impact, our net sales in Canada would have increased $4.2 million.

47

Gross Profit

Gross profit for the six months ended July 4, 2015 increased $13.2 million or 14.3% as compared to the six months ended June 28, 2014. Excluding the impact of the Canyon Stone acquisition, which was completed on May 29, 2015, and contributed increased gross profit of approximately $0.8 million, our gross profit increased $12.4 million or 13.4%. The gross profit increase resulted from the 8.2% net sales increase resulting from improved market and weather conditions in the United States partially offset by the weakening of the Canadian dollar. The higher volumes experienced during the six months ended July 4, 2015 enabled us to increase our operating leverage and cover fixed manufacturing costs relative to the lower volumes experienced during the six months ended June 28, 2014. This operating leverage combined with increased average selling prices, lower freight expenses, and favorable material cost pricing during the six months ended July 4, 2015 relative to the six months ended June 28, 2014 improved our gross profit. For material costs, PVC resin decreased 2.0% during the six months ended July 4, 2015 relative to the six months ended June 28, 2014. The favorable impact from higher selling prices and favorable material cost pricing and lower freight expense were partially offset by the negative impact of the weakening of the Canadian dollar.

As a percentage of net sales, gross profit increased from 25.3% for the six months ended June 28, 2014 to 26.7% for the six months ended July 4, 2015. The 140 basis point increase for the six months ended July 4, 2015 resulted from improved operating leverage from the 8.2% net sales increase as well as improved selling prices, favorable material cost pricing, and favorable freight expense.

Selling, general and administrative expenses

SG&A expense for the six months ended July 4, 2015 increased $3.3 million or 7.9% as compared to the six months ended June 28, 2014. The increase related predominantly to higher incentive compensation expense of approximately $1.4 million, an additional $0.4 million of SG&A expense from the Canyon Stone acquisition, and higher sales and marketing expenses related to the 8.2% net sales increase during the six months ended July 4, 2015 relative to the six months ended June 28, 2014. As a percentage of net sales, SG&A expense remained consistent at approximately 11.2% during the six months ended July 4, 2015 and June 28, 2014.

Amortization of intangible assets

Amortization expense for the six months ended July 4, 2015 decreased by $0.4 million or 5.5% as a result of the negative 11.2% movement in the Canadian dollar relative to the U.S. dollar during the six months ended July 4, 2015. As a percentage of net sales, amortization expense was 1.6% for the six months ended July 4, 2015 as compared to 1.8% for the six months ended June 28, 2014 resulting from the negative Canadian dollar exchange rate movement during the six months ended July 4, 2015.

Currency transaction loss

The currency transaction loss for the six months ended July 4, 2015 was a nominal $0.3 million resulting from the impact of the Canadian dollar devaluation. The currency transaction gain for the six months ended June 28, 2014 was a nominal $0.0 million.

Windows and Doors Segment
 
 
For the three months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
263,761

 
100.0
 %
 
$
181,263

 
100.0
 %
Gross profit
 
54,043

 
20.5
 %
 
25,166

 
13.9
 %
SG&A expense
 
41,372

 
15.7
 %
 
24,305

 
13.4
 %
Amortization of intangible assets
 
3,091

 
1.2
 %
 
1,927

 
1.1
 %
Operating earnings (loss)
 
9,580

 
3.6
 %
 
(1,066
)
 
(0.6
)%
Currency transaction gain (loss)
 
(90
)
 
—
 %
 
260

 
0.1
 %


48

Net Sales

Net sales for the three months ended July 4, 2015 increased $82.5 million or 45.5% as compared to the three months ended June 28, 2014. The net sales increase for the three months ended July 4, 2015 was primarily related to our Simonton acquisition, which was completed on September 19, 2014, and accounted for increased net sales of $86.5 million during the three months ended July 4, 2015. Excluding Simonton, our Windows and Doors’ net sales decreased $4.0 million or 2.2% during the three months ended July 4, 2015 compared to the three months ended June 28, 2014. The net sales decrease resulted from higher net sales in the United States for our U.S. window products of approximately $8.0 million more than offset by lower net sales for our Western Canadian business of approximately $12.0 million. The U.S. net sales increase resulted from improved market conditions reflected in industry metrics. Our building products typically are installed on a new construction residential home 90 to 120 days after the start of the home, therefore the single family housing starts in the preceding three month period directly impacts the demand for our products in the current three month period. According to the U.S. Census Bureau, single family housing starts increased 4.6% during the first quarter of 2015 relative to the first quarter of 2014. In addition to the improved industry conditions in the United States, our Windows and Doors selling prices increased for our window products from price increases that we have implemented and favorable product mix that resulted from a higher proportion of our window sales being derived from our vinyl windows which typically carry a higher selling price than our aluminum windows. The impact of higher selling prices that resulted from our price increases and favorable product mix is estimated to have increased our average selling price for our U.S. window products by 5.0% which contributed higher net sales of approximately $6.8 million for the three months ended July 4, 2015.

These increases in the U.S. market were more than offset by a 28.5% decrease in net sales in our Western Canadian business during the three months ended July 4, 2015 compared to the three months ended June 28, 2014. The housing market conditions within the prairie provinces of Western Canada, in which a majority of our Western Canadian business' net sales are generated, has experienced demand softness due to declining world oil prices on this heavily dependent energy industrial area. The weakening of the Canadian dollar also negatively impacted our net sales by approximately $3.0 million during the three months ended July 4, 2015 compared to the three months ended June 28, 2014. During the three months ended July 4, 2015, the Canadian dollar weakened 11.3% against the U.S. dollar relative to the three months ended June 28, 2014.

Gross Profit

Gross profit for the three months ended July 4, 2015 increased $28.9 million or 114.7% as compared to the three months ended June 28, 2014. Our gross profit was favorably impacted by the Simonton acquisition, which was completed on September 19, 2014, and contributed gross profit of approximately $24.1 million during the three months ended July 4, 2015. Adjusting for the Simonton acquisition, our gross profit for the three months ended July 4, 2015 increased by approximately $4.8 million or 18.9%. This gross profit increase can be attributed to the continued improvement in our U.S. windows business, which was driven by improved net pricing and favorable product mix that resulted in a 5.0% increase in average selling price during the three months ended July 4, 2015. In addition to the average sales price improvement, we have improved our operational efficiencies as a result of our “enterprise lean” initiative which continues to streamline our window product offering by providing additional manufacturing flexibility as well as our improved sales and operations planning process that is intended to provide better resource planning which will help to minimize ramp up costs that result from spikes in demand within a geographical area. Overall, our gross profit increased approximately $6.2 million for our U.S. windows business but decreased approximately $1.4 million for our Western Canadian business during the three months ended July 4, 2015 compared to the three months ended June 28, 2014. The decrease in our Canadian gross profit is largely attributed to the negative impact of foreign currency resulting from the weakening of the Canadian dollar.

As a percentage of net sales, gross profit excluding Simonton, increased from 13.9% for the three months ended June 28, 2014 to 16.9% for the three months ended July 4, 2015. The 300 basis point net increase in gross profit was driven by a 350 basis point improvement in U.S. windows gross profit performance resulting from improved net pricing and operational efficiencies while Western Canada achieved a 260 basis point increase from improved net pricing and operational efficiencies, partially offset by a negative foreign currency impact.

Selling, general and administrative expenses

SG&A expense for the three months ended July 4, 2015 increased $17.1 million or 70.2% compared to the three months ended June 28, 2014. The SG&A expense increase relates to the Simonton acquisition, which was completed on September 19, 2014, and contributed $17.9 million of SG&A expense for the three months ended July 4, 2015. Excluding Simonton, our Windows and Doors’ SG&A expense actually decreased a nominal $0.8 million or 3.5%.


49

Excluding Simonton, SG&A expense as a percentage of net sales was consistent at approximately 13.2% for the three months ended July 4, 2015 compared to 13.4% for the three months ended June 28, 2014.

Amortization of intangible assets

Amortization expense for the three months ended July 4, 2015 increased $1.2 million or 60.4% compared to the three months ended June 28, 2014. The increase in amortization expense for the three months ended July 4, 2015 was due to the additional intangible assets acquired in the Simonton acquisition that was completed on September 19, 2014. As a percentage of net sales, amortization expense remained consistent at 1.1% after excluding the impact of the Simonton acquisition for the three months ended July 4, 2015 compared to the three months ended June 28, 2014.

Currency transaction loss

The currency transaction loss of approximately $0.1 million for the three months ended July 4, 2015 increased approximately $0.4 million or 134.6% due to the 11.3% weakening of the Canadian dollar relative to the U.S. dollar during the three months ended July 4, 2015 as compared to the three months ended June 28, 2014.
 
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
483,367

 
100.0
 %
 
$
313,673

 
100.0
 %
Gross profit
 
79,553

 
16.5
 %
 
34,911

 
11.1
 %
SG&A expense
 
80,165

 
16.6
 %
 
52,579

 
16.8
 %
Amortization of intangible assets
 
6,214

 
1.3
 %
 
3,899

 
1.2
 %
Operating loss
 
(6,826
)
 
(1.4
)%
 
(21,567
)
 
(6.9
)%
Currency transaction gain (loss)
 
(771
)
 
(0.2
)%
 
175

 
0.1
 %

Net Sales

Net sales for the six months ended July 4, 2015 increased $169.7 million or 54.1% as compared to the six months ended June 28, 2014. The net sales increase for the six months ended July 4, 2015 was predominantly related to our Simonton acquisition, which was completed on September 19, 2014, and accounted for increased net sales of $149.9 million during the six months ended July 4, 2015. Excluding Simonton, our Windows and Doors’ net sales increased $19.8 million or 6.3% during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. The net sales increase resulted from higher net sales in the United States for our U.S. window products of approximately $30.4 million offset by lower net sales for our Western Canadian business of approximately $10.6 million. The U.S. net sales increase resulted from improved market and weather conditions which are reflected in industry metrics. The 2014 winter weather had a negative impact on the new construction market to which our Windows and Doors market is highly aligned. Our building products typically are installed on a new construction residential home 90 to 120 days after the start of the home, therefore the single family housing starts in the preceding three month period directly impacts the demand for our products in the current period. The improved weather and overall housing market conditions was evidenced by the U.S. Census Bureau reporting that single family housing starts increased 9.1% during the six months ended in the first quarter of 2015 relative to the comparable prior year period. In addition to the improved U.S. industry and weather conditions, our Windows and Doors’ selling prices increased for our window products from price increases that we have implemented and favorable product mix that resulted from a higher proportion of our window sales being derived from our vinyl windows which typically carry a higher selling price than our aluminum windows. The impact of higher selling prices that resulted from our price increases and favorable product mix is estimated to have increased our average selling price for our U.S. window products by 5.2% which contributed higher net sales of approximately $12.8 million for the six months ended July 4, 2015. Furthermore, our net sales for the six months ended July 4, 2015 were positively impacted by the timing of the Company’s fiscal calendar which provided four additional shipping days for the six months ended July 4, 2015 relative to the six months ended June 28, 2014.

These increases in the U.S. market were more than offset by a 14.9% decrease in net sales in our Western Canadian business during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. The housing market conditions within the prairie provinces of Western Canada, in which a majority of our Western Canadian business' net sales are generated, has experienced demand softness due to declining world oil prices on this heavily dependent energy industrial area.

50

The weakening of the Canadian dollar negatively impacted our net sales by approximately $6.8 million during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. During the six months ended July 4, 2015, the Canadian dollar weakened 11.2% against the U.S. dollar relative to the six months ended June 28, 2014.

Gross Profit

Gross profit for the six months ended July 4, 2015 increased $44.6 million or 127.9% as compared to the six months ended June 28, 2014. Our gross profit was favorably impacted by the Simonton acquisition, which was completed on September 19, 2014, and contributed gross profit of approximately $36.3 million for the six months ended July 4, 2015. Adjusting for the Simonton acquisition, our gross profit for the six months ended July 4, 2015 increased by approximately $8.3 million or 23.8%. This gross profit increase can be attributed to the continued improvement in our U.S. windows business which was driven by improved net pricing and favorable product mix that resulted in a 5.2% increase in average selling price during the six months ended July 4, 2015. In addition to the average sales price improvement, we have improved our operational efficiencies as a result of our “enterprise lean” initiative which continues to streamline our window product offering by providing additional manufacturing flexibility as well as our improved sales and operations planning process that is intended to provide better resource planning which will help to minimize ramp up costs that result from spikes in demand within a geographical area. Our Windows and Doors segment also experienced lower freight expense of approximately $0.5 million from declining fuel prices which contributed to the gross profit increase during the six months ended July 4, 2015 relative to the six months ended June 28, 2014.

Overall, our gross profit increased approximately $10.1 million for our U.S. windows business but decreased approximately $1.8 million for our Western Canadian business during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. The decrease in our Canadian gross profit is primarily attributable to lower sales that resulted from depressed market conditions in Western Canada and the negative impact from the deterioration of the Canadian dollar.

As a percentage of net sales, gross profit excluding Simonton, increased from 11.1% for the six months ended June 28, 2014 to 13.0% for the six months ended July 4, 2015. The 190 basis point net increase in gross profit was driven by a 260 basis point improvement in U.S. windows gross profit performance resulting from improved net pricing and operational efficiencies partially offset by an approximate 20 basis point decrease in Western Canadian gross profit performance from negative foreign currency and reduced operating leverage on the reduced sales level.

Selling, general and administrative expenses

SG&A expense for the six months ended July 4, 2015 increased $27.6 million or 52.5% compared to the six months ended June 28, 2014. The SG&A expense increase relates to the Simonton acquisition, which was completed on September 19, 2014, and contributed $34.2 million of SG&A expense for the six months ended July 4, 2015. Excluding Simonton, our Windows and Doors SG&A expense decreased $6.6 million or 12.5%. This SG&A expense decrease was predominantly related to a $5.0 million expense recognized in connection with a preliminary settlement of class action lawsuits during the six months ended June 28, 2014. The remaining decrease in SG&A expense related to $0.7 million in lower sales and marketing expenses for Western Canada due to the 14.9% net sales decrease and $1.3 million in lower personnel and integration costs during the six months ended July 4, 2015 relative to the six months ended June 28, 2014. These decreases were partially offset by increased incentive compensation of $0.8 million for the Windows and Doors segment during the six months ended July 4, 2015.

Excluding Simonton and the expense associated with the class action settlement, SG&A expense as a percentage of net sales was approximately 13.8% for the six months ended July 4, 2015 compared to 15.2% for the six months ended June 28, 2014. The SG&A expense decrease as a percentage of sales related to lower restructuring and integration costs for our Western Canadian business for the six months ended July 4, 2015 compared to the six months ended June 28, 2014. We incurred more SG&A expense in the six months ended June 28, 2014 as a result of combining two facilities into a single manufacturing facility in 2014.

Amortization of intangible assets

Amortization expense for the six months ended July 4, 2015 increased $2.3 million or 59.4% compared to the six months ended June 28, 2014. The increase in amortization expense for the six months ended July 4, 2015 is due to the additional intangible assets acquired in the Simonton acquisition that was completed on September 19, 2014. As a percentage of net sales, amortization expense remained consistent at 1.1% for the six months ended July 4, 2015 after excluding the impact of the Simonton acquisition for the six months ended July 4, 2015 compared to 1.2% for the six months ended June 28, 2014.

51

Currency transaction loss

The currency transaction loss of approximately $0.8 million for the six months ended July 4, 2015 increased approximately $0.9 million or 540.6% due to the 11.2% weakening of the Canadian dollar relative to the U.S. dollar during the six months ended July 4, 2015 as compared to the six months ended June 28, 2014.

Combined quarterly profitability and seasonality trend

During the three months ended July 4, 2015, the Company’s gross profit margin increased to 24.8% of net sales compared to 21.4% for the three months ended June 28, 2014. Excluding the impact of the Simonton acquisition, which was completed on September 19, 2014, and contributed gross profit of $24.1 million during the three months ended July 4, 2015, our gross profit margins would have been 24.2% for the three months ended July 4, 2015, an increase of approximately 280 basis points. This increase was primarily attributed to improved operating performance of our Windows and Doors segment specifically our U.S. Windows business which earned increased gross profit of $6.2 million from improved selling prices of approximately 5.0% partially offset by challenges within our Western Canadian whose results were negatively impacted by a deteriorating Canadian dollar and a declining Canadian housing market. Our Siding, Fencing, and Stone segment also contributed to the improved gross profit margins achieving an increase of $7.7 million during the three months ended July 4, 2015 excluding acquisitions resulting from increased average selling prices, lower freight expense, and favorable material cost pricing.

SG&A expense as a percentage of net sales was 14.5% for the three months ended July 4, 2015 as compared to 12.5% for the three months ended June 28, 2014. Excluding the impact of the Simonton acquisition, our SG&A expense as a percentage of net sales for the three months ended July 4, 2015 was 13.2% increasing primarily as a result of higher incentive compensation expense during the three months ended July 4, 2015. Simonton’s SG&A expenses are typically higher as percentage of net sales as its core business focuses on the repair and remodeling market and while this distribution network typically carries a higher gross profit margin it also requires increased marketing and other related SG&A expense compared to our existing U.S. Windows business which currently focuses on the new construction market.

To further clarify the trends in SG&A expenses for the Company as whole, Gienow and Mitten’s SG&A expenses are also higher as a percentage of sales at approximately 22.8% and 19.8%, respectively, compared to the Company's overall SG&A expense 14.5% for the three months ended July 4, 2015, indicating that the remaining SG&A expense excluding Simonton, Gienow, and Mitten would be approximately 11.8% for the Company’s other businesses as a percentage of sales for the three months ended July 4, 2015. Gienow and Mitten operate and sell primarily in Canada and own their distribution centers across their respective regions in Eastern and Western Canada, which increases their respective SG&A expense while allowing them to service their Canadian customer base across a broad geographical area.

Overall, our key performance metrics and trends have improved relative to the prior year comparable period and to our first quarter which is typically our lowest performing quarter due to seasonality. The positive trend in our 2015 operating performance continued during the three months ended July 4, 2015 by continued gross profit margin expansion from improved market conditions, improved product mix, improved average selling prices, improved freight expenses, and favorable material costs partially offset by the negative impact from the weakening of the Canadian dollar relative to the U.S. dollar. Our results for the three and six months ended July 4, 2015 include the results of Simonton which were excluded from the comparable 2014 periods since the acquisition was completed in September 2014.

Unallocated Operating Earnings, Interest, and Provision (Benefit) for Income Taxes
 
 
For the three months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
SG&A expense
 
$
(8,603
)
 
$
(5,463
)
Operating loss
 
(8,603
)
 
(5,463
)
Interest expense
 
(18,699
)
 
(17,238
)
Interest income
 
1

 
2

Tax receivable agreement liability adjustment
 
2,006

 
3,942

Income tax (provision) benefit for income taxes
 
$
1,482

 
$
(7,051
)

52


Operating loss

Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments.  Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses.  The unallocated operating loss for the three months ended July 4, 2015 increased by $3.1 million or 57.5% compared to the same period in 2014 due primarily to increased incentive compensation of approximately $1.0 million, increased executive retention expense of $0.4 million, increased professional fees of approximately $0.8 million, and various other personnel expenses.


Interest expense

Interest expense for the three months ended July 4, 2015 increased by approximately $1.5 million or 8.5% compared to the same period in 2014 as a result of the additional $150.0 million debt incurred for the Simonton acquisition completed in September 2014. The increased interest expense relates to the $150.0 million in 6.50% Senior Notes issued in September 2014 ("Senior Tack-on Notes") being outstanding during the three months ended July 4, 2015 and not during the three months ended June 28, 2014.

Tax receivable agreement ("TRA") liability adjustment

As a result of the Company’s full tax valuation allowance position, the Company’s methodology for calculating the TRA liability considers expectations regarding (i) current year taxable income only (due to the uncertainty of future taxable income associated with the Company’s cumulative loss position) and (ii) future income due to the expected reversals of deferred tax liabilities. During the three months ended July 4, 2015, the Company estimated its projected taxable income for the full year ending December 31, 2015 based on the Company’s 2015 estimates. However, the Company’s methodology to estimate the TRA liability excludes forecasts for fiscal years subsequent to 2015 because such future forecasts and projections cannot be relied upon based on the negative evidence from the Company’s three year cumulative loss position. For fiscal year 2015, the Company estimated to be in a taxable income position; however, this taxable income estimate was not sufficient to outweigh the negative evidence or alleviate the Company’s three year cumulative loss position. In addition to projecting the Company’s current year taxable income estimate, the Company considered the reversals of deferred tax assets and deferred tax liabilities. The resulting taxable income (loss) from deferred taxes was then combined with the Company’s current year taxable income estimate to determine the cumulative NOLs that are expected to be utilized in 2015 and the TRA liability was accordingly adjusted using the 85% TRA rate.

The $2.0 million decrease for the TRA liability for the three months ended July 4, 2015 resulted from decreases in taxable income estimates resulting from reversing deferred tax liabilities as well as decreases in the Company’s 2015 estimate for taxable income. The decrease in the Company’s 2015 estimated taxable income resulted from the industry lowering their projections of single family housing starts for 2015 by 6.8% which lowered the Company’s forecasts and estimates for 2015 taxable income. In addition to lower taxable income estimates for 2015, the Company also acquired Canyon Stone on May 29, 2015 and this acquisition created book goodwill of $7.8 million that is not amortized for financial reporting purposes but is amortized for income taxes. The reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income. The decreases in the Company’s 2015 taxable income estimates as well as the Canyon Stone acquisition were partially offset by the purchase accounting adjustments for Simonton during the three months ended July 4, 2015 which decreased deferred tax assets by approximately $3.1 million. All of these factors were considered in deriving the estimate of the tax receivable liability as of and for the three months ended July 4, 2015.

Income taxes

The income tax benefit for the three months ended July 4, 2015 increased by approximately $8.5 million compared to the same period in 2014.  Our pre-tax income for the three months ended July 4, 2015 was approximately $28.9 million including the $2.0 million tax receivable agreement liability adjustment compared to pre-tax income of $18.4 million for the three months ended June 28, 2014.  For the three months ended July 4, 2015, the increase in income tax benefit resulted primarily from the impact of the Simonton purchase accounting adjustments as well as a combination of income and losses from our operating units and pre-tax losses in some entities for which no tax benefit was recognized.


53

 
 
For the six months ended
(Amounts in thousands)
 
July 4, 2015
 
June 28, 2014
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
SG&A expense
 
$
(16,568
)
 
$
(11,514
)
Amortization of intangible assets
 
—

 
—

Initial public offering costs
 
—

 
—

Operating loss
 
(16,568
)
 
(11,514
)
Interest expense
 
(37,784
)
 
(35,744
)
Interest income
 
2

 
3

Loss on modification or extinguishment of debt
 
—

 
(21,364
)
Tax receivable agreement liability adjustment
 
(15,179
)
 
(431
)
Income tax benefit for income taxes
 
$
3,876

 
$
5,419



Table of Contents

Operating loss

Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments.  Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses.  The unallocated operating loss for the six months ended July 4, 2015 increased by $5.1 million or 43.9% compared to the same period in 2014 due primarily to increased incentive compensation of approximately $1.0 million, increased executive retention expense of $0.6 million, increased professional fees of approximately $0.8 million, and various other personnel expenses.

Interest expense

Interest expense for the six months ended July 4, 2015 increased by approximately $2.0 million or 5.7% compared to the same period in 2014 as a result of the additional $150.0 million debt incurred for the Simonton acquisition completed in September 2014 partially offset by the January 2014 debt refinancing.  The increase is primarily due to the $150.0 million in Senior Tack-on Notes being outstanding during the six months ended July 4, 2015 and not during the six months ended June 28, 2014. The 6.50% Senior Notes due 2022 (the "6.50% Senior Notes") and the Term Loan Facility due 2021 (the "Term Loan Facility"), which were issued and entered into on January 30, 2014 to replace the 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") and 9.375% Senior Notes due 2017 (the "9.375% Senior Notes"), carry lower interest rates on a weighted average basis of approximately 300 basis points and consequently reduced interest expense during the six months ended July 4, 2015 compared to the same period in 2014.

Tax receivable agreement liability adjustment

As a result of the Company’s full tax valuation allowance position, the Company’s methodology for calculating the TRA liability considers expectations regarding (i) current year taxable income only (due to the uncertainty of future taxable income associated with the Company’s cumulative loss position) and (ii) future income due to the expected reversals of deferred tax liabilities. During the six months ended July 4, 2015, the Company estimated its projected taxable income for the full year ending December 31, 2015 based on the Company’s 2015 estimates. However, the Company’s methodology to estimate the TRA liability excludes forecasts for fiscal years subsequent to 2015 because such future forecasts and projections cannot be relied upon based on the negative evidence from the Company’s three year cumulative loss position. For fiscal year 2015, the Company estimated to be in a taxable income position; however, this taxable income estimate was not sufficient to outweigh the negative evidence or alleviate the Company’s three year cumulative loss position. In addition to projecting the Company’s current year taxable income estimate, the Company considered the reversals of deferred tax assets and deferred tax liabilities. The resulting taxable income (loss) from deferred taxes was then combined with the Company’s current year taxable income estimate to determine the cumulative NOLs that are expected to be utilized in 2015 and the TRA liability was accordingly adjusted using the 85% TRA rate.


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The $15.2 million TRA liability adjustment for the six months ended July 4, 2015 resulted from increases in taxable income estimates resulting from reversing deferred tax liabilities as well as increases in the Company’s 2015 estimate for operating income compared to the 2014 period. The increase in the Company’s 2015 estimated taxable income can be attributed to the following factors noted in the first six months of 2015 (i) the continued U.S. housing recovery which is estimated to have a 14.7% year over year increase in single family housing starts according to the U.S. Census Bureau, (ii) improvements in the repair and remodeling market evidenced by the 5.4% increase in homeowner improvements during the first six months of 2015 versus the first six months of 2014 according to LIRA, (iii) the positive income contributions from the Company’s acquisition of Simonton which was completed in September 2014, and (iv) continued improvements in the Company’s existing operations specifically for our U.S. Windows business which increased its operating earnings by approximately $10.0 million during the six months ended July 4, 2015 compared to the six months ended June 28, 2014. All of these items increased the Company’s taxable income estimate for the year ending December 31, 2015 and hence our estimate of the TRA liability for the six months ended July 4, 2015.
   
Loss on modification or extinguishment of debt

As a result of the 6.50% Senior Notes issuance and our entering into the Term Loan Facility and the tender, redemption, and repurchase of the 8.25% Senior Notes and the 9.375% Senior Secured Notes as further described in the Liquidity and Capital Resources section below, we recognized a loss on modification or extinguishment of debt of approximately $21.4 million during the six months ended June 28, 2014.

Income taxes

The income tax benefit for the six months ended July 4, 2015 decreased by approximately $1.5 million compared to the same period in 2014.  Our pre-tax loss for the six months ended July 4, 2015 was approximately $22.4 million including the $15.2 million tax receivable agreement liability adjustment compared to a pre-tax loss of $45.6 million for the six months ended June 28, 2014.  For the six months ended July 4, 2015, the decrease in income tax benefit resulted primarily from the combination of income and losses from our operating units and pre-tax losses in some entities for which no tax benefit was recognized.

Liquidity and Capital Resources

During the six months ended July 4, 2015, cash increased by approximately $2.7 million compared to a decrease of approximately $54.8 million during the six months ended June 28, 2014.  The increase in cash used during the comparative six month period was primarily due to a $50.2 million improvement in working capital period over period. Accounts receivable improved by $29.2 million and inventory improved by $29.8 million.

One of the largest changes in operating cash flows during the six months ended July 4, 2015 is the movement in the accounts receivable balance. The approximate $68.6 million increase in accounts receivable from December 31, 2014 to July 4, 2015 can be attributed to the seasonality of our business. Net sales in the final month of each respective quarter drove this increase as aging profiles were relatively consistent. Net sales for June 2015 were approximately $201.9 million, versus approximately $144.2 million for December 2014, for an increase of $57.7 million. The improvement in June’s net sales reflects the Company’s normal seasonal business as the weather in June is generally improved compared to December, which allows for further construction activity, increasing the Company’s sales with a corresponding increase in accounts receivable.

Our business is seasonal because inclement weather during the winter months typically reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors, especially in the Northeast and Midwest regions of the United States and Canada.  As a result, our liquidity typically increases during the second and third quarters as our ABL Facility borrowing base increases, reaching a peak early in the fourth quarter, and decreases late in the fourth quarter and throughout the first quarter.

Our primary cash needs are for working capital, capital expenditures, and debt service.  As of July 4, 2015, our annual interest charges for debt service for the year ending December 31, 2015, including the ABL Facility, is estimated to be approximately $61.3 million.  We do not have any scheduled debt maturities until 2018.  The specific debt instruments and their corresponding terms and due dates are described in the following sections.  Our capital expenditures have historically been approximately 1.5% to 2.0% of net sales on an annual basis.  Historically, we have been able to manage our capital expenditures based on market conditions for the new construction and repair and remodeling markets during any given fiscal year. As of July 4, 2015, our purchase commitments for inventory are approximately $67.5 million.  We finance these cash requirements, including payments under the Tax Receivable Agreement through internally generated cash flow and funds borrowed under the ABL Facility.

55


Our outstanding indebtedness will mature in 2018 (ABL Facility), 2021 (Term Loan Facility), and 2022 (6.50% Senior Notes).  Although we expect to refinance or pay off such indebtedness, we may not be successful in refinancing, extending the maturity or otherwise amending the terms of such indebtedness because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness.

Our specific cash flow movement for the six months ended July 4, 2015 and June 28, 2014 is summarized below:

Cash used in operating activities

Net cash used in operating activities for the six months ended July 4, 2015 was approximately $19.4 million as compared to approximately $86.5 million used in operations for the six months ended June 28, 2014. The net cash used in operating activities was impacted by the increase in operating earnings of approximately $20.0 million which was driven by improved operating performance for our U.S. windows business of approximately $14.7 million and $10.3 million operating earnings improvement in the Siding, Fencing and Stone segment. In addition to the improvement in operating earnings, the Company also had improved working capital metrics during the six months ended July 4, 2015 relative to the six months ended June 28, 2014 of approximately $50.2 million related to improved accounts receivable and inventory as we experienced improved collection rates on receivables and managed our seasonal inventory build more effectively as we purchased some of our seasonal material requirements in December 2014 rather than the spring and summer of 2015.

Cash used in investing activities

Net cash used in investing activities for the six months ended July 4, 2015 and June 28, 2014 was approximately $34.3 million and $9.3 million, respectively, primarily used for capital expenditures on various ongoing capital projects and a $21.0 million acquisition for Canyon Stone in 2015. Capital expenditures for 2015 were higher than 2014 but were consistent as a percentage of net sales at 1.5% for both periods, which is comparably to our historical average of 1.5% to 2.0%.

Cash provided by financing activities

Net cash provided by financing activities for the six months ended July 4, 2015 was approximately $58.5 million, primarily from net revolver borrowings of $60.0 million. Net cash provided by financing activities for the six months ended June 28, 2014 was approximately $41.2 million, primarily from net revolver borrowings of $40.0 million. The long term debt refinancing in the six months ended June 28, 2014 was essentially cash neutral after considering the final debt structure and related premiums/discounts with proceeds of $927.9 million offset by debt payments on the 8.25% Senior Secured Notes and 9.375% Senior Notes of $852.0 million, $61.1 million of tender/call premiums, and $14.6 million of debt issuance costs.

Our specific debt instruments and terms are described below:
 
2014 Debt Transactions
    
On January 30, 2014, Ply Gem Industries completed an offering of $500.0 million aggregate principal amount of 6.50% Senior Notes due 2022 (the “6.50% Senior Notes”) and also entered into a $430.0 million senior secured term loan facility due 2021 (the “Term Loan Facility”). The approximate $927.9 million of net proceeds from the issuance of the 6.50% Senior Notes and the borrowings under the Term Loan Facility were used by Ply Gem Industries to purchase all of its 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") and 9.375% Senior Notes due 2017 (the "9.375% Senior Notes") tendered in the tender offers described below, to satisfy and discharge the remaining obligations under the indentures governing the 8.25% Senior Secured Notes and 9.375% Senior Notes and to pay related fees and expenses.

56

On January 30, 2014, Ply Gem Industries purchased approximately $705.9 million of the outstanding 8.25% Senior Secured Notes in a tender offer at a price of $1,067.50 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries also purchased approximately $94.7 million of the outstanding 9.375% Senior Notes in a tender offer at a price of $1,108.36 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. As a result, Ply Gem Industries paid aggregate consideration of approximately $780.2 million for the tendered 8.25% Senior Secured Notes, including a tender premium of approximately $47.6 million, and paid aggregate consideration of approximately $107.6 million for the tendered 9.375% Senior Notes, including a tender premium of approximately $10.3 million.

On March 1, 2014, pursuant to the terms of the indenture governing the 8.25% Senior Secured Notes, Ply Gem Industries redeemed the remaining approximate $50.1 million principal amount of the outstanding 8.25% Senior Secured Notes at a redemption price equal to 106.188% of the principal amount thereof, plus accrued and unpaid interest. On February 16, 2014, pursuant to the terms of the indenture governing the 9.375% Senior Notes, Ply Gem Industries redeemed the remaining approximate $1.3 million principal amount of the outstanding 9.375% Senior Notes at a redemption price equal to 100% of the principal amount plus the “make-whole” premium required under the indenture governing the 9.375% Senior Notes (which equated to 110.179% of the principal amount thereof), plus accrued and unpaid interest. As of March 1, 2014, there were no longer outstanding any 8.25% Senior Secured Notes. As of February 16, 2014, there were no longer outstanding any 9.375% Senior Notes.

On September 19, 2014, Ply Gem Industries issued an additional $150.0 million aggregate principal amount of its 6.50% Senior Notes (“Senior Tack-on Notes”).  The net proceeds from the transaction were approximately $138.0 million after deducting $10.1 million for the debt discount and $1.9 million in transaction costs. The proceeds from the issuance of the Senior Tack-on Notes and approximately $3.1 million of cash on hand were used by Ply Gem Industries to fund Ply Gem Industries’ purchase of all the issued and outstanding shares of common stock of Simonton, to pay fees and expenses related to the offering of the Senior Tack-on Notes and the Simonton acquisition and for general corporate purposes, including the repayment of approximately $10.0 million of indebtedness under the Company’s senior secured asset-backed revolving credit facility (the "ABL Facility"). The additional $150.0 million of 6.50% Senior Tack-on Notes have the same terms and covenants as the original $500.0 million of 6.50% Senior Notes due 2022. The 6.50% Senior Notes originally issued in January 2014 and the Senior Tack-on Notes issued in September 2014 (collectively, the "6.50% Senior Notes") will mature on February 1, 2022 and bear interest at the rate of 6.50%.

In November 2014, the Company exercised a portion of the accordion feature under the ABL Facility for $50.0 million, or 50% of the eligible accordion, increasing the ABL Facility from $250.0 million to $300.0 million to account for the additional borrowing base acquired from Simonton.

6.50% Senior Notes due 2022

On January 30, 2014, Ply Gem Industries issued $500.0 million of 6.50% Senior Notes at par. On September 19, 2014, Ply Gem Industries issued an additional $150.0 million of 6.50% Senior Notes at a discount of approximately $10.1 million. Interest accrues at 6.50% per annum and is paid semi-annually on February 1 and August 1 of each year. The 6.50% Senior Notes will mature on February 1, 2022.

Prior to February 1, 2017, Ply Gem Industries may redeem up to 40% of aggregate principal amount of the 6.50% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 106.50% of the aggregate principal amount of the 6.50% Senior Notes to be redeemed, plus accrued and unpaid interest, if any, provided that at least 50% of the aggregate principal amount of the 6.50% Senior Notes remains outstanding after the redemption. Prior to February 1, 2017, Ply Gem Industries may redeem the 6.50% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium plus accrued and unpaid interest, if any. At any time on or after February 1, 2017, Ply Gem Industries may redeem the 6.50% Senior Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 6.50% Senior Notes plus, in each case, accrued and unpaid interest, if any, to the redemption date. The effective interest rate for the 6.50% Senior Notes is 8.48% after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.

57

The 6.50% Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Ply Gem Holdings and all of the wholly-owned domestic subsidiaries of Ply Gem Industries (the “Guarantors”).  The indenture governing the 6.50% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt (as defined in the indenture) in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00.  

In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt under certain circumstances, including, but not limited to, debt under credit facilities (as defined in the indenture) (x) in an amount not to exceed the greater of (a) $350.0 million and (b) the borrowing base (as defined in the indenture) and (y) in an amount not to exceed the greater of (A) $575.0 million and (B) the aggregate amount of indebtedness (as defined in the indenture) that that would cause the consolidated secured debt ratio (as defined in the indenture) to be equal to 4.00 to 1.00; purchase money indebtedness in an aggregate amount not to exceed the greater of (x) $35.0 million and (y) 10% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed the greater of (x) $60.0 million and (y) 15% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt pursuant to a general basket in an aggregate amount at any one time outstanding not to exceed the greater of (x) $75.0 million and (y) 20% of consolidated net tangible assets; and the refinancing of debt under certain circumstances.

On September 5, 2014, Ply Gem Industries completed an exchange offer with respect to the 6.50% Senior Notes issued in January 2014 to exchange $500.0 million 6.50% Senior Notes registered under the Securities Act for $500.0 million of the issued and outstanding 6.50% Senior Notes. Upon completion of the exchange offer, all $500.0 million of issued and outstanding 6.50% Senior Notes were registered under the Securities Act.  On January 23, 2015, Ply Gem Industries completed an exchange offer with respect to the Senior Tack-on Notes issued in September 2014 to exchange $150.0 million Senior Tack-on Notes registered under the Securities Act for $150.0 million of the issued and outstanding Senior Tack-on Notes. Upon completion of the exchange offer, all $150.0 million of issued and outstanding Senior Tack-on Notes were registered under the Securities Act. 
  
Term Loan Facility due 2021

On January 30, 2014, Ply Gem Industries entered into a credit agreement governing the terms of its new $430.0 million Term Loan Facility. Ply Gem Industries borrowed $430.0 million under the Term Loan Facility on January 30, 2014, with an original discount of approximately $2.2 million, yielding proceeds of approximately $427.9 million. The Term Loan Facility will mature on January 30, 2021. The Term Loan Facility requires scheduled quarterly payments in an aggregate annual amount equal to 1.00% of the original aggregate principal amount of the Term Loan Facility with the balance due at maturity. Interest on outstanding borrowings under the Term Loan Facility are paid quarterly.
  
Borrowings under the Term Loan Facility bear interest at a rate equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the highest of (i) the prime rate of the administrative agent under the credit agreement, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBO rate for a one-month interest period plus 1.00% or (b) a LIBO rate determined by reference to the cost of funds for eurocurrency deposits in dollars for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor, plus, in each case, an applicable margin of 3.00% for any eurocurrency loan and 2.00% for any alternate base rate loan. As of July 4, 2015, the Company's interest rate on the Term Loan Facility was 4.00%. The effective interest rate for the Term Loan is 7.00% after considering each of the different interest expense components of this instrument, including the coupon payment, the deferred debt issuance costs and the original issue discount.

The Term Loan Facility allows Ply Gem Industries to request one or more incremental term loan facilities in an aggregate amount not to exceed the greater of (x) $140.0 million and (y) an amount such that Ply Gem Industries’ consolidated senior secured debt ratio (as defined in the credit agreement), on a pro forma basis, does not exceed 3.75 to 1.00, in each case, subject to certain conditions and receipt of commitments by existing or additional financial institutions or institutional lenders. Ply Gem Industries may voluntarily repay outstanding loans under the Term Loan Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

58

The Term Loan Facility requires Ply Gem Industries to prepay outstanding term loans, subject to certain exceptions, with: (i) 50% (which percentage will be reduced to 25% if our consolidated senior secured debt ratio is equal or less than 2.50 to 1.00 but greater than 2.00 to 1.00 and to 0% if our consolidated senior secured debt ratio is equal to or less than 2.00 to 1.00) of our annual excess cash flow (as defined in the credit agreement), to the extent such excess cash flow exceeds $15.0 million, commencing with the fiscal year ending December 31, 2015; (ii) 100% of the net cash proceeds of certain non-ordinary course asset sales or certain insurance and condemnation proceeds, in each case subject to certain exceptions and reinvestment rights; and (iii) 100% of the net cash proceeds of certain issuances of debt, other than proceeds from debt permitted under the Term Loan Facility.
   
The Term Loan Facility is secured on a first-priority lien basis by the stock of Ply Gem Industries and by substantially all of the assets (other than the assets securing the obligations under the ABL Facility, which primarily consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper, contract rights, instruments, documents related thereto and proceeds of the foregoing) of Ply Gem Industries and the Guarantors that are subsidiaries of Ply Gem Industries and on a second-priority lien basis by the assets that secure the ABL Facility.

The Term Loan Facility includes negative covenants, subject to certain exceptions, that are substantially the same as the negative covenants in the 6.50% Senior Notes and also does not contain any restrictive financial covenants. The Term Loan Facility also restricts the ability of Ply Gem Industries’ subsidiaries to enter into agreements restricting their ability to grant liens to secure the Term Loan Facility and contains a restriction on changes in fiscal year.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes at par.  Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses.  A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes given that the 2011 transaction was predominately accounted for as a loan modification.  On February 15, 2012, Ply Gem Industries issued an additional $40.0 million principal amount of its 8.25% Senior Secured Notes. The 8.25% Senior Secured Notes would have matured on February 15, 2018 and bore interest at the rate of 8.25% per annum.   Interest was paid semi-annually on February 15 and August 15 of each year. The 8.25% Senior Secured Notes were fully and unconditionally and jointly and severally guaranteed on a senior secured basis by the Guarantors. The 8.25% Senior Secured Notes and the related guarantees were secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

On January 30, 2014, Ply Gem Industries purchased approximately $705.9 million of its outstanding 8.25% Senior Secured Notes in a tender offer at a price of $1,067.50 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries irrevocably deposited with the trustee for the 8.25% Senior Secured Notes an amount sufficient to satisfy and discharge its obligations under the 8.25% Senior Secured Notes and the indenture. On March 1, 2014, Ply Gem Industries redeemed the remaining outstanding principal amount of the 8.25% Senior Secured Notes at a redemption price equal to 106.188% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. Following the redemption, there were no longer any 8.25% Senior Secured Notes outstanding.


59

Senior Secured Asset Based Revolving Credit Facility due 2018

On November 1, 2013, Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Gienow Canada Inc., and Mitten Inc. (together with Ply Gem Canada and Gienow, the “Canadian Borrowers”) entered into an amended and restated credit agreement governing the ABL Facility. Among other things, the amendment and restatement of the credit agreement governing the ABL Facility: (i) increased the overall facility to $250.0 million from $212.5 million, (ii) increased the accordion feature to $100.0 million, (iii) reduced the applicable margin for borrowings under the ABL Facility to a range from 1.50% to 2.00% for Eurodollar rate loans, depending on availability, and (iv) increased the amount available under the ABL Facility to Ply Gem Industries' Canadian subsidiaries to $50.0 million. In November 2014, the Company exercised a portion of the accordion feature under the ABL Facility for $50.0 million, or 50% of the eligible accordion, increasing the ABL Facility from $250.0 million to $300.0 million to account for the additional borrowing base acquired from Simonton. Under the terms of the ABL Facility, the Company has the ability to further increase the revolving commitments up another $50.0 million to $350.0 million, subject to certain terms and conditions. All outstanding loans under the ABL Facility are due and payable in full on November 1, 2018. Under the ABL Facility, $250.0 million is available to Ply Gem Industries and $50.0 million is available to the Canadian Borrowers. The following summary describes the ABL Facility after giving effect to the amendment and restatement.

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent under the ABL Facility and (2) the federal funds rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowings under the ABL Facility was 0.75% for base rate loans and 1.75% for Eurodollar rate loans.  The applicable margin for borrowings under the ABL Facility is subject to step ups and step downs based on average excess availability under the ABL Facility.  Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the ABL Facility, Ply Gem Industries is required to pay a commitment fee in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the ABL Facility (increasing when utilization is low and decreasing when utilization is high) multiplied by a commitment fee rate determined by reference to average excess availability under the ABL Facility. The commitment fee rate during any fiscal quarter is 0.375% when average excess availability is greater than $100.0 million for the preceding fiscal quarter and 0.25% when average availability is less than or equal to $100.0 million for the preceding fiscal quarter.  Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees.   As of July 4, 2015, the Company’s interest rate on the ABL Facility was approximately 1.78% .  The ABL Facility requires that if (a) excess availability is less than the greater of (x) 10.0% of the lower of the borrowing base and the aggregate commitments and (y) $17.5 million or (b) any event of default has occurred and is continuing, Ply Gem Industries must comply with a minimum fixed charge coverage ratio test of 1.0 to 1.0.  If the excess availability under the ABL Facility is less than the greater of (a) 12.5% of the lesser of the borrowing base and the aggregate commitments and (b) $22.5 million ($20.0 million for the months of January, February, March and April) for a period of 5 consecutive days or an event of default has occurred and is continuing, all cash from Ply Gem Industries material deposit accounts (including all concentration accounts) will be swept daily into a collection account controlled by the administrative agent under the ABL Facility and used to repay outstanding loans and cash collateralize letters of credit.

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries.  All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the Term Loan Facility on a first-priority basis.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of the Canadian Borrowers, which are borrowers under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiaries, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of the Canadian Borrowers pledged only to secure the Canadian sub-facility.

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The ABL Facility contains certain covenants that limit Ply Gem Industries’ ability and the ability of Ply Gem Industries’ subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries is permitted to incur additional debt in limited circumstances, including, but not limited to, permitted subordinated indebtedness in an aggregate principal amount not to exceed $112.5 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $10.0 million at any one time outstanding, indebtedness in connection with the tax receivable agreement in an aggregate principal amount not to exceed $100.0 million, and the refinancing of debt under certain circumstances.  

As of July 4, 2015, Ply Gem Industries had approximately $233.4 million of contractual availability and approximately $206.4 million of borrowing base availability under the ABL Facility, reflecting $60.0 million of borrowings outstanding and approximately $6.6 million of letters of credit and priority payables reserves.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes would have matured on April 15, 2017 and bore interest at the rate of 9.375% per annum. Interest was paid semi-annually on April 15 and October 15 of each year. The 9.375% Senior Notes were unsecured and fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Guarantors.

On January 30, 2014, Ply Gem Industries purchased approximately $94.7 million of the outstanding 9.375% Senior Notes at a tender price of $1,108.36 per $1,000 principal amount, which included an early tender payment of $30.00 per $1,000 principal amount, plus accrued and unpaid interest. On January 30, 2014, Ply Gem Industries irrevocably deposited with the trustee for the 9.375% Senior Notes an amount sufficient to satisfy and discharge its obligations under the 9.375% Senior Notes and the indenture. On February 16, 2014, Ply Gem Industries redeemed the remaining outstanding principal amount of the 9.375% Senior Notes at a redemption price equal to 100% of the principal amount plus the “make-whole” premium required under the indenture (which equated to 110.179% of the principal amount thereof), plus accrued and unpaid interest. Following the redemption, there were no longer any 9.375% Senior Notes outstanding.

Loss on debt modification or extinguishment

As a result of the January 2014 6.50% Senior Notes and Term Loan Facility issuance and the tender, redemption, and repurchase of the 8.25% Senior Secured Notes and the 9.375% Senior Notes (the "January 2014 Refinancing") during the six months ended June 28, 2014, the Company performed an analysis to determine the proper accounting treatment for the January 2014 Refinancing. Specifically, the Company evaluated each creditor with ownership in both the new 6.50% Senior Notes and/or Term Loan Facility debt instruments and the old 8.25% Senior Secured Notes and/or 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual creditor. The Company had approximately $34.4 million of unamortized debt discount and $14.9 million of unamortized debt issuance costs associated with the 8.25% Senior Secured Notes and 9.375% Senior Notes, of which approximately $4.8 million and $2.1 million, respectively, were expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014 as a result of the January 2014 Refinancing.


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The Company also incurred an early tender premium of approximately $61.1 million in conjunction with this transaction, of which approximately $52.6 million was recorded as a discount on the 6.50% Senior Notes and the Term Loan Facility and approximately $8.5 million was expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014. The Company also expensed approximately $0.3 million for the third party fees for the 8.25% Senior Secured Notes and 9.375% Senior Notes as a result of the January 2014 Refinancing for the six months ended June 28, 2014. The Company also incurred approximately $14.7 million of costs associated with the 6.50% Senior Notes and Term Loan Facility, of which approximately $9.2 million was recorded as debt issuance costs and approximately $5.5 million was expensed as a loss on modification of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014. Additionally, the Company incurred an original issue discount of approximately $2.2 million for the Term Loan Facility, of which approximately $1.9 million was recorded as a discount and approximately $0.3 million was expensed as a loss on extinguishment of debt in the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 28, 2014.

Based on the January 2014 Refinancing, the Company recognized a loss on debt modification or extinguishment of approximately $21.4 million for the six months ended July 4, 2015 and June 28, 2014, as summarized in the table below. There was no loss on debt modification or extinguishment in the three months ended July 4, 2015 or June 28, 2014.
(Amounts in thousands)
 
For the six months ended
 
 
July 4, 2015
 
June 28, 2014
Loss on extinguishment of debt:
 
 

 
 

Tender premium
 
$
—

 
$
(8,493
)
8.25% Senior Secured Notes and 9.375% Senior Notes unamortized discount
 
—

 
(4,773
)
8.25% Senior Secured Notes and 9.375% Senior Notes unamortized debt issuance costs
 
—

 
(2,067
)
Term Loan Facility unamortized discount
 
—

 
(255
)
 
 
—

 
(15,588
)
Loss on modification of debt:
 
 
 
 
Third party fees for 8.25% Senior Secured Notes and 9.375% Senior Notes
 
—

 
(302
)
Third party fees for 6.50% Senior Notes and Term Loan Facility
 
—

 
(5,474
)
 
 
—

 
(5,776
)
Total loss on modification or extinguishment of debt
 
$
—

 
$
(21,364
)


Liquidity requirements

We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under our ABL Facility.  We believe that we will continue to meet our liquidity requirements over the next 12 months.  We believe that our operating units are positive cash flow generating units and will continue to sustain their operations without any significant liquidity concerns.  The performance of these operating units is significantly impacted by the performance of the housing industry, specifically single family housing starts and the repair and remodeling activity.  Any unforeseen or unanticipated downturn in the housing industry could have a negative impact on our liquidity position.

Management anticipates that our current liquidity position, as well as expected cash flows from our operations, should be sufficient to meet ongoing operational cash flow needs, capital expenditures, debt service obligations, and other fees payable under other contractual obligations for the foreseeable future.  As of July 4, 2015, we had cash and cash equivalents of approximately $35.9 million, approximately $233.4 million of contractual availability under the ABL Facility and approximately $206.4 million of borrowing base availability.  

In order to further supplement our operating cash flow, we have from time to time opportunistically accessed capital markets based on prevailing economic and financial conditions.  Based on market conditions, we may elect to pursue additional financing alternatives in the future. 

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.


Contractual Obligations

In addition to the items listed in the Contractual Obligations table presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, we have a potential obligation related to certain tax matters of approximately $3.2 million, including interest of approximately $1.0 million.  The timing of the potential tax payments is unknown.

As of July 4, 2015, the Company had inventory purchase commitments related to supply agreements for aluminum and glass of approximately $67.5 million.


Inflation; Seasonality

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment.  We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.
    
The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and Canada where inclement weather conditions during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors.  Our sales in both segments are usually lower during the first and fourth quarters.  Since a portion of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels.  In addition, the demand for cash to fund our working capital is greater from late in the fourth quarter through the first quarter.


Recent Accounting Pronouncements

See Note 1 – Summary of Significant Accounting Policies to the condensed consolidated financial statements, regarding the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.


Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology.  These statements are only predictions.  Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and other cautionary statements included therein and herein.

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There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and the following:
 
•
our high degree of leverage and significant debt service obligations;
•
restrictions under the indenture governing the 6.50% Senior Notes and the restrictions under our Term Loan Facility and ABL Facility;
•
the competitive nature of our industry;
•
changes in interest rates, and general economic, home repair and remodeling and new home construction market conditions;
•
changes in the price and availability of raw materials; and
•
changes in our relationships with our significant customers.

Other factors that could cause actual results to differ from those implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q include those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  We undertake no obligation to update the forward-looking statements in this report.



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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our principal interest rate exposure relates to the loans outstanding under our Term Loan Facility and our ABL Facility, which provides for borrowings of $430.0 million on the Term Loan and up to $300.0 million on the ABL, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin.  Each quarter point increase or decrease in the interest rate would change our interest expense by approximately $1.1 million per year for the Term Loan Facility.  Assuming the ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.8 million per year. At July 4, 2015, we were not party to any interest rate swaps or caps to manage our interest rate risk. In the future, we may enter into interest rate swaps or interest rate caps, involving exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.

Foreign Currency Risk
 
Our results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of the Canadian dollar.  For the three and six months ended July 4, 2015, the net impact of foreign currency changes to our results of operations was a loss of approximately $0.1 million and $1.0 million, respectively. The impact of foreign currency changes related to translation resulted in a increase in stockholders' deficit of approximately $7.2 million for the six months ended July 4, 2015. The revenue or expense reported by us as a result of currency fluctuations will be greater in times of U.S. dollar devaluation and less in times of U.S. dollar appreciation. During 2014, we entered into a forward contract to mitigate the exposure risk of currency fluctuation against the Canadian dollar.  At July 4, 2015, our foreign currency hedging contract had a fair value of $2.3 million and is recorded as a decrease in stockholders' deficit as of July 4, 2015.

Commodity pricing risk

We are subject to significant market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum, and wood.  If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly.  We manage the exposure to commodity pricing risk by increasing our selling prices for corresponding material cost increases, continuing to diversify our product mix, strategic buying programs and vendor partnering. The Midwest ingot price of aluminum decreased approximately 8.0% for the six months ended July 4, 2015 compared to the six months ended June 28, 2014. The average market price for PVC resin was estimated to have decreased approximately 2.6% for the six months ended July 4, 2015 compared to the six months ended June 28, 2014.


Inflation

We do not believe that inflation, net of our corresponding price increases for material cost, has had a material effect on our business, financial condition or results of operations.  Our lease payments related to our sale/leaseback agreement include an annual increase based on the Consumer Price Index, which could expose us to potential higher costs in years with high inflation. The CPI decrease for the twelve months ended June 2015 was approximately 0.1%.

Labor force risk
Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the U.S. housing market recovers and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease and any growth potential could be impaired. Historically, the Company has believed that the lag period between breaking ground on a new housing start and the utilization of our products on the exterior of a home was 90 days. The Company believes that the labor force risk has expanded the historical 90 day lag period to 120 days or more.
During the three months ended July 4, 2015 a new Collective Bargaining Agreement ("CBA") was agreed upon and ratified with the United Brotherhood of Carpenters and Joiners of America, which represents employees in our Western Canadian business unit. This newly ratified agreement will expire in June 2017.

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Item 4.     CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures
 
Our management maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the required disclosure.

Our management is responsible for establishing and maintaining our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures as of July 4, 2015.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of July 4, 2015 were not effective as a result of a material weakness in our internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 10-K").

Notwithstanding the material weakness that existed as of December 31, 2014, our Chief Executive Officer and Chief Financial Officer have each concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with GAAP. We are in the process of remediating such material weakness as described below.

Plan for Remediation of Material Weakness in Internal Control over Financial Reporting

Management is in the process of remediating the material weakness in our internal control over financial reporting described in Item 9A of the 2014 10-K, and the audit committee of the Company’s Board of Directors has monitored and will continue to monitor the remediation plan and progress. Management’s remediation efforts include improving upon the timeliness and effectiveness of the review of nonstandard journal entries. These improvements will include increased documentation and refinement in our approval processes for these nonstandard journal entries. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent improvements in our controls.  When fully implemented and operating effectively, such enhancements are expected to remediate the material weakness described in Item 9A of the 2014 10-K.
In addition, under the direction of the audit committee, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies.


Changes in Internal Control Over Financial Reporting

Except as discussed above, there have been no changes in our internal control over financial reporting during the three months ended July 4, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

    

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PART II – OTHER INFORMATION



Item 6.                                                 EXHIBITS

(a)   Exhibits

Exhibit No.                                                                  Description of Exhibits
3.1
Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the Company’s Form 8-K, dated May 29, 2013 (File No. 001-35930)).

3.2 *
Certificate of Amendment to the Amended and Restated Certificate of Incorporation.
3.3
Amended and Restated By-laws (incorporated by reference from Exhibit 3.2 to the Company’s Form 8-K, dated May 29, 2013 (File No. 001-35930)).

3.4
Certificate of Amendment to the Amended and Restated By-laws (incorporated by reference from Exhibit 3.1 to the Company's Form 8-K, dated May 13, 2015 (File No. 001-35930)).
31.1 *
Certification by President, Chief Executive Officer, and Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2 *
Certification by Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1 *
Certification by President, Chief Executive Officer, and Chairman pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2 *
 
 
Certification by Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101*
The following financial statements from Ply Gem Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended July 4, 2015, filed on August 10, 2015, were formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); (iii) Condensed Consolidated Statements of Cash Flows; (iv) the Notes to Condensed Consolidated Financial Statements.

*  Filed herewith.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PLY GEM HOLDINGS, INC.
(Registrant)
 

 
Date:  August 10, 2015

By:    
/s/ Gary E. Robinette                
 
Gary E. Robinette
 
President, Chief Executive Officer, and
Chairman of the Board



Date:  August 10, 2015

By:  
/s/ Shawn K. Poe                        
 
Shawn K. Poe
 
Executive Vice President, Chief Financial Officer, Treasurer and Secretary


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