10-Q 1 a201492710q.htm PLY GEM 10-Q 2014.9.27 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 September 27, 2014
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                    [   ]   
Non-accelerated filer     [X]                                                                       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 November 7, 2014, there were 67,845,371 shares of common stock, $0.01 par value, outstanding.
 





PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY PERIOD ENDED September 27, 2014


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
 
 
September 27, 2014
 
September 28, 2013
Net sales
 
$
437,848

 
$
407,426

Cost of products sold
 
339,259

 
323,258

Gross profit
 
98,589

 
84,168

Operating expenses:
 
 

 
 

Selling, general and administrative expenses
 
51,355

 
47,597

Amortization of intangible assets
 
5,307

 
5,651

Total operating expenses
 
56,662

 
53,248

Operating earnings
 
41,927

 
30,920

Foreign currency loss
 
(766
)
 
(376
)
Interest expense
 
(16,300
)
 
(22,045
)
Interest income
 
18

 
285

Tax receivable agreement liability adjustment
 
(13,988
)
 
6,669

Income before benefit for income taxes
 
10,891

 
15,453

Benefit for income taxes
 
(10,514
)
 
(1,442
)
Net income
 
$
21,405

 
$
16,895

Comprehensive income
 
$
17,282

 
$
20,969

Net income attributable to common shareholders per share:
 
 
 
 
Basic
 
$
0.32

 
$
0.25

Diluted
 
$
0.32

 
$
0.25

Weighted average shares outstanding:
 
 
 
 
Basic
 
67,844,546

 
67,120,389

Diluted
 
67,944,470

 
68,244,727




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 nine months ended
 
 
September 27, 2014
 
September 28, 2013
Net sales
 
$
1,116,524

 
$
1,032,663

Cost of products sold
 
890,717

 
832,389

Gross profit
 
225,807

 
200,274

Operating expenses:
 
 

 
 

Selling, general and administrative expenses
 
156,391

 
131,162

Amortization of intangible assets
 
15,841

 
14,575

Initial public offering costs
 
—

 
23,527

Total operating expenses
 
172,232

 
169,264

Operating earnings
 
53,575

 
31,010

Foreign currency loss
 
(517
)
 
(755
)
Interest expense
 
(52,065
)
 
(70,605
)
Interest income
 
64

 
359

Tax receivable agreement liability adjustment
 
(14,419
)
 
(1,474
)
Loss on modification or extinguishment of debt
 
(21,364
)
 
(18,948
)
Loss before provision (benefit) for income taxes
 
(34,726
)
 
(60,413
)
Provision (benefit) for income taxes
 
(15,933
)
 
1,676

Net loss
 
$
(18,793
)
 
$
(62,089
)
Comprehensive loss
 
$
(24,206
)
 
$
(60,998
)
 
 
 
 
 
Basic and diluted net loss per share attributable to common shareholders
 
$
(0.28
)
 
$
(1.08
)
 
 
 
 
 
Basic and diluted weighted average shares outstanding
 
67,807,801

 
57,538,917





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)
 
September 27, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
26,782

 
$
69,801

Accounts receivable, less allowances of $4,518 and $4,453, respectively
 
278,138

 
140,062

Inventories:
 
 

 
 

Raw materials
 
75,858

 
51,313

Work in process
 
28,359

 
23,817

Finished goods
 
71,490

 
60,340

Total inventory
 
175,707

 
135,470

Prepaid expenses and other current assets
 
20,502

 
23,214

Deferred income taxes
 
6,554

 
3,178

Total current assets
 
507,683

 
371,725

Property and Equipment, at cost:
 
 

 
 

Land
 
8,017

 
4,528

Buildings and improvements
 
65,670

 
43,691

Machinery and equipment
 
360,775

 
321,614

Total property and equipment
 
434,462

 
369,833

Less accumulated depreciation
 
(273,893
)
 
(258,186
)
Total property and equipment, net
 
160,569

 
111,647

Other Assets:
 
 

 
 

Intangible assets, net
 
155,006

 
110,012

Goodwill
 
450,618

 
420,228

Deferred income taxes
 
—

 
5,406

Other
 
30,986

 
23,233

Total other assets
 
636,610

 
558,879

 
 
$
1,304,862

 
$
1,042,251

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable
 
$
116,976

 
$
82,981

Accrued expenses
 
147,557

 
112,940

Current portion of long-term debt
 
4,300

 
—

Total current liabilities
 
268,833

 
195,921

Deferred income taxes
 
22,520

 
17,115

Payable to related parties pursuant to tax receivable agreement
 
26,042

 
11,623

Other long-term liabilities
 
52,398

 
52,560

Long-term debt, less current portion
 
1,008,525

 
817,028

 
 
 
 
 
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, 67,845,371 and 67,223,233 issued and outstanding, respectively
 
678

 
672

Additional paid-in-capital
 
744,529

 
741,789

Accumulated deficit
 
(810,036
)
 
(791,243
)
Accumulated other comprehensive loss
 
(8,627
)
 
(3,214
)
Total stockholders' deficit
 
(73,456
)
 
(51,996
)
 
 
$
1,304,862

 
$
1,042,251


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 nine months ended
 
 
September 27, 2014
 
September 28, 2013
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(18,793
)
 
$
(62,089
)
Adjustments to reconcile net loss to cash
 
 

 
 

used in operating activities:
 
 

 
 

Depreciation and amortization expense
 
33,916

 
32,983

Fair-value premium on purchased inventory
 
38

 
2,015

Fair-value decrease of contingent acquisition liability
 
(264
)
 
(358
)
Non-cash restructuring costs
 
3,012

 
—

Non-cash interest expense, net
 
11,606

 
9,457

Loss on foreign currency transactions
 
517

 
755

Non-cash litigation expense
 
4,593

 
—

Loss on modification or extinguishment of debt
 
21,364

 
18,948

Prepaid management fee write off
 
—

 
2,682

Stock based compensation
 
1,672

 
1,631

Deferred income taxes
 
(17,195
)
 
1,765

Tax receivable agreement liability adjustment
 
14,419

 
1,474

Increase (reduction) in tax uncertainty, net of valuation allowance
 
254

 
(1,279
)
Other
 
(224
)
 
(5
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
(102,728
)
 
(75,403
)
Inventories
 
(24,074
)
 
(11,730
)
Prepaid expenses and other assets
 
2,607

 
(5,181
)
Accounts payable
 
15,180

 
(4,192
)
Accrued expenses
 
(1,468
)
 
26,552

Payment of advisory termination fee to affiliate
 
—

 
(18,852
)
Cash payments on restructuring liabilities
 
(4,412
)
 
(2,893
)
Other
 
4,571

 
(912
)
Net cash used in operating activities
 
(55,409
)
 
(84,632
)
Cash flows from investing activities:
 
 

 
 

Acquisitions, net of cash acquired and outstanding checks assumed
 
(130,856
)
 
(99,282
)
Capital expenditures
 
(14,524
)
 
(16,314
)
Proceeds from sale of assets
 
744

 
24

Net cash used in investing activities
 
(144,636
)
 
(115,572
)
Cash flows from financing activities:
 
 

 
 

Proceeds from long-term debt
 
1,067,725

 
—

Net revolver borrowings (payments)
 
20,000

 
(1,000
)
Payments on long-term debt
 
(853,075
)
 
(148,000
)
Payment of tender and early call premiums
 
(61,142
)
 
(8,520
)
Net proceeds from issuance of common stock
 
—

 
353,407

Proceeds from exercises of employee stock options
 
1,073

 
—

Debt issuance costs paid
 
(16,721
)
 
(62
)
Net cash provided by financing activities
 
157,860

 
195,825

Impact of exchange rate movements on cash
 
(834
)
 
301

Net decrease in cash and cash equivalents
 
(43,019
)
 
(4,078
)
Cash and cash equivalents at the beginning of the period
 
69,801

 
27,194

Cash and cash equivalents at the end of the period
 
$
26,782

 
$
23,116




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 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014.  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 2013 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, 2014 through September 27, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

On May 23, 2013, the Company issued 18,157,895 shares of common stock at an initial public offering price of $21.00 per share and received net proceeds of approximately $353.4 million in an initial public offering ("IPO") of its common stock after deducting underwriting discounts and commissions of approximately $25.4 million and offering expenses of approximately $2.5 million. Prior to the IPO, the Company also issued a total of 48,962,494 shares of common stock in connection with the merger of Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”) into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity.

The condensed consolidated balance sheet at December 31, 2013 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 nine months ended September 27, 2014 and September 28, 2013, the condensed consolidated statements of cash flows for the nine months ended September 27, 2014 and September 28, 2013, and the condensed consolidated balance sheets as of September 27, 2014 and December 31, 2013.
    
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.

6

  
Initial Public Offering and Related Transactions
    
As a result of the IPO, the Company expensed within operations approximately $23.5 million in costs associated with the offering that were not directly attributable to the securities offered. The following table summarizes these costs for the nine months ended September 28, 2013. No such costs were incurred during the nine months ended September 27, 2014.
        
(Amounts in thousands)
 
Advisory termination fee to affiliate
$
18,852

2013 management fee as of date of termination
2,682

Other transaction expenses for the IPO
1,993

 
$
23,527

        
Further, the Company incurred approximately $27.9 million in costs associated with the IPO that have been recorded within additional paid-in-capital. These costs include underwriter fees along with legal, accounting, printing and other general expenses directly associated with the public offering.

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.

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 reserve for 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.  Illiquid credit markets, volatile equity markets, foreign currency, litigation risk, and the depressed housing and remodeling markets 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 $4.5 million at September 27, 2014 and December 31, 2013.  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.


7

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 September 27, 2014, the Company had inventory purchase commitments of approximately $27.2 million.

Inventory reserves were approximately $10.4 million at September 27, 2014, increasing during the nine months ended September 27, 2014 by $1.5 million compared to the December 31, 2013 reserve balance of approximately $8.9 million.

Property and Equipment
 
Property and equipment are presented at cost.  Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows: 
Buildings and improvements
10-37 years
Machinery and equipment, including leases
3-15 years
Leasehold improvements
Term of lease or useful life, whichever is shorter
 
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized.  When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations.  

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 (“US Windows”), (iii) the combined Simonton windows companies in the Windows and Doors segment, (iv) Gienow Canada Inc. ("Gienow Canada") (a combined Western Canadian company created by the January 2014 amalgamation of the Company's legacy Western Canadian business and the Gienow entity acquired in April 2013) in the Windows and Doors segment, and (v) Mitten (formerly known as Mitten, Inc.) 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 nine months ended September 27, 2014.

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 nine months ended September 27, 2014 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.

8


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 $25.1 million and $17.7 million as of September 27, 2014 and December 31, 2013, 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 September 27, 2014 and September 28, 2013 was approximately $0.8 million and $1.2 million, respectively.  Amortization of debt issuance costs for the nine months ended September 27, 2014 and September 28, 2013 was approximately $2.8 million and $3.2 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.
 
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.  As a result of the 2013 Ply Gem Prime and Ply Gem Holdings merger, U.S. federal income tax returns will be prepared and filed by Ply Gem Holdings on behalf of itself, Ply Gem Industries, Inc. (“Ply Gem Industries”), and its U.S. subsidiaries.  The Company has executed a tax sharing agreement with Ply Gem Industries and Ply Gem Holdings pursuant to which tax liabilities for each respective party are computed on a stand-alone basis.  The Company along with its U.S. subsidiaries file a consolidated federal income tax return, separate state income tax returns, combined state returns, and unitary state returns. Gienow Canada and Mitten both file separate Canadian federal income tax returns and separate provincial returns. 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.

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.

9

 
The Company recorded a loss from foreign currency transactions of approximately $(0.8) million for the three months ended September 27, 2014 and a loss of approximately $(0.4) million for the three months ended September 28, 2013. The Company recorded a loss from foreign currency transactions of approximately $(0.5) million for the nine months ended September 27, 2014 and a loss of approximately $(0.8) million for the nine months ended September 28, 2013. As of September 27, 2014 and December 31, 2013, accumulated other comprehensive loss included a currency translation adjustment of approximately $(5.4) million and $(2.9) million, respectively.

Derivative Financial Instruments
During the nine months ended September 27, 2014, the Company entered into a foreign currency zero-cost collar agreement to hedge approximately $43.0 million of its 2014 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 zero-cost collar agreement as a cash flow hedge. As a cash flow hedge, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The zero-cost collar 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 September 27, 2014, approximately $47,000 of the deferred net loss on derivative instruments included in accumulated other comprehensive loss is expected to be reclassified as cost of goods sold during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions.
The fair value of the foreign currency zero-cost collar 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 liability included in the accompanying condensed consolidated balance sheets is as follows:
(Amounts in thousands)
 
 
 
 
September 27, 2014
 
December 31, 2013
Foreign currency hedge (included in accrued expenses)
$
(47
)
 
$
—


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

 
$
625,625

 
$
625,625

 
$
—

 
$
—

Term Loan Facility
 
428,925

 
422,491

 
422,491

 
—

 
—

As of September 27, 2014
 
$
1,078,925

 
$
1,048,116

 
$
1,048,116

 
$
—

 
$
—

Liabilities:
 
 

 
 

 
 

 
 

 
 

Senior Notes-9.375%
 
$
96,000

 
$
103,440

 
$
103,440

 
$
—

 
$
—

Senior Secured Notes-8.25%
 
756,000

 
805,140

 
805,140

 
—

 
—

As of December 31, 2013
 
$
852,000

 
$
908,580

 
$
908,580

 
$
—

 
$
—


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 nine months ended September 27, 2014 and for the nine months ended September 28, 2013 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 September 27, 2014 and excluded approximately 0.1 million shares of common stock for the nine months ended September 27, 2014. The computation of the dilutive effect of other potential common shares included options and unvested restricted stock representing approximately 0.2 million shares of common stock for the three months ended September 28, 2013 and excluded approximately 0.2 million shares of common stock for the nine months ended September 28, 2013. Under the treasury stock method, the inclusion of these stock awards would have been anti-dilutive.

Prior to the IPO, the Company issued a total of 48,962,494 shares of common stock in connection with the merger of Ply Gem Prime into Ply Gem Holdings. Therefore, for purposes of EPS, the Company had 48,962,494 shares of common stock outstanding for the 2013 period through May 23, 2013. The Company calculated the amounts as net loss divided by the 48,962,494 shares of common stock outstanding for the 2013 period through May 23, 2013 plus the weighted-average shares outstanding subsequent to the IPO on May 23, 2013 through September 28, 2013. Prior to the IPO, all options and unvested restricted shares were instruments that were exercisable into Ply Gem Prime stock. Subsequently, those options and unvested restricted share grants were converted into Ply Gem Holdings instruments and as such will be treated prospectively from the date of the IPO for the calculation of dilutive income per share.





11

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 2016, 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. This new guidance is not expected to affect the Company's consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of Ply Gem's fiscal year 2017. This update will be effective for the Company beginning in the first quarter of fiscal year 2017, and allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. 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.


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 which will provide 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 will balance our end window market mix by moving our 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 expected to be approximately 50% and 50% for the new construction and repair and remodeling markets, respectively. Simonton will strategically fit into the Company’s existing footprint and broaden 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.

Since the acquisition was recently completed on September 19, 2014, the final acquisition accounting allocation remains subject to further adjustments. The specific accounts subject to ongoing purchase accounting adjustments include various income tax assets and liabilities, 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 September 27, 2014, and the preliminary acquisition accounting allocation detailed below is subject to adjustment. The Company anticipates completing these acquisition accounting adjustments during 2015.



12



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
37,269

Inventories
17,673

Prepaid expenses and other current assets
2,233

Property and equipment
53,655

Intangible assets
62,170

Goodwill
32,344

Other assets
426

Accounts payable and accrued expenses
(45,555
)
Deferred income taxes
(24,979
)
Other liabilities
(4,380
)
 
$
130,000

    
The $32.3 million of goodwill was 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 after the Company’s acquisition of Simonton. As of the acquisition date and as of September 27, 2014, Simonton was in a net deferred tax liability position, which was evaluated with the Company’s existing net deferred tax asset position as of September 27, 2014 considering the Company’s full valuation allowance position. This resulted in a reversal of approximately $25.0 million in the Company's valuation allowance during the three and nine months ended September 27, 2014. The reversal was recorded in the Company's condensed consolidated statement of operations and comprehensive income (loss) in the provision (benefit) for income taxes.
For the three and nine months ended September 27, 2014, Simonton contributed net sales of approximately $7.2 million from the acquisition date (September 19, 2014), which has been included within the Company’s condensed consolidated statement of operations and comprehensive income (loss). If the Simonton acquisition would have occurred at the beginning of 2013, the Company’s consolidated net sales would have been $1,344.4 million and $1,251.7 million for the nine months ended September 27, 2014 and September 28, 2013, respectively, with a net loss of $18.8 million and $66.2 million for the nine months ended September 27, 2014 and September 28, 2013, respectively.
During the three and nine months ended September 27, 2014, the Company incurred $0.6 million of acquisition-related costs for Simonton. 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 Windows and Doors segment.

Gienow    

On April 9, 2013, the Company, through its wholly-owned Canadian subsidiary Gienow Canada Inc., acquired Gienow WinDoor Ltd. for $20.4 million, through the purchase of all of the capital stock of Gienow WinDoor Ltd. Immediately subsequent to the acquisition, Gienow WinDoor Ltd. was amalgamated into Gienow Canada Inc. (the surviving entity, "Gienow"). In January 2014, Gienow was amalgamated with the Company's legacy Western Canadian business. Gienow is in the business of manufacturing, distributing, and selling windows, doors, and related products and services to industrial and residential customers in Canada and the United States. Gienow has a manufacturing facility located in Calgary, Alberta, Canada. The Company accounted for the transaction as a purchase in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Gienow based upon fair values as of the acquisition date.

13

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
$
11,714

Inventories
6,814

Other current assets
1,118

Property and equipment
4,746

Deferred taxes
2,657

Intangible assets
1,083

Goodwill
3,717

Accounts payable and accrued expenses
(10,041
)
Other liabilities
(1,428
)
 
$
20,380

The $3.7 million of goodwill was allocated to the Windows and Doors segment and none of the goodwill is expected to be deductible for tax purposes.
Mitten
On May 31, 2013, Ply Gem completed an acquisition for cash consideration of approximately $76.8 million to acquire the capital stock of Mitten Inc. (now known as Mitten), a leading manufacturer and distributor of vinyl siding and accessories in Canada. Mitten is located in Ontario, Canada, and therefore the acquisition expanded the Company's presence in Eastern Canada and enabled the Company to expand its current distribution of its portfolio of exterior building products to this market for its siding and windows businesses. 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 Mitten based upon fair values as of the acquisition date.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows:
(Amounts in thousands)
 
Accounts receivable
$
18,393

Inventories
22,592

Other current assets
904

Property and equipment
9,279

Other assets
1,439

Intangible assets
35,400

Goodwill
26,098

Accounts payable and accrued expenses
(27,499
)
Deferred taxes
(9,786
)
 
$
76,820

    
The allocation reflects a $2.1 million working capital adjustment that was recognized during the fourth quarter of 2013. The $26.1 million of goodwill was allocated to the Siding, Fencing and Stone segment and none of the goodwill is expected to be deductible for tax purposes.     





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, 2013 and no impairment indicators which would trigger an interim impairment test during the three and nine months ended September 27, 2014. 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 September 27, 2014 and December 31, 2013:
(Amounts in thousands)
 
 
 
 
 
 
September 27, 2014
 
December 31, 2013
Siding, Fencing and Stone
 
$
344,970

 
$
346,140

Windows and Doors
 
105,648

 
74,088

 
 
$
450,618

 
$
420,228


The changes in the goodwill balances from December 31, 2013 to September 27, 2014 relate to currency translation adjustments and the additional $32.3 million of goodwill established in the Simonton acquisition as described in Note 2. A goodwill rollforward for 2014 is included in the table below:


15

 
 
Windows and
 
Siding, Fencing
(Amounts in thousands)
 
Doors
 
and Stone
Balance as of December 31, 2013
 
 

 
 

Goodwill
 
$
401,861

 
$
468,367

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
74,088

 
$
346,140

Currency translation adjustments
 
(784
)
 
(1,170
)
Simonton acquisition
 
32,344

 
—

Balance as of September 27, 2014
 
 

 
 

Goodwill
 
433,421

 
467,197

Accumulated impairment losses
 
(327,773
)
 
(122,227
)
 
 
$
105,648

 
$
344,970



16



4.   INTANGIBLE ASSETS

The table that follows presents the major components of intangible assets as of September 27, 2014 and December 31, 2013:
(Amounts in thousands)
 
Average
Amortization
Period
 
 
 
Accumulated
 
Net Carrying
 
 
(in Years)
 
Cost
 
Amortization
 
Value
As of September 27, 2014
 
 
 
 
 
 
 
 
Patents
 
14
 
$
12,770

 
$
(9,958
)
 
$
2,812

Trademarks/Tradenames
 
11
 
117,660

 
(69,304
)
 
48,356

Customer relationships
 
13
 
221,155

 
(118,962
)
 
102,193

Other
 
5
 
4,390

 
(2,745
)
 
1,645

Total intangible assets
 
12
 
$
355,975

 
$
(200,969
)
 
$
155,006

 
 
 
 
 
 
 
 
 
As of December 31, 2013:
 
 
 
 

 
 

 
 

Patents
 
14
 
$
12,770

 
$
(9,250
)
 
$
3,520

Trademarks/Tradenames
 
10
 
91,884

 
(65,801
)
 
26,083

Customer relationships
 
12
 
187,055

 
(107,721
)
 
79,334

Other
 
5
 
3,427

 
(2,352
)
 
1,075

Total intangible assets
 
12
 
$
295,136

 
$
(185,124
)
 
$
110,012

    

Estimated amortization expense for the fiscal years 2014 through 2018 is shown in the following table:
 
Amortization
(Amounts in thousands)
expense
 
 
2014 (remainder of year)
$
5,723

2015
25,051

2016
24,374

2017
20,511

2018
19,731




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 nine months ended
 
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net income (loss)
 
$
21,405

 
$
16,895

 
$
(18,793
)
 
$
(62,089
)
Foreign currency translation adjustment
 
(5,009
)
 
4,074

 
(5,366
)
 
1,091

Unrealized gain (loss) on derivative instrument
 
886

 
—

 
(47
)
 
—

Comprehensive income (loss)
 
$
17,282

 
$
20,969

 
$
(24,206
)
 
$
(60,998
)




17


6.   LONG-TERM DEBT
 
Long-term debt in the accompanying condensed consolidated balance sheets at September 27, 2014 and December 31, 2013 consists of the following:
(Amounts in thousands)
 
 
 
 
 
 
September 27, 2014
 
December 31, 2013
Senior secured asset based revolving credit facility
 
$
20,000

 
$
—

Term Loan due 2021, net of unamortized early tender premium
 
 
 
 
and discount of $33,658 and $0, respectively
 
395,267

 
—

6.50% Senior notes due 2022, net of unamortized early tender premium
 
 
 
 
and discount of $52,442 and $0, respectively
 
597,558

 
—

8.25% Senior secured notes due 2018, net of unamortized early
 
 

 
 

tender premium and discount of $0 and $30,426, respectively
 
—

 
725,574

9.375% Senior notes due 2017, net of unamortized
 
 
 
 
discount of $0 and $4,546, respectively
 
—

 
91,454

 
 
$
1,012,825

 
$
817,028

Less current portion of long-term debt
 
(4,300
)
 
—

 
 
$
1,008,525

 
$
817,028


Recent developments
    
As described in the following paragraph, Ply Gem Industries modified its debt structure during the nine months ended September 27, 2014. 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. 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.








18


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%.

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 4.24% after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.

The 6.50% Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Ply Gem Holdings and all of the wholly-owned domestic subsidiaries of Ply Gem Industries (the “Guarantors”).  The indenture governing the 6.50% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets.  In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt (as defined in the indenture) in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00.  In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt under certain circumstances, including, but not limited to, debt under credit facilities (as defined in the indenture) (x) in an amount not to exceed the greater of (a) $350.0 million and (b) the borrowing base (as defined in the indenture) and (y) in an amount not to exceed the greater of (A) $575.0 million and (B) the aggregate amount of indebtedness (as defined in the indenture) that that would cause the consolidated secured debt ratio (as defined in the indenture) to be equal to 4.00 to 1.00; purchase money indebtedness in an aggregate amount not to exceed the greater of (x) $35.0 million and (y) 10% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed the greater of (x) $60.0 million and (y) 15% of consolidated net tangible assets (as defined in the indenture) at any one time outstanding; debt pursuant to a general basket in an aggregate amount at any one time outstanding not to exceed the greater of (x) $75.0 million and (y) 20% of consolidated net tangible assets; and the refinancing of debt under certain circumstances. On January 30, 2014, Ply Gem Industries and the Guarantors entered into a registration rights agreement relating to the 6.50% Senior Notes. Ply Gem Industries will be required to pay additional interest on the 6.50% Senior Notes if it fails to comply with certain of its obligations under the registration rights agreement within specified time periods.

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.  However, the $150.0 million of Senior Tack-on Notes issued in September 2014 have not yet been registered under the Securities Act.

19

  
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 will be 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 September 27, 2014, the Company's interest rate on the Term Loan Facility was 4.00%. The effective interest rate for the Term Loan is 1.76% 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 and with respect to certain repricing transactions occurring within six months of January 30, 2014, which shall be subject to a prepayment premium of 1.00%.

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.












20


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.

As a result of the 2013 initial public offering, on June 28, 2013, Ply Gem Industries redeemed $84.0 million aggregate principal amount of its 8.25% Senior Secured Notes at a redemption price equal to 103%, plus accrued and unpaid interest thereon of approximately $2.6 million. The call premium for this redemption was approximately $2.5 million. Additionally, the Company expensed approximately $3.8 million of unamortized discount and $1.8 million of unamortized debt issuance costs in connection with this redemption and the related loss on debt extinguishment.

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 primarily 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 to 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. As a result of the ABL Facility amendment in which the loan syndication consisted of previous members who either maintained or increased their position as well as new syndication members, the Company capitalized new debt issuance costs of $1.3 million and will amortize these costs through 2018.

The ABL Facility provides for revolving credit financing of up to $300.0 million subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans and borrowings in Canadian dollars and United States dollars, $250.0 million of the ABL Facility is available to Ply Gem Industries and $50.0 million is available to the Canadian Borrowers.




21

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 September 27, 2014, the Company’s interest rate on the ABL Facility was approximately 1.72%.  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.  

As of September 27, 2014, Ply Gem Industries had approximately $224.3 million of contractual availability and approximately $221.4 million of borrowing base availability under the ABL Facility, reflecting $20.0 million of borrowings outstanding and approximately $5.7 million of letters of credit and priority payables reserves.





22


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.

A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

As a result of the 2013 initial public offering, on June 22, 2013, Ply Gem Industries redeemed $64.0 million aggregate principal amount of the 9.375% Senior Notes at a redemption price equal to 109.375%, plus accrued and unpaid interest thereon of approximately $1.1 million. The call premium for this redemption was approximately $6.0 million. Additionally, the Company expensed approximately $3.7 million of unamortized discount and $1.2 million of unamortized debt issuance costs in connection with this redemption and the related loss on debt extinguishment.

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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 2014.


23

As a result of the June 28, 2013 redemption of approximately $84.0 million aggregate principal amount of the 8.25% Senior Secured Notes, the Company recorded a loss on debt extinguishment of approximately $8.1 million in the condensed consolidated statement of operations for the nine months ended September 28, 2013.

As a result of the June 22, 2013 redemption of approximately $64.0 million aggregate principal amount of the 9.375% Senior Notes, the Company recorded a loss on debt extinguishment of approximately $10.8 million in the condensed consolidated statement of operations for the nine months ended September 28, 2013.
Based on the January 2014 Refinancing, the Company recognized a loss on debt modification or extinguishment of approximately $21.4 million for the nine months ended September 27, 2014 and approximately $18.9 million for the nine months ended September 28, 2013 related to the 2013 redemptions, as summarized in the table below.


(Amounts in thousands)
 
For the nine months ended
 
 
September 27, 2014
 
September 28, 2013
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
)
 
—

Call premium for 8.25% Senior Secured Notes
 
—

 
(2,520
)
8.25% Senior Secured Notes unamortized discount
 
—

 
(3,831
)
8.25% Senior Secured Notes unamortized debt issuance costs
 
—

 
(1,766
)
Call premium for 9.375% Senior Notes
 
—

 
(6,000
)
9.375% Senior Notes unamortized discount
 
—

 
(3,666
)
9.375% Senior Notes unamortized debt issuance costs
 
—

 
(1,165
)
 
 
(15,588
)
 
(18,948
)
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
)
 
$
(18,948
)



















24


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 nine months ended
 
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Service cost
 
$
—

 
$
29

 
$
—

 
$
87

Interest cost
 
476

 
440

 
1,427

 
1,320

Expected return on plan assets
 
(567
)
 
(513
)
 
(1,702
)
 
(1,539
)
Amortization of loss
 
116

 
234

 
347

 
702

Net periodic benefit expense
 
$
25

 
$
190

 
$
72

 
$
570






25





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 $3.0 million and $3.1 million at September 27, 2014 and December 31, 2013, respectively.  As of September 27, 2014 and December 31, 2013, the Company has recorded liabilities related to these indemnifications of approximately $0.5 million and $0.4 million, respectively, in current liabilities and $2.5 million and $2.7 million, respectively, in long-term liabilities, consisting of the following:

(Amounts in thousands)
 
September 27, 2014
 
December 31, 2013
Product claim liabilities
 
$
140

 
$
140

Multi-employer pension plan withdrawal liability
 
2,251

 
2,362

Other
 
647

 
576

 
 
$
3,038

 
$
3,078

    
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 September 27, 2014 and December 31, 2013, warranty liabilities of approximately $11.4 million and $10.9 million, respectively, have been recorded in current liabilities and approximately $32.1 million and $31.6 million, respectively, have been recorded in long term liabilities.

Changes in the Company’s short-term and long-term warranty liabilities are as follows:
 
 
For the three months ended
 
For the nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Balance, beginning of period
 
$
40,397

 
$
40,554

 
$
42,466

 
$
37,870

Acquisitions - Simonton, Gienow, and Mitten
 
5,370

 
—

 
5,370

 
4,675

Warranty expense during period
 
2,897

 
3,827

 
8,209

 
8,197

Settlements made during period
 
(5,148
)
 
(4,012
)
 
(12,529
)
 
(10,373
)
Balance, end of period
 
$
43,516

 
$
40,369

 
$
43,516

 
$
40,369












26


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 previous occupants. The amount of any liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent, 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 Administrative Order on Consent, MW provided the EPA, among other things, a RCRA Facility Investigation 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 RCRA Facility Investigation Workplan (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 September 27, 2014 and December 31, 2013.  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 September 27, 2014, no recovery has been recognized on the Company’s condensed consolidated balance sheet, but the Company will actively pursue the validity of 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, however the facility has not received any official communications concerning this sampling event or the addition of the groundwater contamination site to the NPL. 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 strength of Alcan’s financial condition as well as the terms and limits of the indemnity.










27


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), 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.
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's subsidiaries will not result in material costs or liabilities. While the stock 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.













28


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 and Robert D. Callahan 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.

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 that would settle both the Gulbankian and Hartshorn cases on a nationwide basis (the “Vinyl Clad Settlement Agreement”). The Court granted preliminary approval of this settlement on May 23, 2014. If the Court grants final approval, the Vinyl Clad Settlement Agreement provides for a cash payment for eligible consumers submitting qualified claims showing, among other requirements, certain damage to the frames of their MW vinyl clad windows. Under the Vinyl Clad Settlement Agreement, MW has also agreed to pay attorneys' fees and costs to plaintiffs' counsel in an amount not to exceed $2.5 million. The Court will make a determination regarding counsel’s fees and costs upon final approval of the settlement. The Vinyl Clad Settlement Agreement provides that this settlement would apply to any and all MW vinyl clad windows manufactured from January 1, 1987 through May 23, 2014. While a final approval hearing occurred on October 29, 2014, the Court has not issued a ruling. It is expected that, if the settlement receives final approval, it will result in the dismissal of Karl Memari v. Ply Gem Prime Holdings, Inc. et al., another pending lawsuit discussed below that is seeking class certification with respect to vinyl clad windows manufactured by MW. The settlement is not final until the Court grants final approval of the settlement, and the Court may, in its sole discretion, determine not to grant final approval of the settlement. If the Court does not grant final approval of the settlement, the Vinyl Clad Settlement Agreement will not be binding on the parties. The Company and MW deny all liability in the settlement and with respect to the facts and claims alleged. The Company, however, is aware of the substantial burden, expense, inconvenience and distraction of continued litigation, and agreed to settle the litigation to avoid these.

As a result of this settlement, the Company recognized a $5.0 million expense during the nine months ended September 27, 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 approximately $5.0 million. Approximately $4.6 million of this liability is currently outstanding, with $2.6 million as a current liability within accrued expenses and $2.0 million as a noncurrent liability within other long-term liabilities in the Company’s condensed consolidated balance sheet as of September 27, 2014.

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. Discovery regarding class certification has closed, however, the hearing regarding class certification has not yet been scheduled as this case is currently stayed pending the final approval hearing in the Gulbankian and Hartshorn matters. While the damages sought in this action have not yet been quantified, it is expected that, if the settlement of the Gulbankian and Hartshorn cases receives final approval, it will result in the dismissal of this action.





29

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, however, the hearing regarding class certification has not yet been scheduled. 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 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, 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. As such, only state unfair competition and trade practices claims currently remain. 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. The damages sought in this action have not yet been quantified.

In J-Channel Industries Corporation v. Lowe’s Companies, Inc., and Ply Gem Industries, Inc., a purported patent infringement case filed in August 2013 in the United States District Court for the Eastern Division of Tennessee, Northern Division, plaintiff, a wholly owned subsidiary of CopyTele, Inc., a company specializing in patent monetization and patent assertion, alleged damages as a result of patent infringement by certain windows having an integrated “j-channel” feature. The plaintiff sought a variety of relief, including (i) economic and compensatory damages and (ii) attorneys' fees and costs of litigation. This action was settled and paid during the three and nine months ended September 27, 2014.

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. 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 businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty and modification, adjustment or replacement of component parts of 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.



30

9.   ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
 
Accrued expenses consist of the following at September 27, 2014 and December 31, 2013:
(Amounts in thousands)
 
September 27, 2014
 
December 31, 2013
Insurance
 
$
9,292

 
$
3,926

Employee compensation and benefits
 
17,445

 
8,916

Sales and marketing
 
42,989

 
34,215

Product warranty
 
11,387

 
10,861

Accrued freight
 
2,701

 
1,350

Accrued interest
 
9,813

 
25,477

Accrued environmental liability
 
456

 
463

Accrued pension
 
2,258

 
2,258

Accrued sales returns and discounts
 
4,063

 
3,263

Accrued taxes
 
4,418

 
3,433

Litigation accrual
 
2,594

 
—

Other
 
40,141

 
18,778

 
 
$
147,557

 
$
112,940


Other long-term liabilities consist of the following at September 27, 2014 and December 31, 2013:
(Amounts in thousands)
 
September 27, 2014
 
December 31, 2013
Insurance
 
$
2,043

 
$
2,213

Pension liabilities
 
5,176

 
6,622

Multi-employer pension withdrawal liability
 
2,251

 
2,362

Product warranty
 
32,129

 
31,605

Long-term product claim liability
 
140

 
140

Long-term environmental liability
 
1,227

 
1,247

Liabilities for tax uncertainties
 
3,188

 
2,934

Litigation accrual
 
2,000

 
—

Other
 
4,244

 
5,437

 
 
$
52,398

 
$
52,560


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 September 27, 2014 and September 28, 2013, the Company recognized a LTIP expense of $0.5 million and $0.2 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 nine months ended September 27, 2014 and September 28, 2013, the Company recognized a LTIP expense of $1.5 million and $1.1 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 is $3.3 million and $4.6 million as of September 27, 2014 and December 31, 2013, respectively, of which $2.3 million and $2.9 million has been recorded within accrued expenses and $1.0 million and $1.7 million in other long-term liabilities in the condensed consolidated balance sheets as of September 27, 2014 and December 31, 2013, respectively.

Other liabilities

During the three months ended September 27, 2014 and September 28, 2013, the Company made approximately $1.1 million and $1.0 million, in cash payments on restructuring liabilities, respectively. During the nine months ended September 27, 2014 and September 28, 2013, the Company made approximately $4.4 million and $2.9 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.


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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 (loss) income. 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.
For the nine months ended September 27, 2014, the Company's estimated effective income tax rate was approximately 9.3%, which varied from the statutory rate primarily due to state income tax expense, valuation allowance, tax contingencies, and foreign income taxes. The effective tax rate including discrete items was 45.9%. The tax benefit for the three and nine months ended September 27, 2014 is approximately $10.5 million and $15.9 million, respectively.

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Valuation allowance
As of September 27, 2014, 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. During the nine months ended September 27, 2014, the Company established a full valuation allowance on its deferred tax assets for Gienow Canada of approximately $7.9 million as a result of its operating performance and challenges associated with combining two separate manufacturing facilities into a single facility.
As a result of the Simonton acquisition on September 19, 2014, the Company evaluated Simonton's net deferred tax liability position with Ply Gem's full valuation allowance position, which resulted in a $25.0 million reversal of valuation allowance during the three and nine months ended September 27, 2014. All of the Company's subsidiaries, excluding Mitten, are in a full valuation allowance position as of September 27, 2014. 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 $20.2 million that is not amortized, which results in a deferred tax liability of approximately $6.2 million at September 27, 2014. 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 nine months ended September 27, 2014, the Company increased its tax contingency reserve by approximately $0.3 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 September 27, 2014, the Company had a non-current liability of approximately $26.0 million for the amount due pursuant to the Tax Receivable Agreement related to NOL carryovers. The Company recognized a $14.0 million and $14.4 million expense for the change in this liability during the three and nine months ended September 27, 2014, respectively, mostly as a result of Simonton's net deferred tax liabilities acquired which will create future taxable income to utilize net operating loss carryforwards.

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Other
As of September 27, 2014, 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 nine months ended September 27, 2014 is presented below: 
 
 
Stock Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (Years)
Balance at January 1, 2014
 
3,285,750

 
$
11.04

 
5.24

Granted
 
151,147

 
15.11

 
—

Exercised
 
(618,615
)
 
1.76

 
—

Forfeited or expired
 
(105,494
)
 
10.85

 
—

Balance at September 27, 2014
 
2,712,788

 
$
13.39

 
5.71


In connection with the merger in conjunction with the IPO, options to purchase shares of common stock of Ply Gem Prime were converted into 3,386,008 options to purchase shares of Ply Gem Holdings common stock with adjustments to the per share exercise prices.

As of September 27, 2014, 2,091,234 options were 100% vested.  At September 27, 2014, the Company had approximately $2.4 million of total unrecognized compensation expense that will be recognized over the weighted average period of 1.80 years.  The Company recorded compensation expense of $0.6 million and $0.6 million for the three months ended September 27, 2014 and September 28, 2013, respectively, and $1.5 million and $1.5 million for the nine months ended September 27, 2014 and September 28, 2013, respectively, related to the vesting of these options.

Restricted stock

During December 2012, the Company issued 3,886 restricted shares of common stock to each of three independent members of the Board of Directors.  These shares will vest over the 2012 through 2013 twelve month period and the Company is expensing these items ratably over the twelve month period up to the vesting date. During the three and nine months ended September 28, 2013, the Company expensed $45,000 and $90,000, respectively, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).

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 will vest over the approximate ten-month period to December 31, 2014 and the Company is expensing 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 is expensing these items ratably over the eight-month period up to the vesting date. During the three and nine months ended September 27, 2014, the Company expensed approximately $76,000 and $182,000, respectively, related to all of these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive income (loss).
    


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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 nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net sales
 
 
 
 
 
 
 
 
Siding, Fencing and Stone
 
$
244,416

 
$
228,214

 
$
609,419

 
$
565,010

Windows and Doors
 
193,432

 
179,212

 
507,105

 
467,653

 
 
$
437,848

 
$
407,426

 
$
1,116,524

 
$
1,032,663

Operating earnings (loss)
 
 

 
 

 
 

 
 

Siding, Fencing and Stone
 
$
44,756

 
$
39,476

 
$
89,484

 
$
92,998

Windows and Doors
 
3,773

 
(4,489
)
 
(17,793
)
 
(22,549
)
Unallocated
 
(6,602
)
 
(4,067
)
 
(18,116
)
 
(39,439
)
 
 
$
41,927

 
$
30,920

 
$
53,575

 
$
31,010

 
 
 
 
 
 
 
 
 
 
 
Total assets as of
 
 
 
 
 
 
September 27, 2014
 
December 31, 2013
 
 
 
 
Total assets
 
 

 
 

 
 
 
 
Siding, Fencing and Stone
 
$
722,440

 
$
655,252

 
 
 
 
Windows and Doors
 
540,793

 
305,789

 
 
 
 
Unallocated
 
41,629

 
81,210

 
 
 
 
 
 
$
1,304,862

 
$
1,042,251

 
 
 
 



35


13.  RELATED PARTY TRANSACTIONS
 
Under the General Advisory Agreement (the “General Advisory Agreement”) the Company entered into with CI Capital Partners LLC (“CI Capital Partners”), formerly Caxton-Iseman Capital LLC, CI Capital Partners provided the Company with acquisition and financial advisory services as the Board of Directors reasonably requested.  Under the General Advisory Agreement the Company paid and expensed, as a component of selling, general, and administrative expenses, a management fee of approximately $0.0 million and $0.4 million for the three and nine months ended September 28, 2013, respectively. The General Advisory Agreement was terminated in May 2013 and as a result, no management fee was paid during the three and nine months ended September 27, 2014.

During 2012, the Company and CI Capital Partners amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. In connection with the IPO in May 2013, the General Advisory Agreement was terminated prior to the end of the initial term, as such, Ply Gem Industries paid to CI Capital Partners an amount equal to the present value of the annual advisory fees that would have been payable for three years, based on the Company’s cost of funds to borrow amounts under the Company’s senior credit facilities. This payment of approximately $18.9 million was made in May 2013 and was expensed within initial public offering costs in the condensed consolidated statement of operations and comprehensive income (loss) for the nine months ended September 28, 2013. The Company also expensed approximately $2.7 million of the 2013 capitalized advisory fees paid to CI Capital Partners as a result of the termination within initial public offering costs in the condensed consolidated statement of operations and comprehensive income (loss) for the nine months ended September 28, 2013. The Company also paid CI Capital Partners approximately $0.4 million for advisory services in connection with the Gienow acquisition during the nine months ended September 28, 2013 and this amount was expensed within selling, general, and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss) during the nine months ended September 28, 2013.

In May 2013, the Company finalized an agreement with the Company's President and Chief Executive officer providing a one-time cash bonus of $1.5 million upon the successful completion of an IPO prior to December 31, 2013, subject to his continued employment with the Company through this date. This bonus agreement was made in lieu of any benefits that the President and Chief Executive Officer may have received under the Tax Receivable Agreement and was paid during May 2013 and expensed within initial public offering costs in the condensed consolidated statement of operations and comprehensive income (loss) during the nine months ended September 28, 2013.


14.   RESTRUCTURING

On September 30, 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 nine months ended September 27, 2014:
(Amounts in thousands)
 
Accrued as of
 
Adjustments
 
Expensed
 
Cash payments
 
Accrued as of
 
 
December 31, 2013
 
during 2014
 
during 2014
 
during 2014
 
September 27, 2014
Western Canada
 
 
 
 
 
 
 
 
 
 
Severance costs
 
$
603

 
$
(80
)
 
$
49

 
$
(485
)
 
$
87

Contract terminations
 
157

 
(24
)
 
—

 
—

 
133

Equipment removal and other
 
533

 
(69
)
 
2,963

 
(3,350
)
 
77

 
 
$
1,293

 
$
(173
)
 
$
3,012

 
$
(3,835
)
 
$
297


36


The adjustments incurred in the nine months ended September 27, 2014 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 segments shown in the following table:
 
 
 
For the three months ended
 
For the nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Siding, Fencing and Stone
 
$
—

 
$
—

 
$
—

 
$
—

Windows and Doors
 
819

 
—

 
3,012

 
—

 
 
$
819

 
$
—

 
$
3,012

 
$
—






37



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 September 27, 2014 and December 31, 2013, and for the three and nine months ended September 27, 2014 and September 28, 2013.  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)
For the three months ended September 27, 2014
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
352,856

 
$
84,992

 
$
—

 
$
437,848

Cost of products sold
 
—

 
—

 
275,938

 
63,321

 
—

 
339,259

Gross profit
 
—

 
—

 
76,918

 
21,671

 
—

 
98,589

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
6,602

 
28,502

 
16,251

 
—

 
51,355

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
4,528

 
1,047

 
(5,575
)
 
—

Amortization of intangible assets
 
—

 
—

 
4,008

 
1,299

 
—

 
5,307

Total operating expenses
 
—

 
6,602

 
37,038

 
18,597

 
(5,575
)
 
56,662

Operating earnings (loss)
 
—

 
(6,602
)
 
39,880

 
3,074

 
5,575

 
41,927

Foreign currency loss
 
—

 
—

 
—

 
(766
)
 
—

 
(766
)
Intercompany interest
 
—

 
13,328

 
(11,723
)
 
(1,605
)
 
—

 
—

Interest expense
 
—

 
(16,296
)
 
(4
)
 
—

 
—

 
(16,300
)
Interest income
 
—

 
1

 
4

 
13

 
—

 
18

Tax receivable agreement liability adjustment
 
—

 
(13,988
)
 
—

 
—

 
—

 
(13,988
)
Intercompany administrative income
 
—

 
5,575

 
—

 
—

 
(5,575
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income
 
—

 
(17,982
)
 
28,157

 
716

 
—

 
10,891

Equity in subsidiaries' income
 
21,405

 
39,387

 
—

 
—

 
(60,792
)
 
—

Income before provision
 
 
 
 
 
 
 
 
 
 
 
 
(benefit) for income taxes
 
21,405

 
21,405

 
28,157

 
716

 
(60,792
)
 
10,891

Provision (benefit) for income taxes
 
—

 
—

 
(11,159
)
 
645

 
—

 
(10,514
)
Net income
 
$
21,405

 
$
21,405

 
$
39,316

 
$
71

 
$
(60,792
)
 
$
21,405

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
(5,009
)
 
—

 
(5,009
)
Unrealized gain on derivative instrument
 
—

 
—

 
—

 
886

 
—

 
886

Total comprehensive income (loss)
 
$
21,405

 
$
21,405

 
$
39,316

 
$
(4,052
)
 
$
(60,792
)
 
$
17,282



38


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the three months ended September 28, 2013
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
316,548

 
$
90,878

 
$
—

 
$
407,426

Cost of products sold
 
—

 
—

 
256,912

 
66,346

 
—

 
323,258

Gross profit
 
—

 
—

 
59,636

 
24,532

 
—

 
84,168

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

  Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
4,067

 
26,780

 
16,750

 
—

 
47,597

  Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
4,235

 
1,941

 
(6,176
)
 
—

Amortization of intangible assets
 
—

 
—

 
4,221

 
1,430

 
—

 
5,651

Total operating expenses
 
—

 
4,067

 
35,236

 
20,121

 
(6,176
)
 
53,248

Operating earnings (loss)
 
—

 
(4,067
)
 
24,400

 
4,411

 
6,176

 
30,920

Foreign currency loss
 
—

 
—

 
—

 
(376
)
 
—

 
(376
)
Intercompany interest
 
—

 
17,842

 
(17,509
)
 
(333
)
 
—

 
—

Interest expense
 
—

 
(22,070
)
 
(9
)
 
34

 
—

 
(22,045
)
Interest income
 
—

 
1

 
165

 
119

 
—

 
285

Tax receivable agreement liability adjustment
 
—

 
6,669

 
—

 
—

 
—

 
6,669

Intercompany administrative income
 
—

 
6,176

 
—

 
—

 
(6,176
)
 
—

Income before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' income
 
—

 
4,551

 
7,047

 
3,855

 
—

 
15,453

Equity in subsidiaries' income
 
16,895

 
12,344

 
—

 
—

 
(29,239
)
 
—

Income before provision (benefit)
 
 

 
 

 
 

 
 

 
 

 
 

for income taxes
 
16,895

 
16,895

 
7,047

 
3,855

 
(29,239
)
 
15,453

Provision (benefit) for income taxes
 
—

 
—

 
(2,124
)
 
682

 
—

 
(1,442
)
Net income
 
$
16,895

 
$
16,895

 
$
9,171

 
$
3,173

 
$
(29,239
)
 
$
16,895

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
4,074

 
—

 
4,074

Total comprehensive income
 
$
16,895

 
$
16,895

 
$
9,171

 
$
7,247

 
$
(29,239
)
 
$
20,969


39

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 27, 2014
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
905,393

 
$
211,131

 
$
—

 
$
1,116,524

Cost of products sold
 
—

 
—

 
728,675

 
162,042

 
—

 
890,717

Gross profit
 
—

 
—

 
176,718

 
49,089

 
—

 
225,807

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
18,116

 
90,553

 
47,722

 
—

 
156,391

Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
12,774

 
4,567

 
(17,341
)
 
—

Amortization of intangible assets
 
—

 
—

 
11,793

 
4,048

 
—

 
15,841

Total operating expenses
 
—

 
18,116

 
115,120

 
56,337

 
(17,341
)
 
172,232

Operating earnings (loss)
 
—

 
(18,116
)
 
61,598

 
(7,248
)
 
17,341

 
53,575

Foreign currency loss
 
—

 
—

 
—

 
(517
)
 
—

 
(517
)
Intercompany interest
 
—

 
45,352

 
(42,753
)
 
(2,599
)
 
—

 
—

Interest expense
 
—

 
(52,033
)
 
(30
)
 
(2
)
 
—

 
(52,065
)
Interest income
 
—

 
4

 
24

 
36

 
—

 
64

Tax receivable agreement liability adjustment
 
—

 
(14,419
)
 
—

 
—

 
—

 
(14,419
)
Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

    extinguishment of debt
 
—

 
(21,364
)
 
—

 
—

 
—

 
(21,364
)
Intercompany administrative income
 
—

 
17,341

 
—

 
—

 
(17,341
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' loss
 
—

 
(43,235
)
 
18,839

 
(10,330
)
 
—

 
(34,726
)
Equity in subsidiaries' income (loss)
 
(18,793
)
 
24,442

 
—

 
—

 
(5,649
)
 
—

Income (loss) before provision
 
 

 
 

 
 

 
 

 
 

 
 

         (benefit) for income taxes
 
(18,793
)
 
(18,793
)
 
18,839

 
(10,330
)
 
(5,649
)
 
(34,726
)
Provision (benefit) for income taxes
 
—

 
—

 
(21,134
)
 
5,201

 
—

 
(15,933
)
Net income (loss)
 
$
(18,793
)
 
$
(18,793
)
 
$
39,973

 
$
(15,531
)
 
$
(5,649
)
 
$
(18,793
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
(5,366
)
 
—

 
(5,366
)
Unrealized loss on derivative instrument
 
—

 
—

 
—

 
(47
)
 
—

 
(47
)
Total comprehensive income (loss)
 
$
(18,793
)
 
$
(18,793
)
 
$
39,973

 
$
(20,944
)
 
$
(5,649
)
 
$
(24,206
)


40

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the nine months ended September 28, 2013
 
 
Guarantor
 
Issuer
 
 
 
Non-
 
 
 
 
 
 
Ply Gem
 
Ply Gem
 
Guarantor
 
Guarantor
 
Consolidating
 
 
(Amounts in thousands)
 
Holdings, Inc.
 
Industries, Inc.
 
Subsidiaries
 
Subsidiary
 
Adjustments
 
Consolidated
Net sales
 
$
—

 
$
—

 
$
872,528

 
$
160,135

 
$
—

 
$
1,032,663

Cost of products sold
 
—

 
—

 
713,064

 
119,325

 
—

 
832,389

Gross profit
 
—

 
—

 
159,464

 
40,810

 
—

 
200,274

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

  Selling, general and
 
 

 
 

 
 

 
 

 
 

 
 

administrative expenses
 
—

 
15,912

 
83,032

 
32,218

 
—

 
131,162

  Intercompany administrative
 
 

 
 

 
 

 
 

 
 

 
 

charges
 
—

 
—

 
15,134

 
5,047

 
(20,181
)
 
—

Amortization of intangible assets
 
—

 
—

 
12,629

 
1,946

 
—

 
14,575

Initial public offering costs
 
—

 
23,527

 
—

 
—

 
—

 
23,527

Total operating expenses
 
—

 
39,439

 
110,795

 
39,211

 
(20,181
)
 
169,264

Operating earnings (loss)
 
—

 
(39,439
)
 
48,669

 
1,599

 
20,181

 
31,010

Foreign currency loss
 
—

 
—

 
—

 
(755
)
 
—

 
(755
)
Intercompany interest
 
—

 
59,992

 
(59,238
)
 
(754
)
 
—

 
—

Interest expense
 
—

 
(70,583
)
 
(28
)
 
6

 
—

 
(70,605
)
Interest income
 
—

 
6

 
181

 
172

 
—

 
359

Tax receivable agreement liability adjustment
 
—

 
(1,474
)
 
—

 
—

 
—

 
(1,474
)
Loss on modification or
 
 

 
 

 
 

 
 

 
 

 
 

     extinguishment of debt
 
—

 
(18,948
)
 
—

 
—

 
—

 
(18,948
)
Intercompany administrative income
 
—

 
20,181

 
—

 
—

 
(20,181
)
 
—

Income (loss) before equity in
 
 

 
 

 
 

 
 

 
 

 
 

subsidiaries' loss
 
—

 
(50,265
)
 
(10,416
)
 
268

 
—

 
(60,413
)
Equity in subsidiaries' income (loss)
 
(62,089
)
 
(11,824
)
 
—

 
—

 
73,913

 
—

Income (loss) before provision (benefit)
 
 

 
 

 
 

 
 

 
 

 
 

for income taxes
 
(62,089
)
 
(62,089
)
 
(10,416
)
 
268

 
73,913

 
(60,413
)
Provision (benefit) for income taxes
 
—

 
—

 
1,866

 
(190
)
 
—

 
1,676

Net income (loss)
 
$
(62,089
)
 
$
(62,089
)
 
$
(12,282
)
 
$
458

 
$
73,913

 
$
(62,089
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
—

 
—

 
—

 
1,091

 
—

 
1,091

Total comprehensive income (loss)
 
$
(62,089
)
 
$
(62,089
)
 
$
(12,282
)
 
$
1,549

 
$
73,913

 
$
(60,998
)


41


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 27, 2014
(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
 
$
—

 
$
12,151

 
$
(3,427
)
 
$
18,058

 
$
—

 
$
26,782

Accounts receivable, net
 
—

 
—

 
229,183

 
48,955

 
—

 
278,138

Inventories:
 
 

 
 

 
 

 
 

 
 

 
 

Raw materials
 
—

 
—

 
62,437

 
13,421

 
—

 
75,858

Work in process
 
—

 
—

 
27,018

 
1,341

 
—

 
28,359

Finished goods
 
—

 
—

 
52,699

 
18,791

 
—

 
71,490

Total inventory
 
—

 
—

 
142,154

 
33,553

 
—

 
175,707

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
461

 
15,494

 
4,547

 
—

 
20,502

Deferred income taxes
 
—

 
—

 
6,554

 
—

 
—

 
6,554

Total current assets
 
—

 
12,612

 
389,958

 
105,113

 
—

 
507,683

Investments in subsidiaries
 
(73,456
)
 
(8,108
)
 
—

 
—

 
81,564

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

   Land
 
—

 
—

 
7,100

 
917

 
—

 
8,017

   Buildings and improvements
 
—

 
—

 
60,030

 
5,640

 
—

 
65,670

   Machinery and equipment
 
—

 
2,701

 
341,481

 
16,593

 
—

 
360,775

 
 
—

 
2,701

 
408,611

 
23,150

 
—

 
434,462

Less accumulated depreciation
 
—

 
(1,967
)
 
(264,168
)
 
(7,758
)
 
—

 
(273,893
)
    Total property and equipment, net
 
—

 
734

 
144,443

 
15,392

 
—

 
160,569

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
128,345

 
26,661

 
—

 
155,006

Goodwill
 
—

 
—

 
415,386

 
35,232

 
—

 
450,618

Intercompany note receivable
 
—

 
953,510

 
—

 
—

 
(953,510
)
 
—

Other
 
—

 
28,283

 
2,703

 
—

 
—

 
30,986

Total other assets
 
—

 
981,793

 
546,434

 
61,893

 
(953,510
)
 
636,610

 
 
$
(73,456
)
 
$
987,031

 
$
1,080,835

 
$
182,398

 
$
(871,946
)
 
$
1,304,862

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
541

 
$
91,518

 
$
24,917

 
$
—

 
$
116,976

Accrued expenses
 
—

 
15,756

 
106,557

 
25,244

 
—

 
147,557

Current portion of long-term debt
 
—

 
4,300

 
—

 
—

 
—

 
4,300

Total current liabilities
 
—

 
20,597

 
198,075

 
50,161

 
—

 
268,833

Deferred income taxes
 
—

 
—

 
14,784

 
7,736

 
—

 
22,520

Intercompany note payable
 
—

 
—

 
842,051

 
111,459

 
(953,510
)
 
—

Payable to related parties pursuant to
 
 
 
 
 
 
 
 
 
 
 
 
   tax receivable agreement
 
—

 
26,042

 
—

 
—

 
—

 
26,042

Other long-term liabilities
 
—

 
5,323

 
42,880

 
4,195

 
—

 
52,398

Long-term debt, less current portion
 
—

 
1,008,525

 
—

 
—

 
—

 
1,008,525

Commitments and contingencies
 


 


 


 


 


 


Stockholders' Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
678

 
678

 
—

 
—

 
(678
)
 
678

Additional paid-in-capital
 
744,529

 
744,529

 
622,281

 
13,581

 
(1,380,391
)
 
744,529

(Accumulated deficit) retained earnings
 
(810,036
)
 
(810,036
)
 
(639,236
)
 
636

 
1,448,636

 
(810,036
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive loss
 
(8,627
)
 
(8,627
)
 
—

 
(5,370
)
 
13,997

 
(8,627
)
Total stockholders' (deficit) equity
 
(73,456
)
 
(73,456
)
 
(16,955
)
 
8,847

 
81,564

 
(73,456
)
 
 
$
(73,456
)
 
$
987,031

 
$
1,080,835

 
$
182,398

 
$
(871,946
)
 
$
1,304,862


42

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2013
 
 
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
 
$
—

 
$
57,800

 
$
(4,970
)
 
$
16,971

 
$
—

 
$
69,801

Accounts receivable, net
 
—

 
—

 
110,475

 
29,587

 
—

 
140,062

Inventories:
 
 

 
 

 
 

 
  

 
 

 
 

Raw materials
 
—

 
—

 
41,593

 
9,720

 
—

 
51,313

Work in process
 
—

 
—

 
22,781

 
1,036

 
—

 
23,817

Finished goods
 
—

 
—

 
42,751

 
17,589

 
—

 
60,340

Total inventory
 
—

 
—

 
107,125

 
28,345

 
—

 
135,470

Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
613

 
17,270

 
5,331

 
—

 
23,214

Deferred income taxes
 
—

 
—

 
2,825

 
353

 
—

 
3,178

Total current assets
 
—

 
58,413

 
232,725

 
80,587

 
—

 
371,725

Investments in subsidiaries
 
(51,996
)
 
(229,668
)
 
—

 
—

 
281,664

 
—

Property and Equipment, at cost:
 
 

 
 

 
 

 
 

 
 

 
 

Land
 
—

 
—

 
3,565

 
963

 
—

 
4,528

Buildings and improvements
 
—

 
—

 
38,059

 
5,632

 
—

 
43,691

Machinery and equipment
 
—

 
3,275

 
300,089

 
18,250

 
—

 
321,614

 
 
—

 
3,275

 
341,713

 
24,845

 
—

 
369,833

Less accumulated depreciation
 
—

 
(1,385
)
 
(249,344
)
 
(7,457
)
 
—

 
(258,186
)
Total property and equipment, net
 
—

 
1,890

 
92,369

 
17,388

 
—

 
111,647

Other Assets:
 
 

 
 

 
 

 
 

 
 

 
 

Intangible assets, net
 
—

 
—

 
77,968

 
32,044

 
—

 
110,012

Goodwill
 
—

 
—

 
383,042

 
37,186

 
—

 
420,228

Deferred income taxes
 
—

 
—

 
—

 
5,406

 
—

 
5,406

Intercompany note receivable
 
—

 
958,631

 
—

 
—

 
(958,631
)
 
—

Other
 
—

 
20,907

 
2,326

 
—

 
—

 
23,233

Total other assets
 
—

 
979,538

 
463,336

 
74,636

 
(958,631
)
 
558,879

 
 
$
(51,996
)
 
$
810,173

 
$
788,430

 
$
172,611

 
$
(676,967
)
 
$
1,042,251

 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
601

 
$
66,847

 
$
15,533

 
$
—

 
$
82,981

Accrued expenses
 
—

 
31,056

 
62,120

 
19,764

 
—

 
112,940

Total current liabilities
 
—

 
31,657

 
128,967

 
35,297

 
—

 
195,921

Deferred income taxes
 
—

 
—

 
9,005

 
8,110

 
—

 
17,115

Intercompany note payable
 
—

 
—

 
859,768

 
98,863

 
(958,631
)
 
—

Payable to related parties pursuant to
 
 
 
 
 
 
 
 
 
 
 
 
   tax receivable agreement
 
—

 
11,623

 
—

 
—

 
—

 
11,623

Other long-term liabilities
 
—

 
1,861

 
46,315

 
4,384

 
—

 
52,560

Long-term debt
 
—

 
817,028

 
—

 
—

 
—

 
817,028

Commitments and contingencies
 


 


 


 


 


 


Stockholders' Equity (Deficit):
 
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
 
—

 
—

 
—

 
—

 
—

 
—

Common stock
 
672

 
672

 
—

 
—

 
(672
)
 
672

Additional paid-in-capital
 
741,789

 
741,789

 
423,584

 
12,727

 
(1,178,100
)
 
741,789

(Accumulated deficit) retained earnings
 
(791,243
)
 
(791,243
)
 
(679,209
)
 
16,167

 
1,454,285

 
(791,243
)
Accumulated other
 
 

 
 

 
 

 
 

 
 

 
 

comprehensive income (loss)
 
(3,214
)
 
(3,214
)
 
—

 
(2,937
)
 
6,151

 
(3,214
)
Total stockholders' (deficit) equity
 
(51,996
)
 
(51,996
)
 
(255,625
)
 
25,957

 
281,664

 
(51,996
)
 
 
$
(51,996
)
 
$
810,173

 
$
788,430

 
$
172,611

 
$
(676,967
)
 
$
1,042,251


43


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 27, 2014
(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)
 
$
(18,793
)
 
$
(18,793
)
 
$
39,973

 
$
(15,531
)
 
$
(5,649
)
 
$
(18,793
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash used in operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
486

 
27,239

 
6,191

 
—

 
33,916

Fair-value premium on purchased inventory
 
—

 
—

 
38

 
—

 
—

 
38

Fair-value decrease of contingent acquisition liability
 
—

 
—

 
(264
)
 
—

 
—

 
(264
)
Non-cash restructuring costs
 
—

 
—

 
—

 
3,012

 
—

 
3,012

Non-cash interest expense, net
 
—

 
11,606

 
—

 
—

 
—

 
11,606

Loss on foreign currency transactions
 
—

 
—

 
—

 
517

 
—

 
517

Non-cash litigation expense
 
—

 
—

 
4,593

 
—

 
—

 
4,593

Loss on modification or extinguishment of debt
 
—

 
21,364

 
—

 
—

 
—

 
21,364

Stock based compensation
 
—

 
1,672

 
—

 
—

 
—

 
1,672

Deferred income taxes
 
—

 
—

 
(22,227
)
 
5,032

 
—

 
(17,195
)
Tax receivable agreement liability adjustment
 
—

 
14,419

 
—

 
—

 
—

 
14,419

Increase in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
254

 
—

 
—

 
254

Equity in subsidiaries' net loss
 
18,793

 
(24,442
)
 
—

 
—

 
5,649

 
—

Other
 
—

 
—

 
(50
)
 
(174
)
 
—

 
(224
)
Changes in operating assets and liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(81,439
)
 
(21,289
)
 
—

 
(102,728
)
Inventories
 
—

 
—

 
(17,394
)
 
(6,680
)
 
—

 
(24,074
)
Prepaid expenses and other assets
 
—

 
189

 
2,673

 
(255
)
 
—

 
2,607

Accounts payable
 
—

 
(60
)
 
5,873

 
9,367

 
—

 
15,180

Accrued expenses
 
—

 
(18,259
)
 
11,865

 
4,926

 
—

 
(1,468
)
Cash payments on restructuring liabilities
 
—

 
—

 
(577
)
 
(3,835
)
 
—

 
(4,412
)
Other
 
—

 
2

 
(1,997
)
 
6,566

 
—

 
4,571

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
(11,816
)
 
(31,440
)
 
(12,153
)
 
—

 
(55,409
)
Cash flows from investing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Acquisitions, net of cash acquired and
 
 
 
 
 
 
 
 
 
 
 
 
outstanding checks assumed
 
—

 
(130,856
)
 
—

 
—

 
—

 
(130,856
)
Capital expenditures
 
—

 
(1,075
)
 
(11,907
)
 
(1,542
)
 
—

 
(14,524
)
Proceeds from sale of assets
 
—

 
—

 
109

 
635

 
—

 
744

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(131,931
)
 
(11,798
)
 
(907
)
 
—

 
(144,636
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Proceeds from long-term debt
 
—

 
1,067,725

 
—

 
—

 
—

 
1,067,725

Net revolver borrowings
 
—

 
20,000

 
—

 
—

 
—

 
20,000

Payments on long-term debt
 
—

 
(853,075
)
 
—

 
—

 
—

 
(853,075
)
Payment of tender and early call premiums
 
—

 
(61,142
)
 
—

 
—

 
—

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

 
1,073

 
—

 
—

 
—

 
1,073

Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 


investment
 
—

 
(59,762
)
 
44,781

 
14,981

 
—

 
—

Debt issuance costs paid
 
—

 
(16,721
)
 
—

 
—

 
—

 
(16,721
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
98,098

 
44,781

 
14,981

 
—

 
157,860

Impact of exchange rate movements on cash
 
—

 
—

 
—

 
(834
)
 
—

 
(834
)
Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
(45,649
)
 
1,543

 
1,087

 
—

 
(43,019
)
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
 
$
—

 
$
12,151

 
$
(3,427
)
 
$
18,058

 
$
—

 
$
26,782


44

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 28, 2013
(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)
 
$
(62,089
)
 
$
(62,089
)
 
$
(12,282
)
 
$
458

 
$
73,913

 
$
(62,089
)
Adjustments to reconcile net income (loss)
 
 

 
 

 
 

 
 

 
 

to cash provided by (used in) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
315

 
28,744

 
3,924

 
—

 
32,983

Fair-value premium on purchased inventory
 
—

 
—

 
—

 
2,015

 
—

 
2,015

Fair-value decrease of contingent acquisition liability
 
—

 
—

 
(358
)
 
—

 
—

 
(358
)
Non-cash interest expense, net
 
—

 
9,457

 
—

 
—

 
—

 
9,457

Loss on foreign currency transactions
 
—

 
—

 
—

 
755

 
—

 
755

Loss on modification or extinguishment of debt
 
—

 
18,948

 
—

 
—

 
—

 
18,948

Prepaid management fee write off
 
—

 
2,682

 
—

 
—

 
—

 
2,682

Stock based compensation
 
—

 
1,631

 
—

 
—

 
—

 
1,631

Deferred income taxes
 
—

 
—

 
1,937

 
(172
)
 
—

 
1,765

Tax receivable agreement liability adjustment
 
—

 
1,474

 
—

 
—

 
—

 
1,474

Reduction in tax uncertainty,
 
 

 
 

 
 

 
 

 
 

 
 

net of valuation allowance
 
—

 
—

 
(1,279
)
 
—

 
—

 
(1,279
)
Equity in subsidiaries' net loss
 
62,089

 
11,824

 
—

 
—

 
(73,913
)
 
—

Other
 
—

 
—

 
(5
)
 
—

 
—

 
(5
)
Changes in operating assets and liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
 
—

 
—

 
(67,244
)
 
(8,159
)
 
—

 
(75,403
)
Inventories
 
—

 
—

 
(13,605
)
 
1,875

 
—

 
(11,730
)
Prepaid expenses and other
 
 

 
 

 
 

 
 

 
 

 
 

current assets
 
—

 
(5,322
)
 
(294
)
 
435

 
—

 
(5,181
)
Accounts payable
 
—

 
107

 
3,142

 
(7,441
)
 
—

 
(4,192
)
Accrued expenses
 
—

 
(2,713
)
 
17,428

 
11,837

 
—

 
26,552

Payment of advisory termination fee to affiliate
 
—

 
(18,852
)
 
—

 
—

 
—

 
(18,852
)
Cash payments on restructuring liabilities
 
—

 
—

 
(2,535
)
 
(358
)
 
—

 
(2,893
)
Other
 
—

 
—

 
87

 
(999
)
 
—

 
(912
)
Net cash provided by (used in)
 
 

 
 

 
 

 
 

 
 

 
 

operating activities
 
—

 
(42,538
)
 
(46,264
)
 
4,170

 
—

 
(84,632
)
Cash flows from investing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Acquisitions, net of cash acquired
 
—

 
(99,282
)
 
—

 
—

 
—

 
(99,282
)
Capital expenditures
 
—

 
(542
)
 
(15,014
)
 
(758
)
 
—

 
(16,314
)
Proceeds from sale of assets
 
—

 
—

 
24

 
—

 
—

 
24

Net cash used in
 
 

 
 

 
 

 
 

 
 

 
 

investing activities
 
—

 
(99,824
)
 
(14,990
)
 
(758
)
 
—

 
(115,572
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

 
 

 
 

Net revolver payments
 
—

 
(1,000
)
 
—

 
—

 
—

 
(1,000
)
Payments on long-term debt
 
—

 
(148,000
)
 
—

 
—

 
—

 
(148,000
)
Payment of early call premium
 
—

 
(8,520
)
 
—

 
—

 
—

 
(8,520
)
Net proceeds from issuance of common stock
 
—

 
353,407

 
—

 
—

 
—

 
353,407

Proceeds from intercompany
 
 

 
 

 
 

 
 

 
 

 


investment
 
—

 
(60,152
)
 
57,582

 
2,570

 
—

 
—

Debt issuance costs paid
 
—

 
(62
)
 
—

 
—

 
—

 
(62
)
Net cash provided by
 
 

 
 

 
 

 
 

 
 

 
 

financing activities
 
—

 
135,673

 
57,582

 
2,570

 
—

 
195,825

Impact of exchange rate movement
 
 

 
 

 
 

 
 

 
 

 
 

on cash
 
—

 
—

 
—

 
301

 
—

 
301

Net increase (decrease) in cash
 
 

 
 

 
 

 
 

 
 

 
 

and cash equivalents
 
—

 
(6,689
)
 
(3,672
)
 
6,283

 
—

 
(4,078
)
Cash and cash equivalents at the
 
 

 
 

 
 

 
 

 
 

 
 

beginning of the period
 
—

 
23,332

 
(4,307
)
 
8,169

 
—

 
27,194

Cash and cash equivalents at the end
 
 

 
 

 
 

 
 

 
 

 
 

of the period
 
$
—

 
$
16,643

 
$
(7,979
)
 
$
14,452

 
$
—

 
$
23,116


45


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, 2013.  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 55% and 45% of our net sales, respectively, for the nine months ended September 27, 2014.  These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada.  Vinyl building products have the leading share of sales volume in siding and windows in the United States.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products.  We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.  

Since Ply Gem incorporated in 2004, we have acquired nine additional businesses to complement and expand our product portfolio and geographic diversity, including two acquisitions during 2013 and one during 2014.  On April 9, 2013, we acquired the capital stock of Gienow WinDoor Ltd. (which was amalgamated into Gienow Canada Inc.) ("Gienow"), a manufacturer of windows and doors in Western Canada for a purchase price of $20.4 million.  On May 31, 2013, we acquired the capital stock of Mitten Inc. (now known as Mitten, "Mitten"), a manufacturer of vinyl siding and distributor of various other exterior building products in Canada for a purchase price, net of cash acquired, of $76.8 million.  Gienow is part of our Western Canadian windows business and is part of the Windows and Doors segment, and the majority of Mitten's operations are part of the Siding, Fencing and Stone segment. 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.

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' $250.0 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.
 





46



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.

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.


47


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, 2013 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.

 
 
For the three months ended
 
For the nine months ended
 
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
 
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
Net sales
 
 
 
 
 
 
 
 
 
Siding, Fencing and Stone
 
$
244,416

 
$
228,214

 
$
609,419

 
$
565,010

 
Windows and Doors
 
193,432

 
179,212

 
507,105

 
467,653

 
Operating earnings (loss)
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
44,756

 
39,476

 
89,484

 
92,998

 
Windows and Doors
 
3,773

 
(4,489
)
 
(17,793
)
 
(22,549
)
 
Unallocated
 
(6,602
)
 
(4,067
)
 
(18,116
)
 
(39,439
)
 
Foreign currency gain (loss)
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
(352
)
 
100

 
(278
)
 
33

 
Windows and Doors
 
(414
)
 
(476
)
 
(239
)
 
(788
)
 
Interest income (expense), net
 
 

 
 

 
 

 
 

 
Siding, Fencing and Stone
 
7

 
153

 
13

 
148

 
Windows and Doors
 
6

 
156

 
15

 
183

 
Unallocated
 
(16,295
)
 
(22,069
)
 
(52,029
)
 
(70,577
)
 
Income tax benefit (provision)
 
 

 
 

 
 

 
 

 
Unallocated
 
10,514

 
1,442

 
15,933

 
(1,676
)
 
Tax Receivable Agreement liability adjustment
 
 
 
 
 
 
 
 
 
Unallocated
 
(13,988
)
 
6,669

 
(14,419
)
 
(1,474
)
 
Loss on modification or
 
 

 
 

 
 
 
 
 
extinguishment of debt
 
 

 
 

 
 
 
 
 
Unallocated
 
—

 
—

 
(21,364
)
 
(18,948
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
21,405

 
$
16,895

 
$
(18,793
)
 
$
(62,089
)
 

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.
 

48


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)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
244,416

 
100.0
 %
 
$
228,214

 
100.0
%
Gross profit
 
68,587

 
28.1
 %
 
63,255

 
27.7
%
SG&A expense
 
20,543

 
8.4
 %
 
20,235

 
8.9
%
Amortization of intangible assets
 
3,288

 
1.3
 %
 
3,544

 
1.6
%
Operating earnings
 
44,756

 
18.3
 %
 
39,476

 
17.3
%
Currency transaction gain (loss)
 
(352
)
 
(0.1
)%
 
100

 
—
%

Net Sales

Net sales for the three months ended September 27, 2014 increased $16.2 million or 7.1% as compared to the three months ended September 28, 2013. The net sales increase was caused by favorable demand which drove higher unit sales relative to the comparable period in 2013. This demand improvement can be attributed to improved weather conditions in recent months relative to the harsh winter weather conditions that existed during the early part of 2014 which negatively impacted demand during the first six months of 2014. These improved industry conditions are reflected in industry metrics. According to the U.S. Census Bureau single family housing starts increased 7.2% during the three months ended September 27, 2014 compared to the three months ended September 28, 2013. According to the Leading Indicator of Remodeling Activity Index (“LIRA”), the 2014 third quarter trailing twelve months increased 6.1% compared to the prior year period. These favorable industry conditions contributed to the 7.1% net sales increase for the three months ended September 27, 2014. In addition to the more favorable industry conditions, the net sales increase can be attributed to higher selling prices for our products which were raised in response to increases in raw material costs resulting in increased net sales of approximately $3.0 million for the three months ended September 27, 2014.

Including Mitten, our U.S. market position in vinyl siding for the three months ended September 27, 2014 was 37.9%, while our combined share of the Canadian vinyl siding market was 29.2%. For the three months ended September 27, 2014, the percentage of sales within our Siding, Fencing and Stone segment derived from vinyl siding and metal accessories represented approximately 58.7% and 28.7%, respectively, with sales of other products comprising the remaining 12.6%. These net sales percentages were consistent with the three months ended September 28, 2013, for which the percentage of sales in vinyl siding and metal accessories represented approximately 61.2% and 26.9%, respectively, of our net sales with sales of other products comprising the remaining 11.9%.










49

Gross Profit

Gross profit for the three months ended September 27, 2014 increased $5.3 million or 8.4% as compared to the three months ended September 28, 2013. Our gross profit increased consistent with our 7.1% net sales increase. As a percentage of sales, gross profit increased from 27.7% for the three months ended September 28, 2013 to 28.1% for the three months ended September 27, 2014. The 40 basis increase for the three months ended September 27, 2014 was caused by improved operating leverage as volume and demand increased during the three months ended September 27, 2014 relative to the prior year period. In addition to improved operating leverage and lower product warranty expense, as previously noted, we increased our selling prices of our products in response to higher freight costs to deliver our products and increased material costs, specifically PVC resin and aluminum. The Midwest Ingot price of aluminum increased 20.7%, while the average market price for PVC resin was estimated to have increased approximately 10.3% for the three months ended September 27, 2014 relative to the three months ended September 28, 2013. Excluding the impact of any selling price changes, commodity cost fluctuations, predominantly for aluminum and PVC, and freight costs negatively impacted gross profit as a percentage of sales by approximately 2.1% for the three months ended September 27, 2014.
 
Selling, general and administrative expenses

SG&A expense for the three months ended September 27, 2014 was consistent with the three months ended September 28, 2013 increasing only $0.3 million or 1.5% as compared to the three months ended September 28, 2013. As a percentage of sales, SG&A expense decreased from 8.9% for the three months ended September 28, 2013 to 8.4% for the three months ended September 27, 2014. The decrease in SG&A expense as a percentage of net sales can be attributed to the net sales increase of 7.1% as we leveraged the fixed component of our SG&A expense as our total SG&A expense remained consistent for the three months ended September 27, 2014 as compared to the three months ended September 28, 2013.

Amortization of intangible assets

Amortization expense for the three months ended September 27, 2014 decreased by $0.3 million or 7.2% consistent with the prior year period. As a percentage of net sales, amortization expense was consistent at 1.3% for the three months ended September 27, 2014 as compared to 1.6% for the three months ended September 28, 2013.
  
Currency transaction loss

A currency transaction impact was established in May 2013 with the Mitten acquisition within the Siding, Fencing, and Stone segment. The currency transaction loss for the three months ended September 27, 2014 was a nominal $0.4 million resulting from the devaluation in the Canadian dollar during the three months ended September 27, 2014.


 
 
For the nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
609,419

 
100.0
 %
 
$
565,010

 
100.0
%
Gross profit
 
160,894

 
26.4
 %
 
152,471

 
27.0
%
SG&A expense
 
61,487

 
10.1
 %
 
51,163

 
9.1
%
Amortization of intangible assets
 
9,923

 
1.6
 %
 
8,310

 
1.5
%
Operating earnings
 
89,484

 
14.7
 %
 
92,998

 
16.5
%
Currency transaction gain (loss)
 
(278
)
 
—
 %
 
33

 
—
%










50

Net Sales

Net sales for the nine months ended September 27, 2014 increased $44.4 million or 7.9% as compared to the nine months ended September 28, 2013. Our net sales were favorably impacted by the Mitten acquisition, which was completed on May 31, 2013, and accounted for increased net sales of approximately $39.5 million. Excluding Mitten, our Siding, Fencing, and Stone net sales increased $4.9 million or 0.9% for the nine months ended September 27, 2014 reflecting the challenging weather conditions that existed early in 2014 offset by increased sales of our metal accessory products that resulted from new business wins, improved industry conditions in the third quarter of 2014, and higher selling prices to offset higher material costs. All of these factors contributed on a net basis to the 0.9% net sales growth experienced during the nine months ended September 27, 2014. The Vinyl Siding Institute reported that U.S. vinyl siding industry shipments decreased 1.0% during the nine months ended September 27, 2014.

Including Mitten, our U.S. market position in vinyl siding for the nine months ended September 27, 2014 was 38.7%, while our combined share of the Canadian vinyl siding market was 27.1%. For the nine months ended September 27, 2014, the percentage of sales within our Siding, Fencing, and Stone segment derived from vinyl siding and metal accessories represented approximately 60.3% and 27.2%, respectively, with sales of other products comprising the remaining 12.5%. These net sales percentages were consistent with the nine months ended September 28, 2013, for which the percentage of sales in vinyl siding and metal accessories represented approximately 63.1% and 25.2%, respectively, of our net sales with sales of other products comprising the remaining 11.7%.
 
Gross Profit

Gross profit for the nine months ended September 27, 2014 increased $8.4 million or 5.5% as compared to the nine months ended September 28, 2013. Our gross profit was favorably impacted by the Mitten acquisition, which was completed on May 31, 2013, and contributed increased gross profit of approximately $11.0 million. Adjusting for the Mitten acquisition, our gross profit for the nine months ended September 27, 2014 decreased by approximately $2.6 million or 1.7%. This gross profit decrease for the nine month period was driven primarily by the first quarter net sales decrease which was negatively impacted by the adverse winter weather, which resulted in lower unit volume sales and gross profit. This lower sales volume created less operating leverage to cover fixed manufacturing costs contributing to the decrease in gross profit. In addition, we experienced higher raw material and freight expenses that were not fully offset by our selling price increases within the nine month period ended September 27, 2014. The average market price for PVC resin was estimated to have increased 9.3% during the nine months ended September 27, 2014 while freight expenses increased approximately $3.4 million on a volume adjusted basis during the nine months ended September 27, 2014.
    
As a percentage of net sales, gross profit decreased to 26.4% for the nine months ended September 27, 2014 as compared to 27.0% for the nine months ended September 28, 2013. The 60 basis point decrease for the nine months ended September 27, 2014 can be attributed to the negative sales volume impact experienced during the first quarter of 2014 which negatively impacted our manufacturing operating leverage and higher commodity costs, predominantly PVC and freight expense that were not fully offset by our selling price increases within the nine months ended September 27, 2014.

Selling, general and administrative expenses

SG&A expense for the nine months ended September 27, 2014 increased $10.3 million or 20.2% as compared to the nine months ended September 28, 2013. Our SG&A expense increased as a result of our Mitten acquisition, which was completed on May 31, 2013, causing increased SG&A expense of approximately $10.6 million adjusting the comparable SG&A expense decrease to a nominal decrease of $0.3 million or 0.6% consistent with the prior year period. As a percentage of net sales, excluding the increased SG&A expense attributable to Mitten, our SG&A expense percentage remained consistent at 8.9% for the nine months ended September 27, 2014 compared to 9.1% for the nine months ended September 28, 2013.

Amortization of intangible assets

Amortization expense for the nine months ended September 27, 2014 increased by $1.6 million or 19.4% as compared to the nine months ended September 28, 2013 due to the addition of approximately $35.4 million of intangible assets for the Mitten acquisition on May 31, 2013. The Mitten intangible assets resulted in approximately $2.1 million of increased amortization expense during the nine months ended September 27, 2014. Excluding Mitten, amortization expense decreased nominally by $0.5 million or 6.3% consistent with the prior year period. Excluding Mitten, amortization of intangible assets as a percentage of net sales was consistent at 1.4% for the nine months ended September 27, 2014 as compared to 1.5% for the nine months ended September 28, 2013.
  

51

Currency transaction (loss)

A currency transaction impact was established in May 2013 with the Mitten acquisition within the Siding, Fencing, and Stone segment. The currency transaction loss for the nine months ended September 27, 2014 was $0.3 million increasing from a currency transaction gain of $33,000 for the nine months ended September 28, 2013 from the devaluation in the Canadian dollar during the nine months ended September 27, 2014.
    


Windows and Doors Segment

 
 
For the three months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
193,432

 
100.0
 %
 
$
179,212

 
100.0
 %
Gross profit
 
30,002

 
15.5
 %
 
20,913

 
11.7
 %
SG&A expense
 
24,210

 
12.5
 %
 
23,295

 
13.0
 %
Amortization of intangible assets
 
2,019

 
1.0
 %
 
2,107

 
1.2
 %
Operating earnings (loss)
 
3,773

 
2.0
 %
 
(4,489
)
 
(2.5
)%
Currency transaction loss
 
(414
)
 
(0.2
)%
 
(476
)
 
(0.3
)%

Net Sales

Net sales for the three months ended September 27, 2014 increased $14.2 million or 7.9% as compared to the three months ended September 28, 2013. Our net sales were modestly impacted by the Simonton acquisition, which was completed on September 19, 2014, and accounted for increased net sales of $7.2 million. Excluding Simonton, our Windows and Doors’ net sales increased $7.0 million or 3.9% for the three months ended September 27, 2014. The 3.9% net sales increase was primarily due to higher selling prices for our window products derived 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 4.5%, which contributed higher net sales of approximately $5.7 million for the three months ended September 27, 2014. Improving industry conditions have also contributed to our 3.9% net sales increase with the U.S. Census Bureau estimating that single family housing starts increased 7.2% for the three months ended September 27, 2014 relative to the three months ended September 28, 2013.
    
The net sales increases for the three months ended September 27, 2014 were partially offset by a net sales decrease of approximately $4.6 million for Western Canada attributed to integration challenges with our dealer customers and a negative foreign currency impact from a weakening Canadian dollar during the three months ended September 27, 2014 relative to the three months ended September 28, 2013.
















52


Gross Profit

Gross profit for the three months ended September 27, 2014 increased $9.1 million or 43.5% as compared to the three months ended September 28, 2013. Our gross profit was modestly impacted by the Simonton acquisition, which was completed on September 19, 2014, and contributed gross profit of approximately $1.8 million. Adjusting for the Simonton acquisition, our gross profit for the three months ended September 27, 2014 increased by approximately $7.3 million or 34.7%. This gross profit increase for the three months ended September 27, 2014 can be attributed to the improvement in our U.S. windows business. Our U.S. windows business’s gross profit increased by approximately $10.7 million or 145.4% during the three months ended September 27, 2014. This gross profit increase was driven by improved net pricing and product mix that resulted in a 4.5% increase in average selling price during the three months ended September 27, 2014. In addition to the average sales price improvement, we have improved our operational efficiencies as a result of our “enterprise lean” initiative which will continue to streamline our window product offering by providing additional manufacturing flexibility in the future and 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 significant spikes in demand within a geographical area. In addition to these improvement initiatives, we did not incur approximately $0.3 million of expense associated with the start-up and consolidation of our production facility in Dallas, Texas and higher than normal “enterprise lean” expenditures which occurred during the three months ended September 28, 2013. These positive gross profit increases were partially offset by the performance of our combined Western Canadian businesses. On a combined basis, our Western Canadian businesses experienced a decrease in gross profit of approximately $3.3 million during the three months ended September 27, 2014. This gross profit decrease can be primarily attributed to expenses and inefficiencies associated with the consolidation of two operations (Gienow and Ply Gem Canada) into a single manufacturing facility including manufacturing inefficiencies and certain customer losses which decreased operating leverage and profitability for our Western Canadian businesses during the three months ended September 27, 2014.

As a percentage of sales, gross profit, excluding the Simonton gross profit, increased from 11.7% to 15.1% for the Windows and Doors segment during the three months ended September 27, 2014 as compared to the three months ended September 28, 2013. This increase was driven by the improvement in our U.S. windows gross profit performance that resulted in an improvement of approximately 570 basis points in gross profit performance in our Windows and Doors segment that resulting from improved net pricing and operational efficiencies during the three months ended September 27, 2014 relative to the three months ended September 28, 2013. This improvement was partially offset by the negative near-term integration costs incurred in our Western Canadian operations that resulted in the deterioration of approximately 180 basis points in gross profit performance during the three months ended September 27, 2014.

Selling, general and administrative expenses

SG&A expense for the three months ended September 27, 2014 increased $0.9 million or 3.9% compared to the three months ended September 28, 2013. Our SG&A expense increased as a result of our Simonton acquisition, which was completed on September 19, 2014, causing increased SG&A expense of approximately $1.2 million. In addition, SG&A expense increased as a result of $0.9 million of one-time restructuring and integration costs related to the integration of our Western Canadian businesses. After adjusting for Simonton and the Western Canadian integration costs, our SG&A expense decreased $1.2 million or 5.3%. This SG&A expense decrease related to the relocation of our U.S. window group’s corporate office from Roanoke, Virginia to Cary, North Carolina that occurred during the three months ended September 28, 2013 and the elimination of certain consulting costs related to the “enterprise lean” initiative. As a percentage of net sales, excluding the increased SG&A expense attributable to Simonton and the Western Canada integration expenses, our SG&A expense percentage decreased to 11.8% for the three months ended September 27, 2014 compared to 13.0% for the three months ended September 28, 2013. The percentage decrease related to the elimination of certain relocation and consulting costs for the U.S. windows group as well as increased leverage on the fixed component of SG&A expense as net sales increased during the three months ended September 27, 2014.

Gienow and Mitten’s SG&A expenses are higher as a percentage of sales at approximately 19.1% and 16.8%, respectively, compared to the remainder of the Company at approximately 10.2% for the three months ended September 27, 2014. Gienow and Mitten 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. Also included in Gienow and Mitten’s SG&A expense are one-time costs related to restructuring and integration that are not expected to recur in future periods. These costs amounted to approximately $0.9 million for the three months ended September 27, 2014.



53



Amortization of intangible assets

Amortization expense for the three months ended September 27, 2014 was comparable to the three months ended September 28, 2013 decreasing 4.2%. Amortization expense as a percentage of sales at 1.0% for the three months ended September 27, 2014 was consistent with the three months ended September 28, 2013 at 1.2%.

Currency transaction loss

The currency transaction loss of approximately $0.4 million for the three months ended September 27, 2014 was consistent to the transaction loss of $0.5 million for the three months ended September 28, 2013.

 
 
For the nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
 
 
 
 
Net sales
 
$
507,105

 
100.0
 %
 
$
467,653

 
100.0
 %
Gross profit
 
64,913

 
12.8
 %
 
47,803

 
10.2
 %
SG&A expense
 
76,788

 
15.1
 %
 
64,087

 
13.7
 %
Amortization of intangible assets
 
5,918

 
1.2
 %
 
6,265

 
1.3
 %
Operating loss
 
(17,793
)
 
(3.5
)%
 
(22,549
)
 
(4.8
)%
Currency transaction loss
 
(239
)
 
—
 %
 
(788
)
 
(0.2
)%

Net Sales

Net sales for the nine months ended September 27, 2014 increased $39.4 million or 8.4% as compared to the nine months ended September 28, 2013. Our net sales were favorably impacted by acquisitions during the nine months ended September 27, 2014. The Simonton acquisition, which was completed on September 19, 2014, contributed net sales of approximately $7.2 million during the nine months ended September 27, 2014. The Gienow acquisition, which was completed on April 9, 2013 and legally amalgamated with our legacy Ply Gem Canada business effective January 2014, resulted in our net sales increasing by approximately $12.9 million during the nine months ended September 27, 2014. The Mitten acquisition, which was completed on May 31, 2013, contributed increased net sales of approximately $2.2 million during the nine months ended September 27, 2014. After excluding the impact of these acquisitions, our net sales increased $17.1 million or 3.7% for the nine months ended September 27, 2014. The 3.7% net sales increase was primarily due to higher selling prices for our window products derived 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 4.5%, which contributed higher net sales of approximately $15.7 million for the nine months ended September 27, 2014. While the U.S. Census Bureau estimates that single family housing starts increased 7.2% relative to the third quarter of 2013, the industry and our net sales for the first nine months of 2014 were negatively impacted by severe winter weather during the first half of 2014 that adversely impacted our customers with higher levels of snow accumulation and extreme cold temperatures with the polar vortex phenomenon. The winter weather had a negative impact on the new construction market to which our Windows and Doors market is highly aligned.
    
The net sales increases for the nine months ended September 27, 2014 were partially offset by a net sales decrease of approximately $8.3 million for Western Canada attributed to difficult weather conditions in the early spring, integration challenges with our dealer customers, and a negative foreign currency impact from a weakening Canadian dollar during the nine months ended September 27, 2014 relative to the nine months ended September 28, 2013.







54

Gross Profit

Gross profit for the nine months ended September 27, 2014 increased $17.1 million or 35.8% as compared to the nine months ended September 28, 2013. Our gross profit was favorably impacted by the Simonton, Gienow, and Mitten acquisitions which on a combined basis contributed increased gross profit by approximately $3.0 million. Excluding the impact of these acquisitions, our gross profit increased $14.1 million or 29.4% during the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. This gross profit increase for the nine months ended September 27, 2014 can be attributed to the improvement in our U.S. windows business. Our U.S. windows business’s gross profit increased by approximately $19.9 million or 94.2% during the nine months ended September 27, 2014. This gross profit increase was driven by improved net pricing and product mix that resulted in a 4.5% increase in average selling price during the nine months ended September 27, 2014. In addition to the average sales price improvement, we have improved our operational efficiencies as a result of our “enterprise lean” initiative which will continue to streamline our window product offering by providing additional manufacturing flexibility in the future and 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 significant spikes in demand within a geographical area. In addition to these improvement initiatives, we did not incur approximately $1.4 million of expense associated with the start-up and consolidation of our production facility in Dallas, Texas and $0.7 million of higher than normal “enterprise lean” expenditures which occurred during the nine months ended September 28, 2013. These positive gross profit increases were partially offset by the performance of our combined Western Canadian businesses. On a combined basis, our Western Canadian businesses experienced a decrease in gross profit of approximately $4.8 million during the nine months ended September 27, 2014. This gross profit decrease can be primarily attributed to expenses and inefficiencies associated with the consolidation of two operations (Gienow and Ply Gem Canada) into a single manufacturing facility including manufacturing inefficiencies and certain customer losses which decreased operating leverage and profitability for our Western Canadian businesses during the nine months ended September 27, 2014.

As a percentage of sales, gross profit, excluding the Simonton, Gienow, and Mitten acquisitions, increased from 10.2% to 12.8% for the Windows and Doors segment during the nine months ended September 27, 2014 as compared to the nine months ended September 28, 2013. This increase was driven by the improvement in our U.S. windows gross profit performance that resulted in an improvement of approximately 400 basis points in gross profit performance resulting from improved net pricing and operational efficiencies during the nine months ended September 27, 2014 relative to the nine months ended September 28, 2013. This improvement was partially offset by the negative near-term integration costs incurred in our Western Canadian operations that resulted in the deterioration of approximately 100 basis points in gross profit performance during the nine months ended September 27, 2014.

Selling, general and administrative expenses

SG&A expense for the nine months ended September 27, 2014 increased $12.7 million or 19.8% compared to the nine months ended September 28, 2013. The SG&A expense increase was caused by several factors with the first relating to the impact of the Gienow and Simonton acquisitions, which on a combined basis increased SG&A expense by approximately $7.7 million including restructuring and integration costs related to Gienow of approximately $3.8 million. These restructuring and integration expenses arose due to the consolidation of two manufacturing facilities into a single facility during the nine months ended September 27, 2014. Excluding the impact of these acquisitions, SG&A expense increased approximately $5.0 million or 7.9% for the nine months ended September 27, 2014 as compared to the nine months ended September 28, 2013. This increase was due to the preliminary legal settlement of class action lawsuits on May 1, 2014 for our Windows and Doors segment which resulted in a $5.0 million expense during the nine months ended September 27, 2014.

As a percentage of sales, SG&A expense increased to 15.1% of net sales from 13.7% during the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. Excluding the expense associated with the class action settlement as well as the acquisition and integration costs, SG&A expense decreased as a percentage of sales at 13.2% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. The percentage decrease related to the elimination of certain relocation and consulting costs for the U.S. windows business as well as increased leverage on the fixed component of SG&A expense as net sales increased during the nine months ended September 27, 2014.

Gienow and Mitten’s SG&A expenses are higher as a percentage of sales at approximately 21.4% and 20.2%, respectively, compared to the remainder of the Company at approximately 12.4% for the three months ended September 27, 2014. Gienow and Mitten 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. Also included in Gienow and Mitten’s SG&A expense are one-time costs related to restructuring and integration that are not expected to recur in future periods. These costs amounted to approximately $3.8 million for the nine months ended September 27, 2014.

55


Amortization of intangible assets

Amortization expense for the nine months ended September 27, 2014 was comparable to the nine months ended September 28, 2013 decreasing 5.5%. Amortization expense as a percentage of sales at 1.2% for the nine months ended September 27, 2014 was consistent with the nine months ended September 28, 2013 at 1.3%.

Currency transaction (loss)

The currency transaction loss for the nine months ended September 27, 2014 decreased $0.5 million as compared to the nine months ended September 28, 2013 based on the fluctuation of the U.S. dollar to the Canadian dollar as compared to the nine months ended September 28, 2013.

Quarterly profitability and seasonality trend

During the three months ended September 27, 2014, the Company’s gross profit margin increased to 22.5% of net sales compared to 20.7% for the three months ended September 28, 2013. This increase was primarily attributed to the improved operating performance of our US Windows businesses partially offset by the integration and restructuring challenges associated with combining our Western Canadian businesses. SG&A expense as a percentage of net sales remained consistent at 11.7% for the three months ended September 27, 2014 as compared to 11.7% for the three months ended September 28, 2013 as SG&A expense increases related to the acquisitions and integration expenses were offset by the Company gaining leverage on the fixed component of SG&A expense. Our key performance metrics and trends have improved relative to the prior year comparable period and to our first quarter which is consistent with previous years based on the seasonality of our business. The negative performance during the first three months of 2014 was caused by adverse weather and the inclusion of the Canadian business acquisitions, Gienow and Mitten, which were acquired in April and May of 2013, respectively. The first quarter of 2014 included the results of Gienow and Mitten, whereas the first quarter of 2013 excluded the results of these Canadian acquisitions. These acquisitions’ first quarter performance is typically the lowest of the year and was further impacted by the harsh winter in Canada and therefore their inclusion in the first quarter of 2014 had a negative impact on the trends in both gross profit margins and SG&A expense as a percentage of sales. Furthermore, we incurred increased integration costs related to the consolidation of its two Western Canadian manufacturing plants into a single facility which decreased gross margins and increased SG&A expense for the nine months ended September 27, 2014.


Unallocated Operating Earnings, Interest, and Provision (Benefit) for Income Taxes
 
 
For the three months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
SG&A expense
 
$
(6,602
)
 
$
(4,067
)
Operating loss
 
(6,602
)
 
(4,067
)
Interest expense
 
(16,296
)
 
(22,070
)
Interest income
 
1

 
1

Tax receivable agreement liability adjustment
 
(13,988
)
 
6,669

Income tax benefit for income taxes
 
$
10,514

 
$
1,442


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 September 27, 2014 increased by $2.5 million or 62.3% compared to the same period in 2013 due primarily to various personnel costs, increasing professional fees, and costs associated with the Simonton acquisition which was completed on September 19, 2014.




56

Interest expense

Interest expense for the three months ended September 27, 2014 decreased by approximately $5.8 million or 26.2% compared to the same period in 2013.  The decrease was due to the reduction in interest expense with holding the 9.375% Senior Notes due 2017 (the "9.375% Senior Notes") and the 8.25% Senior Secured Notes due 2018 (the "8.25% Senior Secured Notes") outstanding during the three months ended September 28, 2013 compared to the new notes issued in January 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 on January 30, 2014 to replace the 8.25% Senior Secured Notes and 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 three months ended September 27, 2014 compared to the same period in 2013.

Tax receivable agreement liability adjustment

The $14.0 million tax receivable agreement liability adjustment for the three months ended September 27, 2014 resulted from the Simonton acquisition and the assumption of their approximate $25.0 million deferred tax liability position creating future taxable income that accelerated the timing of anticipated NOL utilization.

Income taxes
 
The income tax benefit for the three months ended September 27, 2014 increased by approximately $9.1 million compared to the same period in 2013.  Our pre-tax income for the three months ended September 27, 2014 was approximately $10.9 million including the $14.0 million tax receivable agreement liability adjustment compared to pre-tax income of $15.5 million for the three months ended September 28, 2013.  For the three months ended September 27, 2014, the increase in income tax benefit resulted from the Simonton acquisition and the assumption of their deferred tax liabilities which resulted in a $25.0 million reversal of the Company's valuation allowance partially offset by changes in the Company's estimated effective tax rate. Our estimated effective income tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and foreign income tax expense (benefit).


 
 
For the nine months ended
(Amounts in thousands)
 
September 27, 2014
 
September 28, 2013
 
 
(unaudited)
 
(unaudited)
Statement of operations data:
 
 
 
 
SG&A expense
 
$
(18,116
)
 
$
(15,912
)
Initial public offering costs
 
—

 
(23,527
)
Operating loss
 
(18,116
)
 
(39,439
)
Interest expense
 
(52,033
)
 
(70,583
)
Interest income
 
4

 
6

Loss on modification or extinguishment of debt
 
(21,364
)
 
(18,948
)
Tax receivable agreement liability adjustment
 
(14,419
)
 
(1,474
)
Income tax benefit (provision) for income taxes
 
$
15,933

 
$
(1,676
)

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 nine months ended September 27, 2014 decreased by $21.3 million or 54.1% compared to the same period in 2013 due primarily to the $23.5 million in initial public offering costs incurred during the nine months ended September 28, 2013 highlighted in the table below, partially offset by various personnel costs, increasing professional fees, and costs associated with the Simonton acquisition which was completed on September 19, 2014.


57

(Amounts in thousands)
 
 
Advisory termination fee to affiliate
 
$
18,852

2013 management fee as of date of termination
 
2,682

Other transaction expenses for the IPO
 
1,993

 
 
$
23,527


Interest expense

Interest expense for the nine months ended September 27, 2014 decreased by approximately $18.6 million or 26.3% compared to the same period in 2013.  The decrease was primarily due to the reduction in interest expense with holding the 9.375% Senior Notes and the 8.25% Senior Secured Notes outstanding during the nine months ended September 28, 2013 compared to the new debt incurred in 2014. The 6.50% Senior Notes which were issued and the Term Loan Facility which was entered into on January 30, 2014 to replace the 8.25% Senior Secured Notes and 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 nine months ended September 27, 2014 compared to the same period in 2013. Additionally, the average balance on the ABL Facility has been slightly lower during the nine months ended September 27, 2014 compared to the same period in 2013.

Tax receivable agreement liability adjustment

The $14.4 million tax receivable agreement liability adjustment for the nine months ended September 27, 2014 resulted from the Simonton acquisition and the assumption of their approximate $25.0 million deferred tax liability position creating future taxable income that accelerated the timing of anticipated NOL utilization.

Loss on modification or extinguishment of debt

As a result of the 6.50% Senior Notes and 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 nine months ended September 27, 2014.

As a result of the long-term debt redemptions during June 2013, as further described in the Liquidity and Capital Resources section below, we recognized a loss on extinguishment of debt of approximately $18.9 million for the nine months ended September 28, 2013. When considering the partial redemption of both the 8.25% Senior Secured Notes and the 9.375% Senior Notes, the loss consisted of the call premiums paid of $8.5 million, the write off of a portion of the capitalized bond discounts of approximately $7.5 million, and the write off of a portion of the capitalized financing costs of approximately $2.9 million.

Income taxes
 
The income tax benefit for the nine months ended September 27, 2014 increased by approximately $17.6 million compared to the same period in 2013.  Our pre-tax loss for the nine months ended September 27, 2014 was approximately $34.7 million including the $14.4 million tax receivable agreement liability adjustment compared to a pre-tax loss of $60.4 million for the nine months ended September 28, 2013.  For the nine months ended September 27, 2014, our estimated effective income tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and foreign income tax expense (benefit).  Our tax benefit for the nine months ended September 27, 2014 was primarily due to the Simonton acquisition and the assumption of their deferred tax liabilities which resulted in a $25.0 million reversal of the Company's valuation allowance partially offset by the establishment of a $7.9 million full valuation allowance for our combined Western Canadian businesses that resulted from the integration and restructuring expenses associated with combining separate manufacturing facilities into a single facility and by changes in the Company's effective tax rate during the nine months ended September 27, 2014.

Liquidity and Capital Resources

In connection with the IPO in 2013, we entered into a Tax Receivable Agreement which provides for us to pay the Tax Receivable Entity 85% of the amount of cash savings if any, in U.S. federal, state and local income tax that we actually realize in periods ending after the IPO as a result of (i) net operating loss ("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 us as a result of or attributable to payments under the Tax Receivable Agreement. Future payments on the Tax Receivable Agreement could be substantial. Management estimates that the total amount of payments under the Tax Receivable Agreement will be approximately $100.0 million assuming no material changes in the relevant tax law, that we earn 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.

58


During the nine months ended September 27, 2014, cash decreased by approximately $43.0 million compared to a decrease of approximately $4.1 million during the nine months ended September 28, 2013.  The decrease in cash generated during the comparative nine month period was primarily due to increases in trade receivables and inventory during the nine months ended September 27, 2014. The Simonton acquisition of $130.0 million was offset by additional financing instruments during the nine months ended September 27, 2014. The significant investing and financing activities in 2013 included approximately $99.3 million in acquisitions and a net inflow of approximately $196.9 million inflow from the IPO and subsequent debt repayment financing transactions.

One of the largest changes in operating cash flows during the nine months ended September 27, 2014 is the movement in the accounts receivable balance. The approximate $138.1 million increase in accounts receivable from December 31, 2013 to September 27, 2014 can be attributed to the seasonality of our business and the Simonton acquisition in the final week of September 2014. Net sales in the final two months of each respective quarter drove this increase as aging profiles were relatively consistent. Net sales for August and September 2014 were approximately $135.1 million and $174.9 million, respectively, versus approximately $98.0 million and $113.3 million in December and November 2013, respectively, for an increase of $98.7 million. The significant improvement in August and September 2014’s net sales reflects the Company’s normal seasonal business as the weather in August and September is generally improved compared to November and December, which allows for further construction activity, increasing the Company’s sales with a corresponding increase in accounts receivable. The Simonton acquisition also contributed an additional $37.3 million in accounts receivable from the September 19, 2014 acquisition.

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 September 27, 2014, our annual interest charges for debt service for the years ending December 31, 2014 and 2015, including the ABL Facility, are estimated to be approximately $54.7 million and $60.5 million, respectively.  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 September 27, 2014, our purchase commitments for inventory are approximately $27.2 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.

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.















59

Our specific cash flow movement for the nine months ended September 27, 2014 and September 28, 2013 is summarized below:

Cash used in operating activities

Net cash used in operating activities for the nine months ended September 27, 2014 was approximately $55.4 million as compared to approximately $84.6 million used in operations for the nine months ended September 28, 2013. After considering the $18.9 million payment made to CI Capital Partners during the nine months ended September 28, 2013 for the termination of an advisory agreement, the net cash used in operating activities was consistent between the two periods reflecting increased operating earnings of approximately $22.6 million primarily attributable to improved operating performance for our U.S. windows business during the nine months ended September 27, 2014. This $22.6 million was offset by negative movement for the increase in accounts receivable of approximately $27.3 million related to the 8.1% increase in net sales for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. The receivable increase was offset by lower interest expense and related accruals of approximately $17.3 million resulting from the January 2014 refinancing activities which lowered our weighted average interest rate by approximately 300 basis points reducing cash interest by approximately $24.8 million for the nine months ended September 27, 2014.

Cash used in investing activities

Net cash used in investing activities for the nine months ended September 27, 2014 and September 28, 2013 was approximately $144.6 million and $115.6 million, respectively, primarily used for capital expenditures on various ongoing capital projects and the $130.0 million acquisition of Simonton in 2014 and for the acquisitions of Mitten and Gienow in 2013. The 2013 acquisitions consisted of $78.9 million paid for Mitten and $20.4 million paid for Gienow. Capital expenditures for 2014 were lower than 2013, at approximately 1.3% of net sales which is comparably to our historical average of 1.5%.


Cash provided by financing activities

Net cash provided by financing activities for the nine months ended September 27, 2014 was approximately $157.9 million, primarily from net revolver borrowings of $20.0 million and the issuance of an additional $150.0 million in 6.50% Senior Notes. The long term debt refinancing in the nine months ended September 27, 2014 that occurred in January 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. The issuance of an additional $150.0 million in 6.50% Senior Notes in the nine months ended September 27, 2014 resulted in net proceeds of approximately $138.0 million after deducting $10.1 million for the debt discount and approximately $1.9 million in transaction costs incurred. Net cash provided by financing activities for the nine months ended September 28, 2013 was approximately $195.8 million, primarily from net proceeds from the issuance of common stock of $353.4 million offset by the redemption of long-term debt of $148.0 million combined with the $8.5 million of call premiums associated with that redemption.

Our specific debt instruments and terms are described below:
 
Recent developments
        
As described in the following paragraph, Ply Gem Industries modified its debt structure during the nine months ended September 27, 2014. 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.








60

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 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%.

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 4.24% after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.













61

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 January 30, 2014, Ply Gem Industries and the Guarantors entered into a registration rights agreement relating to the 6.50% Senior Notes. Ply Gem Industries will be required to pay additional interest on the 6.50% Senior Notes if it fails to comply with certain of its obligations under the registration rights agreement within specified time periods.

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.  However, the $150.0 million of Senior Tack-on Notes issued in September 2014 have not yet been 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 will be 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 September 27, 2014, the Company's interest rate on the Term Loan Facility was 4.00%. The effective interest rate for the Term Loan is 1.76% 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 and with respect to certain repricing transactions occurring within six months of January 30, 2014, which shall be subject to a prepayment premium of 1.00%.





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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.

As a result of the 2013 initial public offering, on June 28, 2013, Ply Gem Industries redeemed $84.0 million aggregate principal amount of its 8.25% Senior Secured Notes at a redemption price equal to 103%, plus accrued and unpaid interest thereon of approximately $2.6 million. The call premium for this redemption was approximately $2.5 million. Additionally, the Company expensed approximately $3.8 million of unamortized discount and $1.8 million of unamortized debt issuance costs in connection with this redemption and the related loss on debt extinguishment.

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.








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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 primarily 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 to 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. As a result of the ABL Facility amendment in which the loan syndication consisted of previous members who either maintained or increased their position as well as new syndication members, the Company capitalized new debt issuance costs of $1.3 million and will amortize these costs through 2018.

The ABL Facility provides for revolving credit financing of up to $300.0 million subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans and borrowings in Canadian dollars and United States dollars, $250.0 million of the ABL Facility is available to Ply Gem Industries and $50.0 million is available to the Canadian Borrowers.

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 September 27, 2014, the Company’s interest rate on the ABL Facility was approximately 1.72%.  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.










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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.  

As of September 27, 2014, Ply Gem Industries had approximately $224.3 million of contractual availability and approximately $221.4 million of borrowing base availability under the ABL Facility, reflecting $20.0 million of borrowings outstanding and approximately $5.7 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.

A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

As a result of the 2013 initial public offering, on June 22, 2013, Ply Gem Industries redeemed $64.0 million aggregate principal amount of the 9.375% Senior Notes at a redemption price equal to 109.375%, plus accrued and unpaid interest thereon of approximately $1.1 million. The call premium for this redemption was approximately $6.0 million. Additionally, the Company expensed approximately $3.7 million of unamortized discount and $1.2 million of unamortized debt issuance costs in connection with this redemption and the related loss on debt extinguishment.









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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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 2014.

As a result of the June 28, 2013 redemption of approximately $84.0 million aggregate principal amount of the 8.25% Senior Secured Notes, the Company recorded a loss on debt extinguishment of approximately $8.1 million in the condensed consolidated statement of operations for the nine months ended September 28, 2013.

As a result of the June 22, 2013 redemption of approximately $64.0 million aggregate principal amount of the 9.375% Senior Notes, the Company recorded a loss on debt extinguishment of approximately $10.8 million in the condensed consolidated statement of operations for the nine months ended September 28, 2013.
Based on the January 2014 Refinancing, the Company recognized a loss on debt modification or extinguishment of approximately $21.4 million for the nine months ended September 27, 2014 and approximately $18.9 million for the nine months ended September 28, 2013 related to the 2013 redemptions, as summarized in the table below.



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(Amounts in thousands)
 
For the nine months ended
 
 
September 27, 2014
 
September 28, 2013
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
)
 
—

Call premium for 8.25% Senior Secured Notes
 
—

 
(2,520
)
8.25% Senior Secured Notes unamortized discount
 
—

 
(3,831
)
8.25% Senior Secured Notes unamortized debt issuance costs
 
—

 
(1,766
)
Call premium for 9.375% Senior Notes
 
—

 
(6,000
)
9.375% Senior Notes unamortized discount
 
—

 
(3,666
)
9.375% Senior Notes unamortized debt issuance costs
 
—

 
(1,165
)
 
 
(15,588
)
 
(18,948
)
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
)
 
$
(18,948
)



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 September 27, 2014, we had cash and cash equivalents of approximately $26.8 million, approximately $224.3 million of contractual availability under the ABL Facility and approximately $221.4 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, 2013, we have a potential obligation related to certain tax matters of approximately $3.2 million, including interest of approximately $1.2 million.  The timing of the potential tax payments is unknown.


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, 2013 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, 2013, 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, 2013.  We undertake no obligation to update the forward-looking statements in this report.



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 $250.0 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 $0.6 million per year. At September 27, 2014, 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 nine months ended September 27, 2014, the net impact of foreign currency changes to our results of operations was a loss of approximately $0.8 million and $0.5 million, respectively. The impact of foreign currency changes related to translation resulted in a decrease in stockholders' deficit of approximately $5.4 million for the nine months ended September 27, 2014. 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 the nine months ended September 27, 2014, we entered into a hedging contract in order to mitigate the exposure risk of currency fluctuation against the Canadian dollar.  At September 27, 2014, our foreign currency hedging contract had a market value of $47,000 and is recorded as an increase in stockholders' deficit for the nine months ended September 27, 2014.

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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. According to the London Metal Exchange, the price of aluminum decreased approximately 8.8% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. Conversely, the average market price for PVC resin was estimated to have increased approximately 10.3% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013.


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 increase for the twelve months ended September 2014 was approximately 1.7%.

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 nine months ended September 27, 2014, a union vote was held at the newly combined Western Canadian entity and the union received a favorable vote. It is expected that the manufacturing operations at that facility will be unionized through ratification of that vote.


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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 September 27, 2014.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of September 27, 2014 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) 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.
 
There have been no changes in our internal control over financial reporting during the three months ended September 27, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") issued an updated version of its Internal Control – Integrated Framework ("2013 Framework"). Originally issued in 1992 ("1992 Framework"), the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. As of September 27, 2014, the Company continues to utilize the 1992 Framework during the transition to the 2013 Framework by the end of 2014. The Company does not expect significant changes to its overall internal control structure over financial reporting to result from the transition to the 2013 Framework.

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PART II – OTHER INFORMATION
Item 5.                                                 OTHER INFORMATION

On November 6, 2014, the Company, Ply Gem Industries, a wholly-owned subsidiary of the Company, Gienow Canada Inc. (“Gienow”), and Mitten Inc. (“Mitten”, and together with Gienow, the “Canadian Borrowers”) and certain subsidiaries of Ply Gem Industries, as loan parties, entered into Amendment No. 2 and Incremental Assumption Agreement to Amended and Restated Credit Agreement with certain financial institutions and institutional lenders providing incremental revolving credit commitments and UBS AG, Stamford Branch, as U.S. administrative agent (the “ U.S. Administrative Agent”), exercising a portion of the accordion feature under the ABL Facility for $50.0 million.

This accordion exercise for $50.0 million increases the aggregate amount of the commitments under 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 to another $50.0 million to $350.0 million, subject to certain terms and conditions. All other terms and conditions under the ABL Facility remain unchanged. Please refer to “Note 6-Long-Term Debt” to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the ABL Facility, which information is incorporated by reference into this Item 5.

In the ordinary course of their businesses, certain of the agents and lenders under the ABL Facility and certain of their affiliates have, from time to time, provided, and may in the future provide, financial services to or engage in investment and commercial banking or other transactions of a financial nature with the Company, Ply Gem Industries or their respective affiliates, including the provision of certain advisory services and the making of loans to the Company and its affiliates, for which they received or will receive customary fees and expenses.



Item 6.                                                 EXHIBITS

(a)   Exhibits

Exhibit No.                                                                  Description of Exhibits
2.1*
Stock Purchase Agreement, dated as of August 19, 2014, by and among Ply Gem Industries, Inc., Fortune Brands Home & Security, Inc. and Fortune Brands Windows & Doors, Inc.
4.1
Registration Rights Agreement, September 19, 2014, among Ply Gem Industries, inc., the Guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers (incorporated by reference from Exhibit 4.1 to the Company's Form 8-K, dated September 19, 2014 (File No. 001-359302).
31.1 *
Certification by President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2 *
Certification by Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1 *
Certification by President and Chief Executive Officer 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 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 September 27, 2014, filed on November 7, 2014, 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:  November 7, 2014

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



Date:  November 7, 2014

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


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