Hooked on Florida

Hooked on Florida

PUBLIC COMPANIES by Mark Gordon | Managing Editor

PGT Industries, the Venice-based window and door manufacturer that rose to statewide prominence after Hurricane Andrew wrecked South Florida in 1992, is getting ready to go public.

And just as the state gave the company its launching pad to success and profits, its top management also knows Florida could be the source of PGT's downfall. In fiscal 2005, for instance, 88% of sales were generated in the state, according to documents filed with the U.S. Securities and Exchange Commission.

As the company warns potential investors in its public offering registration statement: "Any other adverse condition in the state could cause a decline in the demand for our products in Florida, which could have a material adverse effect on our financial condition..."

Abiding by the quiet period that precedes public offerings, PGT Chief Financial Officer Jeff Jackson declined to elaborate on the filings. There is no date yet for the IPO or the price of shares when they are offered. The shares will be traded on the Nasdaq under the symbol PGTI.

The offering statements give potential investors a detailed view of the workings of one of Sarasota County's most successful homegrown, privately held companies. PGT reported 2005 revenues of $333 million, with $8 million in net income (net profit of 2.4%). It has about 2,400 employees.

In the filing, PGT states that it's seeking to pay down more than $350 million in long-term debt with the money raised in the IPO, in addition to using it for general capital.

PGT manufactures impact-resistant doors and windows under its WinGuard brand name. The products combine heavy-duty aluminum or vinyl frames with laminated glass to provide protection from hurricane-force winds and debris. The company's doors and windows are an alternative to shutters and other products that need to be installed and removed before and after storms, known as "active" protection.

President and Chief Executive Officer Rodney Hershberger co-founded PGT in 1980 along with Paul Hostetler; it was originally called Vinyl Technology Inc. The PGT brand was established in 1987. The company grew from being a mostly local player to a statewide presence under Randy White, who served in leadership roles with the company, including CEO, from 1997 to 2005. White remains a PGT board member.

New York City-based JLL Partners, a private equity firm, is PGT's biggest shareholder, with 21,486 shares, 91.8% of the overall total. The shareholder with the next biggest percentage is Hershberger, who has 1,121 shares, or 4.6%. According to PGT filings, JLL backs several other investments in the building products industry, including supply firm Builders FirstSource, Inc., which completed a $225 million IPO in June 2005.

JLL Partners says it has managed more than $4 billion worth of private equity funds since its 1988 founding. The firm isn't only supporting building supply and window manufacturers, either. It lists radio station owner Liberty Broadcasting, food distributor Foodbrands America and Jackson Automotive Group as past clients.

A review of PGT's financial statements shows a company over the past three years with consistently rising sales, growing at an average annual rate of 22.5%. Profits, however, show less consistency. In that same period, the company's pre-tax profit margins were 14.5% in 2003 and slightly greater than 8% for each of the past two years.

Eating into PGTs profits the past two years has been the company's long-term debt, on the balance sheet at the end of 2005 at $183.5 million. It's a heavy load: The company's debt-to-equity ratio, often used to gauge the strength of a company if it were liquidated, is 1.2 times more debt than equity. That explains one of reasons for the public offering. PGT hopes to use the proceeds to pay down debt.

Even with its debt load, PGT still is profitable enough and has enough cash flow to operate and expand - although not enough cash on hand for a big acquisition (only $3.2 million). Its pre-tax profit margins have come in between 8% and 14% over the past three years. At the same time, cash flow from operations for the year ending Dec. 31, 2005, was $21.7 million compared to long-term debt payments of $14.5 mi1lion.

With an equity offering that pays down debt, the company would have an easier time generating a cash stockpile to fuel growth beyond Florida.

The SEC filings show that PGT is going to keep riding its main product, WinGuard, to increase revenues and profits. "An estimated 80% of the U.S. impact-resistant market still uses shutters and other forms of 'active' hurricane protection," PGT states, "providing us with a significant growth opportunity as demand continues to shift toward impact-resistant windows and doors." WinGuard sales have increased at a compound annual growth rate of 51% since 1999 and represented 56% of the 2005 net sales.

The filings also point out that PGT is relying on the heightened hurricane activity over the next 10 to 20 years predicted by the National Hurricane Center "to further drive awareness of impact-resistant windows and doors." PGT's strategy also calls for the company to expand sales in states along the Atlantic Coast in an effort to prepare itself for any problems in Florida.

In the filings, PGT listed some its competitive strengths, including the experience its technicians and staff have picked up over the past 12 years of putting the products through "rigorous" tests to be in compliance with strict building codes. The experience facet starts at the top, too, PGT says. Hershberger has been with the firm since its founding 27 years ago and the senior management team has an average of 23 years of manufacturing experience.

PGT says some of the national competitors in the market include Simonton Windows, Jeld-Wen Windows and Doors and Silver Line Windows.

PGT BY THE NUMBERS

Consolidated Year-End statements of operations

($ in thousands) 2005 2004 2003 2002

Net sales $332,813 $256,394 $222,594 $160,627

Cost of sales 209,475 166,313 135,285 96,327

Gross margin 123,338 90,081 87,309 64,300

SG&A 81,794 68,089 54,855 39,961

Write off of trademark 7,200 - - -

Stock compensation expense 7,146 - - -

Income (loss) from operations 27,198 22,992 32,454 24,339

Other expense, net 1,554 1,553 800 800

Interest expense 13,871 10,411 7,292 7,630

Income (loss) before income taxes 11,773 10,028 24,362 15,909

Income tax expense (benefit) 3,910 3,621 9,397 6,287

Net income (loss) 7,863 6,409 14,965 9,622

Consolidated Balance Sheet

ASSETS 12/31/05 1/1/05

Current assets:

Cash and cash equivalents 3,270 2,525

Accounts receivable, net 45,193 26,996

Inventories 13,981 11,451

Other current assets 5,757 6,650

Fair value of aluminum hedges 5,603 2,521

Deferred income taxes 3,133 3,503

Total current assets 76,937 53,646

Property, plant and equipment, net 65,508 57,971

Goodwill 169,648 169,648

Other intangible assets, net 107,760 122,980

Deferred financing costs 4,715 5,500

Other assets, net 985 191

Total assets 425,553 409,936

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities 4,380 2,914

Accounts payable 4,380 2,914

Accrued liabilities 26,757 14,259

Line of credit - 2,000

Total current liabilities 31,137 19,173

Long-term debt 183,525 166,375

Deferred income taxes 54,320- 58,219

Other long-term liabilities -268,982 62

Total liabilities 268,982 243,829

Shareholders' equity

Common stock, $.01 par value(1) - -

Additional paid-in-capital 152,804 157,615

Retained earnings - 6,992

Accumulated other comprehensive income 3,767 1,500

Total shareholders' equity 156,571 166,107

Total liabilities and shareholders' equity 425,553 409,936

(1) 10,000,000 shares authorized: 23,788 and 23,744 issued and outstanding at December 31, 2005 and January 1, 2005, respectively

Cash flows from operating activities:

2005 2004 2003

Net income (loss) 7,863 6,409 14,965

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation 7,503 5,705 5,075

Amortization 8,020 9,333 458

Write-off of trademark 7,200 - -

Deferred financing 1,285 921 477

Derivative financial instruments (221) 11,76 -

Deferred income taxes (4,978) 3,073 1,779

Expense related to stock issuance 334 - -

(Gain) loss on disposals of assets 562 (11) (1)

Change in operating assets and liabilities:

Accounts receivable (18,197) (4,891) (5,382)

Inventories (2,530) (2,754) (419)

Other current assets 893 (3,089) (1,437)

Accounts payable and accrued expenses 13,964 2,089 2,482

Net cash provided by operating activities 21,698 14,194 17,997

Cash flows from investing activities:

Purchases of property, plant, equip. (15,864) (12,785) (7,523)

Proceeds from sales of equipment 261 43 4

Acquisition of subsidiary, net of cash acquired - (286,589) (5,741)

Net cash (used in) investing (15,603) (299,331) (13,260)

Cash flows from financing activities

Proceeds from issuance of long-term debt - 170,000 -

Proceeds from refinancing long-term debt 31,625 - -

Net change in revolving line of credit (2,000) 2,000 -

Proceeds from issuance of common stock - 125,866 -

Payment of dividends (20,000 - -

Payment of financing costs (500) (6,376) -

Payments of long-term debt (14,475) (3,625) (5,600)

Purchase of interest rate cap - (315) -

Net cash (used in) provided by financing (5,350) 287,550 (5,600)

Net increase (decrease) in cash 745 6,180 (863)

Cash, cash equivalents at start of period 2,525 8,536 9,399

Cash, cash equivalents at end of period 3,270 14,716 8,536

PGT EXECUTIVE COMPENSATION, SHAREHOLDERS

Compensation

Salary Bonus Other (1)

Rodney Hershberger, CEO $261,250 - $17,544

Randy White $154,947 - $12,111

Deborah La Pinska $167,000 - $15,483

B. Wayne Varnadore $167,000 - $17,178

David McCutcheon $167,000 - $16,254

Ken Hilliard $162,082 $9,558 $12,167

Linda Gavit $167,000 - $10,100

Other annual compensation in the table includes, forHershberger and White, LaPinska, Messrs. Varnadore, McCutcheon, and Hilliard, and Gavit, the following: (a) 401(k) - $6,300, $4,648, $4,239, $5,010, $5,010, $3,802, and $5,010, respectively; (b) business interruption insurance - $208, $208, $208, $208, $208, $208, and $208, respectively; (c) medical insurance - $10,147, $6,842, $10,147, $11,383, $10,147, $7,335, and $4,005, respectively; (d) life insurance - $43, $43, $43, $43, $43, $43, and $43, respectively; (e) long-term disability insurance - $534, $370, $534, $534, $534, $529, and $534, respectively; (f) membership in YMCA-Venice - $312, $0, $312, $0, $312, $125, and $0, respectively; and (g) membership in Southside Gym - $0, $0, $0, $0, $0, $125, and $300, respectively.

Key Players

Rodney Hershberger, president, CEO: Has been with PGT for 25 years; he was promoted to president in 2004 and CEO in 2005. He previously served as vice president of customer service, led the manufacturing, transportation and logistics operations in Florida and oversaw the company's Florida and North Carolina operations, sales, marketing, and engineering groups. He earned $261,250 last year.

Herman Moore, executive vice president: Joined PGT in November 2005. He's responsible for operations, business logistics, manufacturing and engineering. He held executive positions with Ahlstrom Engine Filtration & Air Media, L.L.C. and Reynolds Metals Co.

Jeffrey Jackson, chief financial officer and treasurer: Joined PGT in November 2005. Jackson previously worked as corporate controller for the Hershey Co. and was the CFO for Mrs. Smith's Bakeries LLC, a division of Flowers Foods Inc.

Note: Regarding Moore and Jackson's compensation, the prospectus says: "(N)either received total annual salary and bonus exceeding $100,000 at the end of the last completed fiscal year. We expect information regarding compensation received by Messrs. Moore and Jackson to be required to be disclosed in this table at the end of the current fiscal year."

LARGEST SHAREHOLDERS

Beneficial Owner Shares/Com. Stock % Ownership

JLL Partners Fund IV, L.P. 21,846 91.8%

Rodney Hershberger 1,141.5 4.7

Herman Moore 22 -

Jeffrey T. Jackson 22 -

Deborah L. LaPinska 140.44 -

B. Wayne Varnadore 956.5 4.0

David McCutcheon 968.89 3.9

Ken Hilliard 94.05 -

Linda Gavit 1,006.81 4.1

Paul S. Levy (1) 21,846 91.8

Floyd F. Sherman 3 -

Randy L. White 494.14 2.0

Directors/executive officers 26,695.33 98.7

(1) Levy is the managing member of JLL Associates G.P. IV, L.L.C., the general partner of JLL Associates IV, L.P., which in turn is the general partner of JLL Partners Fund IV, L.P. As a result, Mr. Levy may be deemed to beneficially own all of the shares of common stock owned by JLL Partners Fund IV, L.P., and to have shared voting or investment power over the shares of common stock owned by JLL Partners Fund IV, L.P. Messrs. Castaldi, Frank, and Milgrim disclaim any beneficial ownership of our common stock.