10-K 1 side-1216x10k.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
 
Commission file number 000-24956
 
Associated Materials, LLC
(Exact name of registrant as specified in its charter) 
 
DELAWARE
 
75-1872487
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3773 STATE ROAD
CUYAHOGA FALLS, OHIO 44223
(Address of principal executive offices)
(330) 929-1811
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ý   No  ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ý    Although the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act for the period commencing January 3, 2016 the registrant has filed all Exchange Act reports for the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
¨
 
 
Accelerated filer
¨
Non-accelerated filer
x  
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
No public trading market exists for the membership interests of the registrant. The aggregate market value of the membership interests held by non-affiliates of the registrant was zero as of July 4, 2015, the last business day of the registrant’s most recently completed second fiscal quarter. The membership interest of the registrant is held by Associated Materials Incorporated, a wholly-owned subsidiary of Associated Materials Group, Inc. As of March 22, 2016, there was one (1) outstanding membership interest of the registrant.



ASSOCIATED MATERIALS, LLC
 
PART I.
 
 
 
PART II.
 
 
 
 
PART III.
 
 
 
 
PART IV.
 
 
 
 
 





PART I
 
ITEM 1. BUSINESS
OVERVIEW
Associated Materials, LLC (the “Company”) is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States and Canada. The Company was founded in 1947 when it first introduced residential aluminum siding under the Alside® name. We provide a comprehensive offering of exterior building products, including vinyl windows, vinyl siding, vinyl railing and fencing, aluminum trim coil, aluminum and steel siding and related accessories, which we produce at our 11 manufacturing facilities. We also sell complementary products that we source from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors, equipment and tools. We also provide installation services. We distribute our products through our extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom we refer to as our “contractor customers.” This dual-distribution network consists of 122 company-operated supply centers, through which we sell directly to our contractor customers, and our direct sales channel, through which we sell to more than 260 independent distributors, dealers and national account customers.
The products we sell are primarily marketed under our brand names, including Alside®, Revere®, Gentek®, Preservation® and Alpine®. Our product sales of vinyl windows, vinyl siding, metal products and third-party manufactured products comprised approximately 35%, 17%, 13% and 24%, respectively, of our net sales for the year ended January 2, 2016. For the year ended January 2, 2016, we had net sales of $1,185.0 million, Adjusted EBITDA of $90.3 million and a net loss of $50.1 million. For the definition of Adjusted EBITDA and a presentation of net loss calculated in accordance with generally accepted accounting principles (“GAAP”), and reconciliation of net loss to Adjusted EBITDA, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a substitute for other measures of liquidity or financial performance reported in accordance with GAAP.
Our company-operated supply centers provide our contractor customers the products, accessories and tools necessary to complete their projects. For each of the years ended January 2, 2016 and January 3, 2015, approximately 74% of our net sales were generated through our network of supply centers. In addition, our supply centers provide value-added services, including marketing support, installation support, technical support and warranty services that become a part of our contractor customers’ workflows, and these services form a critical component of the contractors’ offering to end consumers. Many of our supply centers also offer full-service product installation of our window, siding and third-party products through our Installed Sales Solutions (“ISS”) group. Our ISS group provides a turn-key solution for remodeling dealers and builders who benefit from purchasing bundled products and installation from a single source.
We also distribute products through our direct sales channel, which consists of more than 260 independent distributors, dealers and national account customers. For each of the years ended January 2, 2016 and January 3, 2015, we generated approximately 26% of our net sales through our direct sales channel. We sell to distributors and dealers both in markets where we have existing supply centers and in markets where we may not have a supply center presence, and we utilize our manufacturing and marketing capabilities to help these direct customers grow their businesses. Our distributor and dealer customers in this channel are selected based on their ability to drive sales of our products, deliver high customer service levels and meet other performance factors. This sales channel also allows us to service larger regional and national account customers with a broader geographic scope, which drives additional volume. In addition, in many cases we are able to leverage our vertical integration in support of our distributor and dealer customers by selling and shipping our products directly to their contractor customers.
We estimate that, for the year ended January 2, 2016, approximately 70% of our net sales were generated in the residential repair and remodeling market and approximately 30% of our net sales were generated in the residential new construction market. We believe that the strength of our products and distribution network has created strong brand loyalty and longstanding relationships with our contractor customers and has enabled us to develop and maintain a leading position in the markets that we serve. In addition, we believe that our focus on the repair and remodeling market provides us with a more attractive market due to the relative stability in demand, superior competitive dynamics and higher profit margins compared to the residential new construction market.
On October 13, 2010, AMH Holdings II, Inc. (“AMH II”), the then indirect parent company of Associated Materials, LLC, completed its merger (the “Acquisition Merger”) with Carey Acquisition Corp. (“Merger Sub”), pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2010 (“Merger Agreement”), among Carey Investment Holdings Corp. (now known as Associated Materials Group, Inc.) (“Parent”), Carey Intermediate Holdings Corp. (now known as Associated Materials Incorporated), a wholly-owned direct subsidiary of Parent (“Holdings”), Merger Sub, a wholly-owned

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direct subsidiary of Holdings, and AMH II, with AMH II surviving such merger as a wholly-owned direct subsidiary of Holdings. After a series of additional mergers (together with the Acquisition Merger, the “Merger”), AMH II merged with and into Associated Materials, LLC, with Associated Materials, LLC surviving such merger as a wholly-owned direct subsidiary of Holdings. As a result of the Merger, Associated Materials, LLC is now an indirect wholly-owned subsidiary of Parent. Holdings and Parent do not have material assets or operations other than their direct and indirect ownership, respectively, of the membership interest of Associated Materials, LLC. Approximately 96% of the capital stock of Parent is owned by investment funds affiliated with Hellman & Friedman LLC (such investment funds, the “H&F Investors”). Unless the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “our,” “us” and “our Company” refer to Associated Materials, LLC and its consolidated subsidiaries.
DESCRIPTION OF BUSINESS
Competitive Strengths
We believe we are well-positioned in the industry, and we expect to utilize our strengths to capture additional market share from our competitors. Our key competitive strengths include:
Leading Market Position
We are one of the largest exterior building products companies focused exclusively in the U.S. and Canadian markets. We believe, based on industry data and our estimates, that we hold leading market positions within the North American exterior residential building products market in the vinyl windows and vinyl siding segments, based on sales, and that our market position is strong within the repair and remodeling market in the geographies we serve. We believe that we are able to utilize our scale to service larger regional and national accounts that many of our competitors either cannot cover or can only do so by relying on a series of multiple independent distributors. We believe these capabilities make us a “go-to” provider of exterior building products for our customers.
Differentiated Dual-Distribution Network
Our distribution strategy combines a network of company-operated supply centers with a complementary network of independent distributors and dealers. We believe we are the only major vinyl window and siding manufacturer that primarily markets products to contractors through company-operated supply centers. This dual-distribution strategy, which we have operated since 1952, is part of our corporate legacy. We believe there are significant barriers that make it difficult for our competitors to replicate this strategy, namely the capital costs of building a network of company-operated supply centers and the complexity of maintaining existing relationships with independent distributors and dealers while simultaneously operating a supply center network.
Company-Operated Supply Centers. We believe that our network of 122 U.S. and Canadian company-operated supply centers offers a superior distribution channel compared to the traditional network of third-party distributors and dealers used by our major competitors. We have built dedicated longstanding relationships directly with our contractor customers through our supply centers. In addition, we believe that distributing our products through our vertically integrated network of company-operated supply centers provides a compelling value proposition for our contractor customers through (1) comprehensive service offerings (including marketing and sales support, after-market service and private label and customized offerings), (2) integrated logistics between our manufacturing and distribution facilities (driving product availability and fulfillment), and (3) a broad product offering. In addition, we believe that our supply centers facilitate innovation by allowing us to directly monitor developments in local customer preferences and to bring products to market faster.
Direct Sales Channel. We believe that our strength in selling to independent distributors and dealers provides us with operational flexibility because it allows us to further penetrate markets and expand our geographic reach without requiring us to deploy the resources to establish a company-operated supply center. By offering different brands within a given market through our direct sales channel, we are able to augment our market position in areas that are also served by our company-operated supply centers. This reach also allows us to service larger customers with a broader geographic scope, many of whom cannot be serviced by local and regional competitors that lack geographic coverage. In addition, in many cases we are able to leverage our vertical integration to support our distributor and dealer customers by selling and shipping our products directly to their contractor customers, as evidenced by our approximate 1,000 ship-to locations. We believe that this enhances our value proposition to larger regional and national customers and differentiates us from our major competitors who in many cases must fulfill orders through a network of independent distributors.

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Entrenched Customer Relationships
We believe that we are a deeply integrated partner to our customers. Contractors typically work with a limited number of manufacturers and distributors in order to streamline their processes of selling residential exterior building products and installation services to the end customer. We believe we are a critical part of this sales process and are integrated with our customers’ work flow given the services we provide, including marketing support, sales training, fulfillment, lead generation and, for certain larger customers, private label marketing services. We are able to serve as a single point of contact to our customers for their essential marketing needs because of the depth of our value-added marketing and service offerings. We believe our customer integration has led to longstanding relationships and strong customer retention. Additionally, we have high levels of retention of the larger customers in our supply centers. For our top 100 U.S. supply center customers, the average length of the relationship is eight years.
Comprehensive Product and Service Offering
We believe that our broad product offering is a key advantage relative to competitors who focus on a limited number of products. Our contractor customers often install more than one product type and prefer to purchase multiple products from a single source, and we aim to offer a one-stop solution for these customers. In total, we sell more than 2,000 products, and we believe our longstanding commitment to product innovation will help us continue to drive the expansion of our product offering. We manufacture a diverse mix of vinyl windows, vinyl siding, vinyl railing and fencing, aluminum trim coil, aluminum and steel siding and related accessories. Furthermore, we offer broad product lines, ranging from entry-level economy products to premium products, including many products that have earned the highest ENERGY STAR® rating. All of our windows for the repair and remodeling market are made to order and are custom-manufactured to customer specifications and dimensions. We launched significant enhancements to our window platform in 2014, which we believe results in increased energy efficiency, enhanced aesthetics and additional features and benefits. We utilize our supply center distribution base to sell products that complement our core window and siding product offerings, such as roofing and insulation products.
We believe our brands are known for quality and durability in the residential building products industry and that these brands are a distinguishing factor for our customers. We sell our products under several brand names, including Alside®, Revere®, Gentek®, Preservation® and Alpine®. This portfolio allows us to offer various brands to contractors within a local market, which in turn allows local contractors to differentiate themselves to end consumers.
We combine this strong product and brand portfolio with outstanding service offerings, which we believe differentiates us and helps us strengthen our customer relationships. Our contractor customers require significant support in order to effectively sell and install products. Whether through lead generation, marketing materials, product delivery or installation support, our service offerings allow our contractor customers to generate new business, differentiate themselves to end consumers and efficiently manage their installation resources. Our ISS offering, through which we provide full-service product installation services for our vinyl siding, vinyl window and third-party products, and our private label program, are two examples of offerings that we believe differentiate us from our competitors.
Superior, Vertically Integrated Operating Model
Our operations, from manufacturing our own vinyl extrusions and assembling our insulated glass units, to distributing our products through our network of 122 company-operated supply centers, provide us with a level of vertical integration that we believe differentiates us within the building products industry. We believe our vertically integrated platform offers us intimate knowledge of our customer base, enables us to meet their evolving product needs and facilitates superior service and quality control. In particular, we believe that our ability to service larger regional and national accounts through an integrated manufacturing, sales and delivery platform differentiates us from our competitors. Furthermore, we believe our vertically integrated operations provide us with a cost advantage over our non-vertically integrated competitors, given that we can retain the profit margins that would otherwise be earned by third-party suppliers or distributors.
Attractive Financial Model
We run a capital efficient business, requiring relatively modest annual capital investment and resulting in strong returns on the tangible capital employed in our operations. In addition, our base of company-operated supply centers and manufacturing facilities provides a strong platform for growth, resulting in attractive incremental profit margins. We believe these dynamics, combined with a diverse customer base, a geographically diverse set of operations and a focus on the repair and remodeling market, result in sustainable earnings and attractive returns on capital.
We believe that we have multiple levers that will continue to drive our growth beyond the continued recovery in the residential new construction and repair and remodeling markets. We believe that our implementation of lean principles throughout the organization, coupled with our continued focus on operational efficiency and quality, provide us with the

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opportunity for further margin expansion. In addition, we believe that we have an ability to drive our sales growth over and above the growth of the market by increasing our penetration of existing customers, expanding our base of company-operated supply centers and introducing new products to the market.
Experienced Management Team
We have added a highly experienced executive management team with a track record of operational excellence and extensive industry experience. Members of our senior leadership team bring operational experience from Henry Company, A.M. Castle, Goodman Global, Inc., Honeywell International Inc., Hilti Inc. and Pernod Ricard SA, among other companies. We are leveraging the experiences of these executives to drive enhanced performance across both our manufacturing and distribution operations. The new additions to our management team during both 2015 and 2014 complement a team of experienced executives in the building products industry and Company veterans who bring extensive domain knowledge and customer intimacy. We believe this combination positions us to deliver on our strategic imperatives of driving profitable growth, maximizing our customers’ experience and optimizing the efficiency of our capital deployed.
Strategy
We are committed to maximizing our customers’ experience by providing high quality products and excellent service, while profitably growing our business. We believe that our longstanding customer relationships are among our most critical assets. Our objective is to grow these existing relationships and to build new relationships in targeted markets. By providing customized sales solutions through a dedicated sales, service and fulfillment platform, we seek to enable our customers to continue to grow their market share. Our leadership team is committed to delivering sustainable growth while maintaining a focus on improving profitability.
Drive Incremental Growth from Existing Stores
We believe that we can grow our business by expanding sales to our existing customers and attracting new customers with our high quality products and services. Our differentiated delivery model, outstanding service offering and high quality products provide the foundations for this growth. These elements in particular manifest themselves in our ability to differentially service larger regional and national customers versus our competitors. As many of these larger customers are regional and national homebuilders, these elements are an important driver of our ability to take advantage of the recovery in residential new construction. Our growth is further enhanced by our demonstrated ability to increase the number of products that we sell to each customer; for example, by selling siding to customers who previously only purchased windows. We plan to continue expanding our ISS offering, which allows our customers to expand their geographic presence without increasing their installer base. We believe our product and service offerings, coupled with our efforts to drive sales and operating excellence, as well as invest in new sales representatives, will enable us to expand our customer base and increase our market share.
Expand Our Distribution Network
We believe that we can expand our geographic coverage and intend to grow our network of company-operated supply centers through the creation and acquisition of new supply centers. We have opened new supply centers in eight of the last ten years, including two company-operated supply centers in 2015. We maintain disciplined selection criteria for new supply centers that include target investment return thresholds. We believe our ability to add company-operated supply centers while effectively maintaining our relationship with third-party distributors differentiates us from our competitors. In addition, in areas in which we believe an opportunity for expansion exists but where we do not intend to open new company-operated supply centers, we will selectively pursue additional independent distributor and dealer relationships to drive additional sales.
Innovate and Expand Our Product Portfolio
We intend to expand our product portfolio through product innovation. We plan to capitalize on our vinyl window and siding manufacturing expertise by continuing to develop innovative and complementary new products that offer long-term performance, cost, aesthetic and other competitive advantages. We believe that our vertically integrated operating model and strong customer relationships provide us with valuable insights into the latest product attributes that appeal to customers. We recently developed a new window platform designed not only to increase the energy efficiency of our product line but also to increase our range of window products that we offer. The new window platform was launched on the East Coast in early 2014 and on the West Coast throughout 2015. We believe that our re-designed dual-pane window offering, Mezzo®, which meets ENERGY STAR® Version 6.0 standards in a cost effective manner, is a key differentiator versus our competitors.

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Capitalize on Residential Recovery and Secular Trends
We expect the continued recovery of the residential building products market to drive increases in our revenue and profitability. In addition, we believe that the market for vinyl-related building products, specifically windows and siding, remains strong and poised for continued growth. We expect this growth will be driven by favorable long-term demand drivers, a cyclical recovery in demand within the repair and remodeling and new residential construction markets from historically low levels, a demand for energy efficient products and the ongoing conversion to vinyl as a material of choice, particularly in windows.
Favorable Long-Term Demand Drivers. We expect population growth, an aging housing stock and general economic growth to drive underlying demand for building products. Population growth and household formation are important drivers for both new home construction and repair and remodeling spending, requiring the construction of new homes and the alteration and expansion of existing homes. According to the American Housing Survey by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, more than 67% of the current U.S. housing stock was built before 1980 and the median estimated home age has increased from 23 years in 1985 to 38 years in 2013.
Recovery in Our End Markets. We believe we are well positioned to benefit from recovery in both new residential construction and repair and remodeling spending. In fiscal year 2015, approximately 70% of our revenues were generated from the repair and remodeling market, whereas 30% of our revenues were generated from new residential construction market. We believe the new residential construction market will continue to grow rapidly over the next several years as housing starts improve to rates that are more consistent with historical levels. According to the U.S. Census Bureau, seasonally adjusted single- and multi-family housing starts in 2015 were 1.1 million compared to a 50-year average of 1.4 million.
Energy Efficiency. We believe that there is strong and growing demand for energy efficient, “green” building products. Recent surveys demonstrate that consumers are willing to invest in energy efficient products that provide measurable savings over time. We expect to benefit from this increasing demand for energy efficient building products, as many of our products meet energy efficiency standards, including many of our window product lines that have earned the ENERGY STAR® rating.
Advantages of Vinyl Products. We believe our focus on vinyl products will further drive our market share in the residential building products market. Vinyl has greater durability, requires less maintenance and provides greater energy efficiency than many competing materials. In addition, we believe vinyl products have a price advantage over other material types. As a result, vinyl products have gained a substantial share of the residential building products market over the last decade and are expected to be the continued material of choice, particularly in windows, going forward.
Products
Our core products include vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories. For the year ended January 2, 2016, vinyl window and vinyl siding products together comprised approximately 52% of net sales, while aluminum and steel products comprised approximately 13%. We also sell complementary products that we source from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors, and equipment and tools. For further information about our net sales by principal product offering, please see Note 18 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data.”
We manufacture and distribute vinyl windows in the premium and standard categories, primarily under the Alside®, Revere®, Gentek®, Preservation® and Alpine® brand names. Our vinyl windows are available in a broad range of models, including fixed, double- and single-hung, horizontal sliding, casement, awning and decorative bay, bow and garden, as well as specialty shapes and patio doors. All of our windows for the repair and remodeling market are made to order and are custom-manufactured to customer specifications and dimensions. Additional features include frames that do not require painting, tilt-in sashes for easy cleaning and high-energy efficiency glass packages. Most models offer multiple finish and glazing options and substantially all are accompanied by a limited lifetime warranty. Key offerings include Performance Series, a new construction product with superior strength and stability; Sheffield® and UltraMaxx®, a premium window complete with higher-end options. Preservation® is a high-end siding and window bundled program available to specific dealers on an exclusive basis. In 2014, we introduced the Mezzo® series, which includes a variety of aesthetic and performance attributes, including the ability to meet ENERGY STAR® Version 6.0 standards. In addition, we introduced Fusion, an economy-positioned window platform designed to provide our customers with an entry-level, fully-welded window option. Most replacement window lines feature the FrameWorks® colors palette with seven interior woodgrains (White, Soft Maple, Rich Maple, Light Oak, Dark Oak, Foxwood and Cherry) and seven special exterior finishes (Architectural Bronze, English Red,

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Desert Clay, Hudson Khaki, Forest Green, American Terra and Castle Gray) along with solid colors of White, Beige and Almond/Clay.
We also manufacture and distribute vinyl siding and related accessories in the premium, standard and economy categories, primarily under the Alside®, Revere®, Gentek® and Preservation® brand names. Vinyl siding features and price vary across categories and are generally based on rigidity, thickness, impact resistance, insulation benefits, color selection, ease of installation, as well as other factors. Our vinyl siding is textured to simulate wood lap siding or shingles, and is available in clapboard, dutch lap and board-and-batten styles. Products are available in a wide palette of colors to satisfy individual aesthetic tastes. We also offer specialty siding products, such as shakes and scallops, beaded siding, insulated siding, extended length siding and variegated siding. Our product line is complemented by a broad array of color and style-matched accessories, including soffit, fascia and other components, which enable easy installation and provide numerous appearance options. All of our siding products are accompanied by limited 50-year to lifetime warranties. Key offerings include Charter Oak®, a premium product whose differentiated TriBeam® design system provides superior rigidity; Prodigy®, a premium product that includes an attached insulating underlayment with a surface texture of finely milled cedar lumber; and Coventry®, an easy-to-install product designed for maximum visual appeal.
Our metal offerings include aluminum trim coil and flatstock, aluminum gutter coil, aluminum and steel siding and related accessories. These products are available in a broad assortment of colors, styles and textures and are color-matched to vinyl and other metal product lines with special features including multi-colored paint applications, which replicate the light and dark tones of the grain in natural wood. We offer steel siding in a full complement of profiles including 8”, vertical and Dutch lap. In 2014 we introduced Satinwood® Select, a new steel siding product featuring Kynar® PDVF technology to our U.S. contractor customers. We manufacture aluminum siding and accessories in economy, standard and premium grades in a broad range of profiles to appeal to various geographic and contractor preferences. All aluminum soffit colors match or complement our core vinyl siding colors, as well as those of several of our competitors.
We manufacture a broad range of painted and vinyl coated aluminum trim coil and flatstock for application in siding projects. Our innovative Color Clear Through® and ColorConnect® programs match core colors across our vinyl, aluminum and steel product lines, as well as those of other siding manufacturers. Trim coil and flatstock products are installed in most siding projects, whether vinyl, brick, wood, stucco or metal, and are used to seal and finish exterior corners, fenestration and other areas. These products are typically formed on site by professional installers to fit such surfaces. As a result, due to its superior pliability, aluminum remains the preferred material for these products and is rarely substituted by other materials. Trim coil and flatstock represent a majority of our metal product sales.
We generally market our products under our brand names, including Alside®, Revere®, Gentek®, Preservation® and Alpine®, and offer extensive product, sales and marketing support. A summary of our key window and siding product offerings is presented in the table below according to our product line classification:
Product Line
  
Window
  
Vinyl Siding/Soffit
  
Steel Siding
  
Aluminum Siding/Soffit
 
 
 
 
 
Premium
  
8000 Series
Preservation
Regency
Sequoia Select
Sheffield
Sovereign
UltraMaxx
Westbridge Platinum
  
Board and Batten
Berkshire Beaded
Centennial Beaded
Charter Oak
Charter Oak Soffit
Cypress Creek
EnFusion
Greenbriar Soffit
Northern Forest Elite
Oxford Premium Soffit
Preservation
Prodigy
Sequoia Select
Sequoia Select Soffit
Sovereign Select
Sovereign Select Soffit
SuperSpan Soffit
Trilogy
Williamsport Beaded
  
Cedarwood
Driftwood

  
Aluminum HT Soffit
Cedarwood
Deluxe

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Product Line
  
Window
  
Vinyl Siding/Soffit
  
Steel Siding
  
Aluminum Siding/Soffit
 
 
 
 
 
Standard
  
Alpine 80 Series
Berkshire Elite
Fairfield 80 Series
Mezzo
Sierra
Signature Elite
Westbridge Elite
 
Advantage III
Alliance Soffit
Amherst
Berkshire Classic
Concord
Coventry
Fair Oaks
Odyssey Plus
Signature Supreme
 
PermaFinish Satinwood Satinwood Select
SuperGard
SteelTek SteelTek Supreme
SteelSide
Universal
  
 
 
 
 
 
 
Economy
  
Alpine 70 Series
Amherst Plus
Blue Print Series
Builder Series
Performance Series
Concord Plus
Fairfield 70 Series
Fusion
  
Aurora
Conquest
Driftwood
Fairweather
  
 
  
Aluminum Econ Soffit Woodgrain 2000 Series
To complete our line of exterior residential building products, we also distribute building products manufactured by other companies. The third-party manufactured products that we distribute complement our exterior building product offerings and include such products as roofing materials, cladding materials, insulation, exterior doors, vinyl and polypropylene siding in shake and scallop designs, shutters and accents, and installation equipment and tools. Third-party manufactured products comprised approximately 24% of our net sales for the year ended January 2, 2016.
Marketing and Distribution
We market exterior residential building products to approximately 50,000 professional exterior contractors, builders and dealers, whom we refer to as our contractor customers, engaged in home remodeling and new home construction. Primary distribution consists of our 122 company-operated supply centers, through which we sell directly to our contractor customers, and our direct sales channel, through which we sell to more than 260 independent distributors, dealers and national account customers. For the year ended January 2, 2016, approximately 74% of our net sales were generated through our company-operated supply centers.
Our company-operated supply centers provide our contractor customers the products, accessories and tools necessary to complete their projects. In addition, our supply centers provide value-added services, including marketing support, installation support, technical support and warranty services that become a part of our contractor customers’ workflows, and these services form a critical component of the contractors’ offering to end consumers.
Our contractor customers look to their local supply center to provide a broad range of specialty product offerings in order to maximize their ability to attract remodeling and home building customers. Many have established longstanding relationships with their local supply center based on individualized service and credit terms, quality products, timely delivery, breadth of product offerings, strong sales and promotional programs and competitive prices. We support our contractor customer base with marketing and promotional programs that include a wide range of product samples, sales literature, presentation materials, visualization software, lead generation, job measurement applications and other sales and promotional materials. Professional contractors use these materials to sell remodeling construction services to prospective consumers. The consumer generally relies on the professional contractor to specify the brand of window or siding to be purchased, subject to the consumer’s price, color and quality requirements. Our daily contact with our contractor customers also enables us to closely monitor activity in each of the remodeling and new construction markets in which we compete. This direct presence in the marketplace permits us to obtain current local market information, which helps us recognize trends in the marketplace earlier and adapt our product offerings on a location-by-location basis.
We believe that our strategic approach to provide a comprehensive product offering is a key competitive advantage relative to competitors who focus on a limited number of products. We also believe that our supply centers meet the specialized needs of our contractor customers by distributing more than 2,000 building and remodeling products, including a broad range of company-manufactured vinyl windows, vinyl siding, aluminum trim coil, aluminum and steel siding and related accessories, and vinyl fencing and railing, as well as products manufactured by third parties. We believe that our supply centers have strong appeal to contractor customers and that the ability to provide a broad range of products is a key competitive advantage because it allows our contractor customers, who often install more than one product type, to acquire multiple products from a single source. In addition, we have historically achieved economies of scale in sales and marketing by deploying integrated, multiple product programs on a national, regional and local level. Many of our supply centers also offer full-service product installation

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of our window, siding and third-party products through our ISS group. This service, which helps differentiate us from our competitors, provides a turn-key solution for remodeling dealers and builders who benefit from purchasing bundled products and installation from a single source.
We also sell the products we manufacture directly to independent distributors, dealers and national account customers in the U.S., many of which operate in multiple locations. Independent distributors comprise the industry’s primary market channel for the types of products that we manufacture and, as such, remain a key focus of our marketing activities. With our multi-brand offering, we can often provide these customers with distinct brands and differentiated product, as well as sales and marketing support. Our distribution partners are carefully selected based on their ability to drive sales of our products, deliver high customer service levels and meet other performance factors. We believe that our strength in independent distribution provides us with a high level of operational flexibility because it allows us to penetrate key markets and expand our geographic reach without deploying the necessary capital to establish a company-operated supply center. This reach also allows us to service larger customers with a broader geographic scope, which we believe results in additional sales. For the year ended January 2, 2016, sales to independent distributors and direct dealers accounted for approximately 26% of our net sales.
Manufacturing
We produce our core products at our 11 manufacturing facilities. We fabricate vinyl windows at our facilities in Cuyahoga Falls, Ohio; Bothell, Washington; Cedar Rapids, Iowa; Kinston, North Carolina; Yuma, Arizona and London, Ontario. We operate vinyl extrusion facilities in West Salem, Ohio; Ennis, Texas and Burlington, Ontario. We also have two metal manufacturing facilities located in Woodbridge, New Jersey, and Pointe Claire, Quebec.
Our window fabrication plants in Cuyahoga Falls, Ohio; Kinston, North Carolina; Cedar Rapids, Iowa and London, Ontario each use vinyl extrusions manufactured by the West Salem, Ohio extrusion facility for a portion of their production requirements and utilize high-speed welding and cleaning equipment for their welded window products. By internally producing a large portion of our vinyl extrusions, we believe we achieve higher product quality and improved delivery compared to only purchasing these materials from third-party suppliers. Our Bothell, Washington and Yuma, Arizona facilities also have short-term contracts to purchase a portion of their vinyl extrusions from a third-party supplier, which we typically renew on an annual basis.
Our window plants, which have the capacity to operate on a three-shift basis, generally operate on a two-shift basis. Our vinyl extrusion plants generally operate on a three-shift basis to optimize equipment productivity and utilize additional equipment to increase capacity to meet higher seasonal needs.
We estimate that, in 2015, we spent approximately $55 million on fixed costs, which represent the costs of operating a plant regardless of the volumes that we produce and includes, but is not limited to, plant management personnel and support expense, depreciation of plant fixed assets, rent expense and taxes, all of which are included in cost of sales.
Raw Materials
The principal raw materials used by us are vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware and packaging materials, all of which are available from a number of suppliers. Raw material pricing on certain of our key commodities has fluctuated significantly over the past several years. In response, we have announced price increases over the past several years on certain of our product offerings to offset inflation in raw material pricing and we continually monitor market conditions and price changes. We have a contract with our resin supplier through December 2018 to supply substantially all of our vinyl resin requirements. We believe that other suppliers could meet our requirements for vinyl resin in the event of supply disruptions or upon the expiration of the contract with our current resin supplier.
FINANCIAL INFORMATION ABOUT OUR SEGMENT AND GEOGRAPHIC AREAS
Our business is comprised of one reportable segment, which consists of the single business of manufacturing and distributing exterior residential building products in the United States and Canada. For financial information about the geographic areas where we conduct business and long-lived assets by country, please see Note 18 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data.” We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations. For further information on foreign currency exchange risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Rate Risk.”

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COMPETITION
The market for our products and services is highly competitive. We compete with numerous small and large manufacturers of exterior residential building products, as well as numerous large and small distributors of building products in our capacity as a distributor of these products. We focus primarily on the market for professional contractor customers and on the vinyl market within windows and siding. We also face competition from alternative materials: wood and aluminum in the window market and wood, masonry and fiber cement in the siding market. We believe, based on industry data and our estimates, that we hold leading market positions within the North American exterior residential building products market in the vinyl windows and vinyl siding segments, based on sales, and that our market position is stronger within the repair and remodeling market in the geographies we serve. We believe that we have one of the broadest manufacturing and distribution footprints in North America in our industry, which allows us to service larger regional and national accounts that many of our competitors either cannot cover or can only do so by relying on a series of multiple independent distributors.
Exterior building products manufacturers and distributors generally compete on product performance and reliability, service levels, sales and marketing support, and price. Some of our competitors are larger in size and have greater financial resources than we do.
SEASONALITY
Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have typically utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters.
BACKLOG
Our backlog of orders is not considered material to, or a significant factor in, evaluating and understanding our business. Typical lead time for orders is ranged from immediate spot-buys at our company-owned supply centers to two to three weeks for normal repair and remodeling orders. Our backlog is subject to fluctuation due to various factors, including the size and timing of orders and seasonality for our products, and is not necessarily indicative of the level of future sales. We did not have a significant manufacturing backlog at January 2, 2016.
TRADEMARKS AND OTHER INTANGIBLE ASSETS
We rely on trademark and other intellectual property law and protective measures to protect our proprietary rights. We have registered and common law rights in trade names and trademarks covering the principal brand names and product lines under which our products are marketed. Although we employ a variety of intellectual property in our business, we believe that none of that intellectual property is individually critical to our current operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our operations are subject to various U.S. and Canadian environmental statutes and regulations, including those relating to materials used in our products and operations; discharge of pollutants into the air, water and soil; treatment, transport, storage and disposal of solid and hazardous wastes; and remediation of soil and groundwater contamination. Such laws and regulations may also impact the cost and availability of materials used in manufacturing our products. Our facilities are subject to inspections by governmental regulators, which occur from time to time. While our management does not currently expect the costs of compliance with environmental requirements to increase materially, future expenditures may increase as compliance standards and technology change and as we expand our geographic coverage and grow our network of company-operated supply centers.
For information regarding pending proceedings relating to environmental matters, see Item 3. “Legal Proceedings.”
EMPLOYEES
Our employment needs vary seasonally with sales and production levels. As of January 2, 2016, we had approximately 3,000 full-time employees, including approximately 2,100 hourly workers. At the end of fiscal 2015, collective bargaining agreements at unionized facilities covered approximately 220 employees in the United States and approximately 250 employees in Canada.

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We utilize leased employees to supplement our own workforce at our manufacturing facilities. As of January 2, 2016, the aggregate number of leased employees in our manufacturing facilities on a full-time equivalency basis was approximately 900 workers.
AVAILABLE INFORMATION
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, along with any related amendments and supplements on our website as soon as reasonably practicable after we electronically file or furnish such materials with or to the Securities and Exchange Commission (“SEC”). These reports are available, free of charge, at www.associatedmaterials.com. We use our website as a channel of distribution for Company information and financial and other material information regarding us is routinely posted and accessible thereon. Our website and the information contained in it and connected to it do not constitute part of this annual report or any other report we file with or furnish to the SEC.
MARKET SHARE AND SIMILAR INFORMATION
The market share and other information contained in this report is based on our own estimates, independent industry publications, reports by market research firms, or other published and unpublished independent sources. In each case, we believe that they are reasonable estimates, although we have not independently verified market and industry data provided by third parties. Market share information is subject to change, however, and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process and other limitations and uncertainties inherent in any statistical survey of market share. In addition, customer preferences can and do change and the definition of the relevant market is a matter of judgment and analysis. As a result, you should be aware that market share and other similar information set forth in this report and estimates and beliefs based on such data are subject to change and may not be reliable.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, as well as other information in this Annual Report on Form 10-K, in connection with evaluating our business and prospects. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects.
Conditions in the housing market, consumer credit market and economic conditions generally could adversely affect demand for our products.
Our business is largely dependent on home improvement (including repair and remodeling) and new home construction activity levels in the United States and Canada. Adverse conditions in, or sustained uncertainty about, our industry or the overall economy (including inflation, deflation, interest rates, availability and cost of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions) could adversely impact consumer confidence, causing our customers to delay purchasing or determine not to purchase home improvement products and services. High unemployment, low consumer confidence, declining home prices, increased mortgage rates and tightened credit markets may limit the ability of consumers to purchase homes or to finance home improvements and may negatively affect investments in existing homes in the form of renovations and home improvements. These industry conditions and general economic conditions may have an adverse impact on our business, financial condition and results of operations.
Our focus within the building products industry amplifies the risks inherent in a general economic downturn. The impact of this weakness on our net sales, net income and margins will be determined by many factors, including industry capacity, industry pricing and our ability to implement our business plan.
Our substantial level of indebtedness could adversely affect our financial condition.
We have a substantial amount of indebtedness, which requires significant interest payments. As of January 2, 2016, we had $925.5 million of indebtedness, and interest expense for the year ended January 2, 2016 was $83.5 million. On February 19, 2016, we entered into a first lien promissory note with an affiliate of Hellman & Friedman LLC in an aggregate amount of $27.5 million (the “Sponsor Secured Note”).

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Our substantial level of indebtedness could have important consequences, including the following:
We must use a substantial portion of our cash flow from operations to pay interest and principal on our senior secured asset-based revolving credit facilities (“ABL facilities”), our 9.125% Senior Secured Notes due 2017 (the “9.125% notes”), the Sponsor Secured Note and other indebtedness, which reduces funds available to us for other purposes, such as working capital, capital expenditures, other general corporate purposes and potential acquisitions;
our ability to refinance such indebtedness or to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impacted;
we are exposed to fluctuations in interest rates because the ABL facilities have a variable rate of interest;
our leverage may be greater than that of some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in responding to current and changing industry and financial market conditions;
we may be more vulnerable to economic downturns and adverse developments in our business; and
we may be unable to comply with financial and other restrictive covenants in the ABL facilities, the indenture governing the 9.125% notes (the “Indenture”), the Sponsor Secured Note and other debt instruments, some of which require the obligor to maintain specified financial ratios and limit our ability to incur additional debt and sell assets, which could result in an event of default that, if not cured or waived, would have an adverse effect on our business and prospects and could result in bankruptcy.
Our ability to access funding under the ABL facilities depends upon, among other things, the absence of a default under the ABL facilities, including any default arising from a failure to comply with the related covenants. If we are unable to comply with our covenants under the ABL facilities, our liquidity may be adversely affected.
Our ability to meet expenses, to remain in compliance with our covenants under our debt instruments and to make future principal and interest payments in respect of our debt depends on, among other things, our operating performance, competitive developments and financial market conditions, all of which are significantly affected by financial, business, economic and other factors. We are not able to control many of these factors. If industry and economic conditions deteriorate, our cash flow may not be sufficient to allow us to pay principal and interest on our debt and meet our other obligations.
The Indenture, the ABL facilities and the Sponsor Secured Note impose significant operating and financial restrictions on us.
The Indenture, ABL facilities and the Sponsor Secured Note, as applicable, impose, and the terms of any future debt may impose, significant operating and financial restrictions on us. These restrictions, among other things, limit our ability and that of our subsidiaries to:
pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments;
incur additional debt or issue certain disqualified stock and preferred stock;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
incur liens on assets;
merge or consolidate with another company or sell all or substantially all assets;
enter into transactions with affiliates; and
enter into agreements that would restrict our subsidiaries from paying dividends or making other payments to us.
In addition, as discussed under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Description of Our Outstanding Indebtedness,” if our borrowing availability under the ABL facilities is below specified levels, we will be subject to compliance with a fixed charge coverage ratio. We were in compliance with our debt covenants as of January 2, 2016.
All of these covenants may adversely affect our ability to finance our operations, meet or otherwise address our capital needs, pursue business opportunities, react to market conditions or otherwise restrict activities or business plans. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. If repayment of our indebtedness is accelerated as a result of such default, we cannot provide any assurance that we would have sufficient assets or access to credit to repay such indebtedness.
We may not be able to generate sufficient cash, or access capital resources, to service all of our debt obligations, working capital needs and planned capital expenditures and may be forced to take actions, which could have a material adverse effect on our operations and liquidity.
Our ability to make scheduled payments on our debt obligations, fund working capital needs and make planned capital expenditures depends on our financial condition and operating performance, which are subject to seasonal fluctuations and general economic, financial, competitive, legislative and other factors beyond our control. We cannot assure you that our

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business will generate sufficient cash flow from operations in an amount sufficient to satisfy our debt obligations, working capital needs and capital expenditures. If our cash flows and capital resources are insufficient to fund such obligations, we could face substantial liquidity problems and be forced to pursue one or more alternative strategies, including reducing or delaying investments and capital expenditures, selling assets, seeking additional capital or restructuring or refinancing our indebtedness. These alternative measures may not be successful and could cause us to not meet our scheduled debt service obligations. Our ABL facilities also require us to satisfy specified covenants, which, if triggered, could result in the acceleration of the amounts due thereunder or force us to seek a waiver or amendment with the lenders under our ABL facilities. No assurance can be given that we would be able to obtain any necessary waivers or amendments on satisfactory terms. In addition, our access to, and the availability of, financing on acceptable terms and conditions in the future is dependent on many factors, such as our financial performance, our credit ratings, general economic conditions, including the housing market, and the liquidity of overall debt markets. If we are not able to access to the debt markets on terms acceptable to us, our business, future growth prospects and liquidity could be adversely affected.
Disruption in the financial markets could negatively affect us as well as our customers and suppliers, and the inability to access financing on terms and at a time acceptable to us for any reason could have a material adverse effect on our financial condition, results of operations and liquidity.
Along with our customers and suppliers, we rely on stable and efficient financial markets. Availability of financing depends on the lending practices of financial institutions, financial and credit markets, government policies and economic conditions, all of which are beyond our control. Adverse economic conditions and disrupted financial markets, characterized by persistently high unemployment rates, weakness in many real estate markets, global economic turmoil, limitations on credit availability and growing debt loads for many governments, could compromise the financial condition of our customers and suppliers. In such case, customers may not be able to pay, or may delay payment of, accounts receivable due to liquidity and financial performance issues or concerns affecting them or due to their inability to secure financing. Suppliers may modify, delay or cancel projects and reduce their levels of business with us. In addition, weak credit markets may also impact the ability of the end consumer to obtain any needed financing to purchase our products, resulting in a reduction in overall demand, and consequently negatively impact our sales levels. Further volatility and disruption in the financial markets could adversely affect our ability to refinance indebtedness when required and have a material adverse effect on our financial condition, results of operations and liquidity.
Our industry is highly competitive, and competitive pressures could have an adverse effect on us.
The markets for our products and services are highly competitive. We seek to distinguish ourselves from other suppliers of residential building products and to sustain our profitability through a business strategy focused on increasing sales at existing supply centers, selectively expanding our supply center network, increasing sales through independent specialty distributor customers, developing innovative new products, expanding sales of third-party manufactured products through our supply center network and driving operational excellence by reducing costs and increasing customer service levels. We believe that competition in the industry is based on product and service quality, customer service, price and product features. Sustained increases in competitive pressures could have an adverse effect on results of operations and negatively impact sales and margins.
We have substantial fixed costs and, as a result, operating income is sensitive to changes in net sales.
We operate with significant operating and financial leverage. Significant portions of our manufacturing, selling, general and administrative expenses are fixed costs that neither increase nor decrease proportionately with sales. In addition, a significant portion of our interest expense is fixed. There can be no assurance that we would be able to further reduce our fixed costs in response to a decline in net sales. As a result, a decline in our net sales could result in a higher percentage decline in our income from operations.
We may not successfully develop new products or improve existing products, and we may experience delays in the development of new products.
Our success depends on meeting customer needs, and one of the ways in which we meet customer needs is through new product development. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in sales of existing products. As materials technology for exterior residential building products advances, we will be expected to upgrade and adapt our existing products and production processes and introduce new products in order to continue to provide products incorporating the latest commercial innovations and meet customer expectations.
While we devote significant attention to the development of new products, we may not be successful in new product development, and our new products may not meet customer expectations or be commercially successful. To the extent we are not able to successfully develop new products, our future sales could be harmed. In addition, interruptions or delays in the

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development of new products and new or improved production processes could have an adverse effect on our business, financial condition and results of operations.
Increases in raw material costs and interruptions in the availability of raw materials and finished goods could adversely affect our profit margins.
The principal raw materials used by us are vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware, and packaging materials, all of which have historically been subject to price changes. Raw material pricing on certain of our key commodities has fluctuated significantly over the past several years, but has generally increased. In response, we have announced price increases over the past several years on certain of our product offerings to offset inflation in raw materials and continually monitor market conditions for price changes as warranted. Our ability to maintain gross margin levels on our products during periods of rising raw material costs depends on our ability to obtain increases in the selling price of our products. Furthermore, the results of operations for individual quarters can and have been negatively impacted by a delay between the timing of raw material cost increases and price increases on our products. There can be no assurance that we will be able to maintain the selling price increases already implemented or achieve any future price increases.
Additionally, we rely on our suppliers for deliveries of raw materials and finished goods. If any of our suppliers were unable to deliver raw materials or finished goods to us for an extended period of time, we may not be able to procure the required raw materials or finished goods through other suppliers without incurring an adverse impact on our operations. Even if acceptable alternatives were found, the process of locating and securing such alternatives might be disruptive to our business, and any such alternatives could result in increased costs for us. Extended unavailability of necessary raw materials or finished goods could cause us to cease manufacturing or distributing one or more of our products for an extended period of time.
Consolidation of our customers could adversely affect our business, financial condition and results of operations.
Though larger customers can offer efficiencies and unique product opportunities, consolidation increases their size and importance to our business. These larger customers can make significant changes in their volume of purchases and seek price reductions. Consolidation could adversely affect our margins and profitability, particularly if we were to lose a significant customer. Sales to one customer and its licensees represented approximately 14% of net sales in each of 2015 and 2014 and approximately 13% of total net sales for 2013. The loss of a substantial portion of sales to this customer could have a material adverse effect on our business, financial condition and results of operations.
We are subject to foreign exchange risk as a result of exposures to changes in currency exchange rates between the United States and Canada.
We are exposed to exchange rate fluctuations between the Canadian dollar and U.S. dollar. We realize revenues from sales made through our Canadian distribution centers in Canadian dollars. The exchange rate of the Canadian dollar to the U.S. dollar has fluctuated in recent years. In the event that the Canadian dollar weakens in comparison to the U.S. dollar, earnings generated from Canadian operations will translate into reduced earnings in our Consolidated Statements of Comprehensive Loss reported in U.S. dollars. In addition, our Canadian subsidiary also records certain accounts receivable and accounts payable, which are denominated in U.S. dollars. Foreign currency transactional gains and losses are realized upon settlement of these assets and obligations. For more information, please see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Rate Risk.”
Increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.
Our financial performance is affected by the cost of labor. As of January 2, 2016, excluding leased employees, approximately 15% of our employees were represented by labor unions. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.
Our business is seasonal and can be affected by inclement weather conditions, which could affect the timing of the demand for our products and cause reduced profit margins and adversely affect our financial condition when such conditions exist.
Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we

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have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have typically utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters. Our inability to meet our seasonal cash flow needs because of inclement weather conditions or any other reason could have a material adverse effect on our financial condition and results of operations.
We have a history of operating losses and may not maintain profitability in the future.
We have not been consistently profitable on a quarterly or annual basis. We experienced net losses of $50.1 million, $293.7 million and $33.5 million during the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. As of January 2, 2016, our accumulated deficit was 683.5 million. We may not be able to sustain or increase our growth or profitability in the future. We may incur significant losses in the future for a number of reasons, including the other risks and uncertainties described in this Annual Report. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our growth expectations are not met in future periods, our financial performance will be affected adversely.
Our failure to attract and retain qualified personnel could adversely affect our business.
Our success depends in part on the efforts and abilities of our senior management and key employees. Their motivation, skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract, motivate and retain members of our senior management and key employees could have a negative effect on our results of operations. In particular, the departure of members of our senior management could cause us to lose customers and reduce our net sales, lead to employee morale problems and the loss of key employees, or cause production disruptions.
The obligations under the Indenture, the ABL facilities and the Sponsor Secured Note are secured by substantially all of the assets of our operating subsidiaries, including a pledge of the capital stock of such subsidiaries.

The obligations of our operating subsidiaries under the Indenture, ABL facilities, and the Sponsor Secured Note are secured by a security interest in substantially all of the present and future property and assets of such subsidiaries, including a security interest in the capital stock of such subsidiaries. If we were in default under the Indenture, the ABL facilities or the Sponsor Secured Note, the holders of the 9.125% notes, or the lenders under the ABL facilities or the lender under the Sponsor Secured Note may foreclose on their collateral security under the Indenture, the ABL facilities and the Sponsor Secured Note, including substantially all of the assets of our operating subsidiaries as well as the capital stock of such operating subsidiaries. In any such event, it is possible that there would be no or limited assets remaining. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Description of Our Outstanding Indebtedness” for more information.
We have significant goodwill and other intangible assets, which if impaired, could require us to incur significant charges.
As of January 2, 2016, we had $302.9 million of goodwill and $398.0 million of other intangible assets. The value of these assets is dependent, among other things, upon our future expected operating results. We are required to test for impairment of these assets annually or when factors indicating impairment are present, which could result in a write down of all or a significant portion of these assets. Any future write down of goodwill and other intangible assets could have an adverse effect on our financial condition and on the results of operations for the period in which the impairment charge is incurred.
Failure of certain of our information technology system could disrupt our operations and adversely affect our financial condition.
We rely on certain information technology systems to process, transmit, store, and protect electronic information. Furthermore, communications between our personnel, customers, and suppliers is largely dependent on information technology. Our information technology systems could be interrupted as a result of events that may be beyond our control, including, but not limited to, natural disasters, terrorist attacks, cyber attacks, telecommunications failures, additional security issues, and other technological failures. Our technology and information security processes and disaster recovery plans may not be adequate, or implemented properly, to ensure that our operations are not disrupted. In addition, while our information technology systems are current, underinvestment in our technology solutions as technology advances could result in disruptions in our business.

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The future recognition of our deferred tax assets is uncertain, and assumptions used to determine the amount of our deferred tax asset valuation allowance are subject to revision based on changes in tax laws and variances between future expected operating performance and actual results.
Our inability to realize deferred tax assets may have an adverse effect on our consolidated results of operations and financial condition. We recognize deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We evaluate our deferred tax assets for recoverability based on available evidence, including assumptions about future profitability.
Our valuation allowance is estimated based on the uncertainty of the future realization of deferred tax assets. This reflects our assessment that a portion of our deferred tax assets could expire unused if we are unable to generate taxable income in the future sufficient to utilize them or we enter into one or more transactions that limit our ability to realize all of our deferred tax assets. The assumptions used to make this determination are subject to revision based on changes in tax laws or variances between our future expected operating performance and actual results. As a result, significant judgment is required in assessing the possible need for a deferred tax asset valuation allowance. If we determine that we would not be able to realize an additional portion of the deferred tax assets in the future, we would further reduce our deferred tax asset through a charge to earnings in the period in which the determination was made. Any such net charge could have an adverse effect on our consolidated results of operations and financial condition.
We are controlled by investment funds affiliated with Hellman & Friedman LLC, whose interests may be different than the interests of other holders of our securities.
By reason of their majority ownership interest in Parent, which is our indirect parent company, the H&F Investors have the ability to designate a majority of the members of our board of directors (the “Board of Directors”). The H&F Investors are able to control actions to be taken by us, including future issuances of our securities, the payment of dividends, if any, on our securities, amendments to our organizational documents and the approval of significant corporate transactions, including mergers, sales of substantially all of our assets, distributions of our assets, the incurrence of indebtedness and any incurrence of liens on our assets. The interests of the H&F Investors may be materially different than the interests of our other stakeholders. In addition, the H&F Investors may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to our other stakeholders. For example, the H&F Investors may cause us to take actions or pursue strategies that could impact our ability to make payments under the Indenture, the ABL facilities and the Sponsor Secured Note or that cause a change of control. In addition, to the extent permitted by the Indenture and the ABL facilities, the H&F Investors may cause us to pay dividends rather than make capital expenditures or repay debt. The H&F Investors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The H&F Investors also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the H&F Investors continue to own a significant amount of the combined voting power of Parent, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions and, so long as the H&F Investors continue to own shares of Parent’s outstanding common stock, designate individuals to Parent’s board of directors pursuant to a stockholders agreement (the “Stockholders Agreement”) entered into in connection with the Merger on October 13, 2010, by and among Parent, Holdings, us, the H&F Investors and each member of our management and Board of Directors that held shares of common stock or options of Parent at that date. The members of our Board of Directors have been determined by action of Holdings, our sole member and a 100% owned subsidiary of Parent. Parent has designated the members of its board of directors to also be the members of each of Holdings’ and our board of directors. In addition, the H&F Investors will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. For a discussion regarding the Stockholders Agreement, please refer to Item 13. “Certain Relationships, Related Transactions and Director Independence — Stockholders Agreement.”
We could face potential product liability claims relating to products we manufacture or distribute.
We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage, but we may not be able to obtain such insurance on acceptable terms in the future, if at all, or any such insurance may not provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert management and other personnel for months or years regardless of the ultimate outcome. An unsuccessful product liability defense could have an adverse effect on our business, financial condition, results of operations or business prospects or ability to make payments on our indebtedness when due.

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We rely on a variety of intellectual property rights. Any threat to, or impairment of, these rights could cause us to incur costs to defend these rights.
As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands. We also have issued patents and rely on trade secret and copyright protection for certain of our technologies. These protections may not adequately safeguard our intellectual property, and we may incur significant costs to defend our intellectual property rights, which may harm our operating results. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we would have to defend these rights. There is also a risk that third parties, including our current competitors, will claim that our products infringe on their intellectual property rights. These third parties may bring infringement claims against us or our customers, which may harm our operating results.

Increases in freight costs could cause our cost of products sold to increase and net income to decrease.
Increases in freight costs can negatively impact our cost to deliver our products to our company-operated supply centers and customers and thus increase our cost of products sold. Freight costs are strongly correlated to oil prices, and increases in fuel prices, surcharges and other factors have increased freight costs and may continue to increase freight costs in the future. As we incur substantial freight costs to transport materials and components from our suppliers and to deliver finished products to our company-operated supply centers and customers, an increase in freight costs could increase our operating costs, which we may be unable to pass to our customers. If we are unable to increase the selling price of our products to our customers to cover any increases in freight costs, our net income may be adversely affected.
We may incur significant, unanticipated warranty claims.
Consistent with industry practice, we provide to homeowners limited warranties on certain products. Warranties are provided for varying lengths of time, from the date of purchase up to and including lifetime. Warranties cover product failures such as seal failures for windows and fading and peeling for siding products, as well as manufacturing defects. Warranty reserves are established annually based on management’s estimates of future warranty costs, which are primarily based on a third-party actuarial review of historical trends and sales of products to which such costs relate. To the extent that our estimates are inaccurate and we do not have adequate warranty reserves, our liability for warranty payments could have a material impact on our financial condition and results of operations.
Potential liabilities and costs from litigation could adversely affect our business, financial condition and results of operations.
We are, from time to time, involved in various claims, litigation matters and regulatory proceedings that arise in the ordinary course of our business and that could have a material adverse effect on us. These matters may include contract disputes, personal injury claims, warranty disputes, environmental claims or proceedings, other tort claims, employment and tax matters and other proceedings and litigation, including class actions.
Increasingly, home builders, including our customers, are subject to construction defect and home warranty claims in the ordinary course of their business. Our contractual arrangements with these customers typically include an agreement to indemnify them against liability for the performance of our products or services or the performance of other products that we install. These claims, often asserted several years after completion of construction, frequently result in lawsuits against the home builders and many of their subcontractors and suppliers, including us, requiring us to incur defense costs even when our products or services may not be the principal basis for the claims.
Although we intend to defend all claims and litigation matters vigorously, given the inherently unpredictable nature of claims and litigation, we cannot predict with certainty the outcome or effect of any claim or litigation matter, and there can be no assurance as to the ultimate outcome of any such matter.
We maintain insurance against some, but not all, of these risks of loss resulting from claims and litigation. We may elect not to obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant accident, judgment, claim or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations.
We are subject to various environmental statutes and regulations, which may result in significant costs and liabilities.
Our operations are subject to various U.S. and Canadian environmental statutes and regulations, including those relating to: materials used in our products and operations; discharge of pollutants into the air, water and soil; treatment, transport,

16


storage and disposal of solid and hazardous wastes; and remediation of soil and groundwater contamination. Such laws and regulations may also impact the cost and availability of materials used in manufacturing our products. Our facilities are subject to investigations by governmental regulators, which occur from time to time. While our management does not currently expect the costs of compliance with environmental requirements to increase materially, future expenditures may increase as compliance standards and technology change.
Also, we cannot be certain that we have identified all environmental matters giving rise to potential liability. Our past use of hazardous materials, releases of hazardous substances at or from currently or formerly owned or operated properties, newly discovered contamination at any of our current or formerly-owned or operated properties or at off-site locations such as waste treatment or disposal facilities, more stringent future environmental requirements (or stricter enforcement of existing requirements) or our inability to enforce indemnification agreements could result in increased expenditures or liabilities, which could have an adverse effect on our business and financial condition. For further details regarding environmental matters giving rise to potential liability, see Item 3. “Legal Proceedings.”
Legislative or regulatory initiatives related to global warming / climate change concerns may negatively impact our business.
In recent years, there has been an increasing focus on global climate change, including increased attention from regulatory agencies and legislative bodies. This increased focus may lead to new initiatives directed at regulating an unspecified array of environmental matters. Legislative, regulatory or other efforts in the United States to combat climate change could result in future increases in taxes and the cost of raw materials, transportation and utilities for us and our suppliers, which would result in higher operating costs for us. However, our management is unable to predict at this time the potential effects, if any, that any future environmental initiatives may have on our business.
Additionally, the recent legislative and regulatory responses related to climate change could create financial risk. Many governing bodies have been considering various forms of legislation related to greenhouse gas emissions. Increased public awareness and concern may result in more laws and regulations requiring reductions in or mitigation of the emission of greenhouse gases. Our facilities may be subject to regulation under climate change policies introduced within the next few years. There is a possibility that, when and if enacted, the final form of such legislation could increase our costs of compliance with environmental laws. If we are unable to recover all costs related to complying with climate change regulatory requirements, it could have a material adverse effect on our results of operations.
Declining returns in the investment portfolio of our defined benefit pension plans and changes in actuarial assumptions could increase the volatility in our pension expense and require us to increase cash contributions to the plans.
We sponsor a number of defined benefit pension plans for our employees in the United States and Canada. Pension expense for the defined benefit pension plans sponsored by us is determined based upon a number of actuarial assumptions, including expected long-term rates of return on assets and discount rates. The use of these assumptions makes our pension expense and cash contributions subject to year-to-year volatility. Declines in market conditions, changes in pension law and uncertainties regarding significant assumptions used in the actuarial valuations can have a material impact on future required contributions to our pension plans and could result in additional charges to equity and an increase in future pension expense and cash contributions.
We may not be able to consummate and effectively integrate future acquisitions, if any.
We may from time to time engage in strategic acquisitions if we determine that they will provide future financial and operational benefits. Successful completion of any strategic transaction depends on a number of factors that are not entirely within our control, including our ability to negotiate acceptable terms, conclude satisfactory agreements and obtain all necessary regulatory approvals. In addition, our ability to effectively integrate any potential acquisitions into our existing business and culture may not be successful, which could jeopardize future operational performance for the combined businesses.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

17


ITEM 2. PROPERTIES
Management believes that our facilities are generally in good operating condition and are adequate to meet anticipated requirements in the near future. Our operations include both owned and leased facilities as described below:  
Location
 
Principal Use
 
Square Feet
 
 
 
 
 
 
 
Cuyahoga Falls, Ohio
 
Corporate Headquarters
 
63,000

 
Cuyahoga Falls, Ohio
 
Vinyl Windows
 
563,000

 
Bothell, Washington
 
Vinyl Windows
 
159,000

(1)
Yuma, Arizona
 
Vinyl Windows
 
223,000

(1) (4)
Cedar Rapids, Iowa
 
Vinyl Windows
 
259,000

(1)
Kinston, North Carolina
 
Vinyl Windows
 
319,000

(1)
London, Ontario
 
Vinyl Windows
 
60,000

 
Burlington, Ontario
 
Vinyl Siding Products
 
387,000

(2)
Ennis, Texas
 
Vinyl Siding Products
 
538,000

(3)
West Salem, Ohio
 
Vinyl Window Extrusions, Vinyl Fencing and Railing
 
173,000

 
Pointe Claire, Quebec
 
Metal Products
 
278,000

 
Woodbridge, New Jersey
 
Metal Products
 
318,000

(1)
Ashtabula, Ohio
 
Distribution Center
 
297,000

(1)
(1)
Leased facilities.
(2)
Includes 151,000 square foot warehouse space, which is leased.
(3)
Includes 237,000 square foot warehouse space along with the land under the warehouse, which is leased.
(4)
The land for this facility is owned by us, but we lease the use of the building.
Management believes that our facilities are generally in good operating condition and are adequate to meet anticipated requirements in the near future.
During 2015 we exercised the five-year renewal option for the leases at our Kinston and Yuma locations, which extends the lease terms to 2018 and 2020, respectively. The aforementioned leases are renewable at our option for two additional five-year periods for our Kinston location and one additional five-year period for our Yuma location. The leases for our Bothell, Woodbridge and Cedar Rapids locations expire in 2018, 2019 and 2020, respectively.
The lease for our warehouse at Burlington expires in 2024 and is renewable at our option for two additional five-year periods. The leases for the warehouses at our Ashtabula and Ennis locations expire in 2017 and 2020, respectively.
We also operate 122 supply centers in major metropolitan areas throughout the United States and Canada. Except for one owned location in Akron, Ohio, we lease our supply centers for terms generally ranging from three to ten years with renewal options. The supply centers range in size from 9,000 square feet to 106,300 square feet depending on sales volume and the breadth and type of products offered at each location.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the ordinary course of business, none of which, individually or in the aggregate, after giving effect to existing insurance coverage, is expected to have a material adverse effect on our financial position, results of operations or liquidity. From time to time, we are also involved in proceedings and potential proceedings relating to environmental and product liability matters.
Environmental Claims
The Woodbridge, New Jersey facility is currently the subject of an investigation and/or remediation before the New Jersey Department of Environmental Protection (the “NJDEP”) under ISRA Case No. E20030110 for our wholly-owned subsidiary, Gentek Building Products, Inc. (“Gentek”). The facility is currently leased by Gentek. Previous operations at the facility resulted in soil and groundwater contamination in certain areas of the property. In 1999, the property owner and Gentek signed a remediation agreement with the NJDEP, pursuant to which the property owner and Gentek agreed to continue an investigation/remediation that had been commenced pursuant to a Memorandum of Agreement with the NJDEP. Under the remediation agreement, the NJDEP required posting of a remediation funding source of $0.1 million, which is currently

18


satisfied by a $0.3 million standby letter of credit that was provided by Gentek to the NJDEP. During 2014, the delineation studies were completed and in early 2015 we were presented with several remedial plans. Based on the alternatives presented, we identified what we believed to be the most likely option and recorded the minimum liability for that option, which totaled $1.0 million as of January 3, 2015, the balance of which remains unchanged as of January 2, 2016. We believe this matter will not have a material adverse effect on our financial position, results of operations or liquidity.
Environmental claims, product liability claims and other claims are administered by us in the ordinary course of business, and we maintain pollution and remediation and product liability insurance covering certain types of claims. Although it is difficult to estimate our potential exposure to these matters, we believe that the resolution of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

19


PART II
 
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
There is no established public trading market for our membership interests.
HOLDERS
As of March 22, 2016, Associated Materials Incorporated is the sole record holder of our membership interest.
DIVIDENDS
Our asset-based revolving credit facilities (“ABL facilities”) and the Indenture governing our 9.125% Senior Secured Notes due 2017 (the “9.125% notes”), as well as the first lien promissory note we entered into with an affiliate of Hellman & Friedman LLC (the “Sponsor Secured Note”) restrict dividend payments by us. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Description of Our Outstanding Indebtedness” for further details of our ABL facilities, 9.125% notes and the Sponsor Secured Note.
We presently do not plan to pay future cash dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have no outstanding equity compensation plans under which our securities are authorized for issuance. Equity compensation plans are maintained by Associated Materials Group, Inc., our indirect parent company.
RECENT SALES OF UNREGISTERED SECURITIES
None.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.

20


ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the five-year period ended January 2, 2016 was derived from our audited consolidated financial statements. The data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” included elsewhere in this Annual Report.
 
Years Ended
(in thousands)
January 2, 2016
 
January 3, 2015
 
December 28, 2013
 
December 29, 2012
 
December 31, 2011
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
1,184,969

 
$
1,186,973

 
$
1,169,598

 
$
1,142,521

 
$
1,159,515

Cost of sales
908,775

 
943,419

 
887,798

 
859,617

 
894,333

Gross profit
276,194

 
243,554

 
281,800

 
282,904

 
265,182

Selling, general and administrative expenses
239,790

 
247,614

 
232,281

 
240,027

 
247,506

Impairment of goodwill

 
144,159

 

 

 
84,253

Impairment of other intangible assets

 
89,687

 

 

 
79,894

Restructuring costs
1,837

 
(331
)
 

 

 

Merger costs

 

 

 

 
585

Income (loss) from operations
34,567

 
(237,575
)
 
49,519

 
42,877

 
(147,056
)
Interest expense
83,494

 
82,527

 
79,751

 
75,520

 
75,729

Foreign currency loss
1,878

 
788

 
754

 
119

 
438

Loss before income taxes
(50,805
)
 
(320,890
)
 
(30,986
)
 
(32,762
)
 
(223,223
)
Income tax (benefit) expense
(693
)
 
(27,201
)
 
2,507

 
5,605

 
(20,434
)
Net loss
$
(50,112
)
 
$
(293,689
)
 
$
(33,493
)
 
$
(38,367
)
 
$
(202,789
)
 
(in thousands)
January 2,
2016
 
January 3,
2015
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
9,394

 
$
5,963

 
$
20,815

 
$
9,594

 
$
11,374

Working capital
101,423

 
115,482

 
116,130

 
110,367

 
104,046

Total assets
1,082,013

 
1,162,177

 
1,456,619

 
1,482,284

 
1,521,168

Total debt
925,484

 
903,404

 
835,230

 
808,205

 
804,000

Member’s (deficit) equity
(214,361
)
 
(138,149
)
 
197,790

 
231,055

 
270,464


21


ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States and Canada. We were founded in 1947 when we first introduced residential aluminum siding under the Alside® name. We produce a comprehensive offering of exterior building products, including vinyl windows, vinyl siding, vinyl railing and fencing, aluminum trim coil, aluminum and steel siding and related accessories, which we produce at our 11 manufacturing facilities. We also sell complementary products that we source from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors and equipment and tools. We also provide installation services. We distribute these products through our extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom we refer to as our “contractor customers.” This dual-distribution network consists of 122 company-operated supply centers, through which we sell directly to our contractor customers, and our direct sales channel. Through our direct sales channel we sell to more than 260 independent distributors, dealers and national account customers. The products we sell are generally marketed under our brand names, such as Alside®, Revere®, Gentek®, Preservation® and Alpine®.
Because our exterior residential building products are consumer durable goods, our sales are impacted by, among other things, the availability of consumer credit, consumer interest rates, employment trends, changes in levels of consumer confidence and national and regional trends in the housing market. Our sales are also affected by changes in consumer preferences with respect to types of building products. Overall, we believe the long-term fundamentals for the building products industry remain strong, as homes continue to get older, pent-up demand in the residential repair and remodeling market normalizes, household formation is expected to be strong, demand for energy-efficient products continues and vinyl remains an optimal material for exterior window and siding solutions, all of which we believe bodes well for the demand for our products in the future.
Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have typically utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters.
Management operates the business with the aim of achieving profitable growth and makes operating decisions and assesses the performance of the business based on financial and other measures that it believes provide important data regarding the business. Management primarily uses Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”), a non-GAAP financial measure, along with generally accepted accounting principles (“GAAP”) measures of profitability, including gross profit, income from operations and net income, to measure operating performance. See the tabular presentation in the “—Results of Operations.”
Our business is comprised of one reportable segment, which consists of the single business of manufacturing and distributing exterior residential building products in the United States and Canada. For financial information about the geographic areas where we conduct business and long-lived assets by country, please see Note 18 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” for further information.
We operate on a 52/53 week fiscal year that ends on the Saturday closest to December 31st. Our 2015 and 2013 fiscal years ended on January 2, 2016 and December 28, 2013, respectively, and included 52 weeks of operations. Our 2014 fiscal year that ended January 3, 2015 included 53 weeks of operations, with the additional week recorded in the fourth quarter of fiscal 2014. Our results for the year ended January 2, 2016 were significantly impacted by a weaker Canadian dollar, compared to the prior year. Foreign currency translation negatively impacted net sales, gross profit and operating income by approximately $34 million, $28 million and $20 million, respectively.
Our net sales for the year ended January 2, 2016 were $1,185.0 million, representing a decrease of $2.0 million, or 0.2%, compared to $1,187.0 million for the year ended January 3, 2015. The decline in net sales was primarily driven due to lower volumes in our vinyl siding, third-party manufactured products and metal product sales. The overall decrease was partially offset by an increase in our vinyl window sales and growth in our Installed Sales Solutions (“ISS”) business compared to the prior year. Both our windows and ISS businesses have benefited from increased demand in the new construction market. Additionally, we see continued improvement in our window product mix since the launch of our new window platform in early 2014. On a constant currency basis compared to year ended January 3, 2015, our net sales for the year ended January 2, 2016 were higher by $31.8 million, or 2.7%. Approximately 20 percent of the Company’s sales in fiscal 2014 and 2015 were in

22


Canada, and the foreign exchange rate declined in fiscal 2015 compared to fiscal 2014 by approximately 14.1% on an annual basis. The additional week of operations in 2014 contributed approximately $10 million of additional net sales compared to the current year. Vinyl windows, vinyl siding, metal products and third-party manufactured products comprised approximately 35%, 17%, 13% and 24%, respectively, of our net sales for the year ended January 2, 2016, compared to approximately 34%, 18%, 13% and 25%, respectively, of our net sales for the year ended January 3, 2015.
Our gross profit for the year ended January 2, 2016 was $276.2 million, or 23.3% of net sales, compared to $243.6 million, or 20.5% of net sales, for the year ended January 3, 2015. Compared to the prior year, we achieved an approximate 280 basis point increase in gross profit as a percent of net sales, due to our continued focus on driving profitability through our integrated product offerings. The increase in gross profit was predominantly attributable to the continued improvement in our windows business, including better operational execution, compared to the prior year. Furthermore, we also incurred fewer costs related to the continued roll out of our new window platform on the West Coast in the current year, compared to the launch on the East Coast in the prior year.
Our selling, general and administrative (“SG&A”) expenses were $239.8 million, or 20.2% of net sales, for the year ended January 2, 2016, compared to $247.6 million, or 20.9% of net sales, for the year ended January 3, 2015. The $7.8 million, or 3.2% net decrease was a result of reductions in marketing-related costs, professional fees, executive officer separation and hiring costs, partially offset by increases in employee compensation expense and incentive compensation. SG&A expenses were also favorably impacted by both the weaker Canadian dollar in 2015 compared to 2014, as well as the fact that 2014 included one additional week of operations.
During the quarter ended October 3, 2015, in an effort to improve overall profitability, we announced a restructuring plan focused primarily on realigning certain costs within our U.S. distribution business and select corporate functions. The restructuring plan includes the closure of four underperforming company-operated supply centers in the United States and the elimination of our roofing product offering in eleven U.S. supply centers. Overall, we eliminated 65 employees, or approximately 5%, of our U.S. distribution and corporate workforce. We expect that these actions will yield annualized cost savings and EBITDA improvement in 2016 of $7.5 million and $5.7 million, respectively. The costs associated with the 2015 restructuring plan totaled $4.5 million and are comprised of fixed asset impairment costs and charges related to early lease termination and reduction of our workforce of $2.3 million and a non-cash charge for the write-down of inventory of $2.2 million, reflected within cost of sales for the year. Restructuring costs of $1.8 million recorded during the year ended January 2, 2016 included costs associated with the aforementioned restructuring plan as well as an adjustment to the liability recorded in 2009 for manufacturing restructuring efforts initiated during the fiscal year then ended.
Income from operations was $34.6 million for the year ended January 2, 2016, an increase of $272.2 million, compared to the prior year loss from operations of $237.6 million. The 2014 operating loss included goodwill and other intangible asset impairments totaling approximately $234 million, caused primarily by the continued decline in our operating results for the year.
THE MERGER
On October 13, 2010, AMH Holdings II, Inc. (“AMH II”), our then indirect parent company, completed its merger (the “Acquisition Merger”) with Carey Acquisition Corp. (“Merger Sub”), pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2010 (“Merger Agreement”), among Carey Investment Holdings Corp. (now known as Associated Materials Group, Inc.) (“Parent”), Carey Intermediate Holdings Corp. (now known as Associated Materials Incorporated), a wholly-owned direct subsidiary of Parent (“Holdings”), Merger Sub, a wholly-owned direct subsidiary of Holdings, and AMH II, with AMH II surviving such merger as a wholly-owned direct subsidiary of Holdings. After a series of additional mergers (together with the Acquisition Merger, the “Merger”), AMH II merged with and into our Company, with our Company surviving such merger as a wholly-owned direct subsidiary of Holdings. As a result of the Merger, our Company is now an indirect wholly-owned subsidiary of Parent. Holdings and Parent do not have material assets or operations other than their direct and indirect ownership, respectively, of the membership interest of the Company. Approximately 96% of Parent’s capital stock is owned by investment funds affiliated with Hellman & Friedman (such investment funds, the “H&F Investors”).

23


RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, our results of operations (dollars in thousands):  
 
Years Ended
 
January 2, 2016
 
% of
Net
Sales
 
January 3, 2015
 
% of
Net
Sales
 
December 28, 2013
 
% of
Net
Sales
Net sales (1)
$
1,184,969

 
100.0
%
 
$
1,186,973

 
100.0
 %
 
$
1,169,598

 
100.0
%
Gross profit
276,194

 
23.3
%
 
243,554

 
20.5
 %
 
281,800

 
24.1
%
Selling, general and administrative expenses
239,790

 
20.2
%
 
247,614

 
20.9
 %
 
232,281

 
19.9
%
Impairment of goodwill

 
%
 
144,159

 
12.1
 %
 

 
%
Impairment of other intangible assets

 
%
 
89,687

 
7.6
 %
 

 
%
Restructuring costs
1,837

 
0.2
%
 
(331
)
 
 %
 

 
%
Income (loss) from operations
34,567

 
2.9
%
 
(237,575
)
 
(20.0
)%
 
49,519

 
4.2
%
Interest expense
83,494

 
 
 
82,527

 
 
 
79,751

 
 
Foreign currency loss
1,878

 
 
 
788

 
 
 
754

 
 
Loss before income taxes
(50,805
)
 
 
 
(320,890
)
 
 
 
(30,986
)
 
 
Income tax (benefit) expense
(693
)
 
 
 
(27,201
)
 
 
 
2,507

 
 
Net loss
$
(50,112
)
 
 
 
$
(293,689
)
 
 
 
$
(33,493
)
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
EBITDA (2)
$
72,568

 
 
 
(195,619
)
 
 
 
91,806

 
 
Adjusted EBITDA (2)
90,261

 
 
 
58,622

 
 
 
109,397

 
 
Depreciation and amortization
39,879

 
 
 
42,744

 
 
 
43,041

 
 
Capital expenditures
(16,573
)
 
 
 
(12,852
)
 
 
 
(11,702
)
 
 
 
(1) The following table presents a summary of net sales by principal product offering as a percentage of net sales (dollars in thousands):
 
Years Ended
 
January 2, 2016
% of
Net
Sales
 
January 3, 2015
% of
Net
Sales
 
December 28, 2013
% of
Net
Sales
Vinyl windows
$
419,885

35.0
%
 
$
401,550

34.0
%
 
$
369,869

32.0
%
Vinyl siding products
200,518

17.0
%
 
213,949

18.0
%
 
216,872

19.0
%
Metal products
148,747

13.0
%
 
155,464

13.0
%
 
166,602

14.0
%
Third-party manufactured products
286,173

24.0
%
 
296,927

25.0
%
 
314,408

27.0
%
Other products and services
129,646

11.0
%
 
119,083

10.0
%
 
101,847

8.0
%
 
$
1,184,969

100.0
%
 
$
1,186,973

100.0
%
 
$
1,169,598

100.0
%

(2)
EBITDA is calculated as net loss plus interest, taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA adjusted to reflect certain adjustments that are used in calculating covenant compliance under the Amended and Restated Revolving Credit Agreement governing our senior secured ABL facilities and the indenture governing our 9.125% Senior Secured Notes due November 1, 2017 (the “Indenture”) and the Sponsor Secured Note. We consider EBITDA and Adjusted EBITDA to be important indicators of the operational strength and performance of our business. We have included Adjusted EBITDA because it is a key financial measure used by our management to (i) assess our ability to service our debt or incur debt and meet our capital expenditure requirements; (ii) internally measure our operating performance; and (iii) determine our incentive compensation programs. EBITDA and Adjusted EBITDA have not been prepared in accordance with GAAP. Adjusted EBITDA as presented by us may not be comparable to similarly titled measures reported by other companies. EBITDA and Adjusted EBITDA are not measures determined in accordance with GAAP and should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with GAAP) as a measure of our operating results or net cash provided by operating activities (as determined in accordance with GAAP) as a measure of our liquidity.

24


The reconciliation of our net loss to EBITDA and Adjusted EBITDA is as follows (in thousands): 
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
Net loss
$
(50,112
)
 
$
(293,689
)
 
$
(33,493
)
Interest expense
83,494

 
82,527

 
79,751

Income tax (benefit) expense
(693
)
 
(27,201
)
 
2,507

Depreciation and amortization
39,879

 
42,744

 
43,041

EBITDA
72,568

 
(195,619
)
 
91,806

Impairment of goodwill and other intangible assets (a)

 
233,846

 

Purchase accounting related adjustments (b)
(3,456
)
 
(3,736
)
 
(3,851
)
Restructuring costs (c)
4,085

 
(331
)
 

(Gain) loss on disposal or write-offs of assets
(37
)
 
(42
)
 
130

Executive officer separation and hiring costs (d)
952

 
3,809

 
1,383

Stock-based compensation expense (e)
184

 
457

 
155

Non-cash benefit adjustments (f)

 
(1,435
)
 
(2,612
)
Other normalizing and unusual items (g)
9,146

 
15,023

 
10,692

Foreign currency loss (h)
1,878

 
788

 
754

Run-rate cost savings (i)
4,941

 
5,862

 
10,940

Adjusted EBITDA
$
90,261

 
$
58,622

 
$
109,397

 

(a)
We review goodwill and other intangible assets for impairment on an annual basis at the beginning of the fourth quarter, or an interim basis if there are indicators of potential impairment. Due to a continued decline in operating results during 2014, management determined that an indicator of potential impairment for indefinite-lived intangible assets existed and performed interim impairment testing as of August 31, 2014, which resulted in an impairment loss of $89.7 million and $144.2 million for certain non-amortized trade names and goodwill, respectively.
(b)
Represents the elimination of the impact of purchase accounting adjustments recorded as a result of the Merger, and includes the following (in thousands):
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
Pension expense adjustment
$
(2,510
)
 
$
(2,610
)
 
$
(2,661
)
Amortization related to fair value adjustment of leased facilities
(237
)
 
(403
)
 
(459
)
Amortization related to warranty liabilities
(709
)
 
(723
)
 
(731
)
Purchase accounting related adjustments (b)
$
(3,456
)
 
$
(3,736
)
 
$
(3,851
)
(c)
Represents expenses of $4.5 million recorded as a result of the 2015 restructuring plan, offset by a favorable adjustment of $0.5 million related to the liability recorded in 2009 for manufacturing restructuring efforts initiated during the fiscal year then ended. Costs associated with the 2015 restructuring plan are comprised primarily of fixed asset impairment costs and the write-down of inventory, as well as charges related to early lease termination and the reduction of our workforce.
(d)
Represents separation and hiring costs, including payroll taxes and certain benefits and professional fees as follows:
(i)
During the year ended January 2, 2016, $1.0 million was incurred primarily attributable to payments made in connection with the resignation of former executives and costs incurred in connection with the hiring of their replacements.
(ii)
During the year ended January 3, 2015, $3.8 million was incurred primarily related to (1) the hirings of Mr. Strauss, our President and Chief Executive Officer and a director of the Company, effective in May 2014; Mr. Stephens, our Executive Vice President and Chief Financial Officer, effective in October 2014; and Mr. Topper, our Executive Vice President, Operations, in July 2014; and (2) the resignations of Mr. Burris, our former President and Chief Executive Officer and a former director of the Company in January 2014; Mr. Nagle, our former Chief Operations Officer, AMI Distribution and Services, in January 2014; Mr. Gaydos, our former Senior Vice President, Operations, in July 2014; and Mr. Morrisroe, our former Senior Vice President

25


and Chief Financial Officer in October 2014. The amount also included the costs of appointing Mr. Snyder as Interim Chief Executive Officer from January 17, 2014 to May 5, 2014.
(iii)
During the year ended December 28, 2013, $1.4 million was incurred primarily related to make-whole payments to Mr. Burris, our former President and Chief Executive Officer, and Mr. Morrisroe, our former Senior Vice President and Chief Financial Officer. Pursuant to their respective employment agreements, these payments provided compensation to offset losses recognized on the sale of their respective residences in connection with relocating near our corporate headquarters.
(e)
Represents equity-based compensation related to restricted shares or deferred stock units issued to certain of our directors and officers.
(f)
Represents the non-cash expense related to warranty claims paid in excess of the warranty provision.
(g)
Represents the following (in thousands):
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
Professional fees and other costs (i)
$
6,951

 
$
11,711

 
$
8,558

Accretion on lease liability (ii)
434

 
495

 
516

Excess severance costs (iii)
158

 
529

 
600

Expenses due to theft, flood, and fire damage (iv)
100

 
149

 

Disputed insurance claim recovery (v)

 

 
(200
)
Excess legal expense (vi)
1,350

 
113

 
212

Environmental liability (vii)

 
701

 
340

Pension settlement loss (viii)

 
117

 
599

Payroll costs due to change of employment classification (ix)

 
1,079

 

Bank audit fees (x)
153

 
129

 
67


$
9,146

 
$
15,023

 
$
10,692

 
(i)
Represents management’s estimate of unusual consulting and advisory fees and other costs associated with corporate strategic initiatives. For the years ended January 2, 2016 and January 3, 2015, we incurred costs of $1.4 million and $8.8 million, respectively, related to the launch of our new window platform on the West Coast in 2015 and on the East Coast in 2014. We also incurred $3.2 million related to special discretionary bonus awards for the year ended January 2, 2016. The fees for the year ended December 31, 2013 included costs of $2.3 million related to the proposed initial public offering (“IPO”) of Parent.
(ii)
Represents accretion on the liability recorded at present value for future lease costs in connection with the warehouse facility adjacent to our Ennis manufacturing plant, which we discontinued using during 2009.
(iii)
Represents management’s estimates for excess severance expense, primarily due to resignation of certain members of the Company’s non-executive management team.
(iv)
Represents expenses incurred related to theft at our Point Claire facility in August 2015, flood damage at our corporate headquarters building in May 2014, and fire damage at one of our supply centers in July 2014.
(v)
Represents the recovery of an unusual insurance claim paid by us in 2012 and subsequently disputed with our insurance carrier.
(vi)
Represents excess legal expense incurred primarily in connection with the defense of actions filed by plaintiffs. The majority of the expense for the year ended January 2, 2016 represents legal costs we incurred for a lawsuit that was settled in the third quarter of 2015.
(vii)
Represents the environmental liability associated with the remediation of soil and groundwater contamination at our Woodbridge, New Jersey facility. See Item 3. “Legal Proceedings” and Note 17 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for further information.
(viii)
Represents settlement losses recorded during the years ended January 3, 2015 and December 28, 2013 for the defined benefit pension plan for our Pointe Claire, Quebec plant. The lump sum payments made to members of this plan upon termination and retirement totaled more than the sum of the service and interest cost, which resulted in recognition of a settlement loss for the years then ended.

26


(ix)
Represents additional payroll costs that were incurred in relation to a change in employment classification from exempt to non-exempt for certain non-managerial U.S. supply center-based employees.
(x)
Represents bank audit fees incurred under our ABL facilities.
(h)
Represents foreign currency loss recognized in the Consolidated Statements of Comprehensive Loss, including (gain) loss on foreign currency exchange hedging agreements.
(i)
Represents our estimate of run-rate cost savings related to actions taken or to be taken within 12 months after the consummation of any acquisition, amalgamation, merger or operational change and prior to or during such period, calculated on a pro forma basis as though such cost savings had been realized on the first day of the period for which Adjusted EBITDA is being calculated, net of the amount of actual benefits realized during such period from such actions and net of the further adjustments required by the ABL facilities and the Indenture, as described below.
Run-rate cost savings include actions around operational and engineering improvements, procurement savings and reductions in SG&A expenses. The run-rate cost savings were estimated to be approximately $10 million, $12 million and $13 million for the years ended January 2, 2016, January 3, 2015, and December 28, 2013, respectively. Our ABL facilities, the Indenture and the Sponsored Secured Note permit us to include run-rate cost savings in our calculation of Adjusted EBITDA in an amount, taken together with the amount of certain restructuring costs, up to 10% of Consolidated EBITDA, as defined in such debt instruments. As such, only $4.9 million of the approximate $10 million of run-rate cost savings for 2015, $5.9 million of the approximate $12 million of run-rate cost savings for 2014 and $10.9 million of the approximate $13 million of run-rate cost savings for 2013 have been included in the calculation of Adjusted EBITDA under the ABL facilities and the Indenture.
Year Ended January 2, 2016 Compared to Year Ended January 3, 2015
Net sales were $1,185.0 million for the year ended January 2, 2016, a decrease of $2.0 million, or 0.2%, compared to net sales of $1,187.0 million for the year ended January 3, 2015. The decrease in net sales was primarily driven by a $13.4 million, or 6.3%, decrease in vinyl siding sales, a $10.7 million, or 3.6%, decrease in third-party manufactured product sales, primarily roofing, and a $6.8 million, or 4.4%, decrease in our metal product sales mainly attributable to lower volume in our distribution business. The unfavorable impact of the weaker Canadian dollar in 2015 significantly impacted our net sales, particularly in our vinyl and metal product lines. Beyond the negative impact of foreign currency translation, the decline in metal product sales was also a result of reduced volume from our distributor customers. We achieved a $18.3 million, or 4.6%, increase in our vinyl window sales, and a $11.3 million, or 10.1%, increase in our ISS business compared to the prior year. Although window unit volume increased only 1% in 2015, we achieved year-over-year improvements in product mix and overall selling price. Net sales in 2015 were unfavorably impacted by the weaker Canadian dollar in 2015 and the additional week of operations in 2014, circumstances that resulted in lower sales of $34.0 million and approximately $10 million, respectively.
Gross profit for the year ended January 2, 2016 was $276.2 million, or 23.3% of net sales, compared to gross profit of $243.6 million, or 20.5% of net sales, for the year ended January 3, 2015. The $32.6 million, or 13.4%, increase was largely due to our continued focus on driving profitability through our integrated products, particularly in our windows business. The improvement in gross profit was primarily due to favorable sales mix and higher overall price levels of $35.0 million and increased sales volume of $1.3 million compared to the prior year. In addition, compared to the same period in 2014, we achieved operational efficiencies of approximately $11.8 million, primarily in our window plants, and incurred $5.9 million fewer costs related to the roll out of our new window platform. Lower material costs of $5.7 million also contributed to the increase in gross profit compared to the prior year. Increases in gross profit were partially offset by the negative impact of foreign currency fluctuation of $27.8 million due to a weaker Canadian dollar in 2015 compared to the prior year. Also, the additional week of operations in 2014 versus 2015 generated approximately $2 million of additional gross profit, further contributing to the year-over-year decrease. Gross profit for the year was unfavorably impacted by a $2.2 million non-cash charge related to the write-down of inventory, recorded as a result of the restructuring plan announced during 2015.
SG&A expenses were $239.8 million, or 20.2% of net sales, for the year ended January 2, 2016 compared to $247.6 million, or 20.9% of net sales, for the year ended January 3, 2015. The year-over-year decrease of $7.8 million, or 3.2%, was primarily attributable to a $2.9 million reduction in executive officer separation and hiring costs, $2.5 million reduction in marketing expenses related to the launch of the new Mezzo line, and a $2.5 million reduction in professional fees. In addition, compared to 2014, we experienced cost savings of $1.6 million and $1.3 million in insurance and sales incentive expense, respectively, as well as decreases in bad debt expense and depreciation and amortization of $1.1 million and $1.0 million, respectively. These decreases were partially offset by a $4.1 million increase in costs associated with the performance-based incentive program resulting from improved operating results in 2015. We also experienced increases in employee compensation expense of $2.6 million, primarily attributable to the continued expansion of the ISS business. SG&A expenses in 2015 were favorably impacted by both the additional week of operations in 2014, as well as the weakened Canadian dollar in 2015

27


compared to the prior year, which consequently resulted in lower current year SG&A expense of approximately $5 million and $7.5 million, respectively.
Income from operations was $34.6 million for the year ended January 2, 2016 compared to loss of $237.6 million for the year ended January 3, 2015. The increase of $272.2 million reflects the impact of the goodwill and other intangible asset impairment losses recorded in prior year totaling $233.9 million, caused primarily by a continued decline in our operating results for the year.
During the third quarter of 2015, we announced a restructuring plan focused on realigning certain costs within our U.S. distribution and select corporate functions. The restructuring plan includes the closure of four underperforming company-operated supply centers in the United States. and the elimination of our roofing product offering in eleven U.S. supply centers. The costs associated with the aforementioned restructuring plan totaled $4.5 million, which reflects a $2.2 million cash charge, the majority of which relates to lease termination costs to be paid through 2020, in accordance with each supply center’s lease payment schedule, and a $2.3 million non-cash charge primarily related to the write-down of inventory, which is reflected within cost of sales. The $1.8 million reflected in restructuring costs represents a $2.3 million charge associated with the aforementioned restructuring plan as well as a favorable adjustment of $0.5 million related to the liability recorded in 2009 for manufacturing restructuring efforts initiated during the fiscal year then ended.
Interest expense was $83.5 million and $82.5 million for the years ended January 2, 2016 and January 3, 2015, respectively. The $1.0 million increase in interest expense in the year ended January 2, 2016 was primarily attributable to borrowings under the ABL facilities.
Income tax benefit for the year ended January 2, 2016 was $0.7 million reflecting a negative effective income tax rate of 1.4%, compared to an income tax benefit for the year ended January 3, 2015 of $27.2 million, which reflected a negative effective income tax rate of 8.5%. The change in the effective tax rate between years was primarily the result of the impact of the impairment charges recorded in the year ended January 3, 2015 for the goodwill and indefinite-lived intangible assets, with no comparative charges in the current year period, as well as changes in the valuation allowance between years.
Net loss for the year ended January 2, 2016 was $50.1 million, compared to a net loss of $293.7 million for the year ended January 3, 2015.
EBITDA and Adjusted EBITDA was $72.6 million and $90.3 million, respectively, for the year ended January 2, 2016. EBITDA was a loss of $195.6 million and adjusted EBITDA was $58.6 million for the year ended January 3, 2015. For a reconciliation of our net loss to EBITDA and Adjusted EBITDA and additional details of the EBITDA adjustments, see the table presented above.
Year Ended January 3, 2015 Compared to Year Ended December 28, 2013
Net sales were $1,187.0 million for the year ended January 3, 2015, an increase of $17.4 million, or 1.5%, compared to net sales of $1,169.6 million for the year ended December 28, 2013. The improvement in net sales was primarily driven by a $31.7 million, or 8.6%, increase in our vinyl window sales, mainly from unit sales volume growth of approximately 8%, and a $17.1 million, or 18.1%, increase in our ISS business compared to the prior year. Both our windows and ISS businesses have benefited from increased demand in the new construction market. Additionally, we see continued improvement in our window product mix since the launch of our new window platform in early 2014. Partially offsetting these increases were declines in third-party manufactured product sales of $17.5 million, or 5.6%, an $11.1 million, or 6.7%, decrease in our metal product sales, and a $3.0 million, or 1.4%, decrease in vinyl siding sales. During 2014, we de-emphasized and withdrew our roofing product offering in selected markets as we continue to focus on driving profitability through our higher margin, integrated product offerings, which impacted our sales for the third-party manufactured product. The decline in metal product sales was primarily a result of reduced volume from our distributor customers. The additional week of operations in 2014 contributed approximately $10 million of additional net sales compared to the prior year, while the weaker Canadian dollar in 2014 negatively impacted our net sales by $14.6 million.
Gross profit for the year ended January 3, 2015 was $243.6 million, or 20.5% of net sales, compared to gross profit of $281.8 million, or 24.1% of net sales, for the year ended December 28, 2013. The $38.2 million, or 13.6%, decrease was largely due to incremental costs of $4.5 million directly associated with the launch of our new window platform in early 2014, as well as manufacturing inefficiencies of approximately $10 million in our window plants primarily as a result of the launch. We also experienced higher costs for certain materials of $12.1 million, and an approximate $4 million increase in costs primarily related to improvements in product packaging, maintenance and safety programs compared to the prior year. The remainder of the decrease in gross profit was due to an increase in freight and rework costs of $3.6 million and $2.0 million, respectively. The decline in gross profit was partially offset by favorable volume impacts of $1.7 million primarily due to the increase in vinyl window sales, partially offset by the decline in third-party manufactured and metal products sales compared to

28


the prior year. The additional week of operations in 2014 generated approximately $2 million of additional gross profit; however, the weaker Canadian dollar negatively impacted our 2014 gross margin by $10.7 million, compared to the prior year.
SG&A expenses were $247.3 million, or 20.8% of net sales, for the year ended January 3, 2015 compared to $232.3 million, or 19.9% of net sales, for the year ended December 28, 2013. The $15.0 million increase was due to an approximately $8 million increase in employee compensation expense mainly attributable to higher supply center headcount that was added in 2014 to support the growth of our ISS business and supply center operations, a $2.4 million increase in executive officer separation and hiring costs, and $1.1 million additional payroll costs related to a change of employment classification from exempt to non-exempt for certain non-managerial U.S. supply center-based employees. We also incurred a $2.7 million increase in marketing-related costs mainly to support the launch of our new window platform, a $2.0 million increase in costs primarily related to product liability and workers compensation, and higher bad debt expense of $1.0 million, compared to the prior year. These increases were partially offset by prior year costs of $2.2 million associated with the proposed IPO of Parent, which did not recur in 2014, and a $1.7 million decrease in pension expenses. The additional week of operations in 2014 resulted in approximately $5 million of additional SG&A expenses compared to the prior year; however, they were favorably impacted by $3.2 million due to a weaker Canadian dollar in 2014.
During the third quarter of 2014, due to the continued decline in operating results, management believed an indicator of potential impairment existed for indefinite-lived intangible assets and performed interim impairment testing as of August 31, 2014, which resulted in an impairment loss for certain non-amortized trade names of $89.7 million and an estimated impairment charge for goodwill of $148.5 million. During the fourth quarter, we finalized step two of the impairment analysis and reduced the goodwill impairment charge by $4.3 million, thereby resulting in a final impairment charge, including goodwill and indefinite-lived intangible assets, of $233.9 million for 2014. See Note 6 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data.”
Loss from operations was $237.6 million for the year ended January 3, 2015 compared to income of $49.5 million for the year ended December 28, 2013.
Interest expense was $82.5 million and $79.8 million for the years ended January 3, 2015 and December 28, 2013, respectively. The $2.7 million increase in interest expense in the year ended January 3, 2015 primarily relates to a full year of interest on the additional $100 million of the 9.125% Notes issued on May 1, 2013.
The income tax benefit for the year ended January 3, 2015 was $27.2 million reflecting a negative effective income tax rate of 8.5%, whereas the income tax expense for the year ended December 28, 2013 of $2.5 million, reflected an effective income tax rate of 8.1%. The change in the effective tax rate between years was primarily the result of the impact of the goodwill impairment charges recorded in the year ended January 3, 2015 with no comparative charge in the prior year, as well as changes in the valuation allowance between periods.
Net loss for the year ended January 3, 2015 was $293.7 million, compared to a net loss of $33.5 million for the year ended December 28, 2013.
EBITDA was a loss of $195.6 million and Adjusted EBITDA was $58.6 million for the year ended January 3, 2015. EBITDA and Adjusted EBITDA were $91.8 million and $109.4 million, respectively, for the year ended December 28, 2013. For a reconciliation of our net loss to EBITDA and Adjusted EBITDA and additional details of the EBITDA adjustments, see the table presented above.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Because most of our building products are intended for exterior use, our sales and operating profits tend to be lower during periods of inclement weather. Weather conditions in the first quarter of each calendar year usually result in that quarter producing significantly less net sales and net cash flows from operations than in any other period of the year. Consequently, we have historically had losses or small profits in the first quarter and lower profits from operations in the fourth quarter of each calendar year. To meet seasonal cash flow needs during the periods of reduced sales and net cash flows from operations, we have typically utilized our revolving credit facilities and repay such borrowings in periods of higher cash flow. We typically generate the majority of our cash flow in the third and fourth quarters.

29


Unaudited quarterly financial data for 2015 and 2014 are shown in the tables below (in thousands):
 
 
Quarters Ended
2015
 
April 4
 
July 4
 
October 3
 
January 2
Net sales
 
$
220,366

 
$
331,249

 
$
339,787

 
$
293,567

Gross profit
 
41,903

 
81,015

 
81,704

 
71,572

(Loss) income from operations
 
(16,567
)
 
18,849

 
18,526

 
13,759

Net loss
 
(38,322
)
 
(5,138
)
 
(5,204
)
 
(1,448
)
During the third quarter of 2015, we announced a restructuring plan focused on realigning certain costs within our U.S. distribution business and select corporate functions. The restructuring plan included the closure of four underperforming company-operated U.S. supply centers and the elimination of our roofing product offering in eleven U.S. supply centers. As a result, we recorded restructuring charge of $4.5 million, primarily related to early lease termination costs, severance for workforce reductions and the write-down of roofing inventory in certain markets.
 
 
Quarters Ended
2014
 
March 29
 
June 28
 
September 27
 
January 3
Net sales
 
$
196,589

 
$
319,875

 
$
353,742

 
$
316,767

Gross profit
 
34,415

 
72,013

 
74,611

 
62,515

(Loss) income from operations
 
(24,250
)
 
11,747

 
(225,834
)
 
762

Net loss
 
(46,349
)
 
(10,608
)
 
(219,176
)
 
(17,556
)
During the third quarter of 2014, due to the continued decline in operating results, management believed an indicator of potential impairment existed for indefinite-lived intangible assets and performed interim impairment testing as of August 31, 2014, which resulted in an impairment loss for certain non-amortized trade names of $89.7 million and an estimated impairment charge for goodwill of $148.5 million. During the fourth quarter, we finalized step two of the impairment analysis and reduced the goodwill impairment charge by $4.3 million, thereby resulting in a final impairment charge, including goodwill and indefinite-lived intangible assets, of $233.9 million for 2014.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 2016, we had $8.5 million of cash and cash equivalents in the United States and $0.9 million in Canada. As of January 3, 2015, we had $5.9 million of cash and cash equivalents in the United States and an immaterial amount in Canada. We had available borrowing capacity of $55.8 million as of January 2, 2016 under our ABL facilities, after giving effect to outstanding letters of credit and borrowing base limitations. We believe that our borrowing capacity under the ABL facilities and current cash and cash equivalents provide adequate liquidity to maintain our operations and capital expenditure requirements and service our debt obligations for the next 12 months.
Cash Flows
The following sets forth a summary of our cash flows (in thousands):  
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
Net cash (used in) provided by operating activities
$
(3,423
)
 
$
(70,965
)
 
$
253

Net cash used in investing activities
(16,421
)
 
(12,833
)
 
(11,990
)
Net cash provided by financing activities
23,378

 
69,412

 
23,193

Cash Flows From Operating Activities
Net cash used in operating activities was $3.4 million for the year ended January 2, 2016, compared to $71.0 million for the year ended January 3, 2015. The $67.6 million increase in cash in 2015 was primarily driven by improved operating results of $37.8 million and improvement in working capital of $29.7 million. Net cash used in operating activities for the year ended January 3, 2015 decreased $71.3 million compared to a source of cash of $0.3 million for the year ended December 28, 2013, primarily as a result of lower operating results of $56.0 million and net cash used in operating assets and liabilities of $15.3 million.

30


Change in accounts receivable was a use of cash of $7.2 million in 2015, compared to $4.9 million in 2014 and $7.1 million in 2013. The year-over-year fluctuations in cash flows from accounts receivable were primarily due to timing of collections from our customers. The net increase in cash flow of $2.2 million in 2014 reflects more cash collected due to the year-end cut off as of January 3, 2015 compared to December 28, 2013, partially offset by the impact of an increase in sales volume in the fourth quarter of 2014 compared to the same period in 2013.
Change in inventory was a source of cash of $14.2 million for the year ended January 2, 2016, compared to a use of cash of $15.3 million for the year ended January 3, 2015 and a use of cash of $17.7 million for the year ended December 28, 2013. The $29.5 million improvement in cash flow from the change in inventory for the year ended January 2, 2016 was primarily driven by working capital initiatives during 2015 and the timing of inventory builds for seasonal demands for the second half of the year. During 2014, we increased inventory at our supply centers to ensure that we had a variety of products to better service our contractor customers, which led to higher inventory levels at the end of 2014, the consequence of which was a relatively lower use of cash for the year ended January 2, 2016, compared to the year ended January 3, 2015.
Change in accounts payable and accrued liabilities was a source of cash of $3.6 million for the year ended January 2, 2016, compared to $5.1 million for the year ended January 3, 2015 and $27.8 million for the year ended December 28, 2013. The decrease in cash flows from accounts payable and accrued liabilities in 2015 compared to 2014 was primarily due to the timing of inventory purchases. The decrease in cash flows from accounts payable and accrued liabilities in 2014 compared to 2013 was primarily attributable to an increase in the volume of inventory purchases in 2013.
Change in income taxes receivable/payable was a use of cash of $2.9 million for the year ended January 2, 2016, compared to a source of cash of $0.6 million for the year ended January 3, 2015 and a use of cash of $1.7 million for the year ended December 28, 2013. Cash flows (used in) provided by operating activities for the years ended January 2, 2016, January 3, 2015, and December 28, 2013 included net income tax payments of $4.3 million, $3.2 million and $4.7 million, respectively.
Cash Flows From Investing Activities
Investing activities used $16.4 million of cash in the year ended January 2, 2016, compared to $12.8 million in the year ended January 3, 2015 and $12.0 million in the year ended December 31, 2013. The use of cash in the years ended January 2, 2016 and January 3, 2015 consisted of capital expenditures of $16.6 million and $12.9 million, respectively. The use of cash in 2013 consisted of capital expenditures of $11.7 million and a supply center acquisition of $0.3 million. The capital expenditures for the current year related primarily to investments at our window manufacturing facilities to improve efficiency, quality and production capacity. The increase in capital expenditures in 2014 compared to 2013 was primarily due to investments in our new window platform that was launched in early 2014.
Cash Flows from Financing Activities
Net cash provided by financing activities was $23.4 million, $69.4 million and $23.2 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. Net cash provided by financing activities in 2015 included borrowings of $187.3 million under our ABL facilities offset by repayments of $164.0 million. Net cash provided by financing activities in 2014 included borrowings of $240.2 million under our ABL facilities offset by repayments of $170.8 million. Net cash provided by financing activities in 2013 included proceeds of $106.0 million from the May 1, 2013 issuance of the additional 9.125% Senior Secured Notes due 2017, borrowings of $148.9 million under our ABL facilities, and an equity contribution from Parent of $0.7 million. These inflows were partially offset by repayments of $226.9 million under our ABL facilities and $5.5 million of financing costs related to the issuance of the additional 9.125% Senior Secured Notes due 2017 and amendment of our ABL facilities during the second quarter of 2013.
For 2016, cash requirements for working capital, capital expenditures, and interest and tax payments will continue to impact the timing and amount of borrowings on our ABL facilities.
Description of Our Outstanding Indebtedness
9.125% Senior Secured Notes due 2017
In October 2010, our Company and our wholly-owned subsidiary, AMH New Finance, Inc. (“AMHNF” and collectively, the “Issuers”) issued and sold $730.0 million of 9.125% Senior Secured Notes due November 1, 2017 (the “existing notes”). The existing notes bear interest at a rate of 9.125% per annum, payable May 1 and November 1 of each year.
On May 1, 2013, the Issuers issued and sold an additional $100.0 million in aggregate principal amount of 9.125% Senior Secured Notes due November 1, 2017 (the “new notes” and, together with the existing notes, the “9.125% notes”) at an issue price of 106.00% of the principal amount of the new notes in a private placement. We used the net proceeds of the offering to

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repay the outstanding borrowings under our ABL facilities and for other general corporate purposes. The new notes were issued as additional notes under the same indenture, dated as of October 13, 2010, governing the existing notes, as supplemented by a supplemental indenture (the “Indenture”). On October 31, 2013, all of the new notes were exchanged for 9.125% Senior Secured Notes due 2017, which have been registered under the Securities Act of 1933, as amended. The new notes are consolidated with and form a single class with the existing notes and have the same terms as to status, redemption, collateral and otherwise (other than issue date, issue price and first interest payment date) as the existing notes. The debt premium related to the issuance of the new notes is being amortized into interest expense over the life of the new notes. The unamortized premium of $2.7 million is included in the long-term debt balance for the 9.125% notes. The effective interest rate of the new notes, including the premium, is 7.5% as of January 2, 2016.
The 9.125% notes, at par value of $830.0 million, have an estimated fair value, classified as a Level 1 measurement, of $576.4 million and $652.8 million based on quoted market prices as of January 2, 2016 and January 3, 2015 , respectively.
We may from time to time, in our sole discretion, purchase, redeem or retire the 9.125% notes in privately negotiated or open market transactions, by tender offer or otherwise. On April 15, 2014, Parent filed a request with the SEC to withdraw the Registration Statement on Form S-1 filed by Parent on July 15, 2013 for a proposed IPO of its common stock. The registration statement was withdrawn because a determination has been made not to proceed with an IPO of Parent’s common stock at the time.
Guarantees. The 9.125% notes are unconditionally guaranteed, jointly and severally, by each of the Issuers’ 100% owned direct and indirect domestic subsidiaries (“guarantors”) that guarantee our obligations under the ABL facilities.
Collateral. The 9.125% notes and the guarantees are secured by a first-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets located in the United States (other than the ABL collateral, in which the 9.125% notes and the guarantees have a second-priority lien, and certain other excluded assets), including equipment, owned real property valued at $5.0 million or more and all present and future shares of capital stock of each of the Issuers’ and each guarantor’s material directly 100% owned domestic subsidiaries and 65% of the present and future shares of capital stock, of each of the Issuers’ and each guarantor’s directly owned foreign restricted subsidiaries (other than Canadian subsidiaries), in each case subject to the Rule 3-16 exclusion described below, certain other exceptions and customary permitted liens. In addition, the 9.125% notes and the guarantees are secured by a second-priority lien on substantially all of the Issuers’ and the guarantors’ present and future assets, which assets also secure the Issuers’ obligations under the ABL facilities, including accounts receivable, inventory, related general intangibles, certain other related assets and the proceeds thereof.
The capital stock and other securities of any subsidiary will be excluded from the collateral securing the 9.125% notes and the guarantees to the extent that the pledge of such capital stock and other securities would result in the Company being required to file separate financial statements of such subsidiary with the SEC pursuant to Rule 3-16 or Rule 3-10 of Regulation S-X under the Securities Act of 1933, as amended. Rule 3-16 of Regulation S-X requires the presentation of a company’s standalone, audited financial statements if that company’s capital stock or other securities are pledged to secure the securities of another issuer, and the greatest of the principal amount, par value, book value and market value of the pledged stock or securities equals or exceeds 20% of the principal amount of the securities secured by such pledge. Accordingly, the collateral securing the 9.125% notes and the guarantees may in the future exclude the capital stock and securities of the Company’s subsidiaries, in each case to the extent necessary to not be subject to such requirement.
Optional Redemption. The Issuers have the option to redeem the 9.125% notes, in whole or in part, at any time on or after November 1, 2013 at redemption prices (expressed as percentages of principal amount of the 9.125% notes to be redeemed) of 106.844%, 104.563%, 102.281% and 100.000% during the 12-month periods commencing on November 1, 2013, 2014, 2015 and 2016, respectively, plus accrued and unpaid interest thereon, if any, to, but excluding, the applicable redemption date.
Change of Control. Upon the occurrence of a change of control, as defined in the Indenture, the Issuers must give holders of notes the opportunity to sell the Issuers their 9.125% notes at 101% of their face amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
Covenants. The Indenture contains covenants limiting the Issuers’ ability and the ability of their restricted subsidiaries to, among other things: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell all or substantially all assets; enter into transactions with affiliates; and enter into agreements that would restrict our subsidiaries to pay dividends or make other payments to us. These covenants are subject to important exceptions and qualifications as described in the Indenture. Most of these covenants will cease to apply for so long as the 9.125% notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s.

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ABL Facilities
In October 2010, we and certain of our subsidiaries (as “U.S. borrowers” and “Canadian borrowers” and, collectively, the “borrowers”) entered into the ABL facilities in the amount of $225.0 million (comprised of a $150.0 million U.S. facility and a $75.0 million Canadian facility) pursuant to a revolving credit agreement dated October 13, 2010, which was subsequently amended and restated on April 18, 2013 (the “Amended and Restated Revolving Credit Agreement”) to, among other things, extend the maturity date of the revolving credit agreement from October 13, 2015 to the earlier of (i) April 18, 2018 and (ii) 90 days prior to the maturity date of the existing notes. Subsequently, we terminated the tranche B revolving credit commitments of $12.0 million and wrote off $0.5 million of deferred financing fees related to the ABL facilities.
Interest Rate and Fees. At our option, the U.S. and Canadian tranche A revolving credit loans under the Amended and Restated Revolving Credit Agreement governing the ABL facilities bear interest at the rate equal to (1) the London Interbank Offered Rate (“LIBOR”) (for eurodollar loans under the U.S. facility) or the Canadian Dealer Offered Rate (“CDOR”) (for loans under the Canadian facility), plus an applicable margin of 2.00% as of January 2, 2016, or (2) the alternate base rate (for alternate base rate loans under the U.S. facility, which is the highest of a prime rate, the Federal Funds Effective Rate plus 0.50% and a one-month LIBOR rate plus 1.0% per annum) or the alternate Canadian base rate (for loans under the Canadian facility, which is the higher of a Canadian prime rate and the 30-day CDOR Rate plus 1.0%), plus an applicable margin of 1.00% as of January 2, 2016, in each case, which interest rate margin may vary in 25 basis point increments between three pricing levels determined by reference to the average excess availability in respect of the U.S. and Canadian tranche A revolving credit loans. In addition to paying interest on outstanding principal under the ABL facilities, we are required to pay a commitment fee in respect of the U.S. and Canadian tranche A revolving credit loans, payable quarterly in arrears, of 0.375%.
Borrowing Base. Availability under the U.S. and Canadian facilities are subject to a borrowing base, which is based on eligible accounts receivable and inventory of certain of our U.S. subsidiaries and eligible accounts receivable, inventory and, with respect to the Canadian tranche A revolving credit loans, equipment and real property, of certain of our Canadian subsidiaries, after adjusting for customary reserves established or modified from time to time by and at the permitted discretion of the administrative agent thereunder. To the extent that eligible accounts receivable, inventory, equipment and real property decline, our borrowing base will decrease and the availability under the ABL facilities may decrease below $213.0 million. In addition, if the amount of outstanding borrowings and letters of credit under the U.S. and Canadian facilities exceeds the borrowing base or the aggregate revolving credit commitments, we are required to prepay borrowings to eliminate the excess.
Guarantors. All obligations under the U.S. facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material U.S. restricted subsidiary of us and by our direct parent, other than certain excluded subsidiaries (“U.S. guarantors”). All obligations under the Canadian facility are guaranteed by each existing and subsequently acquired direct and indirect wholly-owned material Canadian restricted subsidiary of us, other than certain excluded subsidiaries (“Canadian guarantors” and, together with U.S. guarantors, “ABL guarantors”) and the U.S. guarantors.
Security. The U.S. security agreement provides that all obligations of the U.S. borrowers and the U.S. guarantors are secured by a security interest in substantially all of our present and future property and assets, including a first-priority security interest in our capital stock and a second-priority security interest in the capital stock of each of our direct, material wholly-owned restricted subsidiaries. The Canadian security agreement provides that all obligations of the Canadian borrowers and the Canadian guarantors are secured by the U.S. ABL collateral and a security interest in substantially all of our Canadian assets, including a first-priority security interest in the capital stock of the Canadian borrowers and each direct, material wholly-owned restricted subsidiary of the Canadian borrowers and Canadian guarantors.
Covenants, Representations and Warranties. The Amended and Restated Revolving Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, with respect to negative covenants, among other things, restrictions on indebtedness, liens, investments, fundamental changes, asset sales, dividends and other distributions, prepayments or redemption of junior debt, transactions with affiliates and negative pledge clauses. There are no financial covenants included in the Amended and Restated Revolving Credit Agreement, other than a springing fixed charge coverage ratio of at least 1.00 to 1.00, which will be tested only when excess availability is less than the greater of (i) 10.0% of the sum of (x) the lesser of (A) the U.S. tranche A borrowing base and (B) the U.S. tranche A revolving credit commitments and (y) the lesser of (A) the Canadian tranche A borrowing base and (B) the Canadian tranche A revolving credit commitments and (ii) $20.0 million for a period of five consecutive business days until the 30th consecutive day when excess availability exceeds the above threshold.
On March 23, 2015, we further amended the Amended and Restated Revolving Credit Agreement by entering into Amendment One to Amended and Restated Revolving Credit Agreement (“Amendment No.1”). Pursuant to Amendment No.1, the Company was permitted, among other things, for the period commencing on and including April 3, 2015 through and including June 5, 2015, for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if

33


excess availability was less than $15.0 million for a period of five consecutive business days. In addition, Amendment No.1 included a provision for weekly borrowing base certificate reporting for the period commencing on and including April 12, 2015 through and including June 10, 2015 in lieu of delivery of a borrowing base certificate after each fiscal month.
On December 7, 2015, we entered into Amendment No. 2 to the Amended and Restated Revolving Credit Agreement, (“Amendment No. 2”) which permitted, among other things, for the period commencing on and including February 5, 2016 through March 4, 2016, for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if excess availability is less than $15.0 million for a period of five consecutive business days. Further, for the period commencing on and including March 5, 2016 through June 3, 2016, Amendment No. 2 permitted for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days. In addition, Amendment No. 2 includes a provision for weekly borrowing base certificate reporting for the period commencing on and including February 7, 2016 through and including May 29, 2016 in lieu of delivery of a borrowing base certificate after each fiscal month.
On February 19, 2016, we entered into Amendment No. 3 to Amended and Restated Revolving Credit Agreement (“Amendment No. 3”), which permitted, among other things:
for the period commencing on and including February 19, 2016 through April 21, 2016, for the (1) a cash dominion period to commence, only if (a) excess availability is less than $10.0 million for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days, and
for the period commencing on and including April 22, 2016 through and including May 19, 2016, for the (1) a cash dominion period to commence, only if (a) excess availability is less than $7.5 million for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if excess availability is less than $7.5 million for a period of five consecutive business days, and
for the period commencing on and including May 20, 2016 through and including June 3, 2016, for the (1) a cash dominion period to commence, only if (a) excess availability is less than $10.0 million for the fixed charge coverage ratio to be tested or for a cash dominion period to commence, only if excess availability is less than $10.0 million for a period of five consecutive business days.
In addition, Amendment No. 3 includes a provision which reduces excess availability in certain circumstances by adding an availability block for the period commencing on and including February 19, 2016 through April 21, 2016 in the amount $10.0 million, commencing on and including April 22, 2016 through and including May 19, 2016 in the amount of $7.5 million, and commencing on and including May 20, 2016 through April 18, 2018 in the amount of $10.0 million. In addition, in the event all or any portion of the principal of the Sponsor Secured Note (as defined below) is repaid prior to the Amended and Restated Revolving Credit Agreement maturity date, the availability block increases to $20.0 million.
The fixed charge coverage ratio was 0.87:1.00 for the four consecutive fiscal quarter test period ended January 2, 2016. We have not triggered such fixed charge coverage ratio covenant as of January 2, 2016, as excess availability of $35.8 million as of such date was in excess of the covenant trigger threshold. Based on current projections, we expect that the excess availability will be reduced in the first half of 2016 due to the seasonality of its business. Currently we do not expect to trigger such covenant for 2016. Should the current economic conditions or other factors described herein cause our results of
operations to deteriorate beyond our expectations, we may trigger such covenant and, if so triggered, may not be able to satisfy such covenant and be forced to refinance such debt or seek a waiver. Even if new financing is available, it may not be available on terms that are acceptable to us. If we are required to seek a waiver, we may be required to pay significant amounts to the lenders under our ABL facilities to obtain such a waiver.
As of January 2, 2016, there was $92.8 million drawn under the Amended and Restated Revolving Credit Agreement and $55.8 million available for additional borrowings. The weighted average per annum interest rate applicable to borrowings under the U.S. portion and the Canadian portion of the revolving credit commitment was 2.7% and 4.5%, respectively, as of January 2, 2016. We had letters of credit outstanding of $13.1 million as of January 2, 2016 primarily securing insurance policy deductibles, certain lease facilities and our purchasing card program.
In addition to the financial covenant described above, certain incurrences of debt and investments require compliance with financial covenants under the Amended and Restated Revolving Credit Agreement and the Indenture. The breach of any of these covenants could result in a default under the Amended and Restated Revolving Credit Agreement and the Indenture, and the lenders or note holders, as applicable, could elect to declare all amounts borrowed due and payable. See Item 1A. “Risk Factors.” We were in compliance with such financial covenants as of January 2, 2016.

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EBITDA is calculated by reference to net income plus interest and amortization of other financing costs, provision for income taxes, depreciation and amortization. Consolidated EBITDA, as defined in the Amended and Restated Revolving Credit Agreement and the Indenture, is calculated by adjusting EBITDA to reflect adjustments permitted in calculating covenant compliance under these agreements. Consolidated EBITDA will be referred to as Adjusted EBITDA herein. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate our ability to comply with our financial covenant.
First Lien Promissory Note
On February 19, 2016, we, the other borrowers, AMHNF, Holdings, and H&F Finco LLC (“H&F Finco”), an affiliate of the Hellman & Friedman LLC, entered into a first lien promissory note in an aggregate principal amount of $27.5 million (the “Sponsor Secured Note”), $20.0 million of such aggregate principal amount the U.S. borrowers, AMHNF and Holdings are the obligors and $7.5 million of such aggregate principal the Canadian borrowers are the obligors. The Sponsor Secured Note bears interest at the LIBOR rate plus 4.25%, with a LIBOR floor of 1%, and matures at the earlier of (i) June 18, 2018 and (ii) 30 days prior to the maturity date of our 9.125% notes. Prepayment of the Sponsor Secured Note is required if (i) excess availability on the date of such payment (prior to giving effect thereto) is no less than $60.0 million and (ii) excess availability on the date of such payment (immediately after giving effect thereto) and the projected daily average excess availability for the thirty-day period immediately following the date of such payment is, in each case, no less than $32.5 million. The Sponsor Secured Note is subject to the same covenants and events of default contained in the Amended and Restated Revolving Credit Agreement.
The Sponsor Secured Note is guaranteed by the same guarantors and to the same extent as such guarantors guarantee the obligations under our Amended and Restated Revolving Credit Agreement. Our obligations, including those of AMHNF, Holdings and the guarantors under the Sponsor Secured Note are secured on a pari passu basis to the liens and assets securing the obligations under the Amended and Restated Revolving Credit Agreement (the “ABL Shared Collateral”), subject to the applicable intercreditor agreement. Concurrently with entering into the Sponsor Secured Note, we, the other borrowers, AMHNF, Holdings and the guarantors under the Sponsor Secured Note entered into a revolving loan intercreditor agreement with H&F Finco, as the subordinated debt representative and UBS AG, Stamford Branch and UBS AG Canada Branch, as the senior representatives which subordinates the lien of H&F Finco to the lien of the senior representative and the senior lenders under the Amended and Restated Revolving Credit Agreement in respect of any right of payment from the proceeds of any sale or disposition of ABL Shared Collateral.
CONTRACTUAL OBLIGATIONS
The following table presents our contractual obligations as of January 2, 2016.
 
Payments Due by Fiscal Year
(in thousands)
Total
 
2016
 
2017
 
2018
 
2019
 
2020
 
After 2020
Long-term debt (1)
$
922,800

 
$

 
$
922,800

 
$

 
$

 
$

 
$

Interest payments on 9.125% notes
138,853

 
75,738

 
63,115

 

 

 

 

Operating leases (2)
142,188

 
36,893

 
32,442

 
26,243

 
20,016

 
11,492

 
15,102

Expected pension contributions (3)
22,367

 
1,326

 
3,990

 
5,489

 
5,754

 
5,808

 

Total
$
1,226,208

 
$
113,957

 
$
1,022,347

 
$
31,732

 
$
25,770

 
$
17,300

 
$
15,102

(1)
Represents principal amounts only. As of January 2, 2016, our long-term debt consists of $830.0 million aggregate principal amount of 9.125% notes and we have $92.8 million in borrowings outstanding under our ABL facilities. The stated maturity date of our 9.125% notes is November 1, 2017. We are not able to reasonably estimate the cash payments for interest associated with the ABL facilities due to the significant estimation required related to both market rates as well as projected principal payments. See Note 11 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for further information. The amounts presented in this table do not include the Sponsor Secured Note entered into on February 19, 2016.
(2)
For additional information on our operating leases, see Note 16 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
(3)
Although subject to change, the amounts set forth in the table above represent the estimated minimum funding requirements under current law. Due to uncertainties regarding significant assumptions involved in estimating future required contributions to our pension plans, including: (i) interest rate levels, (ii) the amount and timing of asset returns, and (iii) what, if any, changes may occur in pension funding legislation, the estimates in the table may differ materially from actual future payments. We cannot reasonably estimate payments beyond 2020.

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Net long-term deferred income tax liabilities as of January 2, 2016 were $82.1 million. This amount is excluded from the contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax bases of assets and liabilities and their respective book bases, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods.     As a result, we believe scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs. At January 2, 2016, we had unrecognized tax benefits of $0.6 million relating to uncertain tax positions. Due to our federal net operating loss position, the settlement of such tax positions would be offset by the net operating losses, resulting in no outlay of cash.
Consistent with industry practice, we provide homeowners with limited warranties on certain products, primarily related to window and siding product categories. We have recorded reserves of $85.1 million at January 2, 2016 related to warranties issued to homeowners. We estimate that $8.5 million will be paid in 2016 to satisfy warranty obligations; however, we cannot reasonably estimate payments by year for 2017 and thereafter due to the nature of the obligations under these warranties.
OFF-BALANCE SHEET ARRANGEMENTS
We have no special purpose entities or off-balance sheet debt, other than operating leases in the ordinary course of business, which are disclosed in Note 16 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
At January 2, 2016, we had stand-by letters of credit of $13.1 million with no amounts drawn under the stand-by letters of credit. These letters of credit reduce the availability under the ABL facilities. Letters of credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions.
Under certain agreements, indemnification provisions may require us to make payments to third parties. In connection with certain facility leases, we may be required to indemnify the lessors for certain claims. Also, we may be required to indemnify our directors, officers, employees and agents to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnity provisions under the terms of each agreement varies. The majority of indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. In 2015, we did not make any payments under any of these indemnification provisions or guarantees, and we have not recorded any liability for these indemnities in the accompanying consolidated balance sheets.
EFFECTS OF INFLATION
The principal raw materials used by us are vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware, and packaging materials, as well as diesel fuel, all of which have historically been subject to price changes. Raw material pricing on our key commodities has fluctuated significantly over the past several years. Our freight costs may also fluctuate based on changes in gasoline and diesel fuel costs related to our trucking fleet. Our ability to maintain gross margin levels on our products during periods of rising raw material costs and freight costs depends on our ability to obtain selling price increases. Furthermore, the results of operations for individual quarters can and have been negatively impacted by a delay between the timing of raw material cost increases and price increases on our products. There can be no assurance that we will be able to maintain the selling price increases already implemented or achieve any future price increases. At January 2, 2016, we had no raw material hedge contracts in place.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). The core principal of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous guidance within Accounting Standards Codification Topic 840, Leases. For operating leases, a lessee is required to do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. It is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2018, with early

36


adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. We are currently assessing the potential impact of the new requirements under the standard.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 applies to all entities that present a classified statement of financial position and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. It is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not believe that the adoption of the provisions of ASU 2015-17 will have a material impact on its consolidated financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value (“NRV”). The new guidance eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin) under the current lower of cost or market guidance. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. It is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2016. We do not believe that the adoption of the provisions of ASU 2015-11 will have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than an asset, consistent with the presentation of debt discounts. The recognition and measurement of debt issuance costs are not affected by the new guidance. ASU 2015-03 is effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2015. An entity is required to apply ASU 2015-03 on a retrospective basis and comply with the applicable disclosures, which include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, the debt issuance cost asset and the debt liability). In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 provides that, given the absence of authoritative guidance in ASU 2015-03 with respect to presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, an entity is permitted to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We do not believe that the adoption of the provisions of either ASU 2015-03 or ASU 2015-15 will have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide certain disclosures if it concludes that substantial doubt exists. ASU 2014-15 is effective for all entities for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. We do not believe that the adoption of the provisions of ASU 2014-15 will have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The comprehensive new revenue recognition standard supersedes all existing revenue guidance under GAAP and international financial reporting standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard establishes the following five steps that require companies to exercise judgment when considering the terms of any contract, including all relevant facts and circumstances:
Step 1: Identify the contract(s) with the customer,
Step 2: Identify the separate performance obligations in the contract,
Step 3: Determine the transaction price,
Step 4: Allocate the transaction price to the separate performance obligations, and
Step 5: Recognize revenue when each performance obligation is satisfied.
The new standard also requires significantly more interim and annual disclosures. The new standard allows for either full retrospective or modified retrospective adoption. ASU 2014-09 is effective for fiscal years and interim periods within those

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years, beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of the new revenue standard for all entities by one year. We are currently assessing the potential impact of the new requirements under the standard.

CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to recoverability of intangibles and other long-lived assets, customer programs and incentives, allowance for doubtful accounts, inventories, warranties, valuation allowances for deferred tax assets, pensions and postretirement benefits and various other allowances and accruals. We base our estimates on historical experience, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 1 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
We believe the following critical accounting policies contain some of the more significant judgments and estimates we use in the preparation of our consolidated financial statements.
Revenue Recognition. We primarily sell and distribute our products through two channels: direct sales from our manufacturing facilities to independent distributors and dealers and sales to contractors through our company-operated supply centers. Direct sales revenue is recognized when our manufacturing facility ships the product and title and risk of loss passes to the customer or when services have been rendered. Sales to contractors are recognized either when the contractor receives product directly from the supply center or when the supply center delivers the product to the contractor’s job site. For both direct sales to independent distributors and sales generated through our supply centers, revenue is not recognized until collectability is reasonably assured. A substantial portion of our sales is in the repair and remodel segment of the exterior residential building products industry. Therefore, vinyl windows are manufactured to specific measurement requirements received from our customers.
Revenues are recorded net of estimated returns, customer incentive programs and other incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged to income in the period in which the facts that give rise to the revision become known. We collect sales, use, and value-added taxes that are imposed by governmental authorities on and concurrent with sales to our customers. Revenues are presented net of these taxes as the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. For contracts involving installation, revenue recognition is dependent on the type of contract under which we are performing. For single-family residential contracts, revenue is recognized when the installation is complete. For multi-family residential or commercial contracts, revenue is recognized based on the percentage of completion method, in accordance with ASC Topic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. We measure percentage of completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Due to uncertainties inherent in the estimation process, contract costs incurred to date and expected completion costs are continuously monitored throughout the duration of the contract. If circumstances arise such as changes in job performance, job condition or anticipated contract settlement and it becomes necessary to revise completion cost, such revisions are recognized in the period in which they are determined. Provisions for the entirety of estimated losses of uncompleted contracts, if applicable, are made in the period in which such losses are determined. These factors influence management’s assessment of total contract value and the expected completion costs for the underlying contracts, thereby impacting the ultimate recognition of revenue. For each of the years ended January 2, 2016, January 3, 2015 and December 28, 2013, approximately 1% of our revenue was driven by multi-family residential or commercial contracts utilizing percentage of completion revenue recognition.
We offer certain sales incentives to customers who become eligible based on the volume of purchases made during the calendar year. The sales incentives programs are considered customer volume rebates, which are typically computed as a percentage of customer sales, and in certain instances the rebate percentage may increase as customers achieve sales hurdles. Volume rebates are recorded throughout the year based on management estimates of customers’ annual sales volumes and the expected annual rebate percentage achieved. For these programs, we do not receive an identifiable benefit in exchange for the consideration, and therefore, we characterize the volume rebate to the customer as a reduction of revenue in our Consolidated Statements of Comprehensive Loss.
Accounts Receivable. We record accounts receivable at selling prices which are fixed based on purchase orders or contractual arrangements. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of

38


our customers to make required payments. The allowance for doubtful accounts is based on a review of the overall condition of accounts receivable balances and a review of significant past due accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the recoverability is considered remote. Accounts receivable which are not expected to be collected within one year are reclassified as long-term accounts receivable. Long-term accounts receivable balances, net of the related allowance for doubtful accounts are included in “Other assets” in the Consolidated Balance Sheets.
Inventories. We value our inventories at the lower of cost (first-in, first-out) or market value. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Market value is estimated based on the inventories’ current replacement costs by purchase or production; however, market value shall not exceed net realizable value or be lower than net realizable value less normal profit margins. The market and net realizable values of inventory require estimates and judgments based on our historical write-down experience, anticipated write-downs based on future merchandising plans and consumer demand, seasonal considerations, current market conditions and expected industry trends. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Our estimates of market value generally are not sensitive to management assumptions. Replacement costs and net realizable values are based on actual recent purchases and selling prices, respectively. We believe that our average days of inventory on hand indicate that market value declines are not a significant risk and that we do not maintain excess levels of inventory.
Goodwill and Other Intangible Assets. In accordance with FASB ASC Topic 350, Intangibles — Goodwill and Other, we evaluate the carrying value of our goodwill and other indefinite-lived intangible assets for potential impairment on an annual basis or an interim basis if there are indicators of potential impairment. As the consolidated entity represents the only component that constitutes a business for which discrete financial information is reviewed by our chief operating decision maker for the purpose of making decisions about resources to be allocated and assessing performance, we conclude that we have one reporting unit, which is the same as our single operating segment, and we perform our goodwill impairment assessment for our Company as a whole. The impairment test is conducted by management with the assistance of an independent valuation firm using an income approach. As we do not have a market for our equity, management performs the annual impairment analysis utilizing a discounted cash flow approach incorporating current estimates regarding performance and macroeconomic factors discounted at a weighted average cost of capital. We conduct our impairment test of goodwill and other indefinite-lived intangible assets annually, at the beginning of the fourth quarter of each year, or as indicators of potential impairment arise. The resulting fair value measures used in such impairment tests incorporate significant unobservable inputs, and as such, are considered Level 3 fair value measurements.
Assumptions used in our impairment evaluation, such as long-term sales growth rates, forecasted operating margins and our discount rate are based on the best available market information and are consistent with our internal forecasts and operating plans. Changes in these estimates or a decline in general economic condition could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period. We utilize a cash flow model in estimating the fair value of our reporting unit for the income approach, where the discount rate reflects a weighted average cost of capital rate. The cash flow model used to derive fair value is most sensitive to the discount rate, long-term sales growth rate and forecasted operating margin assumptions used. Our 2015 Step 1 impairment test indicated that the fair value of our enterprise exceeded carrying value by approximately 38% as of October 4, 2015. Consequently, no impairment charges were required as a result of the annual impairment test of goodwill. As of January 2, 2016, goodwill and intangible assets were $302.9 million and $398.0 million, respectively, and were associated with the Merger. Given the significant amount of goodwill and intangible assets that remain, any future impairment could have an adverse effect on our results of operations and financial position.
Income Taxes. We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Income tax expense includes both current and deferred taxes. Deferred tax assets and liabilities may be recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We review the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. When an uncertain tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of expense and benefit to be recognized in our financial statements. No tax benefit is recognized in our financial statements for tax positions that do not meet the more-likely-than-not threshold. We recognize interest and penalties related to income taxes and uncertain tax positions within income tax expense. The effect of a change to the deferred tax assets or liabilities as a result of new tax law, including tax rate changes, is recognized in the period that the tax law is enacted.

39


Product Warranty Costs. Consistent with industry practice, we provide homeowners with limited warranties on certain products, primarily related to window and siding product categories. Warranties are of varying lengths of time from the date of purchase up to and including lifetime. Warranties cover product failures such as seal failures for windows and fading and peeling for siding products, as well as manufacturing defects. We have various options for remedying product warranty claims including repair, refinishing or replacement of the defective product, the cost of which is directly absorbed by us. Warranties also become reduced under certain conditions of time and/or change in home ownership. Certain metal coating suppliers provide warranties on materials sold to us that mitigate the costs incurred by us. Reserves for future warranty costs are provided based on management’s estimates utilizing an actuarial calculation performed by an independent valuation firm that projects future remedy costs using historical data trends of claims incurred, claim payments, sales history of products to which such costs relate and other factors.
As a result of the Merger and the application of purchase accounting, we adjusted our warranty reserves to represent an estimate of the fair value of the liability as of the closing date of the Merger, which was based on an actuarial calculation performed by an independent valuation firm. The fair value of the expected future remedy costs related to products sold prior to the Merger was based on the actuarially determined estimates of expected future remedy costs and other factors and assumptions we believe market participants would use in valuing the warranty reserves. These other factors and assumptions included inputs for claims administration costs, confidence adjustments for uncertainty in the estimates of expected future remedy costs and a discount factor to arrive at the liability at the date of the Merger. The excess of the estimated fair value over the expected future remedy costs of $9.5 million, which was included in our warranty reserve at the date of the Merger, is being amortized as a reduction of warranty expense over the expected term such warranty claims will be satisfied. The remaining unamortized amount at January 2, 2016 is $5.5 million. The provision for warranties is reported within “Cost of sales” in the Consolidated Statements of Comprehensive Loss.
Pension and other postretirement benefit plans. The costs for these plans are determined from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. In selecting these assumptions, management considers current market conditions, including changes in interest rates and market returns on plan assets.
We used weighted average discount rates of 4.02% and 4.00% for the year ended January 2, 2016 to determine the net periodic pension costs for the domestic and foreign pension plans, respectively. A 100 basis point increase in the discount rate would increase 2016 net periodic pension costs for the domestic pension plans by $0.1 million and decrease net periodic pension costs for the foreign pension plans by $0.3 million. A 100 basis point decrease in the discount rate would increase 2016 net periodic pension costs by $0.8 million and $0.4 million for domestic and foreign plans, respectively.
We used weighted average long-term rate of return on assets of 6.70% and 5.60% for the year ended January 2, 2016 to determine the net periodic pension costs for the domestic and foreign pension plans, respectively. A 100 basis point increase in the long-term rate of return would decrease 2016 net periodic pension costs by $0.6 million and $0.7 million for the domestic and foreign pension plans, respectively. A 100 basis point decrease in the long-term rate of return would increase 2016 net periodic pension costs by $0.6 million and $0.7 million for the domestic and foreign pension plans, respectively.
Changes in the related pension benefit costs may occur in the future due to changes in assumptions.
FORWARD-LOOKING STATEMENTS
All statements (other than statements of historical facts) included in this report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
declines in remodeling and home building industries, economic conditions and changes in interest rates, foreign currency exchange rates and other conditions;
our substantial level of indebtedness;
our ability to comply with certain financial covenants in debt instruments and the restrictions such covenants impose on our ability to operate our business;

40


deteriorations in availability of consumer credit, employment trends, levels of consumer confidence and spending and consumer preferences;
our ability to generate sufficient cash, or access capital resources, to service all our debt obligations, working capital needs and planned capital expenditures;
increases in competition from other manufacturers of vinyl and metal exterior residential building products as well as alternative building products;
our substantial fixed costs;
delays in the development of new or improved products or our inability to successfully develop new or improved products;
changes in raw material costs and availability of raw materials and finished goods;
consolidation of our customers;
increases in union organizing activity;
changes in weather conditions;
our history of operating losses;
our ability to attract and retain qualified personnel;
in the event of default under our debt instruments, the ability of creditors under our debt instruments to foreclose on our collateral;
any impairment of goodwill or other intangible assets;
future recognition of our deferred tax assets;
increases in mortgage rates, changes in mortgage interest deductions and the reduced availability of financing;
our exposure to foreign currency exchange risk;
our control by the H&F Investors; and
the other factors discussed under Part I, Item 1A. “Risk Factors” and elsewhere in this report.
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The occurrence of the events described under the caption Item 1A. “Risk Factors” and elsewhere in this report could have a material adverse effect on our business, results of operations and financial condition.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
From time to time, we may have outstanding borrowings under our ABL facilities and may incur additional borrowings for general corporate purposes, including working capital and capital expenditures. As of January 2, 2016, we had $92.8 million of borrowings outstanding under our ABL facilities. The effect of a 1.00% increase or decrease in interest rates would increase or decrease total interest expense by $0.9 million.
As of January 2, 2016, the interest rate applicable to outstanding loans under the U.S. and Canadian tranche A revolving facilities would be, at our option, equal to either a U.S. or Canadian adjusted base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 1.75% to 2.25%, with the applicable margin in each case depending on our quarterly average “excess availability” as defined in the credit facilities.
We have $830.0 million aggregate principal amount of 9.125% notes outstanding as of January 2, 2016 that bear a fixed interest rate of 9.125% and mature in 2017. The fair value of our 9.125% notes is sensitive to changes in interest rates. In addition, the fair value is affected by our overall credit rating, which could be impacted by changes in our future operating

41


results. These 9.125% notes have an estimated fair value of $576.4 million based on quoted market prices as of January 2, 2016.
FOREIGN CURRENCY EXCHANGE RATE RISK
Our revenues are generated primarily from domestic customers and are realized in U.S. dollars. However, we realize revenues from sales made through our Canadian distribution centers in Canadian dollars. Our Canadian manufacturing facilities acquire raw materials and supplies from U.S. vendors, which results in foreign currency transactional gains and losses upon settlement of the obligations. Payment terms among Canadian manufacturing facilities and these vendors are short-term in nature. We may, from time to time, enter into foreign exchange forward contracts with maturities of less than three months to reduce our exposure to fluctuations in the Canadian dollar. We were a party to foreign exchange forward contracts for Canadian dollars, the value of which was immaterial at January 2, 2016.
We experienced foreign currency translation loss of $31.2 million, net of tax, for the year ended January 2, 2016, which was included within “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. A 10% strengthening or weakening from the levels experienced during 2015 of the U.S. dollar relative to the Canadian dollar would have resulted in an approximate $10 million decrease or increase, respectively, in net loss for the year ended January 2, 2016.
COMMODITY PRICE RISK
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects of Inflation” for a discussion of the market risk related to our principal raw materials (vinyl resin, aluminum, steel, resin stabilizers and pigments, glass, window hardware and packaging materials) and diesel fuel.

42


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED MATERIALS, LLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
As of January 2, 2016 and January 3, 2015
 
 
 
 
 
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013
 
 
 
 
 
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013
 
 
 
 
 
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013
 
 
 

43



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of
Associated Materials, LLC
We have audited the accompanying consolidated balance sheets of Associated Materials, LLC and subsidiaries (the “Company”) as of January 2, 2016 and January 3, 2015, and the related consolidated statements of comprehensive loss, member’s equity (deficit), and cash flows for each of the three years in the period ended January 2, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 2, 2016 and January 3, 2015, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Cleveland, Ohio
March 22, 2016

44


ASSOCIATED MATERIALS, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands) 
 
January 2,
2016
 
January 3,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,394

 
$
5,963

Accounts receivable, net
127,043

 
125,121

Inventories
123,374

 
145,532

Income taxes receivable
1,612

 
144

Deferred income taxes
1,502

 
2,439

Prepaid expenses and other current assets
14,163

 
15,859

Total current assets
277,088

 
295,058

Property, plant and equipment, net
90,794

 
93,900

Goodwill
302,908

 
317,257

Other intangible assets, net
397,953

 
437,300

Other assets
13,270

 
18,662

Total assets
$
1,082,013

 
$
1,162,177

 
 
 
 
LIABILITIES AND MEMBER’S DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
91,563

 
$
94,768

Accrued liabilities
83,630

 
81,734

Deferred income taxes
436

 
1,292

Income taxes payable
36

 
1,782

Total current liabilities
175,665

 
179,576

Deferred income taxes
82,102

 
88,330

Other liabilities
113,123

 
129,016

Long-term debt
925,484

 
903,404

Commitments and contingencies

 

Member’s deficit:
 
 
 
Membership interest
556,011

 
555,827

Accumulated other comprehensive loss
(86,907
)
 
(60,623
)
Accumulated deficit
(683,465
)
 
(633,353
)
Total member’s deficit
(214,361
)
 
(138,149
)
Total liabilities and member’s deficit
$
1,082,013

 
$
1,162,177

See accompanying notes to consolidated financial statements.

45


ASSOCIATED MATERIALS, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands) 
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
Net sales
$
1,184,969

 
$
1,186,973

 
$
1,169,598

Cost of sales
908,775

 
943,419

 
887,798

Gross profit
276,194

 
243,554

 
281,800

Selling, general and administrative expenses
239,790

 
247,614

 
232,281

Impairment of goodwill

 
144,159

 

Impairment of other intangible assets

 
89,687

 

Restructuring costs
1,837

 
(331
)
 

Income (loss) from operations
34,567

 
(237,575
)
 
49,519

Interest expense
83,494

 
82,527

 
79,751

Foreign currency loss
1,878

 
788

 
754

Loss before income taxes
(50,805
)
 
(320,890
)
 
(30,986
)
Income tax (benefit) expense
(693
)
 
(27,201
)
 
2,507

Net loss
$
(50,112
)
 
$
(293,689
)
 
$
(33,493
)
Other comprehensive income (loss):
 
 
 
 
 
Pension and other postretirement benefit adjustments, net of tax
4,880

 
(20,268
)
 
19,774

Foreign currency translation adjustments, net of tax
(31,164
)
 
(22,439
)
 
(20,443
)
Total comprehensive loss
$
(76,396
)
 
$
(336,396
)
 
$
(34,162
)
See accompanying notes to consolidated financial statements.

46


ASSOCIATED MATERIALS, LLC
CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY (DEFICIT)
(In thousands)
 
Membership
Interest
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Member’s Equity (Deficit)
Balance at December 29, 2012
$
554,473

 
$
(17,247
)
 
$
(306,171
)
 
$
231,055

Net loss

 

 
(33,493
)
 
(33,493
)
Other comprehensive loss

 
(669
)
 

 
(669
)
Equity contribution from parent
742

 

 

 
742

Stock-based compensation expense
155

 

 

 
155

Balance at December 28, 2013
555,370

 
(17,916
)
 
(339,664
)
 
197,790

Net loss

 

 
(293,689
)
 
(293,689
)
Other comprehensive loss

 
(42,707
)
 

 
(42,707
)
Stock-based compensation expense
457

 

 

 
457

Balance at January 3, 2015
555,827

 
(60,623
)
 
(633,353
)
 
(138,149
)
Net loss

 

 
(50,112
)
 
(50,112
)
Other comprehensive loss

 
(26,284
)
 

 
(26,284
)
Stock-based compensation expense
184

 

 

 
184

Balance at January 2, 2016
$
556,011

 
$
(86,907
)
 
$
(683,465
)
 
$
(214,361
)
 
 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

47


ASSOCIATED MATERIALS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Years Ended
 
January 2,
2016
 
January 3,
2015
 
December 28, 2013
OPERATING ACTIVITIES
 
 
 
 
 
Net loss
$
(50,112
)
 
$
(293,689
)
 
$
(33,493
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
Depreciation and amortization
39,879

 
42,744

 
43,041

Deferred income taxes
(2,231
)
 
(31,201
)
 
(1,503
)
Impairment of goodwill and other intangible assets

 
233,846

 

Non-cash portion of restructuring costs
3,513

 

 

Provision for losses on accounts receivable
1,008

 
2,138

 
1,122

(Gain) loss on sale or disposal of assets
(37
)
 
(42
)
 
130

Amortization of deferred financing costs and premium on senior notes
3,575

 
3,719

 
4,451

Stock-based compensation expense and other non-cash charges
184

 
457

 
161

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(7,200
)
 
(4,863
)
 
(7,142
)
Inventories
14,168

 
(15,309
)
 
(17,696
)
Prepaid expenses
1,483

 
(5,184
)
 
(2,307
)
Accounts payable
1,430

 
731

 
24,262

Accrued liabilities
2,166

 
4,406

 
3,529

Income taxes receivable/payable
(2,866
)
 
555

 
(1,716
)
Other assets
298

 
1,025

 
(2,185
)
Other liabilities
(8,681
)
 
(10,298
)
 
(10,401
)
Net cash (used in) provided by operating activities
(3,423
)
 
(70,965
)
 
253

INVESTING ACTIVITIES
 
 
 
 
 
Capital expenditures
(16,573
)
 
(12,852
)
 
(11,702
)
Proceeds from the sale of assets
152

 
19

 
60

Supply center acquisition

 

 
(348
)
Net cash used in investing activities
(16,421
)
 
(12,833
)
 
(11,990
)
FINANCING ACTIVITIES
 
 
 
 
 
Borrowings under ABL facilities
187,331

 
240,222

 
148,861

Payments under ABL facilities
(163,953
)
 
(170,810
)
 
(226,861
)
Equity contribution from parent

 

 
742

Issuance of senior secured notes

 

 
106,000

Financing costs

 

 
(5,549
)
Net cash provided by financing activities
23,378

 
69,412

 
23,193

Effect of exchange rate changes on cash and cash equivalents
(103
)
 
(466
)
 
(235
)
Increase (decrease) in cash and cash equivalents
3,431

 
(14,852
)
 
11,221

Cash and cash equivalents at beginning of the year
5,963

 
20,815

 
9,594

Cash and cash equivalents at end of the year
$
9,394

 
$
5,963

 
$
20,815

 
 
 
 
 
 
Supplemental Information:
 
 
 
 
 
Cash paid for interest
$
80,023

 
$
78,322

 
$
74,043

Cash paid for income taxes
$
4,408

 
$
4,224

 
$
4,685


See accompanying notes to consolidated financial statements.

48


ASSOCIATED MATERIALS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Associated Materials, LLC (the “Company”) was founded in 1947 when it first introduced residential aluminum siding under the Alside® name. The Company today is a leading, vertically integrated manufacturer and distributor of exterior residential building products in the United States (“U.S.”) and Canada. The Company provides a comprehensive offering of exterior building products, including vinyl windows, vinyl siding, vinyl railing and fencing, aluminum trim coil, aluminum and steel siding and related accessories, which are produced at the Company’s 11 manufacturing facilities. The Company also sells complementary products that it sources from a network of manufacturers, such as roofing materials, cladding materials, insulation, exterior doors, equipment and tools. The Company also provides installation services. The Company distributes these products through its extensive dual-distribution network to over 50,000 professional exterior contractors, builders and dealers, whom the Company refers to as its “contractor customers.” This dual-distribution network consists of 122 company-operated supply centers, through which the Company sells directly to its contractor customers, and its direct sales channel, through which the Company sells to more than 260 independent distributors, dealers and national account customers.
BASIS OF PRESENTATION
On October 13, 2010, AMH Holdings II, Inc. (“AMH II”), the then indirect parent company of the Company, completed its merger (the “Acquisition Merger”) with Carey Acquisition Corp. (“Merger Sub”), pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2010 (“Merger Agreement”), among Carey Investment Holdings Corp. (now known as Associated Materials Group, Inc.) (“Parent”), Carey Intermediate Holdings Corp. (now known as Associated Materials Incorporated), a 100% owned direct subsidiary of Parent (“Holdings”), Merger Sub, a wholly-owned direct subsidiary of Holdings, and AMH II, with AMH II surviving such merger as a wholly-owned direct subsidiary of Holdings. After a series of additional mergers (together with the Acquisition Merger, the “Merger”), AMH II merged with and into the Company, with the Company surviving such merger as a wholly-owned direct subsidiary of Holdings. As a result of the Merger, the Company is now an indirect wholly-owned subsidiary of Parent. Holdings and Parent do not have material assets or operations other than their direct and indirect ownership, respectively, of the membership interest of the Company. Approximately 96% of the capital stock of Parent is owned by investment funds affiliated with Hellman & Friedman LLC (such investment funds, the “H&F Investors”).
The Company operates on a 52/53 week fiscal year that ends on the Saturday closest to December 31st. Its 2015 and 2013 fiscal years ended on January 2, 2016 and December 28, 2013, respectively, and included 52 weeks of operations. Its 2014 fiscal year ended on January 3, 2015 and included 53 weeks of operations, with the additional week recorded in the fourth quarter of fiscal 2014.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2015 presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to recoverability of intangibles and other long-lived assets, customer programs and incentives, allowance for doubtful accounts, inventories, warranties, valuation allowances for deferred tax assets, pensions and postretirement benefits and various other allowances and accruals. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
REVENUE RECOGNITION

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The Company primarily sells and distributes its products through two channels: direct sales from its manufacturing facilities to independent distributors and dealers and sales to contractors through its company-operated supply centers. Direct sales revenue is recognized when the Company’s manufacturing facility ships the product and title and risk of loss passes to the customer or when services have been rendered. Sales to contractors are recognized either when the contractor receives product directly from the supply center or when the supply center delivers the product to the contractor’s job site. For both direct sales to independent distributors and dealers and sales generated from the Company’s supply centers, revenue is not recognized until collectability is reasonably assured. A substantial portion of the Company’s sales is in the repair and remodel segment of the exterior residential building products industry. Therefore, vinyl windows are manufactured to specific measurement requirements received from the Company’s customers. Sales to one customer and its licensees represented approximately 14% of net sales in each of 2015 and 2014 and approximately 13% of total net sales in 2013.     
Revenues are recorded net of estimated returns, customer incentive programs and other incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged to income in the period in which the facts that give rise to the revision become known. The Company collects sales, use, and value-added taxes that are imposed by governmental authorities on and concurrent with sales to the Company’s customers. Revenues are presented net of these taxes as the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. For contracts involving installation, revenue recognition is dependent on the type of contract under which the Company is performing. For single-family residential contracts, revenue is recognized when the installation is complete. For multi-family residential or commercial contracts, revenue is recognized based on the percentage of completion method, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The Company measures percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Due to uncertainties inherent in the estimation process, contract costs incurred to date and expected completion costs are continuously monitored throughout the duration of the contract. If circumstances arise such as changes in job performance, job condition or anticipated contract settlement and it becomes necessary to revise completion cost, such revisions are recognized in the period in which they are determined. Provisions for the entirety of estimated losses of uncompleted contracts, if applicable, are made in the period in which such losses are determined. These factors influence management’s assessment of total contract value and the expected completion costs for the underlying contracts, thereby impacting the Company’s ultimate recognition of revenue.
The Company offers certain sales incentives to customers who become eligible based on the volume of purchases made during the calendar year. The sales incentive programs are considered customer volume rebates, which are typically computed as a percentage of customer sales, and in certain instances the rebate percentage may increase as customers achieve sales hurdles. Volume rebates are accrued throughout the year based on management estimates of customers’ annual sales volumes and the expected annual rebate percentage achieved. For these programs, the Company does not receive an identifiable benefit in exchange for the consideration, and therefore, the Company characterizes the volume rebate to the customer as a reduction of revenue in the Company’s Consolidated Statements of Comprehensive Loss.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company records accounts receivable at selling prices which are fixed based on purchase orders or contractual arrangements. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is based on a review of the overall condition of accounts receivable balances and a review of significant past due accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the recoverability is considered remote. Accounts receivable that are not expected to be collected within one year are reclassified as long-term accounts receivable. Long-term accounts receivable balances, net of the related allowance for doubtful accounts are included in “Other assets” in the Consolidated Balance Sheets. See Note 3 for further information.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Fixed manufacturing overhead is allocated based on normal production capacity and abnormal manufacturing costs are recognized as period costs. See Note 4 for further information.

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PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are stated at cost. The costs of maintenance and repairs to property, plant and equipment are charged to operations in the period incurred. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. The estimated useful lives are approximately 20 to 30 years for buildings and improvements and 3 to 15 years for machinery and equipment. Leasehold improvements are amortized over the lesser of the lease term or the estimated life of the leasehold improvement.
Property, plant and equipment are reviewed for impairment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment. The Company also reviews long-lived assets for impairment whenever events or chang