NOTE 6. ACQUISITION

On February 16, 2016 (the “closing date”), we completed the acquisition of WinDoor, which became a wholly-owned subsidiary of PGT Industries, Inc. The fair value of consideration transferred in the acquisition was $103.3 million, including the estimated fair value of contingent consideration of $3.0 million, which has been preliminarily allocated to the net assets acquired and liabilities assumed as of the acquisition date, in accordance with ASC 805, “Business Combinations”. The cash portion of the acquisition was financed with borrowings under the 2016 Credit Agreement, and with $43.5 million of cash on hand.

The estimated fair value of assets acquired and liabilities assumed as of the closing date, are as follows:


	Current Estimate
Preliminary allocation:
Accounts and notes receivable	$	3,882
Inventories		6,778
Prepaid expenses		246
Property and equipment		5,029
Intangible assets		47,100
Goodwill		42,544
Accounts payable and accrued liabilities		(2,320	)

Purchase price	$	103,259

Consideration:
Cash	$	100,259
Earn-out contingency		3,000

Total fair value of consideration	$	103,259

The fair value of working capital related items, such as accounts receivable, inventories, prepaids, and accounts payable and accrued liabilities, approximated their book values at the date of acquisition. The fair value of property and equipment and remaining useful lives were estimated by management using its knowledge of machinery and equipment in the window and door manufacturing industry, neither of which significantly differed from the net book values and remaining book lives of WinDoor’s property and equipment at the acquisition date. Valuations of the intangible assets (See Note 7) were valued using income and royalty relief approaches based on projections provided by management, which we consider to be Level 3 inputs.

Acquisition costs totaling $0.9 million are included in selling, general, and administrative expenses on the condensed consolidated statement of operations for the six months ended July 2, 2016, and relate to legal expenses, representations and warranties insurance, diligence, and accounting services.

The remaining consideration, after identified intangible assets and the net assets and liabilities recorded at fair value, was preliminarily determined to be $42.5 million, all of which is expected to be deductible for tax purposes, subject to the outcome of the earn-out contingency described below. Goodwill represents the increased value of the combined entity through additional sales channel opportunities as well as operational efficiencies. If our preliminary value of assets and liabilities changes, there will be an equal and offsetting change to the recorded goodwill.

The SPA provides for the potential for an earn-out contingency payment to sellers should WinDoor achieve a certain level of sales in the year ended December 31, 2016. Pursuant to the SPA, the Company is required to pay 5.9% of WinDoor’s sales in excess of $46.0 million for 2016 (including both the pre-acquisition and post-acquisition periods of 2016), up to a maximum sales amount of $51.0 million. The potential undiscounted amount of all future payments that could be required to be paid under the contingent earn-out consideration arrangement is between $0 and $3.0 million. We have recorded an earn-out contingency liability of $3.0 million in the first quarter of 2016, representing its estimated fair value using undiscounted cash flows, based on probability adjusted level of revenues with a range whose minimum is $51.0 million. Estimated sales is a significant input that is not observable in the market, which ASC 820 considers to be a Level 3 input. For tax purposes, contingent consideration does not become part of tax goodwill until paid. As such, the amount of goodwill deductible for tax purposes will not be finalized until the outcome of this earn-out contingency is known. As of July 2, 2016, the amount recorded for the contingent consideration, and the assumptions used to develop its estimated fair value had not changed.

The SPA has a post-closing working capital calculation whereby we are required to prepare, and deliver to the sellers, a final statement of purchase price, including our calculation of the amount we find net working capital actually to have been as of the closing date. We finalized and delivered to the sellers our calculation of closing date net working capital, as defined in the SPA. Pursuant to the SPA, the sellers had 30 days to review our calculations, and have agreed to certain items of our calculations and questioned other items. As of July 2, 2016, the Company and the sellers were in discussions regarding the questioned items and finalizing the calculation of net working capital.

The following unaudited pro forma financial information assumes the acquisition had occurred at the beginning of the earliest period presented that does not include WinDoor’s actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of WinDoor adjusted for the following: amortization expense related to the intangible assets arising from the acquisition and interest expense to reflect the 2016 Credit Agreement entered into in connection with the acquisition. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.


	Three Months Ended		Six Months Ended
	July 4,		July 2,		July 4,
	2015		2016		2015
	(in thousands, except per share amounts)
Pro Forma Results
Net sales	$	112,980	$	221,700	$	214,812

Net income	$	6,589	$	7,484	$	8,741

Net income per common share:
Basic	$	0.14	$	0.15	$	0.18

Diluted	$	0.13	$	0.15	$	0.17