Impact resistant?

Impact resistant?

COMPANIES/UPDATE by Mark Gordon | Managing Editor

Market realities have forced PGT Industries, one of the oldest, and largest, window and door manufacturers on the Gulf Coast, to make some big changes.

Rod Hershberger has had several rock star moments in his three years as chief executive of Venice-based window and door manufacturer PGT Industries, from the surfboards hanging on his office wall to the backslaps and cheers he occasionally receives on strolls through the factory floor.

And that star only grew brighter as Hershberger's infectious smile and sunny disposition led the company, the onetime largest private employer in Sarasota County, through various growth stages. That especially includes PGT's public offering, which initially exceeded expectations when it hit the markets two years ago.

But as the two-year anniversary of going from privately held to publicly traded approaches later this month, that star is beginning to fade, at least on the company itself. The housing market slump, combined with the paradoxical fact that Florida has been relatively free of major hurricanes for two seasons, has sliced into PGT several ways, from a steadily declining share price to an employee base that's been cut by 40%.

"Our market had changed," says Jeff Jackson, PGT's chief financial officer. "We had to realign the company."

Indeed, the company's publicly traded story so far plays out like a rock star's career: In the beginning, it soared to success, with the stock reaching as high as $15.54 a share and annual revenues reaching $371.6 million by the end of 2006. But the company has since fallen off the charts, with a stock that has sunk to as low as $2.23 a share and annual revenues that fell 25%, to $278.39 million going into 2008.

Last year the company also reached another low: It laid off about 200 employees, the first cutbacks of what would be about 1,000 layoffs announced through this past March. With about 1,200 employees remaining on the Venice plant's payroll, PGT has slipped into second place among the largest private employers in the county, falling behind Publix; the company has about 350 employees in a second factory, in Salisbury, N.C.

Still, like any rock star worth his microphone, Hershberger isn't about to sing his last tune. "You can get really depressed thinking about the moves you had to make," says Hershberger, who also serves as company president. "But when I walk out onto the factory floor and see what we still have, I get really jazzed up."

'Pretty cool'

Here's a sampling of what PGT still has:

• Support, although somewhat tepid at times, from Wall Street analysts who think the worst part of the company's troubles are in the past. Just this past month, for instance, Deutsche Securities upgraded its call on the stock from hold to buy. Shares rose to the mid $4-range for parts of May;

• A strong relationship with JLL Partners, its New York-based investment partner. Hershberger says the private equity firm has been impressive - both with the loyalty it has shown to PGT during the company's slump and the reach it has with deep-pocketed Wall Street investors. The latter aspect, which the CEO has seen first person through several trips to New York the past year, is "pretty cool," says Hershberger;

• PGT University, the company's training program for employees, vendors and contractors continues to grow. The program has now trained 18,000 building code officials, Hershberger says.

• New product lines designed to expand the company's reach, both in geography and building type. The company's most prominent effort so far has been its partnership with ASI Limited, an Indianapolis-based high-rise window contractor. The joint venture, announced in March, focuses on designing, manufacturing and placing windows on commercial and residential high-rise buildings.

It's a complicated process known as a curtain wall and the companies have already begun work on the first joint project, a 34-story condo tower in Grand Rapids, Mich.;

• Even with the expansion outside Florida, PGT remains the dominant player in its home state for impact-resistant windows and doors. More than 90% of the company's revenues come from Florida residents and businesses.

The company is shifting resources in order to tap into new markets within the state, too. That includes expanding its remodeling and repair divisions. It would like to grow outside Florida, but it doesn't want to give up Sunshine State market share in the process. "We've put into place various plays to take us to an end goal," says Jackson. "Now we need to see if we can get there."

Still, what PGT lacks is also the element it has the least amount of control over: Housing starts. Without new houses going up, especially in Florida, the company's turnaround will be significantly delayed, Hershberger and Jackson concede.

And the numbers, which the executives recite from memory, are striking. For instance, there were 120,000 new homes starts in the state in 2006 and only 64,000 starts in 2007.

Those numbers look even worse historically. From 1990 through 2004, the average number of starts was around one house per six new residents. That number has now climbed into the low double digits.

Too much pain

The declining number of housing starts - or stops, as it were - and the company's decreased workforce have only served to make PGT's challenges more acute: The company must do more with less, not unlike other, smaller businesses connected to the housing market. Says Hershberger: "Your core beliefs get tested any time things get tough."

One of the company's core beliefs, going back to when it was founded in 1981, was to never layoff employees. In fact, when the company began exploring that option early in 2007, it held a companywide meeting to see if employees would rather have a scaled back work week.

The company went for the second option, keeping jobs intact while spreading around a thinner workload.

But the move backfired when employees complained about falling behind in car payments, mortgages and other bills.

Says Hershberger: "It was causing pain to too many employees."

So the company moved into layoff mode. Jackson says the firm worked backwards until it reached a number that made sense with the decreased amount of work. It most recently let go of 300 employees, in March.

Jackson, who joined PGT in 2005 after working in executive finance positions for the Hershey Co., and Hershberger, who has been with the company since it was founded, say the bulk of the remaining employees have responded well through the tough times.

Both executives have seen employees quickly adapt to new roles and new jobs, a tough task for a big company. "In the boom, the biggest challenge we had was not to get complacent," Hershberger says. "I don't think that's an issue now."

Regrets?

The pair of top executives at Venice-based window and door manufacturer PGT Industries doesn't regret taking the business public - despite the scrutiny for a company that's seen its share price drop from $15 a share to under $3 a share in less than two years.

"If there is one thing we could change," says Rod Hershberger, PGT's president and chief executive officer, "it would be the timing."

To be sure, the day of PGT's initial public offering, June 28, 2006, is awfully close to what is considered the beginning of the housing slide. Past that, Hershberger laments that his time demands have shifted, from spending less time with employees on the factory floor to taking more time to talk to Wall Street analysts and investors.

Meanwhile, during the company's first year as a publicly traded entity, chief financial officer Jeff Jackson devoted a good portion of his time on complying with the Sarbanes-Oxley Act, the federal accounting legislation that has been the bane of many CFO's existence.

"It was a significant effort," says Jackson, who previously worked in executive finance positions with the Hershey Co., which is also publicly traded. "And it took a year to put in place, document and test our controls."

On a personal financial level, it's easy to see why Hershberger and Jackson have no regrets about going public: Hershberger made a total of $2.625 million in 2006, according to the most recent salary documents PGT filed with the Securities and Exchange Commission. The bulk of Hershberger's salary stems from stock options and other bonuses, as his base salary for 2006 was $325,000. Jackson earned $1.224 million in 2006, off a base salary of $260,000.

BY THE NUMBERS

PGT, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS

(unaudited - in thousands, except per share amounts)

Quarter Ended 3/31/2007 3/29/2008

Net sales $72,602 $54,836

Cost of sales 47,903 38,765

Gross margin 24,699 16,071

Selling, general and administrative expenses 20,172 16,269

Income from operations 4,527 -198

Interest expense 3,124 2,727

Other expenses, net 133 -107

Income before income taxes 1,270 -2,818

Income tax (benefit) expense 469 -1,031

Net income $801 ($1,787)

Basic net income per share $0.03 ($0.06)

Diluted net income per share $0.03 ($0.06)

Weighted average shares outstanding:

Basic 26,999 27,636

Diluted 28,366 27,636

PGT, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands)

Quarter Ended 12/29/2007 12/29/2008

Assets (unaudited)

Current assets:

Cash and cash equivalents $19,479 $18,208

Accounts receivable, net 20,956 21,613

Inventories, net 9,223 9,496

Deferred income taxes 3,683 3,293

Other current assets 7,080 9,485

Total current assets 60,421 62,095

Property, plant and equipment, net 80,184 78,357

Other intangible assets, net 96,348 94,956

Goodwill 169,648 169,648

Other assets, net 1,264 1,187

Total assets $407,865 $406,243

Liabilities and shareholders' equity

Current liabilities:

Accounts payable and accrued expenses $15,235 $14,714

Current portion of long-term debt 332 663

Total current liabilities 15,567 15,377

Long-term debt 129,668 129,337

Deferred income taxes 48,927 48,927

Other liabilities 3,231 3,174

Total liabilities 197,393 196,815

Total shareholders' equity 210,472 209,428

Total liabilities and shareholders' equity $407,865 $406,243

AT A GLANCE: PGT Industries

Headquarters: Venice

CEO: Rod Hershberger

FY 2007 Revenues: $278.39 million

Stock symbol: PGTI

Recent stock price: $2.95

52-week stock-price range: $2.18-$13.01

Price-earnings ratio (trailing 12 months): N/A

Dividend: N/A

Market capitalization: $96.94 million

Source: Yahoo! Finance, Google Finance

REVIEW SUMMARY

Business. PGT Industries, Venice

Industry. Construction, housing

Key. PGT is going through a companywide restructuring as it deals with the slumping housing market.