PGT Innovations, Inc. - Quarter Report: 2007 June (Form 10-Q)

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52059

PGT, Inc.

1070 Technology Drive
North Venice, FL 34275

Registrant’s telephone number: 941-480-1600


State of Incorporation		IRS Employer Identification No.

Delaware		20-0634715

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 par value — 27,437,813 shares, as of July 31, 2007.

PGT, INC.
INDEX


	Page
	Number
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations		3
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
Part II. Other Information
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds		23
Item 3. Defaults Upon Senior Securities		24
Item 4. Submission of Matters to a Vote of Security Holders		24
Item 5. Other Information		24
Item 6. Exhibits		25
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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


	3 Months Ended					6 Months Ended
	June 30,		July 1,			June 30,		July 1,
	2007		2006			2007		2006
	*(unaudited)*

Net sales	$	79,707	$	108,689		$	152,382	$	205,044
Cost of sales		50,685		61,579			98,588		122,213


Gross margin		29,022		47,110			53,794		82,831

Stock compensation expense related to dividends paid (includes expenses related to cost of sales and selling, general and administrative expense of $5,069 and $21,829, respectively in 2006)		—		—			—		26,898
Selling, general and administrative		21,718		23,796			41,964		45,664


Income from operations:		7,304		23,314			11,830		10,269
Interest expense, net		2,801		7,282			5,925		17,641
Other expense (income), net		98		(357	)		230		(766	)


Income (loss) before income taxes:		4,405		16,389			5,675		(6,606	)
Income tax expense (benefit)		1,620		6,365			2,090		(2,554	)


Net income (loss):	$	2,785	$	10,024		$	3,585	$	(4,052	)


Net income (loss) per share:
Basic	$	0.10	$	0.62		$	0.13	$	(0.25	)

Diluted	$	0.10	$	0.55		$	0.13	$	(0.25	)

Shares used in calculation of net income per share:
Basic		27,123		16,151			27,061		15,950

Diluted		28,321		18,173			28,344		15,950

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

PGT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


	June 30,		December 30,
	2007		2006
	*(unaudited)*
ASSETS
Current assets:
Cash and cash equivalents	$	18,875	$	36,981
Accounts receivable, net		29,905		25,244
Inventories, net		12,065		11,161
Deferred income taxes, net		6,693		5,231
Other current assets		11,374		13,041


Total current assets		78,912		91,658

Property, plant and equipment, net		79,987		78,802
Other intangible assets, net of amortization		99,133		101,918
Goodwill		169,648		169,648
Other assets, net		1,507		1,968


Total assets	$	429,187	$	443,994


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,415	$	1,123
Accrued liabilities		17,230		16,684
Current portion of long-term debt		—		420


Total current liabilities		20,645		18,227

Long-term debt		140,488		165,068
Deferred income taxes		52,417		52,417
Other long-term liabilities		3,444		3,076


Total liabilities		216,994		238,788

Commitments and Contingencies (Note 8)

Shareholders’ equity:
Preferred stock, par value $0.01 per share: Authorized shares — 10,000; No shares issued or outstanding		—		—
Common stock, par value $0.01 per share: Authorized shares — 200,000; Issued and outstanding shares — 27,541 and 27,438 at June 30, 2007 and 27,078 and 26,999 at December 30, 2006		274		270
Additional paid-in capital		209,218		205,799
Accumulated other comprehensive income		85		106
Retained earnings (accumulated deficit)		2,616		(969	)


Total shareholders’ equity		212,193		205,206


Total liabilities and shareholders’ equity	$	429,187	$	443,994

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

PGT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	6 Months Ended
	June 30,			July 1,
	2007			2006
	*(unaudited)*
Operating activities:
Net income (loss)	$	3,585		$	(4,052	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depreciation		5,016			4,634
Amortization		2,785			2,957
Share-based compensation		845			12
Excess tax benefits from stock-based compensation plans		(1,451	)		—
Amortization of deferred financing costs		460			4,993
Derivative financial instruments		230			(764	)
Impairment of Lexington Facility		826			—
Loss on disposal of assets		2			9
Changes in operating assets and liabilities:
Accounts receivable, net		(4,604	)		1,620
Inventories		(904	)		(241	)
Prepaid expenses and other assets		442			(1,495	)
Accounts payable and accrued liabilities		3,285			(731	)

Net cash provided by operating activities		10,517			6,942

Investing activities:
Purchases of property, plant, and equipment		(6,233	)		(18,639	)
Proceeds from sales of equipment		32			100

Net cash used in investing activities		(6,201	)		(18,539	)

Financing activities:
Proceeds from exercise of stock options		1,127			—
Excess tax benefits from stock-based compensation plans		1,451			—
Proceeds from long-term debt		—			320,000
Payments of dividends		—			(83,484	)
Payments of financing costs		—			(4,459	)
Payments of long-term debt		(25,000	)		(184,038	)


Net cash (used in) provided by financing activities		(22,422	)		48,019


Net increase (decrease) in cash and cash equivalents		(18,106	)		36,422
Cash and cash equivalents at beginning of period		36,981			3,270

Cash and cash equivalents at end of period	$	18,875		$	39,692


Supplemental disclosure of cash flow information:
Interest paid	$	7,128		$	11,423
Taxes paid	$	9		$	893

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

PGT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1. BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of PGT, Inc. and its wholly-owned subsidiary (collectively the “Company”) after elimination of intercompany accounts and transactions. These statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods.

The condensed consolidated balance sheet as of December 30, 2006 is derived from the audited consolidated financial statements but does not include all disclosures required by GAAP. This condensed consolidated balance sheet as of December 30, 2006 and the unaudited condensed consolidated financial statements included herein should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 30, 2006 included in the Company’s most recent annual report on Form 10-K. Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K.

Stock Split

On June 5, 2006, our Board of Directors and our stockholders approved a 662.07889-for-1 stock split of our common stock and approved increasing the number of shares of common stock that the Company is authorized to issue to 200.0 million.

After the stock split, effective June 6, 2006, each holder of record held 662.07889 shares of common stock for every 1 share held immediately prior to the effective date. As a result of the stock split, the Board of Directors also exercised its discretion under the anti-dilution provisions of our 2004 Stock Incentive Plan to adjust the number of shares underlying stock options and the related exercise prices to reflect the change in the per share value and outstanding shares on the date of the stock split. The effect of fractional shares is not material.

Following the effective date of the stock split, the par value of the common stock remained at $0.01 per share. As a result, we have increased the common stock in our consolidated balance sheets and statements of shareholders’ equity included herein on a retroactive basis for all of our Company’s periods presented, with a corresponding decrease to additional paid-in capital. All share and per share amounts and related disclosures have also been retroactively adjusted for all of our Company’s periods presented to reflect the 662.07889-for-1 stock split.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Fiscal Period

Each of our Company’s fiscal quarters ended June 30, 2007 and July 1, 2006 consist of 13 weeks.

Segment Information

Our Company operates in one operating segment: manufacture and supply windows and doors.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates involved in applying our Company’s accounting policies are those that require management to make assumptions about matters that are uncertain at the time

the accounting estimate was made and those for which different estimates reasonably could have been used for the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, and could have a material impact on the presentation of our Company’s financial condition, changes in financial condition or results of operations. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies

Revenue recognition

We recognize sales when all of the following criteria have been met: a valid customer order with a fixed price has been received; the product has been delivered and accepted by the customer; and collectibility is reasonably assured. All sales recognized are net of allowances for cash discounts and estimated returns, which are estimated using historical experience.

Warranty Expense

Our Company has warranty obligations with respect to most of our manufactured products. Warranty periods, which vary by product component, range from 1 to 10 years. However, the majority of the products sold have warranties on components which range from 1 to 3 years. The reserve for warranties is based on management’s assessment of the cost per service call and the number of service calls expected to be incurred to satisfy warranty obligations on recorded net sales. The reserve is determined after assessing our Company’s warranty history and estimating our future warranty obligations.

The following table provides information with respect to our Company’s warranty accrual:


			Accruals for								Balance at
Allowance for Warranty	Balance at Beginning		Warranties		Adjustments			Settlements			End of
(dollars in thousands)	of Period		Issued During Period		Made			Made			Period
Three months ended June 30, 2007	$	5,187		1,594		58			(1,284	)	$	5,555
Three months ended July 1, 2006	$	4,583		1,630		(98	)		(1,383	)	$	4,732
Six months ended June 30, 2007	$	4,934		3,047		229			(2,655	)	$	5,555
Six months ended July 1, 2006	$	4,501		3,075		(237	)		(2,607	)	$	4,732

Inventories

Inventories consist principally of raw materials purchased for the manufacture of our products. Our Company has limited finished goods inventory since all products are custom, made-to-order products. Finished goods inventory costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost (first-in, first-out method) or market value. The reserve for obsolescence is based on management’s assessment of the amount of inventory that may become obsolete in the future and is determined based on historical usage of the inventory, forecasted usage, specific identification method, and consideration of prevailing economic and industry conditions.

Inventories consisted of the following:


	June 30,		December 30,
(dollars in thousands)	2007		2006
Finished goods	$	2,508	$	1,109
Work in process		724		880
Raw materials		9,678		10,297


	June 30,			December 30,
(dollars in thousands)	2007			2006
Less: Reserve for obsolescence		(845	)		(1,125	)

Total	$	12,065		$	11,161

Stock compensation

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)). This statement is a fair-value based approach for measuring stock-based compensation and requires us to recognize the cost of employee and non-employee directors’ services received in exchange for our Company’s equity instruments. Under SFAS No. 123(R), we are required to record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. We have adopted SFAS No. 123(R) on a prospective basis; accordingly, our financial statements for periods prior to January 1, 2006, do not include compensation cost calculated under the fair value method. We recorded compensation expense for stock based awards of approximately $0.5 million and $0 during the second quarters of 2007 and 2006, respectively. For the six months ended June 30, 2007, we recorded expense for stock based awards of approximately $0.8 million and $0. As of June 30, 2007, there was $1.0 million and $1.0 million of total unrecognized compensation cost related to non-vested stock option agreements and non-vested restricted share awards, respectively. These costs are expected to be recognized in earnings on a straight line basis over the weighted average remaining vesting period of 2.8 years.

Stock options granted prior to our Company’s initial public offering were valued using the minimum value method in the pro forma disclosures required by SFAS No. 123, Accounting for Stock Based Compensation. The minimum value method excludes volatility in the calculation of fair value of stock based compensation. In accordance with SFAS No. 123(R), options that were valued using the minimum value method were transitioned to SFAS No. 123(R) using the prospective method. As a result, these options will continue to be accounted for under the same accounting principles (recognition and measurement) originally applied to those awards in the income statement, which for our Company was APB No. 25. Accordingly, the adoption of SFAS No. 123(R) does not result in any compensation cost being recognized for these options.

Goodwill and Other Intangibles

We test goodwill for impairment in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 requires that goodwill not be amortized, but instead be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events as defined by SFAS No. 142. We have one reporting unit. The annual goodwill impairment test is a two-step process. First, we determine if the carrying value of our related reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If we determine that goodwill may be impaired, we compare the implied fair value of the goodwill to its carrying amount to determine if there is an impairment loss.

We also evaluate intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows. The assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current Company operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.

Recently Adopted Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosures, and transition.

FIN 48 is effective for fiscal years beginning after December 15, 2006. Our adoption of FIN 48 did not result in any material impact on our results of operations and financial condition.

Recently Issued Accounting Pronouncements

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of our Company’s 2008 fiscal year. We are considering the provisions of SFAS No. 157 and have not determined the impact, the application of SFAS No. 157 will have on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for our Company beginning in fiscal year 2008. We have not yet determined the impact, if any, from the adoption of SFAS No. 159.

NOTE 3. SHAREHOLDER’S EQUITY

Initial Public Offering

On June 27, 2006, the SEC declared our Company’s registration statement on Form S-1 effective, and our Company completed an initial public offering (“IPO”) of 8,823,529 shares of its common stock at a price of $14.00 per share. Our Company’s common stock began trading on The Nasdaq National Market under the symbol “PGTI” on June 28, 2006. After underwriting discounts of approximately $8.6 million and transaction costs of approximately $2.5 million, net proceeds received by the Company on July 3, 2006, were $112.3 million. Our Company used net IPO proceeds, together with cash on hand, to repay $137.0 million of borrowings under our senior secured credit facilities.

Our Company granted the underwriters an option to purchase up to an additional 1,323,529 shares of common stock at the IPO price, which the underwriters exercised in full on July 27, 2006. After underwriting discounts of approximately $1.3 million, aggregate net proceeds received by the Company on August 1, 2006 were $17.2 million, of which $17.0 million was used to repay a portion of our outstanding debt.

In conjunction with the IPO, our Company’s stockholders approved an amendment and restatement of the Company’s certificate of incorporation. The amended and restated certificate of incorporation provides that the Company is authorized to issue 200.0 million shares of common stock, par value $0.01 per share, and 10.0 million shares of preferred stock, par value $0.01 per share.

Special Cash Dividends

In February 2006, our Company paid a special cash dividend to our stockholders of $83.5 million. In connection with the payment of this dividend, our Company also made a compensatory cash payment of $26.9 million to stock option holders (including applicable payroll taxes of $0.5 million) in-lieu of adjusting exercise prices, that was recorded as stock compensation expense in the accompanying condensed consolidated statement of operations for the six months ended July 1, 2006.

NOTE 4. NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share (“EPS”) is calculated in accordance with SFAS No. 128, Earnings per Share, which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents.

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


	3 Months Ended				6 Months Ended
	June 30,		July 1,		June 30,		July 1,
(in thousands, except per share data)	2007		2006		2007		2006
Net income (loss)	$	2,785	$	10,024	$	3,585	$	(4,052	)
Weighted-average shares of common stock outstanding		27,123		16,151		27,061		15,950
Add: Dilutive effect of stock-based compensation plans		1,198		2,022		1,283		—

Dilutive weighted-average shares of common stock outstanding		28,321		18,173		28,344		15,950

Net income (loss) per share:
Basic	$	0.10	$	0.62	$	0.13	$	(0.25	)
Diluted	$	0.10	$	0.55	$	0.13	$	(0.25	)

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are as follows (in thousands):


	June 30,			December 30,			Useful life
	2007			2006			(in years)

Unamortized Intangible assets:
Goodwill	$	169,648		$	169,648		indefinite

Trademarks		62,500			62,500		indefinite

Amortized intangible assets, gross:
Customer relationships		55,700			55,700			10
Supplier agreements		2,300			2,300			1-2
Non compete agreements		4,469			4,469			2

Total amortized intangible assets, gross		62,469			62,469

Accumulated amortization:
Customer relationships		(19,067	)		(16,282	)
Supplier agreements		(2,300	)		(2,300	)
Non compete agreements		(4,469	)		(4,469	)

Total accumulated amortization:		(25,836	)		(23,051	)

Other intangible assets, net:	$	99,133		$	101,918

NOTE 6. LONG-TERM DEBT

On February 14, 2006, our Company entered into a second amended and restated $235 million senior secured credit facility and a $115 million second lien term loan due August 14, 2012, with a syndicate of banks. The senior secured credit facility is composed of a $30 million revolving credit facility and, initially, a $205 million first lien term loan. As of June 30, 2007 there was $24.2 million available under the revolving credit facility.

The first lien term loan bears interest at a rate equal to an adjusted LIBOR rate plus 3.0% per annum or a base rate plus 2.0% per annum, at our option. The loans under the revolving credit facility bear interest initially, at our option (provided, that all swingline loans shall be base rate loans), at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a base rate plus 1.75% per annum, and the margins above LIBOR and base rate may decline to 2.00% for LIBOR loans and 1.00% for base rate loans if certain leverage ratios are met. A commitment fee equal to 0.50% per annum accrues on the average daily unused amount of the commitment of each lender under the revolving credit facility and such fee is payable quarterly in arrears. We are also required to pay certain other fees with respect to the senior secured credit facility including (i) letter of credit fees on the aggregate undrawn amount of outstanding letters of credit plus the aggregate principal amount of all letter of credit reimbursement obligations, (ii) a fronting fee to the letter of credit issuing bank and (iii) administrative fees.

The first lien term loan is secured by a perfected first priority pledge of all of the equity interests of our subsidiary and perfected first priority security interests in and mortgages on substantially all of our tangible and intangible assets and those of the guarantors, except, in the case of the stock of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences, and subject to such other exceptions as are agreed. The senior secured credit facility contains a number of covenants that, among other things, restrict our ability and the ability of our subsidiaries to (i) dispose of assets; (ii) change our business; (iii) engage in mergers or consolidations; (iv) make certain acquisitions; (v) pay dividends or repurchase or redeem stock; (vi) incur indebtedness or guarantee obligations and issue preferred and other disqualified stock; (vii) make investments and loans; (viii) incur liens; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) issue stock or stock options under certain conditions; (xii) amend or prepay subordinated indebtedness and loans under the second lien secured credit facility; (xiii) modify or waive material documents; or (xiv) change our fiscal year. In addition, under the senior secured credit facility, we are required to comply with specified financial ratios and tests, including a minimum interest coverage ratio, a maximum leverage ratio, and maximum capital expenditures.

Borrowings under the new senior secured credit facility and second lien secured credit facility were used to refinance our Company’s existing debt facility, pay a cash dividend to stockholders of $83.5 million, and make a cash compensatory payment of approximately $26.9 million (including applicable payroll taxes of $0.5 million) to stock option holders in connection with such dividend. Approximately $5.1 million of the cash payment to stock option holders was paid to employees whose other compensation is a component of cost of sales. In connection with the refinancing, our Company incurred fees and expenses aggregating $4.5 million that are included as a component of other assets, net and amortized using the effective interest method over the terms of the new senior secured credit facility. In the first quarter of 2006, the total cash payment to stock option holders and unamortized deferred financing costs of $4.6 million related to the prior credit facility were expensed and recorded as stock compensation expense and as a component of interest expense, respectively.

Contractual future maturities of long-term debt outstanding as of June 30, 2007 are as follows (in thousands):


Remainder of 2007	$	—
2008		715
2009		1,430
2010		1,430
2011		1,430
Thereafter		135,483

Total	$	140,488

During the first half of 2007, we repaid $25.0 million of long term debt with cash on hand. In connection with these repayments, we expensed $0.3 million of unamortized deferred financing costs recorded in interest expense in the consolidated statement of operations. These optional prepayments had the effect of reducing our mandatory principal payments on our first lien term loan from $0.4 million to zero in 2007, from $1.7 million to $0.7 million in 2008, from $1.7 million to $1.4 million in 2009 through 2011, and the final lump sum payment due in 2012 from $158.3 million to $135.5 million.

On an annual basis, our Company is required to compute excess cash flow, as defined in our credit and security agreement with the bank. In periods where there is excess cash flow, our Company is required to make prepayments in an aggregate principal amount determined through reference to a grid based on the leverage ratio. No such prepayments were required for the year ended December 30, 2006. The term note and line of credit require that our Company also maintain compliance with certain restrictive financial covenants, the most restrictive of which requires our Company to maintain a total leverage ratio, as defined in the debt agreement, of not greater than certain predetermined amounts. Our Company believes that we are in compliance with all restrictive financial covenants.

NOTE 7. COMPREHENSIVE INCOME (LOSS)


	3 Months Ended						6 Months Ended
	June 30,			July 1,			June 30,			July 1,
(in thousands)	2007			2006			2007			2006
Net income (loss)	$	2,785		$	10,024		$	3,585		$	(4,052	)
Other comprehensive income (loss), net of taxes:
Amortization of ineffective interest rate swap, net of tax benefit of $30 and $50 for the three months ended June 30, 2007 and July 1, 2006, and $61 and $100 for the six months ended June 30, 2007 and July 1, 2006, respectively		(48	)		(78	)		(96	)		(156	)
Change in fair value of interest rate swap, net of tax expense of $34 and $54 for the three months ended June 30, 2007 and July 1, 2006, and $35 and $54 for the six months ended June 30, 2007 and July 1, 2006, respectively		53			84			50			84
Change in fair value of aluminium forward contracts, net of tax expense / (benefit) of $16 and ($752) for the three months ended June 30, 2007 and July 1, 2006, and $16 and ($746) for the six months ended June 30, 2007 and July 1, 2006, respectively		25			(1,177	)		25			(1,168	)

Total comprehensive income (loss)	$	2,815		$	8,853		$	3,564		$	(5,292	)

NOTE 8. COMMITMENTS AND CONTINGENCIES

Litigation

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

NOTE 9. INCOME TAX EXPENSE

The Company or its subsidiary files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2003 and state and local income tax examinations by tax authorities for years before 2003 in states where the company or a subsidiary has a material tax presence.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, on January 1, 2007. In connection with our FIN 48 implementation, we determined that we have no material unrecognized tax benefits and accordingly, no liability was recorded. However, should we accrue for such liabilities when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.

Our effective tax rate was 36.8% as of June 30, 2007 and 38.7% as of July 1, 2006. The decrease in our effective tax rate was due to an increase in the amount of manufacturing deductions related to the American Jobs Creation Act of 2004 expected to be taken in 2007.

NOTE 10. IMPAIRMENT OF ASSET HELD FOR SALE

In 2006, the Company relocated its vinyl window and door facility from Lexington, NC to Salisbury, NC. As a result of the relocation, we placed our Lexington, NC facility for sale in November 2006. In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, the Company is required to carry the facility at fair value less costs to sell. As a result of a further decline in the market value of the facility, the Company recorded a non-cash impairment charge in the quarter ended June 30, 2007 of approximately $0.8 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 30, 2006 included in our most recent annual report on Form 10-K.

Special Note Regarding Forward-Looking Statements

This document includes forward-looking statements regarding, among other things, our financial condition and business strategy. Forward-looking statements provide our current expectations and projections about future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions, and other statements that are not historical facts. As a result, all statements other than statements of historical facts included in this discussion and analysis and located elsewhere in this document regarding the prospects of our industry and our prospects, plans, financial position, and business strategy may constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe,” or “continue,” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will occur as predicted. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this document. These forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report or to reflect the occurrence of unanticipated events, except as may be required by applicable securities laws.

Risks associated with our business, an investment in our securities, and with achieving the forward-looking statements contained in this report or in our news releases, Web sites, public filings, investor and analyst conferences or elsewhere, include, but are not limited to, the risk factors described below. Any of the risk factors described below could cause our actual results to differ materially from expectations and could have a material adverse effect on our business, financial condition or results of operations. We may not succeed in addressing these challenges and risks.

Overview

We are the leading U.S. manufacturer and supplier of residential impact-resistant windows and doors and pioneered the U.S. impact-resistant window and door industry in the aftermath of Hurricane Andrew in 1992. Our impact-resistant products, which are marketed

under the WinGuard brand name, combine heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris by maintaining their structural integrity and preventing penetration by impacting objects. Impact-resistant windows and doors satisfy increasingly stringent building codes in hurricane-prone coastal states and provide an attractive alternative to shutters and other “active” forms of hurricane protection that require installation and removal before and after each storm. Our current market share in Florida, which is the largest U.S. impact-resistant window and door market, is significantly greater than that of any of our competitors. In addition to our core WinGuard branded product line, we offer a complete range of premium, made-to-order and fully customizable aluminum and vinyl windows and doors primarily targeting the non-impact-resistant market. We manufacture these products in a wide variety of styles, including single hung, horizontal roller, casement, and sliding glass doors, and we also manufacture sliding panels used for enclosing screened-in porches. Our products are sold to both the residential new construction and repair and remodeling end markets.

Our future results of operations will be affected by the following factors, some of which are beyond our control:

	•		Residential new construction. Our business is driven in part by residential new construction activity. According to the U.S. Census Bureau, U.S. housing starts were 1.8 million in 2006 and 2.1 million in 2005. During the second half of 2006, we saw a significant slowdown in the Florida housing market. At this point, it is unclear if housing activity has hit bottom. Like many building material suppliers in the industry, we will be faced with a challenging operating environment over the near term due to the decline in the housing market. Specifically, housing permits in Florida decreased by approximately 49% in the first six months of 2007 compared to the first six months of 2006. According to The Freedonia Group and the Joint Center for Housing Studies of Harvard University, housing demand will continue to be supported over the next decade by new household formations, increasing homeownership rates, the size and age of the population, an aging housing stock (approximately 35% of existing homes were built before 1960), improved financing options for buyers and immigration trends. We still believe there are several meaningful trends such as rising immigration rates, growing prevalence of second homes, the aging demographics of the population, relatively low interest rates, and the aging of the housing stock, that indicate housing demand will remain healthy in the long term. Based on these trends and certain other factors, we believe that the current pullback in the housing industry is likely to be temporary and that, as we have proven historically, we will be able to outperform the market during this cyclical downturn and grow our business over the long term.

	•		Home repair and remodeling expenditures. Our business is also driven by the home repair and remodeling market. According to the U.S. Census Bureau, national home repair and remodeling expenditures have increased in 36 of the past 40 years. This growth is mainly the result of the aging U.S. housing stock, increasing home ownership rates and homeowners’ electing to upgrade their existing residences rather than move into a new home. The repair and remodeling component of window and door demand tends to be less cyclical than residential new construction and partially insulates overall window and door sales from the impact of residential new construction cycles.

	•		Adoption and Enforcement of Building Codes. In addition to coastal states that already have adopted building codes requiring wind-borne debris protection, we expect additional states to adopt and enforce similar building codes, which will further expand the market opportunity for our WinGuard branded line of impact-resistant products. The speed with which new states adopt and enforce these building codes will impact our growth opportunities in new geographical markets.

	•		Cost of materials. The prices of our primary raw materials, including aluminum, laminate and glass, are subject to volatility and affect our results of operations when prices rapidly rise or fall within a relatively short period of time. From time to time, we use hedging instruments to manage the market risk of our aluminum costs. From January 1, 2007 to June 7, 2007, we had no outstanding hedges. On June 8, 2007, we entered into aluminum hedges to cover approximately 10% of our forecasted needs over the next twelve months at an average price of $2,695 per metric ton.

Current Operating Conditions and Outlook

In the first six months of 2007, housing permits in Florida decreased 49% compared to the first half of 2006. In response to the deterioration in the housing market, we have taken a number of steps to maintain profitability and conserve capital. As a result, we adjusted our operating cost structure to more closely align with current demand. In addition, we have decreased our capital spending in 2007. However, we also view this market downturn as an opportunity to gain market share from our competitors. For instance, we have introduced new incentive programs offered to both our distributors and end users. We have also increased marketing and sales efforts in areas outside of our dominant markets, including northern Florida, the Gulf Coast and the Carolinas. Finally, we have introduced new products and expanded product lines to broaden our product offering. As a result of these actions, we continue to outperform the underlying market, however gross margins have declined to 36.4% and 35.3% for the three and six months ended June 30, 2007 from 43.3% and 40.4% for the three and six months ended July 1, 2006.

Though the homebuilding industry is currently in a down turn, we believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. At this point, it is unclear if housing activity has hit bottom. Despite the unfavorable operating conditions, we believe we can continue to grow organically by gaining market share and outperforming our underlying markets. However, we think difficult market conditions affecting our business will continue to have a negative effect on our operating results and year-over-year comparisons in the near term.

Other Developments

Initial Public Offering

Our Company granted the underwriters an option to purchase up to an additional 1,323,529 shares of common stock at the IPO price, which the underwriters exercised in full on July 27, 2006. After underwriting discounts of approximately $1.3 million, aggregate net proceeds received by the Company on August 1, 2006 were $17.2 million of which $17.0 million were used to repay a portion of our outstanding debt.

Stock Split

On June 5, 2006, our board of directors and our stockholders approved a 662.07889-for-1 stock split of our common stock and approved increasing the number of shares of common stock that the Company is authorized to issue to 200.0 million.

After the stock split, effective June 6, 2006, each holder of record held 662.07889 shares of common stock for every 1 share held immediately prior to the effective date. As a result of the stock split, the board of directors also exercised its discretion under the anti-dilution provisions of the 2004 Plan to adjust the number of shares underlying stock options and the related exercise prices to reflect the change in the per share value and outstanding shares on the date of the stock split. The effect of fractional shares is not material.

Following the effective date of the stock split, the par value of the common stock remained at $0.01 per share. As a result, we increased the common stock in our consolidated balance sheets and statements of shareholders’ equity included herein on a retroactive basis for all of our Company’s periods presented, with a corresponding decrease to additional paid-in capital. All share and per share amounts and related disclosures have also been retroactively adjusted for all of our Company’s periods presented to reflect the 662.07889-for-1 stock split.

Selected Financial Data

In the following table, we show financial data derived from our unaudited statements of operations as a percentage of total revenues for the periods indicated.


	3 Months Ended						6 Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		63.6			56.7			64.7			59.6

Gross margin		36.4			43.3			35.3			40.4

Expenses:


	3 Months Ended						6 Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Stock compensation related to dividends paid (includes expenses related to cost of sales and selling, general, and administrative expense)		—			—			—			13.1
Selling, general and administrative		27.2			21.8			27.5			22.3

Income from operations		9.2	%		21.5	%		7.8	%		5.0	%
Interest expense, net		3.6			6.7			3.9			8.6
Other expense (income), net		0.1			(0.3	)		0.2			(0.4	)

Income (loss) before income tax		5.5	%		15.1	%		3.7	%		(3.2	%)
Income tax expense (benefit)		2.0			5.9			1.3			(1.2	)

Net income (loss)		3.5	%		9.2	%		2.4	%		(2.0	%)

Overview

During the first half of 2007, we continued to execute on our strategy of gaining market share and controlling costs during the current housing downturn. The industry experienced a decline in housing permits in Florida of approximately 49% in the first half of 2007 while our revenues declined 25.7%, as compared to the first half of 2006. In addition, gross margin percentage was 35.3% in the first half of 2007, compared to 40.4% in the first half of 2006. The decline was primarily as a result of the significant slowdown in Florida new home construction and rising costs of aluminum. Selling, general and administrative expenses for the first half of 2007 decreased by $3.7 million, or 8.1% from the first half of 2006, primarily driven by lower distribution costs.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND JULY 1, 2006

Net sales

Net sales decreased for the three months ended June 30, 2007, compared to the same period in 2006. Net sales for the three months ended June 30, 2007 were $79.7 million, compared with net sales of $108.7 million for the three months ended July 1, 2006, representing a decrease of 26.7%. The following table shows net sales classified by major product category (in millions):


	3 Months Ended
	June 30,					July 1,
(dollars in millions)	2007		%			2006		%
Product category:
WinGuard Windows and Doors	$	54.9		68.9	%	$	71.6		65.9	%
Other Window and Door Products		24.8		31.1			37.1		34.1

Total revenues	$	79.7		100.0	%	$	108.7		100.0	%

Net sales of WinGuard branded products was $54.9 million for the three months ended June 30, 2007, a decrease of $16.7 million, or 23.3%, from $71.6 million in net sales for the three months ended July 1, 2006. The decrease was mainly due to the decline in new housing. Demand for WinGuard branded products is driven by, among other things, increased enforcement of strict building codes mandating the use of impact-resistant products, increased consumer and homebuilder awareness of the advantages provided by impact-resistant windows and doors over “active” forms of hurricane protection, and our successful marketing efforts.

Net sales of Other Window and Door Products was $24.8 million for the three months ended June 30, 2007, a decrease of $12.3 million, or 33.2%, from $37.1 million in net sales for the three months ended July 1, 2006. The decrease was mainly due to the decline in new housing. New housing demand has traditionally impacted sales of our Other Window and Door Products more than our WinGuard Window and Door Products.

Gross margin

Gross margin was $29.0 million for the three months ended June 30, 2007, a decrease of $18.1 million, or 38.4%, from $47.1 million for the three months ended July 1, 2006. The decrease is mainly due to margin loss associated with lower sales volumes and the impact of higher costs of aluminum offset in part by a higher mix of our WinGuard branded products, which carry a higher margin than our Other Window and Door Products. Our WinGuard branded products increased as a percentage of our total net sales to 68.9%, compared to 65.9% in the three months ended July 1, 2006. The gross margin percentage was 36.4% for the three months ended June 30, 2007 compared to 43.3% for the three months ended July 1, 2006.

Selling, general, and administrative expenses

Selling, general, and administrative expenses were $21.7 million for the three months ended June 30, 2007, a decrease of $2.1 million, from $23.8 million for the three months ended July 1, 2006. This decrease was mainly due to a decrease in distribution costs of $1.4 million as a result of lower volumes, $1.0 million related to the discontinuance of management fees paid to our majority shareholder upon completion of our IPO, and lower bad debt expense of $0.5 million as a result of the improved aging profile of our accounts receivable. This was partially offset by the $0.8 million impairment charge related to the sale of our Lexington facility. The second quarter of 2007 also included $0.5 million of stock compensation expense related to our adoption of SFAS No. 123R. As a percentage of sales, selling, general and administrative expenses increased during the three months ended June 30, 2007 to 27.2% compared to 21.8% for the three months ended July 1, 2006, mainly due to the decrease in volume.

Interest expense, net

Interest expense, net was $2.8 million in the three months ended June 30, 2007, a decrease of $4.5 million from $7.3 million for the three months ended July 1, 2006. The decrease was due to a lower average debt level for the three months ended June 30, 2007 as compared to the three months ended July 1, 2006.

Income tax expense

Our effective tax rate was 36.8% as of June 30, 2007 compared to 38.7% as of July 1, 2006. The decrease in our effective tax rate was due to an increase in the amount of manufacturing deductions related to the American Jobs Creation Act of 2004 expected to be taken in 2007.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND JULY 1, 2006

Net sales

Net sales decreased for the six months ended June 30, 2007, compared to the same period in 2006. Net sales for the six months ended June 30, 2007 were $152.4 million, compared with net sales of $205.0 million for the six months ended July 1, 2006, representing a decrease of 25.7%. The following table shows net sales classified by major product category (in millions):


	6 Months Ended
	June 30,					July 1,
(dollars in millions)	2007		%			2006		%
Product category:
WinGuard Windows and Doors	$	103.0		67.6	%	$	131.8		64.3	%
Other Window and Door Products		49.4		32.4			73.2		35.7

Total revenues	$	152.4		100.0	%	$	205.0		100.0	%

Net sales of WinGuard branded products was $103.0 million for the six months ended June 30, 2007, a decrease of $28.8 million, or 21.9%, from $131.8 million in net sales for the six months ended July 1, 2006. The decrease was mainly due to the decline in new housing. Demand for WinGuard branded products is driven by, among other things, increased enforcement of strict building codes mandating the use of impact-resistant products, increased consumer and homebuilder awareness of the advantages provided by impact-resistant windows and doors over “active” forms of hurricane protection, and our successful marketing efforts.

Net sales of Other Window and Door Products were $49.4 million for the six months ended June 30, 2007, a decrease of $23.8 million, or 32.5%, from $73.2 million in net sales for the six months ended July 1, 2006. The decrease was mainly due to the decline in new housing. New housing demand has traditionally impacted sales of our Other Window and Door Products more than our WinGuard Window and Door Products.

Gross margin

Gross margin was $53.8 million for the six months ended June 30, 2007, a decrease of $29.0 million, or 35.0%, from $82.8 million for the six months ended July 1, 2006. The decrease is mainly due to margin loss associated with lower sales volumes and the impact of higher costs of aluminum offset in part by a higher mix of our WinGuard branded products, which carry a higher margin than our Other Window and Door Products. Our WinGuard branded products increased as a percentage of our total net sales to 67.6% in the six months ended June 30, 2007, compared to 64.3% in the six months ended July 1, 2006. The gross margin percentage was 35.3% for the six months ended June 30, 2007 compared to 40.4% for the six months ended July 1, 2006.

Selling, general, and administrative expenses

Selling, general, and administrative expenses were $42.0 million for the six months ended June 30, 2007, a decrease of $3.7 million, from $45.7 million for the six months ended July 1, 2006. This decrease was mainly due to a decrease in distribution costs of $3.0 million as a result of lower volumes, $1.4 million related to the discontinuance of management fees paid to our majority shareholder upon completion of our IPO, and lower advertising expense of $0.7 million. This was partially offset by a $0.8 million impairment charge related to the sale of our Lexington facility. The first six months of 2007 also included $0.8 million of stock compensation expense related to our adoption of SFAS No. 123R. As a percentage of sales, selling, general and administrative expenses increased during the first six months ended June 30, 2007 to 27.5% compared to 22.3% for the six months ended July 1, 2006 mainly due to the decrease in volume.

Stock compensation expense

Stock compensation expense of $26.9 million was recorded in the six months ended July 1, 2006, relating to payments to option holders in lieu of adjusting exercise prices in connection with the payment of a dividend to shareholders in February 2006.

Interest expense, net

Interest expense, net was $5.9 million for the six months ended June 30, 2007, a decrease of $11.7 million from $17.6 million for the six months ended July 1, 2006. Interest expense includes non-recurring charges of $4.6 million in the first quarter of 2006 related to the write-off of unamortized debt issuance costs in connection with our debt refinancing on February 14, 2006, as described under the Liquidity and Capital Resources section of this report. In addition, there was a lower average debt level for the six months ended June 30, 2007 as compared to the six months ended July 1, 2006.

Income tax expense

Liquidity and Capital Resources

Our principal source of liquidity is cash flow generated by operations, supplemented by borrowings under our credit facilities. This cash generating capability provides us with financial flexibility in meeting operating and investing needs. In addition, we completed

our IPO in June 2006 and used the net proceeds, together with cash on hand, to repay a portion of our long term debt. Our primary capital requirements are to fund working capital needs, meet required debt payments, including debt service payments on our credit facilities, and fund capital expenditures.

Consolidated Cash Flows

Operating activities. Cash flows provided by operating activities was $10.5 million for the six months ended June 30, 2007, compared to cash flows provided by operating activities of $6.9 million for the six months ended July 1, 2006. The improvement in cash provided from operating activities for the six months ended June 30, 2007 is the result of the absence of non-recurring charges from 2006, an increase in profitability, and a change in operating assets and liabilities. Days sales outstanding improved to 35 at the end of the second quarter of 2007 from 46 as of December 30, 2006.

Investing activities. Cash flows used in investing activities was $6.2 million for the six months ended June 30, 2007, compared to $18.5 million for the six months ended July 1, 2006. The decrease in cash flows used in investing activities was mainly due to the completion of our manufacturing facility in Salisbury, North Carolina in 2006.

Financing activities. Cash flows used in financing activities was $22.4 million for the six months ended June 30, 2007, compared to cash flows provided by financing activities of $48.0 million for the six months ended July 1, 2006. Significant financing transactions during 2007 and 2006 included the following:

	•		In February 2006, we entered into a second amended and restated senior secured credit facility and a second lien term loan, and received $320.0 million proceeds. The proceeds were used to refinance our Company’s existing debt facility, pay a cash dividend to stockholders of $83.5 million, make a cash compensatory payment of approximately $26.9 million (including applicable payroll taxes of $0.5 million) to stock option holders in lieu of adjusting exercise prices in connection with such dividend, and pay certain financing costs related to the amendment.

	•		In February 2007, we prepaid $20.0 million of our long-term debt with cash generated from operations.

	•		In June 2007, we prepaid an additional $5.0 million of our long-term debt with cash generated from operations.

Subsequent to the end of the quarter, we prepaid an additional $4.5 million of our long-term debt with cash generated from operations.

Capital Resources. On February 14, 2006, our Company entered into a second amended and restated $235 million senior secured credit facility and a $115 million second lien term loan due August 14, 2012, with a syndicate of banks. The senior secured credit facility is composed of a $30 million revolving credit facility and, initially, a $205 million first lien term loan.

The first lien term loan bears interest, at our option, at a rate equal to an adjusted LIBOR rate plus 3.0% per annum or a base rate plus 2.0% per annum. The loans under the revolving credit facility bear interest initially, at our option (provided, that all swingline loans shall be base rate loans), at a rate equal to an adjusted LIBOR rate plus 2.75% per annum or a base rate plus 1.75% per annum, and the margins above LIBOR and base rate may decline to 2.00% for LIBOR loans and 1.00% for base rate loans if certain leverage ratios are met. A commitment fee equal to 0.50% per annum accrues on the average daily unused amount of the commitment of each lender under the revolving credit facility and such fee is payable quarterly in arrears. We are also required to pay certain other fees with respect to the senior secured credit facility including (i) letter of credit fees on the aggregate undrawn amount of outstanding letters of credit plus the aggregate principal amount of all letter of credit reimbursement obligations, (ii) a fronting fee to the letter of credit issuing bank and (iii) administrative fees.

The first lien term loan is secured by a perfected first priority pledge of all of the equity interests of our subsidiary and perfected first priority security interests in and mortgages on substantially all of our tangible and intangible assets and those of the guarantors, except, in the case of the stock of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences, and subject to such other exceptions as are agreed. The senior secured credit facility contains a number of covenants that, among other things, restrict our ability and the ability of our subsidiaries to (i) dispose of assets; (ii) change our business; (iii) engage in mergers or consolidations; (iv) make certain acquisitions; (v) pay dividends or repurchase or redeem stock; (vi) incur indebtedness or guarantee obligations and issue preferred and other disqualified stock; (vii) make investments and loans; (viii) incur liens; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) issue stock or stock options of our subsidiary; (xii) amend or prepay subordinated indebtedness and loans under the second lien secured credit facility; (xiii) modify or waive material documents; or (xiv) change our fiscal year. In addition, under the first lien secured credit facility, we are required to comply with specified financial ratios and tests, including a minimum interest coverage ratio, a maximum leverage ratio, and maximum capital expenditures.

Borrowings under the new senior secured credit facility and second lien secured credit facility on February 14, 2006, were used to refinance our Company’s existing debt facility, pay a cash dividend to stockholders of $83.5 million, and make a cash compensatory payment of approximately $26.9 million (including applicable payroll taxes of $0.5 million) to stock option holders in lieu of adjusting exercise prices in connection with such dividend. In connection with the refinancing, our Company incurred fees and expenses aggregating $4.5 million that are included as a component of other assets, net and are being amortized over the terms of the new senior secured credit facilities. In the six months of 2006, the total cash payment to option holders and unamortized deferred financing costs of $4.6 million related to the prior credit facility were expensed and recorded as stock compensation expense and a component of interest expense, respectively.

Based on our ability to generate cash flows from operations and our borrowing capacity under the revolver under the senior secured credit facility, we believe we will have sufficient capital to meet our short-term and long-term needs, including our capital expenditures and our debt obligations in 2007.

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. For the six months ended June 30, 2007, capital expenditures were $6.2 million, compared to $18.6 million for the six months ended July 1, 2006. We anticipate that cash flows from operations and liquidity from the revolving credit facility will be sufficient to execute our business plans.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations. Management has discussed the development and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We have identified the following accounting policies that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Revenue recognition

We recognize sales when all of the following criteria have been met: a valid customer order with a fixed price has been received; the product has been delivered and accepted by the customer; and collectibility is reasonably assured. All sales recognized are net of allowances for discounts and estimated returns, which are estimated using historical experience.

Allowance for doubtful accounts and related reserves

We extend credit to dealers and distributors, generally on a non-collateralized basis. Accounts receivable are recorded at their gross receivable amount, reduced by an allowance for doubtful accounts that results in the receivables being recorded at estimated net realizable value. The allowance for doubtful accounts is based on management’s assessment of the amount which may become uncollectible in the future and is determined based on our write-off history, aging of receivables, specific identification of uncollectible accounts, and consideration of prevailing economic and industry conditions. Uncollectible accounts are charged off after repeated attempts to collect from the customer have been unsuccessful. The difference between actual write-offs and estimated reserves has not been material.

Long-lived assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated, based on management estimates, in accordance with Statements of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Estimates made by management are subject to change and include such things as future growth assumptions, operating and capital

expenditure requirements, asset useful lives and other factors, changes in which could materially impact the results of the impairment test. If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell, and depreciation is no longer recorded.

Goodwill and Other Intangibles

The impairment evaluation for goodwill is conducted at the end of each fiscal year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed using a two-step process. In the first step, which is used to screen for potential impairment, the fair value of the reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is determined using the discounted future cash flows method, based on management estimates. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step, which determines the amount of the goodwill impairment to be recorded, must be completed. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets). The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference. Estimation of fair value is dependent on a number of factors, including, but not limited to, interest rates, future growth assumptions, operations and capital expenditure requirements and other factors which are subject to change and could materially impact the results of the impairment tests. Unless our actual results differ significantly from those in our estimation of fair value, it would not result in an impairment of goodwill.

The impairment evaluation of the carrying amount of intangible assets with indefinite lives is also conducted annually, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows. The assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current Company operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.

Warranties

We have warranty obligations with respect to most of our manufactured products. Obligations vary by product components. The reserve for warranties is based on our assessment of the costs that will have to be incurred to satisfy warranty obligations on recorded net sales. The reserve is determined after assessing our warranty history and estimating our future warranty obligations.

Derivative instruments

We account for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). SFAS No. 133 requires us to recognize all of our derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.

All derivative instruments currently utilized by us are designated and accounted for as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk). SFAS No. 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings.

Stock compensation

for our Company’s equity instruments. Under SFAS No. 123(R), we are required to record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. We have adopted SFAS No. 123(R) on a prospective basis; accordingly, our financial statements for periods prior to January 1, 2006, do not include compensation cost calculated under the fair value method. We recorded compensation expense for stock based awards of approximately $0.5 million and $0 during the second quarters of 2007 and 2006, respectively. For the six months ended June 30, 2007, we recorded expense for stock based awards of approximately $0.8 million and $0. As of June 30, 2007, there was $1.0 million and $1.0 million of total unrecognized compensation cost related to non-vested stock option agreements and non-vested restricted share awards, respectively. These costs are expected to be recognized in earnings on a straight line basis over the weighted average remaining vesting period of 2.8 years.

Stock options granted prior to our Company’s initial public offering were valued using the minimum value method in the pro-forma disclosures required by SFAS No. 123. The minimum value method excludes volatility in the calculation of fair value of stock based compensation. In accordance with SFAS No. 123(R), options that were valued using the minimum value method, for purposes of pro forma disclosure under SFAS No. 123, were transitioned to SFAS No. 123(R) using the prospective method. As a result, these options will continue to be accounted for under the same accounting principles (recognition and measurement) originally applied to those awards in the income statement, which for our Company was APB No. 25. Accordingly, the adoption of SFAS No. 123(R) does not result in any compensation cost being recognized for these options. Additionally, pro forma information previously required under SFAS No. 123 and SFAS No. 148 will no longer be presented for these options.

Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, on January 1, 2007. We did not recognize any material liability for unrecognized tax benefits in conjunction with our FIN 48 implementation. However, should we accrue for such liabilities when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding at June 30, 2007, a 25 basis point increase in interest rates would result in approximately $0.4 million of additional interest costs annually.

We utilize derivative financial instruments to hedge price movements in our aluminum materials. As of June 30, 2007, we covered approximately 10% of our anticipated needs for the next twelve months. Short-term changes in the cost of aluminum, which can be significant, are sometimes passed on to our customers through price increases, however, there can be no guarantee that we will be able to continue to pass on such price increases to our customers or that price increases will not negatively impact sales volume, thereby adversely impacting operating margins. For the six months ended June 30, 2007, a 10% increase in the cost of aluminum would increase cost of sales by $1.2 million, net of the change in the fair value of aluminum hedges.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

A control system, however, no matter how well conceived and operated, can at best provide reasonable, not absolute, assurance that the objectives of the control system are met. Additionally, a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our company have been detected, and due to these inherent limitations, misstatements due to error or fraud may occur and not be detected.

Our chief executive officer and chief financial officer, with the assistance of management, evaluated the design, operation and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective for the purposes of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect to claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our financial position or results of operations.

Although our business and facilities are subject to federal, state and local environmental regulation, environmental regulation does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and regulations. As owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances or the discovery of previously unknown environmental conditions.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES

Unregistered Sales of Equity Securities

During the six months ended June 30, 2007, we issued an aggregate of 66,999 shares of our common stock to certain officers, employees and former employees upon the exercise of options associated with the Rollover Stock Option Agreement included as Exhibit 10.18 to Amendment No. 1 to the Registration Statement of the Company on Form S-1, filed with the Securities and Exchange Commission on April 21, 2006, Registration No. 333-132365. We received aggregate proceeds of $0.5 million as a result of the exercise of these options. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 in reliance on, among other things, representations and warranties obtained from the holders of such options.

During the six months ended June 30, 2007, we issued an aggregate of 363,191 shares of our common stock to certain employees and former employees upon the exercise of options awarded under our 2004 Stock Incentive Plan. We received aggregate proceeds of $0.6 million as a result of the exercise of these options. The Company relied on the exemption from the registration requirements of the Securities Act of 1933 in reliance on Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701.

All of the above option grants were made prior to our initial public offering. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering.

Use of Proceeds

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual meeting of PGT, Inc. shareholders held on May 22, 2007, the shareholders elected the directors nominated in the PGT, Inc. Proxy Statement, dated April 20, 2007, with the following affirmative votes and votes withheld:


Director	Affirmative Votes	Votes Withheld
Alexander R. Castaldi	20,011,764	3,869,811
M. Joseph McHugh	23,823,095	58,480
Randy L. White	20,421,321	3,460,254

The shareholders also approved the following proposal:

Proposal

Affirmative Votes

Votes Against

Abstentions

To ratify the appointment of Ernst & Young, LLP as the Company’s independent registered public accounting firm for the 2007 fiscal year

23,811,324

32,866

37,385

ITEM 5. OTHER INFORMATION

None.

ITEM 6 — EXHIBITS

The following items are attached or incorporated herein by reference:


31.1*		Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of chief executive officer 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.


*		Filed herewith.

**		Furnished herewith

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.


	PGT, INC. (Registrant)
Date: August 7, 2007	/s/ Rodney Hershberger
	Rodney Hershberger
	President and Chief Executive Officer


Date: August 7, 2007	/s/ Jeffrey T. Jackson
	Jeffrey T. Jackson
	Chief Financial Officer and Treasurer

EXHIBIT INDEX


31.1*		Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of chief executive officer 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.


*		Filed herewith.

**		Furnished herewith.

PGT Innovations, Inc. - Quarter Report: 2007 June (Form 10-Q)

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