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PGT, Inc. (NASDAQ:PGTI)

Q3 2009 Earnings Call Transcript

November 5, 2009 10:30 am ET

Executives

Jeff Jackson – EVP and CFO

Rod Hershberger – President and CEO

Analysts

Ray Huang – JP Morgan

Sam Darkatsh – Raymond James

Nishu Sood – Deutsche Bank

Jim Wilson – JMP Securities

Robert Kelly – Sidoti & Co.

Peter Reed – Mast Capital Management

John Spikes [ph] – Numeria [ph]

Operator

Good day everyone, and welcome to the PGT Inc. third quarter 2009 earnings conference call. (Operator instructions) At this time, I would now like to turn the conference over to Jeff Jackson. Please go ahead sir.

Jeff Jackson

Thank you and good morning. Welcome to PGT’s third quarter 2009 conference call. I'm Jeff Jackson, CFO, and I'm joined today by Rod Hershberger, President and CEO. We will represent PGT on this morning's call.

Before we begin, let me remind everyone that today's conference call may contain statements concerning the company's future prospects, business strategies, and industry trends. Such statements are considered to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements. So please refer to yesterday's press release and our most recent Form 10-K filed with the SEC. We undertake no obligations to publicly update or revise any forward-looking statements.

A copy of our press release is posted on the investor relations section of our corporate website at www.pgtinc.com. Included in the press release is the unaudited consolidated balance sheets and statements of operations prepared in accordance with GAAP and adjusted information, which was quantitatively reconciled to GAAP. Our company uses non-GAAP measurements as key metrics for evaluating performance internally. A detailed explanation of these non-GAAP measures can be found in our Form 8-K filed yesterday with the SEC. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather we believe the presentation of non-GAAP measurements provide additional information for investors to facilitate the past and present performance.

For today's call, Rod will provide an overview of our performance for the third quarter. Then I'll discuss our results in more detail. After our prepared remarks, we'll take your questions.

With that, let me turn the call over to Rod. Rod?

Rod Hershberger

Thanks Jeff and good morning everyone. As I mentioned in our press release, the third-quarter produced some signs that there is a recovery taking place in the home building industry. Several of the nation's largest homebuilders report increase in new home orders and decreases in cancellation.

The existing home sales in September increased 34% compared to the prior month in our primary market of Florida, as buyers who were reluctant to enter the market moved to take advantage of sales incentives, to stress bargains, and the first-time homebuyers tax credit of 8000. We also saw a 10% increase in sequential quarter, single and multifamily construction starts during the third quarter.

However, new home construction remains in a historically low level as starts in our core market were down 42% in the third quarter compared to last year's third quarter. The continued decline in home prices and low interest rates plus the tax incentives for first-time homebuyers provided some beneficial economic effects during the quarter. But the negative economic effects of increased foreclosures and mortgage delinquency, tight credit standards and higher unemployment, which is now almost 10% nationally, will likely continue to hamper any recovery in the home building industry and make predicting the timing and extent of the turnaround or even stability difficult.

In the face of this market, our sales decreased 23%. Compared to the third quarter of 2008, sales into the repair and remodeling market were down 13%. Our sales into the new construction market were down 43%. As a percentage of total sales for the third quarter of 2009, R&R sales accounted for 73% and new construction sales accounted for 27% compared to the third quarter of 2008 where R&R sales accounted for 64%, and new construction represented 36%.

Even in this challenging environment, we continue to invest in new product offerings to better serve our customers. In August, we began taking orders of our new Vinyl Series 400 and Vinyl WinGuard Series 500 windows that qualify for energy tax credits provided for through The American Recovery and Reinvestment Act of 2009. This act includes an incentive for US homeowners to receive a 30% tax credit for the cost of energy-efficient home improvements made in 2009 and 2010, up to $1500.

In a dealer and distributor road show in late September, we rolled out our new Series 670 and 770 sliding glass door to the marketplace. The feedback has been outstanding. Our customers were thrilled with its improved aesthetics, clean design, ease of installation and the many new features the door offers.

The product line also includes a Series 870 high-performance sliding glass door. We began taking orders in late October and early indications are that the new doors are a success. While we expect this new sliding glass door to eventually replace certain of our existing sliding glass door products, we think its new design and features will drive incremental sales well into the future.

As we announced in a press release in mid-August, we acquired the operating assets of the Hurricane Window & Door Factory previously located in Fort Myers, Florida. Hurricane Window & Door Factory designed and manufactured high-end vinyl impact products for the single and multifamily residential markets. The products provide long-term energy and structural benefits, while qualifying homeowners for the government’s energy tax credit through The American Recovery and Reinvestment Act of 2009.

The product line was developed specifically for the hurricane protection market and combines some of the highest structural ratings in the industry along with excellent energy efficiency. The acquisition of this product line, which we have branded Premier View [ph], expands our presence in the energy efficient vinyl impact resistant market, including our ability to serve the multi-storey condo market, and enhances our ability to offer a complete line of impact products to the customer.

Sales of our new non-impact vinyl window, SpectraGuard targeted for the R&R market launched in March totaled 2.8 million. We continue to be pleased with the sales of our new vinyl product line, and expect this line to continue to provide geographic sales growth as we continue to focus on increasing our distribution network in targeted states outside Florida.

Due to the success of our new vinyl products, in the third quarter of 2009 out of state sales were up nearly 32% compared to last year and nearly 7% compared to the second quarter of 2009. Out of state sales represented $9.1 million or almost 22% of our $41.6 million of net sales during the third quarter of 2009. This compares to just 13% last year and 18% last quarter.

This growth is directly related to the introduction of our new vinyl product line and our success in setting up new distribution outside the state of Florida. In the third quarter, we took further restructuring actions to better align costs with recent sales levels. We also implemented other efficiency initiatives to decrease costs in purchasing distribution and other areas.

These actions are expected to save us an estimated $2 million annually. We will realize the full benefits of all these actions in the fourth quarter.

Comparing the third quarter to the second quarter of 2009, sales decreased $5.3 million, driven mainly by a decrease in the aluminum WinGuard sales in southern Florida. Gross margin decreased $3.8 million from the second quarter, due mainly to the decrease in sales of our higher margin aluminum WinGuard product line and $500,000 of restructuring costs included in the third quarter.

SG&A costs were nearly flat compared to the second quarter, but included $400,000 of restructuring costs. Adjusted EBITDA decreased to $3.2 million in the third quarter of 2009 from $6 million in the second quarter. The decrease in EBITDA was driven by lost margin and operating leverage as a result of lower sales.

Net loss was $3.4 million in the third quarter compared to a net income of $343,000 in the second quarter. Excluding restructuring costs of $900,000, there was an adjusted net loss of $2.5 million in the third quarter. Net loss per diluted share was $0.10 in the third quarter compared to a net income of $0.01 in the second quarter. Excluding restructuring costs, there was an adjusted net loss of $0.07 in the third quarter.

We used cash generated during the third quarter and cash on hand to prepay $12 million worth of outstanding bank debt, but shortly after the close of the quarter we drew down $12 million on our revolving credit facility for working capital and general corporate purposes, including growth initiatives, such as new product offerings and our expanding presence in the vinyl and impact resistant markets.

We think the housing market and conditions in the economy will remain difficult well into 2010 and possibly further. Because the downturn in our industry has been so long and severe, any recovery will take time. Stabilization is the first step to recovery. We are optimistic about our long-term growth as we continue to introduce new products and expand our out-of-state distribution.

In the near term, we will continue to focus on controlling costs and conserving cash. With that I will turn the call back to Jeff, who will review the results for the quarter in greater detail.

Jeff Jackson

Thank you Rod. Let me give you more detail regarding the third quarter and year-to-date results. We reported net sales of $41.6 million for the third quarter, a decrease of 23.4% versus the prior year quarter. As Rod mentioned, new housing starts in our core market were down 42%, which has negatively impacted our year-over-year sales into the new construction market.

Sales for the first nine months of 2009 were $130 million, bringing our year-to-date decrease in sales to 23.2%. Our third quarter and year-to-date decreases were mainly driven by our new construction sales, down 43% versus prior year third quarter, and also down 44% year-to-date.

Single family and multifamily home starts in Florida came in at 8417 for the quarter, down 42% from the third quarter of 2008. Our WinGuard products continue to lead our sales, representing approximately 63% of sales for the third quarter, and 66% year-to-date.

This compares to last year's WinGuard product mix of 69% both for the third quarter and year-to-date periods. The decrease in WinGuard sales coupled with an increase in sales of our vinyl nonimpact products resulted in a decrease in the percentage of WinGuard sales to total sales for the third quarter.

Breaking down our sales drivers for the third quarter compared to 2008 third-quarter, we have WinGuard impact sales at 26.2 million versus 37.8 million, down 31%; aluminum nonimpact products sales at 5.5 million versus 7.9 million, down 30%, architectural system sales were 30 million versus 4.4 million, down 32%.

Vinyl nonimpact and other products sales were 6.9 million versus 4.2 million, up 64%. The increase in vinyl sales is due to our continued focus on increasing our distribution network in targeted markets outside of Florida. Our percentage of sales within our core market, Florida, was 78% of total sales compared to 87% last year. When compared to our sequential quarter our sales decreased to 11% from 46.9 million to 41.6 million.

Our new construction sales were down 9%, while sales into the R&R market decreased 14% compared to the second quarter of 2009. Our gross margin for the third quarter was 26.1% versus 29.8% in the third quarter of 2008, down 370 basis points. Our decrease in gross margin percentage was driven by a decrease in sales, which resulted in our margins down by 630 basis points.

A change in product mix and a decrease in pricing, which resulted in margins decreasing by another 330 basis points and restructuring costs, which reduced our margins by 130 basis points. Partially offsetting these decreases were spending reductions from our cost savings initiatives, which improved our margins by 460 basis points and a decrease in aluminum cost, which improved margins by 260 basis points.

Our average cost of aluminum was approximately 2175 per metric ton during the third quarter comprised of spot purchases averaging 1800 per metric ton for approximately 6% of our needs, and hedged purchases averaging 2200 per metric ton for 94% of our needs. This compares to the third quarter of 2008 average price for aluminum of nearly 2900 per metric ton. The cash price of aluminum rose as high as 3300 per metric ton at times during early third-quarter 2008.

Since that time the cash price per aluminum has fallen dramatically. At times during March 2009 the cash price was as low as 1300 per metric ton. The price has increased since that point to a little over 1900 per metric ton this week.

We were currently hedged at approximately 64% of our estimated needs for the rest of 2009 on an average cost of 2170 per metric ton and 45% of our estimated needs in 2010 and an average of 2064 per metric ton.

Our selling, general, and administrative expenses were $12.6 million, down $1.8 million compared to prior year's third quarter. Excluding $400,000 of restructuring costs, SG&A was down $2.2 million, driven by lower personnel related costs of $1.4 million, lower fuel cost of $500,000, and overall lower spending in various other categories of approximately $500,000.

Offsetting these lower costs in the quarter was an increase of $200,000 in bad debt expense as we added to our allowance for bad debt. We take a conservative view of our accounts receivable reserve and we continue to work with our customers to resolve any collection issues.

SG&A as a percent of sales, excluding restructuring costs was 29.5% in the third quarter of 2009 compared to 26.6% in prior year’s third-quarter. Interest expense was $1.7 million compared to $2.2 million in the third quarter of 2008. The decrease primarily relates to lower debt compared to prior year as we have made prepayments on our long-term debt. The weighted average interest rate on our debt in the third quarter of 2009 was approximately 7% compared to approximately 6.6% for the prior year.

The interest rate on our bank debt is based of our credit agreement and its tiered interest rate structure. For the third quarter, our effective tax rate was a benefit of 5.1% due to certain adjustments related to amending prior year’s tax return. This compares to an effective tax rate benefit of 23.6% in the third quarter of 2008. As a reminder, in the fourth quarter of 2008, we provided a valuation allowance on all our deferred tax assets because their realization in this difficult economic times cannot be assured. As a result, changes in deferred taxes during the third quarter were equally offset by change in the valuation allowance.

Excluding the change in valuation allowance, the effective tax rate for the third quarter of 2009 would have been a benefit of approximately 38%. Going forward, we anticipate our tax rate to be in the range of 38% to 39% absent any further adjustment to the valuation allowance. As we become more profitable, we will be in a good position to realize our deferred tax assets by offsetting future income.

We had a net loss for the third quarter of $3.4 million or $0.10 per diluted share versus a net loss of $1.6 million or $0.05 per diluted share in the third quarter of the prior year. The net loss in the third quarter of 2009 included $900,000 in restructuring costs, while the net loss in the third quarter of 2008 included $1.6 million in non-cash intangible impairments.

Adjusting for these items, results in an adjusted net loss for the third quarter of 2009 of $2.5 million or $0.07 per diluted share, and an adjusted net loss in the third quarter of 2008 of $337,000 or $0.01 per diluted share.

Adjusting EBITDA was $3.2 million or 7.6% of sales for the third quarter versus an adjusted EBITDA of $6 million or 11.1% of sales for the third quarter of 2008. The loss of operating leveraged from the decrease in sales has had a negative impact on our EBITDA.

As additional information, our third quarter depreciation and amortization totaled $4.1 million. A reconciliation of the adjusted net loss and adjusted EBITDA is included in our earnings release for your reference.

Now turning to the balance sheet, at quarter end our net working capital, excluding cash decreased by $589,000 compared to the end of the second quarter. This decrease in net working capital was primarily the result of a decrease of $1 million in accounts receivable related to our decrease in sales during the third quarter and an increase in accounts payable of $1.4 million.

Offsetting these decreases was an increase in our inventory of $2 million, relating to materials we have ordered for upcoming projects and due to the inventory included for our recent acquisition related to the expansion in the vinyl markets.

In reviewing free cash flow for the third quarter, we had an adjusted EBITDA of $3.2 million, third quarter 2009 capital additions of $400,000, cash paid for interest of $1.5 million. We used $600,000 in cash for other purposes including working capital. We used 1.5 million in cash for the recent acquisition.

We also generated cash of approximately $800,000 for returns of margin calls on aluminum hedges due to the increase in aluminum prices over the quarter. Additionally, we received 700,000 in cash from previously funded aluminum settlement contracts, giving us free cash flow totaling 700,000 in the quarter.

As Rod mentioned earlier, we used cash generated during the third quarter in cash on hand to prepay $12 million of outstanding bank debt. This resulted in prepayment of outstanding debt in 2009 totaling 20 million. But our cash on hand decreased to $3.1 million at the end of the third quarter.

As I mentioned in our press release yesterday, shortly after the close of the quarter, we drew down $12 million on our revolving credit facility for working capital and general corporate purposes, including the growth initiatives we previously laid out such as the new product offerings and our continued expanding presence into the vinyl market, both impact and nonimpact markets.

But this had no effect on our net debt. Our net debt at the end of the third quarter of 2009 was approximately $67 million. This compares to net debt of $68 million at the end of the second quarter. We took further restructuring actions in late September, which included reductions in our workforce and changes to our long haul distribution routes to reduce cost in those areas.

These actions are expected to produce approximately $2 million of annualized savings, which when combined with the savings already being achieved through other actions taken in the first quarter of 2009 are on track to provide total annualized savings of approximately $12 million.

As an additional cost savings step, we implemented a temporary 16% pay reduction for all salaried employees at the beginning of the second quarter that continued during the third quarter. Combined with our restructuring actions and other cost savings initiatives, the beneficial impact on our third quarter was nearly $4 million, which helped to offset the negative impact on the contribution margin of over $6 million from the decline in sales when compared to the third quarter of 2008.

We were currently in compliance with all debt covenants, and our projected results suggest we will remain so in the foreseeable future. However, considering the recent historical trends including the fact that our sales for the third water and the fourth quarter in recent years had decreased, we extended the temporary 16% pay reduction for all salaried employees into the fourth quarter.

Additionally, we recently announced a voluntary separation program, which is available to all full-time employees and which we expect will drive additional cost savings to the company. In conjunction with these cost saving measures, we were currently exploring various opportunities to drive incremental sales, investing in future growth opportunities and considering ways to raise additional capital.

Collectively, these actions properly reflect our commitment to managing capital and protecting the long-term strength of the company. We made difficult decisions over the last two years. The benefits of those decisions are seen in our ability to generate cash and paying down our debt, while continuing to invest in our future and continuing to serve our number one priority, the customer.

The US economy did indeed fall into the worst recession in 70 years, and in some ways our worst fears have been realized. Single family starts in any given quarter are ranging in the 6000 range from nearly 60,000 several years ago, home prices falling 30% plus, foreclosures continuing to mount, financial institutions meltdown, and the freezing up of credit.

However, we continue to believe in our long-term outlook for housing and our ability to expand in our core market Florida, and into new markets. With that let me turn the call over to Rod.

Rod Hershberger

Thanks Jeff. We are still in difficult market conditions that negatively affect our business and the overall economy, but as I mentioned earlier we are seeing some signs of stabilization in the home building industry, but it will take additional time to spur growth as the economy continues to shed jobs.

As I previously outlined, we instituted several measures to stimulate sales as well as to reduce operating costs to counteract the current market condition, and we will continue to monitor those conditions closely. Although the Federal stimulus package has put much needed dollars into the credit markets, we are yet to see this money flow through to the consumer.

We believe Federal energy initiatives will drive additional sales, but are unsure what effect that will be on ENERGY STAR programs as they move from the Department of Energy to the Environmental Protection Agency over the next year. The negative effects on the economy due to continued rise in unemployment means the home construction industry is still in for a long period of recovery.

Long term, we believe the US impact resistant marketplace will continue to grow and we have expanded our presence in this market through developing new products internally and through a strategic acquisition like the recent acquisition of Hurricane Window & Door, which gives us an expanded presence in the energy-efficient vinyl impact resistant marketplace and positions us for growth as that market takes hold in Florida.

We continue to actively seek new markets in other geographic areas as well as develop new products in our flagship WinGuard line, most notably our new sliding glass door. We will also continue to develop an increasingly intimate understanding of our customers’ business needs and opportunistically review acquisition candidates as they come up. During this market downturn, we have been able to leverage our value proposition, improve our customer service and maintain our internal structure to quickly take advantage of opportunities when market conditions improve.

I thank all our employees and our customers for believing in us, committing to our strategy, and continuing to perform at higher and higher levels.

With that I will conclude, and Jeff and I will be happy to answer your questions. Cessilia, if you will take the first question please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Michael Rehaut of JP Morgan.

Ray Huang – JP Morgan

Hi guys. This is actually Ray Huang for Mike.

Rod Hershberger

Hi, Ray.

Ray Huang – JP Morgan

The first question on the gross margin and the SG&A. You know, assuming sales volume is you know, down slightly from third quarter, where do you guys see those gross margins and SG&A kind of trending in the fourth quarter given, you know, the current market environment and factoring all the various cost-saving initiatives that you have implemented this year.

Rod Hershberger

Yes, Ray, I mean, we obviously should recognize the full benefit of the measures we took at the end of third quarter in the fourth quarter. So it's a little bit difficult to give you an exact number on that. I do think they shouldn’t get any worse than what we’re seeing. If anything they'll get a little better, probably closer to the upper 20% to 30% range, if things go right in terms of cost.

A lot of that also depends on where aluminum stays at. You know, right now it is staying in the $1900 for our cash buys which is still a good portion of our purchases in the fourth quarter. So, that and the direct labor pieces are the two biggest ones. So we attacked both of those areas, and of course volume being the third. So the two that we control here in terms of the materials and direct labor, I think we've done a good job, and I think we're going to see some good benefits from that. But I expect them to improve slightly from what we saw in the third quarter.

Ray Huang – JP Morgan

Okay, just to clarify the upper 20% to 30% range is that on the SG&A side?

Jeff Jackson

Gross margin.

Ray Huang – JP Morgan

Okay, and just a follow-up question on the -- I think last quarter you guys mentioned some pricing pressure on the commercial side. I was wondering if you can give an update on you know, what you're saying in the commercial market today in terms of volumes and pricing and also if you have you know, a little update on what pricing trends are doing in the residential piece?

Jeff Jackson

Yes. I jump into the commercial side first Ray. We see some pricing pressure. What we are seeing more of is we serve primarily like the Condo market, which is you know, some people look at that market and it's not true commercial, really the high rise market, its operable windows and what we are seeing is with the kind of Condo change and our insurance driven changes, people may be switching from a higher end vinyl energy efficient impact window to an aluminum impact window, which meets all the codes and gets them some of the rebates.

So it hasn't -- it's been you know, fairly competitive on the bidding side, but there is probably been a little more push toward a product that didn't cost quite as much as there has been just pure pricing pressure. On the residential side, I think overall we've been able to hold our pricing pretty steady to our existing dealers and distributors, although projects bidding is more competitive, and project bidding when you are just bidding a one-off project is not too bad.

But what we are seeing is we are seeing delays in starts of projects. So a project that we think is ours or you know, we think has been let out gets delayed for 3 to 6 months, and at that time period goes back out for rebid. So that one there is a little harder to predict and that gets a little more competitive I think as it gets closer to time to start the project.

Rod Hershberger

Yes, and just to wrap up that initial question on that SG&A side, Ray that I'm thinking you know, in terms of percentage wise SG&A, we are going to get a little bit of improvement in the fourth quarter. We closed in at 29.5% for this quarter, but I'm thinking it'll be closer to you know, probably 27%, 28%. We'll get some kind of basis point improvement given the cost restructurings we did in that area as well.

Ray Huang – JP Morgan

Okay, even if volume where to fall a little bit you still be able to get that improvement?

Rod Hershberger

Yes, I think we will be able to drive those improvements again. We've taken out the cost, and a lot of that is still variable. So when the volume falls it falls with it. So if I had to peg a percent, I’m thinking it is still in the upper 20s. I think it will be slightly improved in the third quarter.

Ray Huang – JP Morgan

Okay, great. Thanks guys.

Operator

And our next question comes from Sam Darkatsh of Raymond James.

Sam Darkatsh – Raymond James

Good morning Rod. Good morning Jeff.

Rod Hershberger

Hi Sam. How are you?

Sam Darkatsh – Raymond James

I am well. How are you? Couple of questions, focusing on WinGuard, but my math I think WinGuard is now -- has been declining more than overall sales for three or four quarters in a row. There are some moving parts here with some of your initiatives, but do you anticipate that dynamic changing in terms of WinGuard going back to outperforming and the next -- the profitability mix improving over the near term or because Florida still weak and because the high end, the consumers are not going towards high end, and because there is no hurricanes, and all that that WinGuard will continue to slip as a proportion of your overall sales.

Rod Hershberger

That is hard to predict Sam. Just from what we see in the marketplace, I think the lack of storms and the lack of storm awareness is affecting it. It is definitely affecting it. If you don't get hit in a few years then I think we call it hurricane amnesia kind of sets in and you think it is not going to happen to me.

It is still driven though by insurance, you know, some of the insurance drivers that make you have impact resistance products in place, although it doesn't have to be a window. So we are still seeing change. We are seeing people put in impact resistant products, but it probably gives them a little more opportunity to try to go to a lower-end like a plywood. I mean, we were actually seeing people put plywood up. That tends to change very quickly, when a storm gets close and you physically have to go out and put it up in order for insurance to cover you. So we're one threatening storm away from seeing that market change a little bit.

The flip side is, I think we're going to start seeing a little more activity on the combined energy and impact side, as we see energy codes start rationing down. You know there is a proposed new ENERGY STAR program in place in January, which is a little bit up in air right now as to whether how that gets enforced, and when that really takes place. But it will be early next year, and we think we will see a driver towards more energy efficiency, and probably biennial impact product or at least ENERGY STAR rated products, which we have both in our biennial product line and our aluminum product line.

So I think that will balance it a little bit, but in a tough economic time, yes, I expect to see a lot more conservative pricing as far as WinGuard sales.

Sam Darkatsh – Raymond James

So what -- Jeff I remember your answer to a prior question as to gross margins are looking to expand, is that in the face of declining WinGuard sales or is that just assuming that the overall end-markets begin to improve and then therefore WinGuard as a proportion of the whole just remains kind of constant kind of thing or maybe even improves.

Jeff Jackson

The latter. I think the overall market will ultimately begin to improve. We are adding out a state distribution and out-of-state volume, and so that will obviously help us, but you know WinGuard will hold its own eventually here. I don't see it just continuing to decline quarter-over-quarter over quarter. I think we're going to reach kind of a stabilization to that. That coupled with the cost reductions we have done that targeted COGS, I think that is what is going to drive a slight improvement in our gross margins.

Rod Hershberger

Hey, Sam the 30-30 regulation that is out there too, a point for U value, and point for Solar Heat Gain – which our 500 series vinyl impact and our Premier View impact also meet, will incent a little bit of sales also, because you get that tax credit or 30% of it, up to $1500 tax credit for replacing your existing windows with an impact resistant energy efficient window. So I think that will kick in and we will see a little bit more activity from that.

Jeff Jackson

You also have Sam the acquisition we made on the vinyl side with Premier View. We do expect those margins are going to be in the upper 40s, mid to upper 40s, and as that gains momentum, I think there's going to be a good benefit for that.

Sam Darkatsh – Raymond James

Thank you for that full answer, I appreciate that. The second question, the use of the revolver post quarter, after you paid the debt down to satisfy the covenants, do you anticipate being required to do that in the next few quarters or is that because you had the one quarter rolling off last year that was kind of a weird timing?

Rod Hershberger

Well, is this simple calculation, which is obviously out there for everybody to do. It is five times our debt, and I had mentioned in my comments, our net debt hasn’t changed. So as we close out the fourth quarter, we look at the quarter that we rolled off. We do our calculation and see what kind of payment is required. We have done that consistently now for two years.

So I don't see anything changing there. I anticipate us still going through the same calcs and doing what it takes to stay in comply. I can tell you we are in compliance. Now, if it helps our cash positions and it has improved. If you look at our cash position right now it is almost $19 million.

So based on everything we have seen here and we have to go with this (inaudible) in terms of growing concern out into the future, a year plus. Everything we see, we are in compliance. So we will do what we have always done. We will get the quarter, rolling 12 EBITDA and make whatever payment we need to make.

Sam Darkatsh – Raymond James

So your cash as it stands right now, Jeff is 15 million or what is your cash as you look at it today?

Jeff Jackson

Almost 19 million.

Sam Darkatsh – Raymond James

$19 million and so the difference -- but I thought you used, it was $12 million on the revolver.

Jeff Jackson

We drew down, yes.

Sam Darkatsh – Raymond James

So that would have been 15. So the extra 4 came from…

Jeff Jackson

Well, we closed the quarter with three. So we generated roughly a million dollars of cash so far this quarter.

Sam Darkatsh – Raymond James

Okay, that was where I was getting. Okay. Alright, thank you.

Jeff Jackson

You bet.

Operator

And we will take our next question from Nishu Sood of Deutsche Bank.

Nishu Sood – Deutsche Bank

Thanks. Good morning guys. First question I wanted to ask was following up on Ray’s question earlier, he was kind of looking at the gross margins just into the fourth quarter. I just wanted to talk about them on a longer term basis, you know if you go back through the history of the company into the late 90s, your gross margins was let us say in the 30%, low 30s range.

Obviously, with the tremendous housing boom, the strong hurricane seasons that happened you hit 40%. This year it looks like we will probably be in the high 20s or so, maybe approaching 30%. There is obviously been so many massive shifts in products and obviously the demand environment, you know through this period we were talking about, I wanted to get your folks sense for what normalized might be given the kind of products you are emphasizing going forward, given what normalized demand might be. What you see that number as on a normalized basis?

Jeff Jackson

Yes, what do we see the margin on a normalized basis?

Nishu Sood – Deutsche Bank

Yes, on a gross margin basis.

Jeff Jackson

You know the two biggest factors playing into that, the new acquisition of the vinyl impact window, its success, and the ability once the nonimpact vinyl series has gained distribution outside the state, and North Carolina is in essence full or increased capacity there in terms of what is running through the production line.

So with those two areas in our targeted line, I think long-term you are going to see gross margins in the mid-thirties. That is our goal, and I definitely think we all here believe it is achievable, especially given not only just the cost reductions from employees and personnel standpoint, but the efficiencies we have been building in as we reorganize the company, and in general how we produce products through the plan.

We've got some significant savings in terms of our scrap, our utilization, re-engineering our lines that will definitely benefit us in the future as volume comes back through. So you know I have no problem thinking it is mid-thirties plus, as we start gaining more sales.

Nishu Sood – Deutsche Bank

Got it, great. Thanks. That is very helpful. And second question I wanted to ask was on the stimulus bill in the early part of this year and the tax credit that provides for energy efficiency. I was just wondering if you could help us kind of quantify what type of impact that has had on your folks. I think it only affects the vinyl side, so I mean how much, how do we understand what the impact of that has been. If you could also help us understand how long that is going to affect you. I think that the credit runs through 2010, I believe mid-2010 or so. Maybe you could just help us understand the dynamics of that.

Jeff Jackson

Yes, I will answer the second part of that first. We think it will last through 2010, and I say we think it will. There has been some new legislation introduced to actually change that 30-30 tax credit, which from the window industry point of view and maybe even some of your associations in the window industry point of view we think would be a very good thing, because right now it is one size fits all. The same window that meets the energy efficiency is needed in Maine is the window that meets the energy efficiency in Florida, and that is not realistic.

We have different energy needs in Florida for cooling, and for shading than Maine does for heating. So assuming that that bill doesn't change things in 2010, we will see benefits from the energy savings or the energy, The American Recovery and Reinvestment Act through 2010. To qualify it with an exact dollar, I'm not sure that I can do that. It has affected our SpectraGuard 2300, which is our repair and remodeling window, and it has definitely driven some sales there outside the state of Florida.

So as we see those sales grow, we are seeing that. And it has been pretty recent that we have introduced our -- both our impact, our standard impact, biennial impact window and the Premier View with 30-30 certification on that, so that we can make sure that we are meeting that tax rebate. I don't know that I'm prepared yet to say what that is going to do to us in the next year. It will be beneficial, but I can't put a volume behind it yet.

Nishu Sood – Deutsche Bank

Okay great. Thanks a lot.

Operator

Our next question comes from Jim Wilson of JMP Securities.

Jim Wilson - JMP Securities

Thanks, good morning guys.

Rod Hershberger

Good morning Jim.

Jim Wilson - JMP Securities

I guess, was first wondering Jeff, did you give the WinGuard margins versus other?

Jeff Jackson

WinGuard margins came in right at 39%, and then kind all other nonimpact all other, including vinyl and aluminum, nonimpact was 9%.

Jim Wilson - JMP Securities

And then second question, I was wondering with the continued growth of non-Florida revenues out of the North Carolina plant, are you starting to see more success in other states surrounding North Carolina. Is that primarily into the North Carolina market?

Rod Hershberger

I mean it is really in states around North Carolina. We are distributing products out there and running our truck routes. And we have referenced that a little bit when we talked about trying to put some costs initiatives in place. We are running some pretty long truck routes that weren't necessarily full. And we’ve reduced those to a certain extent. We have talked to our customers, spent a lot of time with them working out the best way to make sure they could get product when they needed it, and so run efficiently from both them and us.

I think we worked through some pretty good plans there, but it is really the Midwest through the Gulf Coast area and over to the coastline, with I don’t know that I could even sit here and say that the focus is on North Carolina, although obviously we would love to sell a lot more products in North Carolina because it is really close. But it is pretty spread out.

Jeff Jackson

In specific markets Jim, we have had some good success as of late in Louisiana, New Orleans area as well as even into Texas. So…

Jim Wilson - JMP Securities

So as and when things recover your geographic reach is pretty significant at this point?

Rod Hershberger

Yes it is much larger.

Jeff Jackson

And distribution starting to get set up very nicely in those areas. It is just a matter of the recovery slowing up the trucks as we deliver.

Jim Wilson - JMP Securities

Okay, great. All right, thanks.

Operator

(Operator instructions) Our next question comes from Robert Kelly of Sidoti.

Robert Kelly – Sidoti & Co

Good morning guys.

Rod Hershberger

Good morning Robert.

Robert Kelly – Sidoti & Co

Just a -- maybe a point of clarification. You said that right now 19 million on cash on the balance sheet?

Jeff Jackson

Yes, almost, approximately.

Robert Kelly – Sidoti & Co

So you had three at the end of -- at the close of 3Q, you borrowed an additional 12 on the revolver, and then that is 15, you actually had 4 come from where?

Jeff Jackson

We had 3 plus, 3 at the end, 12 is 15, plus we generated about a little over a million from ops so far through October, will get you to 16. Extra kind of 2-ish, 2.5 is actually the inventory and working capital, that piece has started to come down as well as AP. We had some timing issues in the quarter that kind of drained our cash. It was simply timing on AP.

Robert Kelly – Sidoti & Co

So the build of inventory during 3Q in some of the new product that you were talking about, and I guess the acquisition you did in August?

Jeff Jackson

Yes, the acquisition we did brought on close to $0.5 million in inventory. The build on the door, the new door that we released, we had bills associated with that as well as our own vinyl, our nonimpact vinyl series as they gain momentum. We had bills and samples as well that goes out to the distribution associated with that.

Robert Kelly – Sidoti & Co

So the revolver borrowing, is this the type of borrowing that you would use to kind of bridge you through the seasonally strong period, and you pay some down coming out of spring or this is kind of like a, should we think this is permanent debt that you will be carrying?

Jeff Jackson

You know, I guess that is a good question. What I will say to that is every quarter we have been cash flow positive, absent the restructuring charges, we have been cash flow positive. I don't see that changing. We have had our worst, couple of our worst quarters here recently, closing out in the third quarter and you know the first quarter of this year was pretty tough and despite that we were still -- we still don't use cash.

During the quarter, we sometimes do with inventory, timing of AP, third-quarter was a situation where we did. We brought on a lot of inventory for new product launches. We were pushing the acquisition. We had the purchase of the new company and product line. We just had a significant, what I will call, significant relative to use of cash in a short time period. So, initially our cash went down. We spent [ph] as we have in the past, already building that cash back up. So, we did not use -- we haven't been a user of cash to date and I don’t see us -- I don't see that trend changing.

Rod Hershberger

Yes, one of our largest costs associated with a project launch is samples. We’ll literally make a thousand samples to roll out to our customers so they have a showroom sample or a hand sample. So, we spend more cash there than we would do a lot of times on the literature and stuff involved with it, and that we have rolled out some new products in Q3 and that has affected the cash also.

Robert Kelly – Sidoti & Co

Okay, great. If I remember back to a year ago, when you went to the banks to relax the covenants for adjusted debt and interest coverage five times to 2 times, that went through 1Q10, what happens once we hit 1Q10 as far as the covenant restriction?

Jeff Jackson

Actually, the leverage fees will start stepping down. That is all spilled out in the new agreement. It shifts down a quarter to 4.75.

Robert Kelly – Sidoti & Co

So, they don’t get extremely tight from what you are looking at right now?

Jeff Jackson

Well, it says in that covenant agreement -- our debt agreement it steps down roughly a quarter each quarter.

Robert Kelly – Sidoti & Co

Got it. Okay.

Jeff Jackson

(inaudible).

Robert Kelly – Sidoti & Co

Okay, just finally on the acquisition that you did, was there a contribution for sales in the quarter, and where there any inefficiencies that you kind of worked through that, or any sort of drags around 3Q?

Jeff Jackson

Yes and yes. You know, the contribution of sales in the quarter was minimal because obviously we did it late in the third quarter. Only, you know, I will say $200,000 roughly, plus or minus ten grand, but roughly $200,000 you know, sales. We will be more in the fourth quarter and again as we get it into our distribution it should be a lot more our market.

In terms of start up, yes, we did move the company. Obviously, we relocated their facilities up to our main plant here in Venice, and we had start-up costs associated with that. You know, there were, you know, not material in the $50,000 range.

Robert Kelly – Sidoti & Co

Thanks guys.

Rod Hershberger

Thanks.

Operator

And our next question comes from Peter Reed of Mast Capital Management.

Peter Reed - Mast Capital Management

Good morning Rod and Jeff.

Rod Hershberger

Good morning Peter. How are you?

Peter Reed - Mast Capital Management

Doing very well. How are you so?

Rod Hershberger

Good.

Peter Reed - Mast Capital Management

I just have too quick questions. The first one was what was your LC balance at the end of the quarter?

Jeff Jackson

The letter credit balance was -- we had $4.3 million reserve against it for like workers comp type things. So that would leave us with 25.5ish. It is a $30 million line.

Peter Reed - Mast Capital Management

Right. Okay, great and what was your stock based compensation in the quarter?

Jeff Jackson

Right at through nine months, it has been about $600,000. So a little over you know, almost $200,000 for the quarter.

Peter Reed - Mast Capital Management

Great. That's all I have. Thank you.

Rod Hershberger

All right.

Jeff Jackson

Okay, thanks.

Operator

Our next question comes from John Spikes [ph] of Numeria [ph].

John Spikes - Numeria

Yes, hi guys. How are you doing?

Rod Hershberger

Good.

Jeff Jackson

Hi, John.

John Spikes - Numeria

What's the current availability under the revolver given the draw?

Jeff Jackson

Given the draw, well, we had reserved, as I mentioned earlier about $4.3 million and we drew down another $12 million. The total line was $30 million. So we currently have you know, almost $14 million available, $13.7 million.

John Spikes - Numeria

Okay, but is that -- so that is through the covenants, in other words, that availability is through the covenants that you have and you could draw that and still be in compliance?

Jeff Jackson

That availability is through the -- I mean, it's there. It's part of our credit agreement, our LC agreement. It's not linked -- it's not linked to the covenants.

John Spikes - Numeria

Okay, okay. I got you. And just one, you know, one other thing, I mean in terms of I know you don't

, I know you don't like to give forward comments that type of thing, but it's just in terms of what you are seeing now and what you kind of factored in, do you feel comfortable with the liquidity position and the free cash flow generating ability with company kind of you know, as we look into the future here given kind of all the factors that you have talked about before, the tough environment, you don’t expect a lot of improvement through 2010. You know, I am just trying to get a sense as to your level of comfort with respect to where you stand liquidity-wise right now.

Jeff Jackson

Yes, and I think -- it's a good question John. I think as we currently look at it, we've taken out cost and been successful at that to help stem the decrease in sales we’ve experienced, and we’ve maintained positive cash flow in the quarter. You know, albeit the toughest measure we've ever been in. So from that standpoint we’re not a use of cash company. So, the fact we're not a use of cash company and we have a line out there currently you know, roughly $13 million available, from a liquidity standpoint, I feel good. You know, that's with almost $19 million of cash on our balance sheet. So, yes, from a liquidity standpoint, I think we're fine.

John Spikes - Numeria

Okay, and you had mentioned that you know, you would use cash that you have on hand to pay down the term loan as it would be needed with respect to the covenants. So does that, comment kind of factored in what you may need to do on that end as well?

Jeff Jackson

Yes, I think obviously we'll use our cash in both -- currently in you know, in our bank and the balance sheet as well at the cash we anticipate to generate during the quarter, fourth quarter which we do anticipate to generate some cash in the fourth quarter to assess whatever is needed at the end of the year. It's a quarterly test on the compliance. So we would look at it and we'll use whatever cash is needed and you know, staying compliant based of our EBITDA. Simple, really simple calculation.

John Spikes - Numeria

Yes, I got you. I’m just -- you know, it's just the liquidity -- it's just the thing I wanted to kind of focus on and just get that sense based on your comment, you know, all of the comments that you've made that was pretty much my question.

Jeff Jackson

You know, every -- again every quarter we again use cash. I want to, you know, stress that. Our net debt and change from -- I think actually has improved by a million dollars since the second quarter, and I don't see us you know, needing cash because of our operations. We've been able to adjust and manage the business accordingly to not need liquidity, if you will, to run the company but I think we have plenty available should that be the case.

John Spikes - Numeria

Okay, that's great. Thank you very much. Appreciate it.

Rod Hershberger

Thanks John.

Operator

We are having no further questions in queue. I like to turn the conference back over to Jeff Jackson for any additional or closing remarks.

Jeff Jackson

Thank you for joining us today and we look forward to speaking with you all again at year end at our next call. If you have any questions, please feel free to call me. Have a great day. Thanks.

Operator

And that does conclude today’s conference, ladies and gentlemen, again we appreciate everyone’s participation today.

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