NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of PGT Innovations, Inc. and its wholly-owned subsidiary, PGT Industries, Inc., and its wholly-owned subsidiaries CGI Window and Door Holdings, Inc. (“CGI”), which includes its wholly-owned subsidiary, CGI Commercial, Inc. (“CGIC”), and WinDoor, Incorporated (collectively, the “Company”), after elimination of intercompany accounts and transactions.

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim period is not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods. Each of the Company’s fiscal quarters ended June 30, 2018, and July 1, 2017, consisted of 13 weeks.

The condensed consolidated balance sheet as of December 30, 2017, is derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of December 30, 2017, and the unaudited condensed consolidated financial statements as of and for the period ended June 30, 2018, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 30, 2017, included in the Company’s most recent Annual Report on Form 10-K. Except for the adoption of the guidance relating to revenue from contracts with customers discussed below, the accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments under ASU 2017-12 refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 was effective for us in the first quarter of 2019, but we elected to early-adopt this guidance effective on December 31, 2017, the first day of our 2018 fiscal year. During the three and six months ended June 30, 2018, we entered into several aluminum forwards contracts which we have designated as cash flow hedges and are accounting for as derivative financial instruments to which we are applying the provisions of ASU 2017-12. For additional information, see Note 12.

In February 2017, the FASB issued ASU 2017-05, “Other Income - Gain and Losses from the Derecognition of Nonfinancial Assets.” ASU 2017-05 clarifies the scope of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets and adds guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU 2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. We adopted this update effective on December 31, 2017, the first day of our 2018 fiscal year. The adoption of this guidance had no impact on our financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” ASU 2017-01 affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business. It also provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. We adopted this update effective on December 31, 2017, the first day of our 2018 fiscal year. The adoption of this guidance had no impact on our financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. We adopted this update effective on December 31, 2017, the first day of our 2018 fiscal year. The adoption of this guidance had no impact on our statement of cash flows.

Adoption of ASU 2014-09, “Revenue from Contracts with Customers”

We adopted the new revenue recognition standard on December 31, 2017 (the first day of our 2018 fiscal year) using the modified retrospective adoption methodology, whereby the cumulative impact of all prior periods is recorded in retained earnings or other impacted balance sheet line items upon adoption. Under the modified retrospective adoption method, we elected to retroactively adjust, inclusive of all previous modifications, only those contracts that were considered open at the date of initial application. Refer to Note 2, “Revenue Recognition and Contracts with Customers” for further information along with our new accounting policies.

Upon adoption, we recognized a net decrease to the fiscal year 2018 opening balance of accumulated deficit of $1.9 million related to sales in excess of billings of $8.7 million, that would have been recognized as earned over time in our prior year ended December 30, 2017. The details of the adjustment to accumulated deficit upon adoption on December 31, 2017 (the first day or our 2018 fiscal year) is as follows (in thousands):


	Cumulative
	Effect			Description of Effects on Line Item
Net sales	$	8,704		Additional contract asset sales
Cost of sales		(5,642	)	Inventory classified as cost of sales
SG&A expenses		(532	)	Accruals for selling costs
Income tax expense		(647	)	Estimated income tax effects

Net income	$	1,883		Additional net income

The following tables reconcile the balances as presented as of and for the three months ended June 30, 2018 to the balances prior to the adjustments made to implement the new revenue recognition standard for the same period, for the accompanying condensed consolidated statement of comprehensive income, and the condensed consolidated balance sheet. The impact to the condensed consolidated statement of cash flows for the three months ended June 30, 2018 was deemed insignificant (in thousands, except per share amounts):


	Three Months Ended June 30, 2018
	As			Impact of			Previous
	Presented			ASU 2014-09			Standard
Net sales	$	169,269		$	(1,987	)	$	167,282
Cost of sales		109,322			(1,459	)		107,863

Gross profit		59,947			(528	)		59,419
Selling, general and administrative expenses		32,581			(100	)		32,481
Gains on transfers of assets		(2,551	)		—			(2,551	)

Income from operations		29,917			(428	)		29,489
Interest expense, net		3,609			—			3,609
Debt extinguishment costs		—			—			—

Income before income taxes		26,308			(428	)		25,880
Income tax expense		3,760			(108	)		3,652

Net income	$	22,548		$	(320	)	$	22,228

Basic	$	0.45					$	0.44

Diluted	$	0.43					$	0.43

Comprehensive income	$	22,226		$	(320	)	$	21,906


	Six Months Ended June 30, 2018
	As Presented			Impact of ASU 2014-09			Previous Standard
Net sales	$	309,522		$	(2,952	)	$	306,570
Cost of sales		204,802			(1,886	)		202,916

Gross profit		104,720			(1,066	)		103,654
Selling, general and administrative expenses		61,238			(185	)		61,053
Gains on transfers of assets		(2,551	)		—			(2,551	)

Income from operations		46,033			(881	)		45,152
Interest expense, net		7,652			—			7,652
Debt extinguishment costs		3,079			—			3,079

Income before income taxes		35,302			(881	)		34,421
Income tax expense		5,414			(225	)		5,189

Net income	$	29,888		$	(656	)	$	29,232

Basic	$	0.60					$	0.58

Diluted	$	0.57					$	0.56

Comprehensive income	$	29,504		$	(656	)	$	28,848


	At June 30, 2018
	As Presented		Impact of ASU 2014-09			Previous Standard
Cash and cash equivalents	$	63,923	$	—		$	63,923
Accounts receivable, net		74,970		—			74,970
Inventories		35,326		7,528			42,854
Contract assets, net		11,012		(11,012	)		—
Prepaid expenses		2,757		—			2,757
Other current assets		7,899		—			7,899

Total current assets		195,887		(3,484	)		192,403
Property, plant and equipment, net		93,433		—			93,433
Trade name and other intangible assets, net		111,725		—			111,725
Goodwill		108,060		—			108,060
Other assets, net		1,336		—			1,336

Total assets	$	510,441	$	(3,484	)	$	506,957


Accounts payable and accrued liabilities	$	45,911	$	(298	)	$	45,613
Current portion of long-term debt		303		—			303

Total current liabilities		46,214		(298	)		45,916
Long-term debt, less current portion		215,081		—			215,081
Deferred income taxes		23,287		(647	)		22,640
Other liabilities		17,015		—			17,015

Total liabilities		301,597		(945	)		300,652

Total shareholders’ equity		208,844		(2,539	)		206,305

Total liabilities and shareholders’ equity	$	510,441	$	(3,484	)	$	506,957

Amounts in the tables above presented under “Previous Standard” represent balances as-if ASU 2014-09 had not been adopted, which primarily reflects finished goods and certain unused glass components with no alternative future use, but recognized as revenue over time under the new standard but still classified in inventory, and no net contract assets on the condensed consolidated balance sheet as of June 30, 2018.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)”. This guidance supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.