PGT Innovations, Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 28, 2019

OR

For the transition period from                to            

Commission File Number: 001-37971

PGT Innovations, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(941) 480-1600

Former name, former address and former fiscal year, if changed since last report: PGT, Inc.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act     Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2019 was approximately $947,888,919 based on the closing price per share on that date of $16.72 as reported on the New York Stock Exchange.

The number of shares of the registrant’s common stock, par value $0.01, outstanding as of February 6, 2020, was 58,579,714.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The Company’s Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

PGT Innovations, Inc.

Table of Contents to Form 10-K

- 2 -

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

From time to time, we have made or will make forward-looking statements within the meaning of Section 21E of the Exchange Act. For those statements we claim the protection of the safe harbor provisions for forward-looking statements contained in such section. Forward-looking statements are not a statement of historical facts but are based on management’s current beliefs, assumptions and expectations regarding our future performance, taking into account the information currently available to management. Forward-looking statements usually can be identified by the use of words such as “goal”, “objective”, “plan”, “expect”, “anticipate”, “intend”, “project”, “believe”, “estimate”, “may”, “could”, or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, results, circumstances or aspirations. Our disclosures in this Annual Report on Form 10-K (this “Report”) contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed or furnished with the Securities and Exchange Commission and in oral presentations. Forward-looking statements are based on assumptions and by their nature are subject to risks and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those described in our forward-looking statements include, but are not limited to:

Statements in this Report that are forward-looking statements include, without limitation, our expectations regarding: (1) demand for our products going forward, including the demand for our impact-resistant products and the products of Western Window Systems; (2) our market position and the positioning of our brands;  (3) our product innovation; (4) our ability to adjust our operations, sales and other business activities and functions to respond to changes in product mix; (5) our ability to continue to achieve manufacturing and operational efficiencies, including with respect to labor costs; (6) our manufacturing capacity; (7) the economy, and single family housing starts in particular, in the state of Florida and in the states in the western United States, including California;  (8) materials costs, including with respect to aluminum; (9) the Company’s ability to continue to grow its sales and earnings going forward; (9) our ability to position ourselves as a national leader in the premium window and door market, and our performance in that market; (10) our ability to identify and complete operational and strategic initiatives in the future, and the results of any such initiatives; and (11) our forecasted financial and operational performance for our 2020 fiscal year. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Except as required by law, we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances after the date of this Report.

- 3 -

PART I

Our Company

PGT Innovations, Inc. (“we,” “us,” “our,” “PGTI” or the “Company”) manufactures and supplies premium windows and doors. Its highly-engineered and technically-advanced products can withstand some of the toughest weather conditions on earth and unify indoor/outdoor living spaces. We create value through deep customer relationships, understanding the unstated needs of the markets we serve and a drive to develop category-defining products. We believe we are also the nation’s largest manufacturer of impact-resistant windows and doors, hold the leadership position in our primary markets, and we are part of the S&P SmallCap 400 Index. We manufacture complete lines of high-end, luxury, premium and mass-custom fully customizable aluminum and vinyl windows and doors and porch enclosure products, targeting both the residential repair and remodeling and new construction end markets. We market our impact-resistant products under four recognized brands: PGT® Custom Windows & Doors, CGI® Windows and Doors, WinDoor®, and, following our acquisition of NewSouth Window Solutions on February 1, 2020, the NewSouth brands. We believe all of these brands are positively associated with service, performance, quality, durability and energy efficiency. We also market a line of window and door products designed to unify indoor/outdoor living spaces under the Western Window Systems® brands, which we believe are associated with innovation, quality, durability and energy efficiency in the indoor/outdoor living space markets. Many of these brands have been added to our portfolio through the acquisitions described below.

Our impact-resistant products combine heavy-duty aluminum or vinyl frames with laminated glass to ensure structural integrity, which provides protection from wind-driven projectiles of all sizes and other debris during a storm. Our impact-resistant products substantially reduce the likelihood of penetration by impacting projectiles, protecting people and property, while providing expansive, unblocked exterior views that other forms of protection, such as shutters or wood coverings, do not provide. Our impact-resistant products also offer many other benefits, including: (1) abatement of sound to substantially decrease outside noise, including during hurricanes; (2) protection against the damaging effects of ultra-violet light; (3) reduction of energy loss due to changing external temperatures; and (4) energy efficiency that can significantly reduce cooling and heating costs, as evidenced by the energy ratings our products have received. These impact-resistant products satisfy the nation’s most 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. We also manufacture vinyl porch and patio enclosure products that are designed to allow air flow while protecting against inclement weather, making outdoor spaces more inviting.

The addition of Western Window Systems (“WWS”) to our family of brands expanded our portfolio of offerings and our geographical footprint and added award-winning and innovative products that combine performance and quality with clean, functional designs. Its products are designed for strength, easy integration into a variety of spaces, smooth operation and are tested for durability.

The acquisition of NewSouth is expected to support our diversification into growing segments in the window and door industry, by enabling us to enter the direct-to-consumer channel, where NewSouth is a market leader in Florida. NewSouth's direct-to-consumer model is supported by its showrooms and in-home sales. With the addition of NewSouth, we expect to continue our strategy to grow in geographic areas outside of our core markets, with showroom openings planned for northern Florida and coastal states in the South.

- 4 -

Our current market share in Florida, and which is the largest impact-resistant window and door market in the U.S., is greater than that of any competitor. We believe our leading market position is derived from our broad and high-quality product offerings, continuous innovation, well-recognized brands, strong customer relationships, technical capabilities, customer care and extensive knowledge of and involvement in developments regarding hurricane-protection building codes and testing protocols.

With approximately 3,000 employees (as of December 28, 2019) at our various manufacturing facilities located in North Venice, Orlando and Hialeah, Florida, and Phoenix, Arizona, our vertically integrated manufacturing capabilities include in-house glass cutting, tempering, laminating and insulating capabilities, which provide us with a consistent source of specialized glass, shorter lead times, lower costs relative to third-party sourcing and an overall more efficient production process. Additionally, our manufacturing process relies on just-in-time delivery of raw materials and components as well as synchronous flow to promote labor efficiency and throughput, allowing us to more consistently fulfill orders on-time for our valued customers.

The geographic regions in which we currently conduct business include the Southeastern U.S., Western U.S., Gulf Coast, Coastal mid-Atlantic, the Caribbean, Central America and Canada. We distribute our products through multiple channels, including approximately 1,700 independently-owned dealers and distributors, national building supply distributors, the in-home sales/custom order divisions of major U.S. home building and improvement supply retailers and, with our acquisition of NewSouth, the direct-to-consumer channel. We believe this broad distribution network provides us with the flexibility to meet demand as it shifts between the repair and remodel and residential new construction end markets.

History

PGT Innovations, Inc. is a Delaware corporation. We were formed on December 16, 2003 as PGT, Inc. and operate our business through our various subsidiaries, PGT Industries, Inc., a Florida corporation, which was founded in 1980 as Vinyl Tech, Inc. On June 27, 2006, we became a publicly listed company on the NASDAQ Global Market (NASDAQ) under the symbol “PGTI”. We changed our name to PGT Innovations, Inc. which we announced on December 14, 2016. Effective on December 28, 2016, the listing of the Company’s common stock was transferred to the New York Stock Exchange (NYSE) and our common stock began trading on the NYSE under our existing ticker symbol of “PGTI”.

Industry Segments

We operate as two segments based on geography: the Southeast segment, and the Western segment. See Note 20 to the Financial Statements in Item 8 for more information.

Our Products

PGT Custom Windows & Doors

PGT’s products carry the PGT/Visibly Better® trade mark, and are designed to be ideal for new construction and replacement projects serving the residential, commercial, high-rise and institutional markets. PGT's product line includes a variety of aluminum and vinyl windows and doors.

WinGuard. WinGuard is an impact-resistant product line that combines heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and wind-borne debris and satisfies increasingly stringent building codes. Our marketing and sales of the WinGuard product line is primarily targeted to hurricane-prone coastal states in the U.S., as well as the Caribbean and Central America. Combining the impact resistance of WinGuard with insulating glass creates energy efficient windows that can significantly reduce cooling and heating costs. Our WinGuard Vinyl line of windows and doors is designed to offer some of the highest design pressures available on impact-resistant windows and doors, in a modern profile, with larger sizes that satisfy the most stringent hurricane codes in the country. It protects against flying debris, intruders, outside noise and UV rays.

EnergyVue. EnergyVue is our non-impact vinyl window featuring energy-efficient insulating glass and multi-chambered frames that meet or exceed ENERGY STAR® standards in all climate zones to help consumers save on energy costs. Its new design has a refined modern profile and robust construction and is offered in larger sizes and higher design pressures, multiple frame colors, and a variety of hardware finishes, glass tints, grid styles and patterns.

Aluminum. We offer a complete line of fully customizable, non-impact-resistant aluminum frame windows and doors. These products primarily target regions with warmer climates, where aluminum is often preferred due to its ability to withstand higher structural loads. Adding insulating glass creates energy-efficient windows that can significantly reduce cooling and heating costs.

Eze-Breeze. Eze-Breeze non-glass vertical and horizontal sliding panels for porch enclosures are vinyl-glazed, aluminum-framed products used for enclosing screened-in porches that provide protection from inclement weather.

- 5 -

CGI

CGI’s products carry the CGI® brand and carry the trademarked product names of Estate Collection, Sentinel by CGI, Estate Entrances, Commercial Series, Targa by CGI, and Sparta. Also, under CGI, CGIC sells the Company’s commercial storefront system.

Estate Collection. Our Estate Collection of windows and doors is CGI’s premium aluminum impact-resistant product line. These windows and doors can be found in high-end homes, resorts and hotels, and in schools and office buildings. Our Estate Collection combines protection against hurricane force damage with architectural-grade quality, handcrafted details and modern engineering. These windows and doors protect and insulate against hurricane winds and wind-driven debris, outside noise, and offer UV protection. Estate’s aluminum frames are thicker than many of our competitors’ frames, making it a preferable choice for consumers in coastal areas prone to hurricanes. In January 2019, consistent with management’s plan for this product line, we began the process of making our Estate Collection part of our WinDoor product offerings, which we believe will align the Estate Collection’s status as a high-end, luxury product line, with WinDoor’s focus on the luxury market. We anticipate completion of this repositioning of the Estate Collection to WinDoor in the first half of 2020.

Sentinel. Sentinel is a complete line of aluminum impact-resistant windows and doors from CGI that provides quality craftsmanship, energy efficiency and durability at a lower price point than our Estate Collection. Sentinel windows and doors are designed and manufactured with the objectives of enhancing home aesthetics, while delivering protection from hurricane winds and wind-borne debris. Sentinel is custom manufactured to exact sizes within our wide range of design parameters, therefore, reducing on-site construction costs. In addition, Sentinel’s frame depth is designed for both new construction and replacement applications, resulting in faster, less intrusive installations.

Targa. Targa is CGI’s line of vinyl, energy-efficient, impact-resistant windows designed specifically to exceed the Florida impact codes, which are the most stringent impact standards in the U.S. Targa windows are designed with the objective of enhancing the aesthetics of a home, are relatively low maintenance, with long-term durability, and environmental compatibility.

Sparta. Sparta is CGI’s line of aluminum impact-resistant windows and doors that are offered at relatively lower price points, and that meet Florida’s impact codes.

Commercial Storefront System. Our Commercial Storefront window system and entry doors are engineered to provide a flexible yet economical solution for a variety of applications. Our system is designed with the goal of providing easy fabrication and assembly, while also reducing installation time and challenges.

WinDoor

WinDoor’s products carry the WinDoor® brand and carry various product names, including its 3000 and 4000 Series aluminum windows, its 6000, 7000 and 8000 Series aluminum sliding glass doors, and its 9000 Series thermally broken windows and doors.

Aluminum Doors and Windows. WinDoor produces a wide array of high-end, luxury aluminum doors and windows, including impact and non-impact sliding glass doors and terrace doors, fixed picture windows, single hung windows, and horizontal rolling windows. All of WinDoor’s aluminum windows are available in impact and non-impact versions and meet or exceed ENERGY STAR® standards in all climate zones.

Thermally Broken Doors and Windows. WinDoor produces a variety of aluminum thermally broken doors and windows. WinDoor’s thermally broken products provide the strength of aluminum with the energy ratings usually seen in only vinyl products. All of WinDoor’s thermally broken products are available in multiple shapes and sizes, have earned high performance ratings on impact and non-impact certifications, and meet or exceed ENERGY STAR® standards in all climate zones.

Western Window Systems

WWS’s products are non-impact products, and include both customized products for its custom sales channel, and standard products for its volume sales channel, and carry the Western Windows Systems® brand under three product categories of the Classic Line, Performance Line, and the Simulated Steel Line, which is a thermally-broken product

Classic Line. WWS’s Classic Line is a portfolio of high-quality, disappearing glass walls and windows that combine exceptional performance with clean design. The products of the Classic Line include fixed and operating windows, as well as well as sliding, folding and hinged doors.

Performance Line. The Performance Line by WWS is a family of moving glass walls and windows engineered to satisfy its customers’ energy and structural requirements, while promoting a contemporary design.

- 6 -

Simulated Steel Line. The Simulated Steel Line by WWS is a portfolio of thermally-broken, aluminum moving glass walls and windows that look like steel but are far more affordable. This portfolio of products embodies WWS’s nearly 60 years of advancements in door and window design, and we believe exhibits luxury and refinement. The Simulated Steel Line has clean, narrow profiles which gives the glass components of the products a prominent positioning, while maximizing natural light.

NewSouth

NewSouth Window Solutions manufactures replacement windows and doors which are made to better enhance the energy efficiency of customers’ homes and combine cutting-edge technologies and a dedication to quality installation.

Windows and Doors. NewSouth manufactures a wide array of single-hung, double-hung, sliding, picture and visually appealing shaped windows which are durable and energy-efficient. NewSouth also manufactures durable and attractive patio and entry doors which we believe enhance safety and improve the appearance of entry spaces.

Installation. NewSouth provides quality installation of its windows and doors through an experienced group of installation services companies who are subcontracted to install its products.

Sales and Marketing

Our sales strategy primarily focuses on attracting and retaining distributors and dealers with an expectation of consistently providing exceptional customer service, leading product designs and quality, and competitive pricing all using our advanced knowledge of building code requirements and technical expertise. We also market our products to national and regional homebuilders, who then purchase our products from dealers and distributors. With our acquisition of NewSouth Window Solutions in February 2020, our sales strategy also focuses on direct-to-consumer sales for the types of jobs and customers that our dealers historically have not targeted or serviced.

Our marketing strategy is designed to reinforce the quality of our products and focuses on both coastal and inland markets. We support our customers through print and web-based advertising, consumer, dealer, and builder promotions, and selling and collateral materials. We also work with our dealers and distributors to educate architects, building officials, consumers and homebuilders on the advantages of using impact-resistant and energy-efficient products. We market our products based on our expectations of quality, building code compliance, outstanding service, shorter lead times, and on-time delivery using our fleet of trucks and trailers.

Our Customers

We have a highly diversified base of approximately 1,700 window distributors, building supply distributors, window replacement dealers and enclosure contractors. Our largest customer accounts for approximately 4% of net sales and our top ten customers account for approximately 22% of net sales. Our sales are driven by residential new construction and home repair and remodel end markets, which represented approximately 49% and 51% of our sales, respectively, during 2019. This compares to 41% and 59%, respectively, in 2018. The increase in the percentage of our sales made to the residential new construction market in 2019 is driven by the addition of the sales of WWS for the full year of 2019, almost all of which are made into the new construction end market.

Before the NewSouth Acquisition, we did not supply our products directly to homebuilders but believe demand for our products is also a function of our strong relationships with certain national homebuilders. With the acquisition of NewSouth, we sell direct to the customer.

Materials, Inventory and Supplier Relationships

Our primary manufacturing materials include aluminum and vinyl extrusions, glass, ionoplast, and polyvinyl butyral. Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. While most of our materials are typically available from other sources, transitioning to alternative sources would require us to complete testing and certifications related to impact-resistance and for the alternative source of supply to create the customized equipment and tooling necessary to provide the materials and components to us. Therefore, our goal is to develop and maintain lasting relationships with our material suppliers.

Aluminum and vinyl extrusions accounted for approximately 36% of our material purchases during 2019. Glass, which includes sheet glass and finished glass, which we sourced from two major national suppliers, represented approximately 35% of our material purchases during 2019. Polyvinyl butyral and ionoplast, which are both used as inner layer in laminated glass, accounted for approximately 5% of our material purchases during 2019. The remainder of our material purchases in 2019 are primarily composed of hardware.

Our inventory consists principally of raw materials purchased for the manufacture of our products and limited finished goods inventory as the majority of our products are custom, made-to-order products. Our inventory levels are more closely aligned with our

- 7 -

number of product offerings rather than our level of sales. We have maintained our inventory level to have (i) raw materials required to support new product launches; (ii) a sufficient level of safety stock on certain items to ensure an adequate supply of material in the event of a sudden increase in demand and given our short lead-times; and (iii) adequate lead times for raw materials purchased from overseas suppliers in bulk supply.

Backlog

Our backlog was $67.0 million as of December 28, 2019, and $63.7 million as of December 29, 2018. Our backlog consists of orders that we have received from customers that have not yet shipped, and we expect that a significant portion of our current backlog will be recognized as sales in the first quarter of 2020, due in part to our lead times which typically range from one to five weeks.

Intellectual Property

We own and have registered trademarks in the U.S. In addition, we own several patents and patent applications concerning various aspects of window assembly and related processes. We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks and patents. If we continue to renew our trademarks when necessary, the trademark protection provided by them is perpetual.

Manufacturing

Our manufacturing facilities are in Florida, where we produce customized impact-resistant and non-impact products, and in Arizona, where we produce customized non-impact products for the custom channel of our WWS brand, and standard products for its volume channel. The manufacturing process for our PGT Custom Windows and Doors products typically begins in our glass plant in North Venice, Florida, where we cut, temper, laminate, and insulate sheet glass to meet specific requirements of our customers’ orders, although our Hialeah (CGI), Orlando (WinDoor), and Tampa (NewSouth), Florida facilities and our Phoenix, Arizona (WWS) facility primarily source their glass needs from external suppliers.

Glass is transported to our window and door assembly lines in a make-to-order sequence where it is combined with an aluminum or vinyl frame. These frames are also fabricated to order. We start with a piece of extruded material which is cut and shaped into a frame that fits the customers’ specifications. Once complete, product is immediately staged for delivery and generally shipped on our trucking fleet or with contracted carriers within 48 hours of completion.

Competition

The window and door industry is highly fragmented, and the competitive landscape is based on geography. The competition falls into the following categories.

Local and Regional Window and Door Manufacturers: This group of competitors consists of numerous local job shops and small manufacturing facilities that tend to focus on selling products to local or regional dealers and wholesalers. Competitors in this group typically lack marketing support and the service levels and quality controls demanded by larger customers, as well as the ability to offer a full complement of products.

National Window and Door Manufacturers: This group of competitors tends to focus on selling branded products nationally to dealers and wholesalers and has multiple locations.

International Window and Door Manufacturers: This group of competitors consists of non-U.S. companies that have created entities and established manufacturing operations within Florida and have an increasing presence in the South Florida region as suppliers of windows and doors, primarily for high-rise buildings.

Active Protection: This group of competitors consists of manufacturers that produce shutters and plywood, both of which are used to actively protect openings. Our impact-resistant windows and doors represent passive protection, meaning, once installed, no activity is required to protect a home from storm related hazards.

The principal methods of competition in the window and door industry are the development of long-term relationships with window and door dealers and distributors, and the retention of customers by delivering a full range of high-quality products in a timely manner, while offering competitive pricing and flexibility in transaction processing. Trade professionals such as contractors, homebuilders, architects and engineers also engage in direct interaction with manufacturers and look to the manufacturer for training and education related to products and codes. We believe our leading position in the U.S. impact-resistant window and door market, and the award-winning designs and quality of our products, position us well to meet the needs of our customers.

Environmental Considerations

Although our business and facilities are subject to federal, state, and local environmental regulation, environmental regulation

- 8 -

does not have a material impact on our operations, and we believe that our facilities are in material compliance with such laws and regulations.

Employees

As of the end of 2019, we employed approximately 3,000 people, none of whom were represented by a collective bargaining unit. We believe we have good relations with our employees.

AVAILABLE INFORMATION

Our Internet address is www.pgtinnovations.com. Through our Internet website under “Financial Information” in the Investors section, we make available free of charge, as soon as reasonably practical after such information has been filed with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet website under “Corporate Governance” in the Investors section is our Code of Business Conduct and Ethics. We are not including this or any other information on our website as a part of, nor incorporating it by reference into this Form 10-K, or any of our other SEC filings. The SEC maintains an Internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.

Risks Related to our Business

We are subject to regional and national economic conditions.

The window and door industry is subject to many economic factors. Changes in macroeconomic conditions in our core markets and throughout the U.S. generally could negatively impact demand for our products as it has in the past, and macroeconomic forces, such as employment rates and the availability of credit could have an adverse effect on our sales and results of operations. In addition, the window and door industry is subject to the cyclical market pressures of the larger new construction and repair and remodeling markets. A decline in the economic environment or new home construction, as well as any other adverse changes in economic conditions, including demographic trends, employment levels, interest rates, and consumer confidence, could result in a decline in demand for, or adversely affect the pricing of, our products, which in turn could adversely affect our sales and results of operations.

Changes in weather patterns, including as a result of global climate change, could significantly affect our financial results or financial condition.

Weather patterns may affect our operating results and our ability to maintain our sales volume throughout the year. Because our dealers’ customers, and the homeowners and builders who are customers of NewSouth Window Solutions and Western Window Systems, depend on suitable weather to engage in new construction and repair and remodel projects, increased frequency or duration of extreme weather conditions could have a material adverse effect on our financial results or financial condition. For example, unseasonably cool weather or extraordinary amounts of rainfall may decrease construction activity, thereby decreasing our sales. Alternatively, extreme weather, such as hurricanes, has historically increased our brand’s visibility and customers’ demand for our impact-resistant products. Therefore, the lack of extreme weather conditions in a given year or over a period of time could result in a decrease of our sales and could have a material adverse effect on our financial results. Weather patterns are difficult to predict and may fluctuate as a result of climate change, and we cannot guarantee that extreme weather conditions will or will not occur. Also, we cannot predict the effects that global climate change may have on our business. In addition to changes in weather patterns, climate change could, for example, reduce the demand for construction, and increase the cost and reduce the availability of construction materials, raw materials and energy. New laws and regulations related to global climate change may also increase our expenses or reduce our sales.

We are subject to fluctuations in the prices of our raw materials, which could have an adverse effect on our results of operations.

We experience significant fluctuations in the cost of our raw materials, including aluminum extrusion, vinyl extrusion, polyvinyl butyral and glass. We anticipate that these fluctuations will continue in the future. A variety of factors over which we have no control, including global demand for aluminum, fluctuations in oil prices, speculation in commodities futures and the creation of new laminates or other products based on new technologies impact the cost of raw materials that we purchase for the manufacture of our products. These factors may also magnify the impact of economic cycles on our business. In addition, the current Presidential Administration has taken actions to impose tariffs on foreign steel and aluminum, in an effort to limit the amounts of steel and aluminum coming into the U.S. These actions have had and could continue to have a negative impact on prices our suppliers pay for their materials, which has increased the cost of steel and aluminum to us. We may not be able to minimize our risk from price

- 9 -

fluctuations and the adverse impact of these tariffs by entering into aluminum forward contracts to hedge these fluctuations in the purchase price of aluminum extrusion we use in production. Substantial, prolonged upward trends in aluminum prices could significantly increase the cost of the unhedged portions of our aluminum needs and have an adverse impact on our sales and results of operations.

We rely on a limited number of outside suppliers for certain key components and materials.

We obtain a significant portion of our key raw materials, such as glass, aluminum and vinyl components, from a few key suppliers, and obtain the polyvinyl butyral interlayers used in certain of our products from a sole supplier. If any of these suppliers is unable to meet its obligations under present or any future supply agreements, the agreements could be terminated, or we may not be able to obtain certain raw materials on commercially reasonable terms and may suffer a significant interruption in our ability to manufacture our products, including because it may be difficult to find substitute or alternate suppliers as the glass, interlayers and aluminum and vinyl extrusions we use are customized. A supplier may also choose, subject to existing contracts, to modify its relationship due to general economic concerns or concerns relating to the supplier or us, at any time. These modifications could include requirements from our suppliers that we provide them additional security in the form of prepayments or letters of credit.

Any interruption of supply or any price increase of raw materials could have a material adverse effect on our business and results of operations. If we are required to obtain an alternate source for these materials or components, we may not be able to obtain pricing on as favorable terms or on terms comparable to our competitors. Additionally, we may be forced to pay additional transportation costs or to invest in capital projects or costly product redesigns and perform costly new product certification testing with respect to our impact-resistant products, in connection with moving to any alternate source of supply.

We could experience a delay between the increased cost to us to obtain these raw materials, and our ability to increase the price of our products. If we are unable to pass on significant cost increases to our customers, our results of operations between periods may be negatively impacted. Any significant change in the terms that we have with our key suppliers or any interruption of supply or any price increase of raw materials could materially adversely affect our financial condition and liquidity.

Our business currently is geographically concentrated in Florida and that concentration increased with our acquisition of NewSouth Window Solutions.

All of our manufacturing facilities, except for one in Arizona, are located in Florida, where the substantial portion of our sales are made. We believe that focusing operations into manufacturing locations in Florida optimizes manufacturing efficiencies and logistics, and we believe that a focused approach to growing our market share within our core wind-borne debris markets in Florida, from the Gulf Coast to the mid-Atlantic, and certain international markets, will maximize value and return. Our acquisition of NewSouth Window Solutions increased our manufacturing and sales concentration in Florida, although we expect to expand NewSouth’s sales and market share in northern Florida and certain other southern coastal states. Our Western Window Systems manufacturing facility in Arizona and the markets served by that business in the Western United States may not provide adequate geographic diversification for our business, as we expect that the primary concentration of our business will continue to be in Florida, and another prolonged decline in the economy of the state of Florida or of certain coastal regions, a change in state and local building code requirements for hurricane protection, or any other adverse condition in the state or certain coastal regions, could cause a decline in the demand for our products, which could have an adverse impact on our sales and results of operations.

Our operating results are substantially dependent on demand for our branded impact-resistant products, contemporary indoor/outdoor window and door systems and factory-direct, energy-efficient residential windows and doors.

A majority of our net sales are derived from the sales of our branded impact-resistant products and on window and door systems for residential, commercial and multi-family markets. Accordingly, our future operating results will depend largely on the demand for our impact-resistant products by current and future customers, including additions to this product line that are subsequently introduced, as well as demand for the contemporary indoor/outdoor window and door systems sold by our Western Window Systems business. Net sales generated by our NewSouth Window Solutions business depends on a direct-to-consumer model and is supported by showrooms and in-home sales. Consequently, a portion of our future operating results are reliant on current and future customer demand for factory-direct, energy-efficient residential windows and doors. If our competitors release new products that are superior to our products in performance or price, or if we fail to update our impact-resistant products with any technological advances that are developed by us or our competitors or introduce new products in a timely manner, demand for our products may decline. In addition, the window and door industry can be subject to changing trends and consumer preferences. If we do not correctly gauge consumer trends for the various products and systems we offer and respond appropriately, customers may not purchase our products and our brand names may be impaired. Even if we react appropriately to changes in trends and consumer preferences, consumers may consider our brands to be outdated or associate our brands with styles that are no longer popular or trend-setting. Any of these outcomes could create significant excess inventories for some products and missed opportunities for other products, which would have a material adverse effect on our brands, our business, results of operations and financial condition. A decline in demand

- 10 -

for our impact-resistant products, our contemporary indoor/outdoor window and door systems or our new direct-to-consumer, energy-efficient residential windows and doors as a result of competition, technological change, changes in consumer preferences or other factors could have a material adverse effect on our ability to generate sales, which would negatively affect results of operations.

Our recently completed acquisitions may result in, or involve activities that cause, increased expenses or unanticipated liabilities.

As a result of our recent acquisitions of Western Window Systems and NewSouth Window Solutions, we have significantly more sales, assets and employees than we did prior to the transactions, which may require our management to devote a significant amount of time, resources and attention to the new product offerings or novel challenges, and/or away from the operations of our historically core impact-resistant windows and doors business. These potential diversions and distractions may result in, or involve activities that cause, increased expenses and unanticipated liabilities.

Our business is subject to seasonal industry patterns and our revenue and profit can vary significantly throughout the year, which may adversely impact the timing of our cash flows and limit our liquidity at certain times of the year.

Our business is seasonal, and our net revenues and operating results vary significantly from quarter to quarter based upon the timing of the building season in our markets. Our sales typically follow seasonal new construction and the repair and remodel industry patterns. Additionally, events like preparation for hurricane season and rebuilding and repairs in the months following a hurricane in the majority of the geographies where we market and sell our products generally creates peak sale volumes during the quarters in which those activities occur. Other quarterly sales volumes might be generally lower due to reduced repair and remodeling and new construction activity as a result of less favorable climate conditions in the majority of our geographic end markets. Failure to effectively manage our demand and production planning, inventory and overall operations in anticipation of or in response to seasonal fluctuations or changing seasonal fluctuations as a result of climate change, could negatively impact our liquidity profile during certain seasonal periods.

Our substantial level of indebtedness could adversely affect our business and financial condition and prevent us from meeting our debt obligations.

Our total gross indebtedness was $429.0 million, including the $50.0 million of recently issued Additional Senior Notes issued in January 2020, and we had an additional $78.0 million available for borrowing under our existing senior secured credit facilities.

This high level of indebtedness could have important consequences, including:

In addition, our senior secured credit facilities are priced on variable interest rates tied to the London Interbank Offering Rate, or LIBOR. In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced its intent to phase out LIBOR by the end of 2021. The discontinuance or modification of LIBOR or the introduction of alternative reference rates or other reforms to LIBOR could cause the interest rate calculated on our senior secured credit facilities to be materially different than expected. Unless alternative rates can be negotiated, our senior secured credit facilities may no longer adjust and may become fixed rate instruments at the time LIBOR ceases to exist. This would adversely affect our asset/liability management and could lead to more

- 11 -

asset and liability mismatches and interest rate risk unless appropriate LIBOR alternatives are developed. The cessation of LIBOR may also cause confusion that could disrupt the capital and credit markets and result in our inability to access capital required in the future to finance, among other things, acquisitions, working capital and capital expenditures.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

Economic and credit market conditions impact our ability to collect receivables.

Economic and credit conditions can negatively impact our bad debt expense, which can adversely impact our results of operations. Some of the markets we serve, which includes dealers whose customers are second and vacation home owners in the repair and remodeling sector, are more sensitive to changes in economic and credit conditions. If economic and credit conditions deteriorate, we may experience difficulties collecting on our accounts receivable, increasing our days sales outstanding and base debts owed to us, which could adversely impact our results of operations and business.

The industry in which we compete is highly competitive.

The window and door industry is highly competitive. We face significant competition from numerous small, regional producers, as well as certain national producers. Furthermore, the impact-resistant window and door market in our primary market of Florida has recently attracted domestic and foreign competitors. Any of these competitors may (i) foresee the course of market development more accurately than do we, (ii) develop products that are superior to our products, (iii) have the ability to produce similar products at a lower cost or compete more aggressively in pricing, or (iv) adapt more quickly to new technologies or evolving customer requirements than do we. Additionally, some of the competitors of our businesses are larger and have greater financial and other resources and less debt than us. Accordingly, these competitors may be better able to withstand changes in conditions within the industries and markets in which we operate and may have significantly greater operating and financial flexibility than we have. Moreover, barriers to entry are low in most product lines and new competitors may enter our industry, especially if the market for impact-resistant windows and doors continues to expand. An increase in competition, including in the form of aggressive pricing by new market entrants and offerings of alternative building materials, could cause us to lose customers and lead to decreases in net sales and profitability if we are not able to respond adequately to such challenges. To the extent we lose customers in the renovation and remodeling markets, we would likely have to market more to the new home construction market, which historically has experienced more significant fluctuations in demand.

If we do not realize the expected benefits from our recent acquisitions, including synergies, from the NewSouth Window Solutions acquisition, our business and results of operations will suffer.

There is no assurance that the NewSouth Window Solutions business will be successfully or cost-effectively integrated into our existing business, or that the synergies expected from that acquisition will be achieved. In addition, although we have made progress in integrating Western Window Systems into our business, those integration efforts are ongoing and there is no assurance that they will ultimately be successful. Our NewSouth Window Solutions business serves a residential market segment, primarily driven by replacement projects, and relatively small order sizes that our dealer network typically does not target and serve, and that we have never served prior to the NewSouth acquisition. The process of simultaneously integrating the business operations of Western Window Systems and NewSouth Window Solutions may cause an interruption of, or loss of momentum in, the activities of our historical business. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and its liquidity, results of operations and financial condition may be materially adversely impacted. In addition, as we continue our integration activities, we may identify additional risks and uncertainties not yet known to us.

Even if we are able to successfully combine the business operations of Western Window Systems, NewSouth Window Solutions and our legacy business, it may not be possible to realize the full benefits of the increased sales volume and other benefits, including the expected synergies, that are expected to result from the Western Window Systems and NewSouth Window Solutions acquisitions, or realize these benefits within the time frame that is expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from these recent acquisitions may be offset by costs incurred or delays in integrating the companies. Our expected cost savings, as well as any revenue or other synergies, are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control. If we fail to realize the benefits, we anticipated from the Western Window Systems and/or NewSouth Window Solutions acquisitions, our liquidity, results of operations or financial condition may be adversely effected.

- 12 -

We rely, and expect to continue to rely on third-party transportation, which subjects us to risks and costs that we cannot control, and which risks and costs may materially adversely affect our profitability.

We rely, and expect to continue to rely on, third party trucking companies to transport raw materials to the manufacturing facilities used by each of our businesses and to ship finished products to customers. These transport operations are subject to various hazards and risks, including extreme weather conditions, work stoppages and operating hazards, as well as interstate transportation regulations. In addition, the methods of transportation we utilize may be subject to additional, more stringent and more costly regulations in the future. If we are delayed or unable to ship finished products or unable to obtain raw materials as a result of any such new regulations or public policy changes related to transportation safety, or these transportation companies fail to operate properly, or if there were significant changes in the cost of these services due to new or additional regulations, or otherwise, we may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship goods, which could result in a material adverse effect on our revenues and costs of operations. Transportation costs represent a significant part of our cost structure. If our transportation costs increased substantially, due to prolonged increases in fuel prices or otherwise, we may not be able to control them or pass the increased costs onto customers, which may materially adversely affect our profitability.

Our business will suffer if certain key officers and employees discontinue employment with us or if we are unable to recruit and retain highly skilled staff at a competitive cost.

The success of our business depends upon the skills, experience, and efforts of our key officers and employees. In recent years, we have hired key executives who have and will continue to be integral in the continuing transformation of our business. The loss of key personnel could have a material adverse effect on our business, financial condition, and results of operations. We do not maintain key-man life insurance policies on any members of management. Our business also depends on our ability to continue to recruit, train, and retain skilled employees, particularly skilled engineering, operations and sales personnel. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively. Should we lose the services of any member of our senior management team, our board of directors would have to conduct a search for a qualified replacement. This search may be prolonged, and we may not be able to locate and hire a qualified replacement. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both.

We may be adversely affected by any disruptions to our manufacturing facilities or disruptions to our customer, supplier, or employee base.

All but one of our manufacturing and operating facilities are currently located in Florida, which is a hurricane-sensitive area. In 2017 and 2018, Hurricane Irma significantly impacted our customers and markets. Any disruption to our facilities resulting from hurricanes and other weather-related events, fire, acts of terrorism, or any other cause could damage a significant portion of our inventory, affect our distribution of products, and materially impair our ability to manufacture our products and to distribute our products to customers. We could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition, if there are disruptions to our customer and supplier base or to our employees caused by hurricanes, our business could be temporarily adversely affected by higher costs for materials, increased shipping and storage costs, increased labor costs, increased absentee rates, and scheduling issues. While our business does not currently rely heavily on international suppliers or sales, significant disruptions in global economic conditions, travel or trade, including as a result of contagious disease such as the recent outbreak of coronavirus in Wuhan, China, may have material adverse impacts on our supply chain. Furthermore, some of our direct and indirect suppliers have unionized work forces, and strikes, work stoppages, or slowdowns experienced by these suppliers could result in slowdowns or closures of their facilities. Any interruption in the production or delivery of our supplies could reduce sales of our products and increase our costs.

We depend on hiring an adequate number of hourly employees to operate our business and are subject to government regulations concerning these and our other employees, including wage and hour regulations.

Our workforce is comprised primarily of employees who work on an hourly basis. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In certain areas where we operate, there is significant competition for employees. The lack of availability of an adequate number of hourly employees, or our inability to attract and retain them, or an increase in wages and benefits to current employees, could adversely affect our business, results of operations, cash flows and financial condition. We are subject to applicable rules and regulations relating to our relationship with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and immigration status. Accordingly, federal, state or locally legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

- 13 -

The homebuilding industry and the home repair and remodeling sector are subject to regulation.

The homebuilding industry and the home repair and remodeling sector are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, and similar matters, including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. Increased regulatory restrictions could limit demand for new homes and home repair and remodeling products and could negatively affect our sales and results of operations.

Increases in interest rates used to finance home construction, repair and remodeling, such as mortgage, home equity loans and credit card interest rates, and the reduced availability of financing for the purchase of new homes and home construction repair and remodeling, could have a material adverse impact on our business, financial condition and results of operations.

Our sales depend in part upon consumers having the ability to access third-party financing for the purchase of new homes and buildings and the remodeling and repair of existing homes and buildings. The ability of consumers to finance these purchases is affected by the interest rates available for home mortgages, credit card debt, home equity or other lines of credit, and other sources of third-party financing. Interest rates in the majority of the regions where we market and sell our products have generally increased in recent years, most notably in the U.S. with the U.S. Each increase in the federal funds rate or applicable central bank’s prime rates could cause an increase in future interest rates applicable to mortgages, credit card debt, and other sources of third-party financing. If interest rates increase and, consequently, the ability of prospective buyers to finance purchases of new homes or home improvement products is adversely affected, our business, financial condition, and results of operations may be materially and adversely affected.

In addition to increased interest rates, the ability of consumers to procure third-party financing is impacted by such factors as new and existing home prices, unemployment levels, high mortgage delinquency and foreclosure rates, and lower housing turnover. Adverse developments affecting any of these factors could result in the imposition of more restrictive lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures.

Sales fluctuations to and changes in our relationships with key customers could have a material adverse effect on our financial condition, liquidity or results of operations.

Some of our business lines and markets are dependent on a few key customers, including dealers. We generally do not enter into written or long-term agreements with our customers. The loss, reduction, or fluctuation of sales to one of these major customers, or any adverse change in our business relationship with any one or more of them, could have a material adverse effect on our financial condition, liquidity or results of operations.

Some of our key customers are companies that have experienced and may continue to experience consolidation in their ownership or expand through internal growth. Consolidation could decrease the number of potential customers for our products and increase our reliance on key customers. Further, any increase in the ownership concentration or size of our key customers could result in our key customers seeking more favorable terms, including pricing, for the products that they purchase from us. Accordingly, any increase in ownership concentration of our key customers or other increases in the size of our customers may further limit our ability to maintain or raise prices in the future. This could have a material adverse effect on our business, financial condition and results of operations.

Changes in building codes could reduce the demand for our impact-resistant windows and doors, which could have a material adverse effect on our financial condition, liquidity or results of operations.

The market for our impact-resistant windows and doors depends in large part on our ability to satisfy state and local building codes that require protection from wind-borne debris. If the standards in such building codes become more stringent, we may not be able to meet their requirements, and demand for our products could decline. Conversely, if the standards in such building codes are lowered or are not enforced in certain areas because of industry lobbying or otherwise, demand for our impact-resistant products may decrease. In addition, if states and regions that are affected by hurricanes but do not currently have such building codes fail to adopt and enforce hurricane protection building codes, our ability to expand our business in such markets may be limited. We are also subject to energy efficiency codes and performance standards in Colorado, California and other states where we operate, several of which are more stringent than those to which we have historically been subject. Any such changes in building codes or energy efficiency codes could lower the demand for our impact-resistant windows and doors, which could have a material adverse effect on our financial condition, liquidity or results of operations.

The homebuilding industry and the home repair and remodeling sector are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, and similar matters, including

- 14 -

regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. Increased regulatory restrictions could limit demand for new homes and home repair and remodeling products and could negatively affect our sales and results of operations.

We may be adversely affected by any disruption in our information technology systems or by unauthorized intrusions or “hacking” into those systems and theft of information from them, or other cybersecurity-related incidents.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions. A disruption in our information technology systems for any prolonged period could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Various third parties, including computer hackers, who are continually becoming more aggressive and sophisticated, may attempt to penetrate our network security and, if successful, misappropriate confidential customer, employee and/or supplier information. In addition, one of our employees, contractors or other third parties with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. While we have implemented systems and processes to protect against unauthorized access to or use of secured data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with new and frequently changing requirements, and compliance with those requirements could result in additional costs. These costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could be substantial and adversely impact our business. A significant compromise of sensitive employee, customer or supplier information in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material. Security breaches could also harm our reputation with our customers and retail partners, potentially leading to decreased revenues, and with federal and state government agencies and bodies.

Operation on multiple Enterprise Resource Planning (“ERP”) information systems, and the conversion from multiple systems to a single system, may negatively impact our operations.

We are highly dependent on our ERP information systems infrastructure in order to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, maintain regulatory compliance and otherwise carry on our business in the ordinary course. We currently operate on four ERP information systems. Since we must process and reconcile our information from multiple systems, the chance of errors is increased, and we may incur significant additional costs related thereto. Inconsistencies in the information from multiple ERP systems could adversely impact our ability to manage our business efficiently and may result in heightened risk to our ability to maintain our books and records and comply with regulatory requirements. Any of the foregoing could result in a material increase in information technology compliance or other related costs and could materially negatively impact our operations. In the future, we may transition all or a portion of our systems to one ERP system. The transition to a different ERP system involves numerous risks, including:

Any of the foregoing could result in a material increase in information technology compliance or other related costs and could materially negatively impact our operations.

The nature of our business exposes us to product liability, warranty and other claims.

We are, from time to time, involved in product liability, product warranty and other claims relating to the products we manufacture and distribute that, if adversely determined, could adversely affect our financial condition, results of operations, and cash flows. In addition, we may be exposed to potential claims arising from the conduct of homebuilders and home remodelers and their sub-contractors. Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, we may not be able to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities. Product liability claims can be expensive to defend and can divert the attention of management and other

- 15 -

personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our company.

Other parties may infringe on our intellectual property rights or may allege that we have infringed on theirs.

Competitors or other third parties may infringe on or otherwise make unauthorized use of our intellectual property rights, including product designs, manufacturing practices, registered intellectual property and other rights. We rely on a variety of measures to protect our intellectual property and proprietary information. However, these measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage. If we determine that such infringement or use has occurred, legal action to enforce our rights may require us to spend significant amounts in legal costs, even if we ultimately prevail.

Conversely, given the nature of our business and product designs, competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, have infringed on their intellectual property rights. Even though we believe such claims and allegations of intellectual property infringement would be without merit, defending against such claims would be time consuming and expensive and could result in the diversion of time and attention of our management and employees. Given the rapidly changing and highly competitive business environment in which we operate, and the increasingly complex designs of our products and other companies’ similar products, the outcome of any contemplated intellectual property-related litigation would be difficult to predict and could cause us to lose significant revenue, to be prohibited from using the relevant designs, systems, processes, technologies or other intellectual property, to cease offering certain products or services or to incur significant license, royalty or technology development expenses.

We conduct all of our operations through our subsidiaries and rely on payments from our subsidiaries to meet all of our obligations.

We are a holding company and derive all of our operating income from our subsidiary, PGT Industries, Inc., and its subsidiaries, CGI, WinDoor, WWS Acquisition, LLC, doing business as Western Window Systems, as well as from the entities acquired in the NewSouth Window Solutions acquisition. All of our assets are held by our subsidiaries, and we rely on the earnings and cash flows of our subsidiaries to meet our obligations. The ability of our subsidiaries to make payments to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdictions of organization (which may limit the amount of funds available for distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiaries, including our credit facilities, and the covenants of any future outstanding indebtedness we or our subsidiaries incur.

We may be adversely impacted by the loss of sales or market share if we are unable to keep up with demand.

We are currently experiencing growth through higher sales volume and growth in market share. To meet the increased demand, we have been hiring and training new employees for direct and indirect support and adding to our glass capacity. However, should we be unable to find and retain quality employees to meet demand, or should there be disruptions to the increase in capacity, we may be unable to keep up with our higher sales demand. If our lag time on delivery falls behind, or we are unable to meet customer timing demands, we could lose market share to competitors.

We may evaluate and engage in asset dispositions, acquisitions, joint ventures and other transactions that may impact our results of operations, and we may not achieve the expected results from these transactions.

From time to time, and subject to the agreements governing our then existing debt or otherwise, we may enter into agreements to and engage in business combinations, purchases of assets or contractual arrangements or joint ventures, including in geographical areas outside the state of Florida, with which we do not have the level of familiarity that we have with the Florida market. In addition, some of those business acquisitions or combinations could involve a seller whose products may be different from the types of products we currently sell, and they could be products that are sold to different types of customers. Subject to the agreements governing our then existing debt or otherwise, some of these transactions may be financed with additional borrowings. The integration of any business we may acquire may be disruptive to us and may result in a significant diversion of management attention and operational resources. Additionally, we may suffer a loss of key employees, customers or suppliers, loss of revenues, increases in costs or other difficulties. If the expected revenue enhancement plans, strategies, goals, efficiencies and synergies from any such transactions are not fully realized, our results of operations could be adversely affected, because of the costs associated with such transactions or otherwise. Other transactions may advance future cash flows from some of our businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term. In addition, if the goodwill, indefinite-lived intangible assets, or other intangible assets that we have acquired or may acquire in the future are determined to be impaired, we may be required to record a non-cash charge to earnings during the period in which the impairment is determined, which could be significant. The failure to realize the expected long-term benefits of any one or more of these transactions could have a material adverse effect on our financial condition or results of operations.

- 16 -

We are subject to potential exposure to environmental liabilities and are subject to environmental regulation.

We are subject to various federal, state, and local environmental laws, ordinances, and regulations. Although we believe that our facilities are in material compliance with such laws, ordinances, 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. Remediation may be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of unknown environmental conditions, or more stringent standards regarding existing residual contamination. More burdensome environmental regulatory requirements may increase our general and administrative costs and may increase the risk that we may incur fines or penalties or be held liable for violations of such regulatory requirements.

Despite our level of indebtedness, we and our subsidiaries will still be able to incur substantial additional amounts of debt, including secured debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries will still be able to incur substantial additional indebtedness in the future. Although the indenture governing the notes and the existing senior secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our existing debt levels, the related risks that we now face would increase. In addition, the indenture governing the notes and the existing senior secured credit facilities will not prevent us from incurring obligations that do not constitute prohibited indebtedness thereunder.

From time to time we are subject to legal and regulatory proceedings which seek material damages from us. These proceedings may be negatively perceived by the public and materially and adversely affect our business.

We are subject to legal and regulatory proceedings from time to time which may result in material damages. Although we do not presently believe that any of our current legal or regulatory proceedings will ultimately have a material adverse impact on our financial performance or operations, we cannot assure you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future and/or significant defense costs related to such lawsuits or regulatory proceedings. For example, many of our products are installed in large, multi-unit condominiums or similar developments, and we may face legal claims for breach of warranties or other claims alleging product defects on a large-scale in connection with such projects. Also, we operate a fleet of delivery trucks and, in addition to the significant compliance-related costs associated with operating such a fleet, we may incur significant adverse judgments, damages and penalties related to accidents that those trucks may be involved in from time to time. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending an appeal or defense costs could materially and adversely affect our liquidity and capital resources. It is also possible that, as a result of a present or future governmental or other proceeding or settlement, significant restrictions will be placed upon, or significant changes made to, our business practices, operations or methods, including pricing or similar terms. Any such restrictions or changes may adversely affect our profitability or increase our compliance costs.

None.

- 17 -

We have the following properties as of December 28, 2019:

On August 13, 2018, we acquired WWS, an established manufacturer of non-impact windows and doors designed to unify indoor/outdoor living spaces, which is headquartered in Phoenix, Arizona. WWS manufacturers its window and door products from its new approximately 170,000 square foot manufacturing and distribution facility in Phoenix. This facility is leased by WWS through the end of May 2027.

We moved the operations of CGI into a new 325,000 square foot leased facility during 2017. This new facility is in Hialeah, Florida, and is leased through the end of 2028.

WinDoor manufactures impact-resistant windows and doors from its approximately 320,000 square foot leased manufacturing and administrative facility in Orlando, Florida. This lease expires in February 2021.

We also own three parcels of undeveloped land in North Venice, Florida, available for future construction needs we may have.

Our leases discussed above expire between April 2020 and December 2028. The leases require us to pay taxes, insurance and common area maintenance expenses associated with the properties.

All of our owned properties secure borrowings under our credit agreement (dated February 16, 2016, as amended by the first amendment thereto, dated as of February 17, 2017, the second amendment thereto, dated as of March 16, 2018, the third amendment thereto, dated October 31, 2019, and as otherwise amended, restated, modified or supplemented, the “2016 Credit Agreement due 2022”). We believe these operating facilities are adequate in capacity and condition to service existing customer needs.

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 of claims and lawsuits. We do not expect that the ultimate resolution of these matters will have a material adverse impact on our financial position, cash flows or results of operations.

Item 4.MINE SAFETY DISCLOSURES

Not Applicable

- 18 -

PART  II

Our Common Stock trades on the New York Stock Exchange under its symbol of “PGTI”. On February 6, 2020, the closing price of our Common Stock was $16.18 as reported on the New York Stock Exchange. The approximate number of stockholders of record of our Common Stock on that date was approximately 2,800, although we believe that the number of beneficial owners of our Common Stock is substantially greater.

Dividends

We do not pay a regular dividend. Any determination relating to dividend policy will be made at the discretion of our Board of Directors. The terms of the agreements governing our outstanding borrowings restrict our ability to pay dividends.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

None.

- 19 -

Performance Graph

The following graphs compare the percentage change in PGT Innovations, Inc.’s cumulative total stockholder return on its Common Stock with the cumulative total stockholder return of the NYSE Composite Index, the SPDR S&P Homebuilders ETF, and the Standard & Poor’s Building Products Index over the period from January 4, 2015 (the first trading day of our 2015 fiscal year), to December 27, 2019 (the last trading day of our 2019 fiscal year).

COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN

AMONG PGT INNOVATIONS, INC., THE NYSE COMPOSITE INDEX, THE SPDR S&P

HOMEBUILDERS ETF AND THE S&P 500 BUILDING PRODUCTS INDEX

- 20 -

The following table sets forth selected historical consolidated financial information and other data as of and for the periods indicated and have been derived from our audited consolidated financial statements.

All information included in the following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7, and with the consolidated financial statements and related notes in Item 8. All years presented consisted of 52 weeks.

- 21 -

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. Management's Discussion and Analysis comparing the results for the year ended December 29, 2018 to the results for the year ended December 30, 2017 can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 29, 2018, filed with the SEC on February 27, 2019, which is hereby incorporated by reference.

Our MD&A is presented in seven sections:

EXECUTIVE OVERVIEW

Sales and Operations

Our sales grew to $745.0 million in our 2019 fiscal year, an increase of 7%, compared to 2018. Sales in 2019 includes $138.3 million from WWS, compared with WWS sales of $49.7 million in the post-acquisition period in 2018 from August 13, 2018, an increase of $88.6 million. We believe WWS experienced organic growth of approximately 10% for 2019, with sales growth in its emerging markets more than offsetting decreases in sales to its core market of California. The benefit to the Company of the sales growth at WWS was more than offset by a decrease in sales in our legacy products. In 2018, we saw record-setting growth as sales of our impact-resistant products benefitted from the rebuilding and repair activity, and the heightened awareness of the benefits of impact products, resulting from two major hurricanes in 2017. Our sales to the repair and remodel market were $376.6 million in 2019, a decrease of 9%, compared to 2018. Our sales into the new construction market were $368.4 million in 2019, an increase of 30%, as compared to 2018, driven primarily by a full year of WWS sales in 2019. Our impact-resistant product sales were $516.1 million in 2019, a decrease of 8%, as compared to 2018. Sales of non-impact products were $228.9 million in 2019, an increase of 67%, compared to 2018, also driven by a full year of WWS sales in 2019.

Gross profit was $260.4 million for our 2019 fiscal year, which increased 7% when compared to 2018. Our gross profit increased primarily due to higher sales volume. Gross margin was 35.0% in 2019, compared to 34.9% in 2018.

Selling, general and administrative expenses (“SG&A”) were $176.3 million for 2019, an increase of $25.4 million compared to 2018. SG&A in 2019 includes the SG&A of WWS of $50.6 million for the full year of 2019, which includes $9.4 million in non-cash amortization expense, compared with $19.5 million of SG&A in the 2018 post-acquisition period measured from August 13, 2018, and $3.6 million in non-cash amortization. Excluding the effects of the inclusion of WWS for the entire year of 2019, and the post-acquisition period in 2018, SG&A for 2019 decreased 4% due to lower personnel-related costs, including lower incentive compensation costs and a decrease in administrative headcount. In addition, acquisition costs in 2019 relating to the NewSouth Acquisition were lower than 2018 acquisition costs of the WWS Acquisition by approximately $2.3 million. In total, non-cash intangible amortization was $15.9 million in 2019, increasing $5.6 million due to the inclusion of a full year of amortization of the intangibles acquired in the WWS Acquisition.

Interest expense was $26.4 million in 2019, which was flat compared with 2018. Interest expense in 2018 includes a higher level of non-cash amortization of deferred financing costs from the significant amount of prepayments under our 2016 Credit Agreement due 2022. Excluding the accelerated non-cash amortization in 2018, interest expense increased by 26%, primarily due to the higher level of outstanding debt during 2019 associated with the 2018 Senior Notes due 2026, which were issued in August 2018, but outstanding for the entire year during 2019.

- 22 -

Our net income in 2019 was $43.7 million, a decrease of $10.2 million when compared to 2018. Although our net income benefitted from the higher level of sales, which drove an increase in gross profit, the increase in our SG&A expense from the inclusion of WWS for the full year of 2019 more than offset the higher gross profit. Net income in 2019 was also impacted by a lower level of excess tax benefits from option exercises and vesting in restricted equity, which was $2.1 million in 2019, compared with $5.2 million in 2018.

Liquidity and Cash Flow

During 2019, we generated $81.2 million in cash flow from operations, a decrease of $19.1 million, compared to 2018. In 2018, operating cash flows included $19.0 million in cash received from Cardinal, one of our glass suppliers, in connection with our sales of certain door glass manufacturing equipment to Cardinal and a related supply agreement. Cash generated from operations was generally used to fund operations and investing cash flows, which was primarily composed of capital expenditures in 2019. However, in 2020, we consummated the NewSouth Acquisition, which was funded with proceeds from the Additional Senior Notes and cash on hand.

On May 22, 2019, our Board of Directors authorized and approved a share repurchase program of up to $30 million. During 2019, we made opportunistic repurchases of 393,819 shares of our common stock at a cost of $5.5 million, representing capital returned to our shareholders. See “Liquidity and Capital Resources” for a more detailed discussion of this event.

RESULTS OF OPERATIONS

Analysis of Selected Items from our Consolidated Statements of Operations

- 23 -

Full Year 2019 Compared with Full Year 2018

Net sales

Net sales for 2019 were $745.0 million, a $46.5 million, or 6.7%, increase in sales, from $698.5 million in the prior year.

The following table shows net sales by segment (in millions, except percentages):

Net sales of our Southeast segment were $595.1 million in 2019, compared with $636.4 million in 2018, a decrease of $41.3 million. Net sales of our Western segment were $149.9 million in 2019, compared with $62.1 million in 2018, an increase of $87.8 million. Sales of our Western segment are primarily composed of sales of WWS, which were $138.3 million in the 2019, compared with $49.7 million in 2018, measured from the date of the WWS acquisition on August 13, 2018.

The increase in net sales in 2019 of $46.5 million was driven by the net increase in sales of $88.6 million from WWS, partially offset by the $41.3 million decline in sales of our Southeast segment, which includes a $38.8 million decrease in sales into the repair and remodel market, primarily due to strong 2018 repair and remodel sales driven by an active hurricane season in 2017. Sales in 2019 were also negatively affected by the disruptions to many of our customers’ operations caused by Hurricane Dorian in late August 2019, which resulted in a decrease in orders and shipments for us.

Gross profit and gross margin

Gross profit was $260.4 million in 2019, an increase of $16.9 million, or 6.9%, from $243.5 million in the prior year. Gross profit increased on the higher level of sales in 2019, compared with 2018, due to the inclusion of WWS for the entire year of 2019, compared with only the post-acquisition period in 2018. The increase in gross profit from the inclusion of WWS for the entire year was partially offset by a decrease in sales of our PGT legacy products in 2019, after a record-setting year in 2018, which was driven by a significant increase in rebuilding and repair activity in 2018, and heightened awareness of the benefits of impact-resistant products, resulting from an active hurricane season in 2017, including the impact of Hurricane Irma in Florida.

Gross margin was 35.0% in 2019, compared to 34.9% in the prior year, a percentage-point increase of 0.1%. This slight improvement in gross margin in 2019 was due primarily to the addition of WWS, which benefitted gross margin by 2.2%. Gross margin also benefitted from increases in our product prices in early 2019, and improvements in operating efficiencies. These margin improvements were offset by the unfavorable effects of a shift in the mix of sales to lower margin products, the decrease in volume in our PGT legacy products, which unfavorably impacted our operating leverage, and slightly increased material costs.

Selling, general and administrative expenses

SG&A expenses for 2019 were $176.3 million, an increase of $25.4 million, or 16.8%, from $150.9 million in the prior year. The increase in SG&A is primarily the result of the inclusion of the SG&A expenses of WWS for the entire year in 2019, compared with only the post-acquisition-period in 2018, which resulted in an increase in SG&A of $31.1 million, including an increase of $5.8 million in amortization of the amortizable intangible asset acquired in the WWS acquisition. Excluding the increase in SG&A from the inclusion of WWS, SG&A decreased $5.7 million in 2019, compared to 2018. The decrease in SG&A was primarily driven by a decrease of personnel-related costs, and a net decrease in acquisition costs of $2.3 million. These decreases were partially offset by an increase in selling and distribution costs for our non-WWS businesses in 2019 compared to 2018, and by an unusually high level of bad debt expense recorded in the second quarter of 2019, an increase in marketing costs, and higher professional fees in 2019.

Gains on sales of assets under APA

On September 22, 2017, we entered into an agreement with Cardinal, one of our glass suppliers, for the sale to Cardinal of certain manufacturing equipment we used in processing glass components for PGT-branded doors. Certain of that equipment was transferred to Cardinal in 2017, and substantially all of the remaining machinery and equipment was transferred to Cardinal during the second quarter of 2018. The equipment and machinery transferred in 2018 had a net book value of $3.2 million and fair value of $5.8 million. We recognized gains on disposals for the difference totaling $2.6 million during 2018, classified as a separate line item in the accompanying consolidated statement of operations for year ended December 29, 2018.

- 24 -

Interest expense

Interest expense was $26.4 million in 2019, a decrease of $0.1 million from $26.5 million in the prior year. Interest expense in 2018 includes $5.6 million of accelerated amortization of lenders fees and discount relating to the prepayment of $152.0 million of borrowings under the term loan portion of the 2016 Credit Agreement due 2022 that we made on September 18, 2018 and the voluntary prepayment of $8.0 million we made on December 19, 2018. There were no prepayments of term loan borrowings during 2019. Excluding the $5.6 million of accelerated amortization, interest expense increased $5.4 million in 2019, compared to 2018. The increase in interest expense is due primarily to the issuance of the 2018 Senior Notes due 2026, composed of $315.0 million aggregate principal amount of 6.75% unsecured senior notes due 2026. The 2018 Senior Notes due 2026 carry a higher per-annum interest rate and have a higher principal amount outstanding than borrowings under the term loan portion of the 2016 Credit Agreement due 2022. This increase in interest expense was partially offset by the interest-reducing effects of the prepayment of $152.0 million in borrowings under the 2016 Credit Agreement due 2022 from the proceeds of the equity issuance we completed in September 2018, and the voluntary prepayment of $8.0 million we made on December 19, 2018.

Debt extinguishment costs

Debt extinguishment costs were $1.5 million in 2019. In connection with the Third Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $1.5 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year ended December 29, 2018.

Debt extinguishment costs were $3.4 million in 2018. In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $3.4 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year ended December 29, 2018.

Income from operations

Income from operations was $84.1 million in 2019, a decrease of $11.0 million, from $95.1 million in 2018. Income from operations in 2019 includes $73.5 million from our Southeast segment and $10.6 million from our Western segment, compared to $90.1 million and $5.0 million from our Southeast and Western segments, respectively, in 2018, all after allocation of corporate operating costs in both periods. The decrease in income from operations in 2019 compared to 2018 is a result of the increase in SG&A, including higher amortization. Income from operations also includes the gains on sales of assets under the asset purchase agreement with Cardinal of $2.6 million in 2018.

Income tax expense

Income tax expense was $12.4 million for 2019, representing an effective tax rate of 22.2%. This compares to income tax expense of $11.3 million for 2018, representing an effective tax rate of 17.3%. Income tax expense in 2019, and 2018, includes excess tax benefits relating to exercises of stock options and lapses of restrictions on stock awards, treated as a discrete item of income tax, totaling $2.1 million and $5.2 million, respectively. Also, income tax expense in 2018 includes an adjustment of $231 thousand in tax expense relating to the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Excluding the effects of these discrete items in income tax expense, and certain tax credits received in each period, our effective tax rate in 2019 would have been 25.9%, compared to 25.3% in 2018.

As a result of a reduction in the corporate income tax rate in the state of Florida, from 5.5% to 4.458% for the tax years of 2019 to 2021, our current effective tax rate, excluding the discrete item discussed above, approximates our combined statutory federal and state rate of approximately 25.0% for 2019.

We expect to continue to be profitable in 2020, and thus, that we will incur income tax expense at a combined Federal and state effective rate of between approximately 25% to 26%. This rate is based on the corporate income tax rate of 21% under the TCJA, plus a blended statutory state rate, taking into consideration the temporary reduction in rate in the state of Florida.

- 25 -

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is cash flow generated by operations, supplemented by borrowing capacity under our revolving credit facility, if ever needed. Our cash generating capability provides us with financial flexibility in meeting operating and investing needs. Our primary capital requirements are to fund working capital needs, and to meet required debt payments, including debt service payments on borrowings and fund capital expenditures.

Consolidated Cash Flows

The following table summarizes our cash flow results for 2019 and 2018:

Operating activities. Cash provided by operating activities was $81.2 million for 2019, compared to $100.3 million for 2018.

The decrease in cash flows from operations of $19.1 million in 2019 compared to 2018 was primarily due to the cash received in 2018 under the Cardinal equipment purchase agreement, of which $19.0 million was classified as operating cash flow, which did not recur in 2019. Other changes in operating cash flows include an increase of $71.4 million in collections from customers in 2019 compared to 2018, as the result of increased sales, which was partially offset by an increase in payments to suppliers of $44.9 million as the result of higher procurements of inventory, an increase in personnel related disbursements of $21.3 million due to a larger number of employees during 2019, compared to 2018, and an increase in debt service costs of $13.4 million in 2019, compared to 2018, primarily as a result of the issuance of the 2018 Senior Notes due 2026. Also, in 2019, net tax payments decreased $7.6 million in 2019, compared to 2018, due to a federal tax payment of $9.0 million in January 2018 as the result of our ability to defer our fourth quarter 2017 estimated federal tax payment due to the extension of time to January 2018 to make that payment for companies affected by Hurricane Irma. Other collections of cash and other cash activity, net, increased by $0.5 million, primarily related to sales of scrap aluminum.

Direct cash flows from operations for 2019 and 2018 are presented below:

Day’s sales outstanding (DSO), which we calculate as accounts receivable divided by average daily sales, was 42 days on December 28, 2019, compared to 40 days on December 29, 2018.

Inventory on hand as of December 28, 2019, was $43.9 million, a decrease of $0.8 million from December 29, 2018.

Our inventory consists principally of raw materials purchased for the manufacture of our products and limited finished goods inventory as the majority of our products are custom, made-to-order products. Our inventory levels are more closely aligned with our number of product offerings rather than our level of sales. We have maintained our inventory level to have (i) raw materials required to support new product launches; (ii) a sufficient level of safety stock on certain items to ensure an adequate supply of material in the event of a sudden increase in demand and given our short lead-times; and (iii) adequate lead times for raw materials purchased from overseas suppliers in bulk supply. Inventory turns for the year ended December 28, 2019, was 10.9 times, on par with 11.0 times for the year ended December 29, 2018.

- 26 -

Management monitors and evaluates raw material inventory levels based on the need for each discrete item to fulfill short-term requirements calculated from current order patterns and to provide appropriate safety stock. Because the majority of our products are made-to-order, we have only a small amount of finished goods and work in progress inventory. Due to these factors, we believe our inventories are not excessive, and we expect the value of such inventories will be realized.

Investing activities. Cash used in investing activities was $31.2 million in 2019, compared to $378.4 million in 2018, a decrease in cash used of $347.2 million. We used $354.6 million of cash to acquire businesses in 2018, whereas in 2019 we had no acquisitions. Also, in 2019, we used cash of $31.3 million for capital expenditures, compared to $29.8 million in 2018, an increase of $1.5 million in cash used. Finally, in 2019, we received proceeds of $71 thousand from the sales of property, plant and equipment, compared to $6.0 million in 2018, a decrease of $5.9 million in cash proceeds received from sales of property, plant and equipment, primarily due to cash received in 2018 from Cardinal under the terms of the purchase agreement, pursuant to which we sold certain door glass manufacturing assets to Cardinal.

Financing activities. Cash used in financing activities was $5.4 million in 2019, compared with cash provided of $296.7 million in 2018, a decrease in cash provided of $302.1 million. In 2019, we entered into the Third Amendment of the 2016 Credit Agreement due 2022, which resulted in the repayment of the then existing term loan with proceeds under a new term loan in the amount of $64.0 million, with the exception of a net increase in borrowings of $25 thousand. This compares to 2018, in which we issued the 2018 Senior Notes due 2026, which provided proceeds of $315.0 million. Also, in 2018, we issued Company common stock in the 2018 Equity Issuance, which provided net proceeds of $152.5 million. Using primarily the proceeds from the 2018 Equity Issuance, along with cash on hand, in 2018 we made repayments of long-term debt of nearly $160.3 million.

We recorded payments of financing costs totaling $0.9 million in 2019, related to the Third Amendment, compared to $12.1 million in 2018, related to both the Second Amendment and the 2018 Senior Notes due 2026. In 2019, we also used $5.5 million in cash to make purchases of our common stock in open market transactions. See “Share Repurchase Program” below for more information. Taxes paid relating to common stock withheld from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards were $0.5 million in 2019, compared to $0.7 million in 2018, a decrease in cash used of $0.2 million. Proceeds from the exercises of stock options were $1.6 million in 2019, compared to $2.2 million in 2018, a decrease in cash provided of $0.6 million.

Share Repurchase Program. On May 22, 2019, our Board of Directors authorized and approved a share repurchase program of up to $30 million. The repurchases may be made in open market or private transactions from time to time. Repurchases of shares may be made under a Rule 10b5-1 plan, which would permit repurchases when the Company might otherwise be precluded from doing so under applicable laws. The Company bases repurchase decisions, including the timing of repurchases, on factors such as the Company’s stock price, general economic and market conditions, the potential impact on the Company’s capital structure, the expected return on competing uses of capital such as strategic acquisitions and capital investments, and other corporate considerations, as determined by management. From the inception of the program on May 22, 2019, through December 28, 2019,we made repurchases of 393,819 shares of our common stock at a total cost of $5.5 million. The repurchase program may be suspended or discontinued at any time.

Capital Expenditures. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. In 2019 and 2018, we spent $31.3 million and $29.8 million, respectively, for capital expenditures, primarily representing equipment purchases and facility improvements expected to support growth. Management expects to spend between $28 million and $34 million for capital expenditures in 2020, excluding our NewSouth Acquisition. Our capital expenditure program is geared towards making investments in capital assets targeted at increasing both gross sales and margins, but also includes capital expenditures for maintenance capital.

Capital Resources and Debt Covenants

2018 Equity Issuance

On September 18, 2018, we completed an underwritten, public offering of 7,000,000 shares of our common stock, at a public offering price of $23.00 per share.

The offering resulted in gross proceeds to the Company of $161.0 million. Net of an underwriting fee of $1.15 per share, net cash proceeds to the Company approximated $153.0 million. We used $152.0 million of these proceeds to prepay borrowings outstanding under the term loan portion of the 2016 Credit Agreement due 2022. The remainder of the proceeds were used for working capital or general corporate purposes, including payment of offering expenses of approximately $447 thousand, classified as a reduction of additional paid-in capital in the accompanying consolidated balance sheet as of December 29, 2018.

2018 Senior Notes Due 2026

On August 10, 2018, we completed the issuance of $315.0 million aggregate principal amount of 6.75% senior notes (“2018 Senior Notes Due 2026”), issued at 100% of their principal amount. The 2018 Senior Notes due 2026 are jointly and severally and

- 27 -

fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future restricted subsidiaries, other than any restricted subsidiary of the Company that does not guarantee the existing senior secured credit facilities or any permitted refinancing thereof. The 2018 Senior Notes due 2026 are senior unsecured obligations of the Company and the guarantors, respectively, and rank pari passu in right of payment with all existing and future senior debt and senior to all existing and future subordinated debt of the Company and the guarantors. The 2018 Senior Notes due 2026 were offered under Rule 144A of the Securities Act, and in transactions outside the United States under Regulation S of the Securities Act, and have not been, and will not be, registered under the Securities Act.

The 2018 Senior Notes due 2026 mature on August 10, 2026. Interest on the 2018 Senior Notes due 2026 is payable semi-annually, in arrears, beginning on February 16, 2019, with interest accruing at a rate of 6.75% per annum from August 10, 2018. We incurred financing costs relating to bank fees and professional services costs relating to the offering and issuance of the 2018 Senior Notes due 2026 totaling $10.4 million, which is being amortized under the effective interest method. See “Deferred Financing Costs” below. As of December 28, 2019, the face value of debt outstanding under the 2018 Senior Notes due 2026 was $315.0 million, and accrued interest totaled $8.7 million.

The indenture for the 2018 Senior Notes due 2026 gives us the ability to optionally redeem some or all of the 2018 Senior Notes due 2026 at the redemption prices and on the terms specified in the indenture governing the 2018 Senior Notes due 2026. The indenture governing the 2018 Senior Notes due 2026 does not require us to make any mandatory redemptions or sinking fund payments. However, upon the occurrence of a change of control, as defined in the indenture, the Company is required to offer to repurchase the notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.

The indenture for the 2018 Senior Notes due 2026 includes certain covenants limiting the ability of the Company and any guarantors to, (i) incur additional indebtedness; (ii) pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; (iii) enter into agreements that restrict distributions from restricted subsidiaries; (iv) sell or otherwise dispose of assets; (v) enter into transactions with affiliates; (vi) create or incur liens; merge, consolidate or sell all or substantially all of the Company’s assets; (vii) place restrictions on the ability of subsidiaries to pay dividends or make other payments to the Company; and (viii) designate the Company’s subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications.

On January 24, 2020, we completed the add-on issuance of $50.0 million aggregate principal amount of 6.75% senior notes (“Additional Senior Notes”), issued at 106.375% of their principal amount, resulting in a premium to us of $3.2 million. The Additional Notes are part of the same issuance of, and rank equally and form a single series with, the 2018 Senior Notes due 2026. Proceeds from the Additional Senior Notes, including premium, were used, together with cash on hand, to pay the $92 million purchase price in the NewSouth Acquisition.

2016 Credit Agreement Due 2022

On February 16, 2016, we entered into the 2016 Credit Agreement due 2022, among us, the lending institutions identified in the 2016 Credit Agreement due 2022, and SunTrust Bank, as Administrative Agent and Collateral Agent. The 2016 Credit Agreement due 2022 established new senior secured credit facilities in an aggregate amount of $310.0 million, consisting of a $270.0 million Term B term loan facility maturing in February 2022 that amortized on a basis of 1% annually during its six-year term, and a $40.0 million revolving credit facility that was to mature in February 2021 that included a swing line facility and a letter of credit facility.

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

Pursuant to the Third Amendment, interest on all loans under the 2016 Credit Agreement is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. The Third Amendment decreases the applicable interest rate margins for the Initial Term Loan A from (i) 2.50% to a spread of 1.00% to 1.75% based on our first lien net leverage ratio, in the case of the Base Rate Loans (with a floor of 100 basis points), and (ii) 3.50% to a spread ranging from 2.00% to 2.75% based on our first lien leverage ratio, in the case of the Eurodollar Loans (with a floor of zero basis points).

Also, in connection with the Third Amendment, we will pay quarterly fees on the unused portion of the revolving credit facility equal to a percentage spread (ranging from 0.25% to 0.35%) based on our first lien net leverage ratio. The Third Amendment also modifies the springing financial covenant under the 2016 Credit Agreement to provide that such financial covenant will not be tested until the Initial Term A Loan is paid in full. As of December 28, 2019, there were $2.0 million of letters of credit outstanding and $78.0 million available under the revolver.

- 28 -

Fees and costs relating to the Third Amendment were $0.9 million, which are deferred and being amortized. In connection with the Third Amendment, certain existing lenders modified their positions in or exited the 2016 Credit Agreement. Deferred financing costs and original issue discount allocated to these lenders of $1.5 million were written-off and classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year ended December 28, 2019. As of December 28, 2019, the principal amount of debt outstanding under the 2016 Credit Agreement due 2022 was $64.0 million, and accrued interest was $280 thousand.

On March 16, 2018, we entered into a second amendment of our 2016 Credit Agreement due 2022. The Second Amendment, among other things, decreases the applicable interest rate margins for the Initial Term Loans (as defined in the 2016 Credit Agreement due 2022) from (i) 3.75% to 2.50%, in the case of the Base Rate Loans (as defined in the 2016 Credit Agreement due 2022), and (ii) 4.75% to 3.50%, in the case of the Eurodollar Loans (as defined in the 2016 Credit Agreement due 2022).

In connection with the Second Amendment, certain existing lenders changed their positions in or exited the 2016 Credit Agreement due 2022, which resulted in the write-offs of portions of the deferred financing costs and original issue discount allocated to these lenders. Additionally, at the time of the issuance of the 2018 Senior Notes due 2026, certain existing lenders reduced their positions in the revolving credit portion of the 2016 Credit Agreement due 2022, which resulted in the write-offs of the deferred financing costs allocated to these lenders. As such, write-offs totaling $3.4 million is classified as debt extinguishment costs in the accompanying consolidated statement of operations for the year ended December 29, 2018.

Interest on all loans under the 2016 Credit Agreement due 2022 is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Prior to amending the 2016 Credit Agreement due 2022 on March 16, 2018, as described above, borrowings under the term loans and the revolving credit facility accrued interest at a rate equal to, at our option, LIBOR (with a floor of 100 basis points in respect of the term loan), or a base rate (with a floor of 200 basis points in respect of the term loan) plus an applicable margin. The applicable margin was 475 basis points in the case of LIBOR and 375 basis points in the case of the base rate. The weighted average all-in interest rate for borrowings under the term-loan portion of the 2016 Credit Agreement due 2022 was 3.77% as of December 28, 2019 and was 5.84% at December 29, 2018.

Pursuant to the Third Amendment, the 2016 Credit Agreement due 2022 contains a springing financial covenant that would apply if we draw in excess of thirty-five percent (35%) of the revolving facility commitment (excluding $7.5 million of undrawn letters of credit and letters of credit and draws thereunder that are cash collateralized at 103% of the stated amount thereof from such availability test). To the extent in effect, the springing financial covenant would prohibit us from exceeding a maximum first lien net leverage ratio (based on the ratio of total first lien (less unrestricted cash) debt to EBITDA) as of the last day of each applicable fiscal quarter. To the extent the springing financial covenant is in effect, the first lien net leverage ratio cannot exceed 4.00:1.00 (4.50:1.00 during a significant acquisition period as defined). We have not been required to test our first lien net leverage ratio because we have not exceeded 35% of our revolving capacity.

The 2016 Credit Agreement due 2022 also contains a number of affirmative and restrictive covenants, including limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of our capital stock, entry into restrictive agreements, prepayments of certain debt and transactions with affiliates, in each case, subject to exceptions and qualifications. The 2016 Credit Agreement due 2022 also contains customary events of default. Upon the occurrence of an event of default, the amounts outstanding under the 2016 Credit Agreement due 2022 may be accelerated and may become immediately due and payable.

On September 18, 2018, contemporaneously with the 2018 Equity Issuance, we prepaid $152.0 million in borrowings outstanding under the term loan portion of the 2016 Credit Agreement due 2022. On December 19, 2018, we voluntarily prepaid an additional $8.0 million in borrowings under the 2016 Credit Agreement due 2022. Interest expense, net, in the consolidated statement of operations in the year ended December 29, 2018 includes $5.6 million of accelerated amortization of lenders fees and discount relating to the prepayments of $152.0 million and $8.0 million of borrowings under the term loan portion of the 2016 Credit Agreement due 2022 we made.

- 29 -

Deferred Financing Costs

All debt-related fees, costs and original issue discount, including those related to the revolving credit portion of the facility, is classified as a reduction of the carrying value of long-term debt. The activity relating to third-party fees and costs, lender fees and discount for the year ended December 28, 2019, are as follows:

Estimated amortization expense relating to third-party fees and costs, lender fees and discount for the years indicated, as of December 28, 2019, is as follows:

As a result of prepayments of the term loan portion of the 2016 Credit Agreement due 2022 totaling $204.0 million since its inception in February 2016, and pursuant to the Third Amendment, we have no future scheduled repayments until the maturity of the facility on October 31, 2022. The contractual future maturities of long-term debt outstanding, including other debt relating to our software license financing arrangement, as of December 28, 2019, are as follows (at face value):

- 30 -

Long-Term Debt

Long-term debt consists of the following:

- 31 -

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations as of December 28, 2019 (in thousands):

The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year at December 28, 2019. Purchase orders entered into in the ordinary course of business are excluded from the above table. Amounts for which we are liable are reflected on our consolidated balance sheet as accounts payable and accrued liabilities.

We are obligated to purchase certain raw materials used in the production of our products from certain suppliers pursuant to stocking programs. If all of these programs were cancelled by us, as of December 28, 2019, we would be required to pay $14.9 million for various materials.

At December 28, 2019, we had $2.0 million in standby letters of credit related to our workers’ compensation insurance coverage, and commitments to purchase equipment of $1.4 million.

CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements, we follow U.S. generally accepted accounting principles. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations.

On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in Item 8, Note 2. The following is a summary of our more significant accounting estimates that require the use of judgment in preparing the financial statements.

Goodwill and Indefinite-lived Intangible Assets

We disclosed the Company’s accounting policy for Goodwill and Trade Names under Item 8, Note 2 – Summary of Significant Accounting Policies.

For our Southeast reporting unit, we completed a qualitative assessment of our Southeast reporting unit goodwill on the first day of our fourth quarter of 2019. This qualitative assessment included an evaluation of relevant events and circumstances that existed at the date of our assessment. Those events and circumstances included conditions specific to our Southeast reporting unit, such as the inputs that would be used to calculate its fair values, as well as events and circumstances related to the Southeast reporting unit, such as the industry in which we operate, our competitive environment, the availability and costs of its raw materials and labor, the financial performance of our Southeast reporting unit, and factors related to the markets in which our Southeast reporting unit operates. We also considered that, for our Southeast reporting unit, no new impairment indicators were identified since the date of our prior assessment, which was a qualitative assessment. Based on the most recent qualitative assessment, we concluded that it is not more likely than not that the Southeast reporting unit’s carrying value exceeds it fair value.

For our WWS reporting unit, for the nine-month period in 2019 ended September 28, 2019, we experienced financial results which were below the financial projections as included in our valuation of certain intangible assets relating to our WWS Acquisition. As such, we elected to forego a qualitative assessment of our WWS acquisition goodwill and completed a quantitative assessment on

- 32 -

the first day of our fourth quarter of 2019. The quantitative assessment was conducted using various valuation techniques, including a discounted cash flow analysis, which utilizes Level 3 fair value inputs, and included a reconciliation of the estimated combined fair values of both of our reporting units to the market capitalization of the Company. Based on that quantitative assessment, we concluded that it is not more likely than not that the carrying value our WWS reporting unit exceeds it fair value, as the estimated fair value of our WWS reporting unit substantially exceeded the carrying value.

We completed qualitative assessments of our PGT and CGI trade names on the first day of our fourth quarter of 2019. The qualitative assessments included an evaluation of relevant events and circumstances that existed at the date of our assessment. Those events and circumstances included conditions specific to our PGT and CGI trade names, such as the inputs that would be used to calculate their fair values, as well as events and circumstances related to the PGT and CGI trade names, such as the industry in which we use the PGT and CGI trade names, our competitive environment, the availability and costs of its raw materials and labor, the financial performance of our Company, and factors related to the markets in which our Company operates. We also considered that, for our PGT and CGI trade names, no new impairment indicators were identified since the date of our prior assessment, which was a qualitative assessment for our PGT trade name, and a quantitative assessment for our CGI trade.  The quantitative assessment for CGI resulted from a triggering event in January 2019, consistent with management’s plan for CGI’s Estate Collection of products, in which we began the process of rebranding our Estate Collection as WinDoor-branded products. This rebranding aligns the Estate Collection’s status as a high-end, luxury product line, with WinDoor’s focus on the luxury market. We considered this rebranding of CGI’s Estate Collection of products as WinDoor-branded products as a triggering event in 2018 as it results in a shift in revenues from being sold under the CGI trade name, to being sold under the WinDoor trade name.  Based on these qualitative assessments, we concluded that it is not more likely than not that our PGT and CGI trade names are impaired.

In 2019, our WinDoor trade name did not meet the financial projections used in our prior quantitative assessment. Also, our WWS tradename was affected by the same factors as discussed above for our WWS goodwill. As such, we completed quantitative assessments of our WinDoor and WWS trade names on the first day of our fourth quarter of 2019. Based on these quantitative assessments, we concluded that it is not more likely than not that our WinDoor and WWS trade names are impaired, as the estimated fair value of the tradenames exceeded the carrying value.  The carrying value for the WinDoor and WWS trade names are $18.4 million and $73.0 million, respectively.  

Actual results can differ from our estimates, requiring adjustments to our assumptions. The result of these changes could result in a material change in our calculation and an impairment of our trade names. If our WinDoor and WWS brands do not perform to the levels expected in their most recent quantitative assessments of fair value, the WinDoor and WWS trade names are at higher degrees of risk for future impairment.  The quantitative assessments resulted in the fair value exceeding the carrying value of the WinDoor and WWS trade names by 7% and 6%, respectively. An increase of 1 percentage point in the discount rate, coupled with a 5% decrease in cash flows would result in the carrying values exceeding the fair values of these trade names, and result in impairments.

RECENTLY ISSUED ACCOUNTING STANDARDS

Fair Value Measurement Disclosures

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company does not believe that the adoption of this guidance will have a significant impact on its fair value disclosures.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Subsequently, in November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. ASU 2018-19 clarifies the codification and corrects unintended application of the guidance. ASU’s 2016-13 and 2018-19 are effective for us for our fiscal year beginning after December 15, 2019. We do not believe that the adoption of this guidance will have a significant impact on our consolidated financial statements.

- 33 -

FORWARD OUTLOOK

Net sales

Looking ahead into 2020, we believe Florida’s economic factors that impact our business currently are stable. Single-family housing starts in 2019 grew approximately 6%, below what we believe the Florida market can support. Within our core Florida market, we expect our sales into the repair and remodel segment to grow modestly in 2020, as compared to 2019. We expect to continue to see growth in our sales into the new construction segment due in part to what we believe will be continued growth in single-family starts and dealer expansion. Homebuilder confidence indices ended the year at near record levels, both nationally and regionally, in the South and West. Based on that confidence, as well as interest rates remaining relatively low and the persistent shortage of housing in many markets, we believe indications are that 2020 will be a solid year for single-family housing starts in our primary markets, which may be moderated somewhat by the continuing shortage of workers in many of the construction trades.

For our Western business, we expect our core market in California to begin to rebound from the depressed levels seen in 2019. Our initiatives to grow Western’s custom product sales in core and emerging markets delivered strong growth in 2019 and we expect this trajectory to continue in 2020. In addition, we plan to expand Western sales into the repair and remodel segment with the opening of a pilot site in California in 2020, and the introduction of our Western products to dealers that have a focus on the repair and remodel segment in the western United States.

We expect 2020 full-year sales to range between $850 million and $880 million, representing an increase of between 14% and 18%, as compared to 2019. This estimated sales range for 2020 includes our NewSouth Acquisition.

Gross profit and gross margin

We believe the following factors, which are not all inclusive, may impact our gross profit and gross margin in 2020:

Selling, general and administrative expenses (SG&A)

This expense category will be affected by the inclusion of the SG&A of NewSouth in 2020, including non-cash amortization depending on the level of amortizable intangible assets we determine to have acquired, if any. We are currently in the process of estimating the fair values of acquired intangible assets. We expect to leverage fixed SG&A on anticipated higher sales in 2020, compared to 2019, and to continue to look for areas within SG&A to drive efficiencies.

Depreciation and Amortization

Including the estimated impact on depreciation and amortization from our acquisition of NewSouth, depreciation and amortization is estimated to be approximately $40 million in 2020.

- 34 -

Interest expense

During 2019, we entered into the Third Amendment of the 2016 Credit Agreement due 2022, which resulted in reductions in our overall borrowing rate of 150 basis points, which we expect to reduce interest costs under this agreement. However, with the issuance of the add-on notes we used to finance a portion of the purchase price for acquiring NewSouth, totaling additional $50.0 million, added onto the 2018 Senior Notes due 2026, the level of our debt outstanding increased to $429.0 million, of which $365.0 million is at a fixed interest rate of 6.75%. We believe interest expense on our long-term debt will be approximately $29 million in 2020, including an estimated $1 million of non-cash amortization of net deferred financing costs.

Income tax expense

We expect to continue to be profitable in 2020, and thus, we believe that we will incur income tax expense at a combined Federal and state effective rate of between approximately 25% to 26%. This rate is based on the lower overall corporate income tax rate of 21% as the result of the Tax Act, plus a blended statutory state rate, taking into consideration a reduction in the corporate tax rate in Florida from 5.5% to 4.458%.

Liquidity and capital resources

We had $97.2 million of cash on hand as of December 28, 2019. On February 1, 2020, we completed our acquisition of NewSouth Acquisition for $92 million in cash, financed by the issuance of the Additional Senior Notes of $50.0 million aggregate principal amount of additional 6.75% 2018 Senior Notes due 2026 on January 24, 2020, issued at 106.375% of their principal amount, resulting in a premium to us of $3.2 million, together with cash on hand.

During 2020, we expect to continue to generate sufficient cash from operations to service the interest requirements on our debt, cover our operating expenses, and spend between $28 million and $34 million for capital expenditures, excluding any capital expenditures required by NewSouth. As a result of the Third Amendment, we have no further mandatory required payments remaining until the maturity in October 2022 of our 2016 Credit Agreement due 2022 but may continue to make voluntary prepayments in the future as our cash generation and other relevant factors permit. However, no assurances can be given that cash from operations will be sufficient for some or all these purposes.

We utilize derivative financial instruments to hedge price movements in aluminum materials used in our manufacturing process. As of February 6, 2020, for 2020, we are covered for approximately 64 percent of our anticipated needs through December 2020 at an average price of $0.83 per pound, which is an average representing the cash price per pound, excluding the delivery component for the Midwest Premium, which is currently approximately $0.14 per pound. We have entered into additional coverage for 2021 where we are covered for approximately 14 percent of our anticipated needs through June 2021 at an average cash price of $0.82 per pound.

Regarding only our aluminum hedging instruments for the purchase of aluminum as of December 28, 2019, a 10% decrease in the price of aluminum per pound would decrease the fair value of our forward contracts of aluminum by an estimated $2.2 million. This calculation utilizes our actual commitment of 26.3 million pounds under contract (to be settled throughout December 2020) and the market price of aluminum as of December 28, 2019. This calculation is based only on the LME price of aluminum and excludes an estimate for the Midwest premium.

We experience changes in interest expense when market interest rates change. Changes in our debt could also increase these risks. Based on debt outstanding with a variable rate as of the date of December 28, 2019, of $64.0 million, a 100 basis-point increase in interest rate would result in approximately $0.6 million of additional interest costs annually.

- 35 -

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

- 36 -

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
PGT Innovations, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of PGT Innovations, Inc. and subsidiaries (the Company) as of December 28, 2019 and December 29, 2018, the related consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity for each of the years in the three‑year period ended December 28, 2019, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018 due to the adoption of Accounting Standards Update (ASU) 2016-02, Leases, and several related amendments, as issued by the Financial Accounting Standards Board (FASB).

As discussed in Note 4 to the consolidated financial statements, the Company has changed its method of accounting for revenue as of December 31, 2017 due to the adoption of ASU 2014-09, Revenue from Contracts with Customers, and several related amendments, as issued by the FASB.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

- 37 -

Evaluation of the impairment analyses for brand trade names

As discussed in note 2 and 8 to the consolidated financial statements, the trade names balance as of December 28, 2019 was $148.8 million, of which $18.4 million related to the WinDoor brand and $73 million related to the Western Windows brand. The Company performs impairment testing over each trade name on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a trade name likely exceeds its fair value.

We identified the evaluation of the impairment analyses for these trade names (“the trade names”) as a critical audit matter. The estimated fair value of the trade names approximated their carrying value, indicating a higher risk that the trade names may be impaired and, therefore, involved a high degree of subjective auditor judgment. Specifically, the revenue growth rates, the royalty rates, and the discount rates assumptions used to calculate the fair value of the trade names were challenging to test as minor changes to those assumptions had a significant effect on the Company’s assessment of the carrying values of the trade names.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s trade name impairment analysis process, including controls related to the determination of the fair value of the trade names, the related revenue growth rates, the royalty rates, and the discount rates. We performed sensitivity analyses over the revenue growth rates, royalty rates, and discount rates assumptions to assess their impact on the Company’s determination that the fair value of the trade names exceeded their carrying values. We evaluated the Company’s forecasted revenue growth rates for the brands, by comparing the growth assumptions to forecasted growth rates in the Company’s and its peer companies’ analyst reports. We compared the Company’s historical revenue forecasts to actual results to assess the Company’s ability to accurately forecast. We involved a valuation professional with specialized skills and knowledge, who assisted in:

/s/ KPMG LLP

We have served as the Company’s auditor since 2014.

Tampa, Florida

February 26, 2020

- 38 -

PGT INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

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

- 39 -

PGT INNOVATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)