UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended: April 2, 2022
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: 1-14315
Cornerstone Building Brands, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 76-0127701 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| 5020 Weston Parkway | Suite 400 | Cary | NC | 27513 | ||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(866) 419-0042
(Registrant’s telephone number, including area code)
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 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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ý | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
| Common Stock $0.01 par value per share | CNR | New York Stock Exchange | ||||||
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value - 127,354,001 shares as of April 26, 2022.
TABLE OF CONTENTS
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| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
i
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements.
CORNERSTONE BUILDING BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
See accompanying notes to consolidated financial statements.
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Net sales | $ | 1,566,838 | $ | 1,267,032 | ||||||||||
| Cost of sales | 1,232,931 | 1,007,303 | ||||||||||||
| Gross profit | 333,907 | 259,729 | ||||||||||||
| Selling, general and administrative expenses | 176,536 | 153,168 | ||||||||||||
| Intangible asset amortization | 49,008 | 46,202 | ||||||||||||
| Restructuring and impairment charges, net | 831 | 1,838 | ||||||||||||
| Strategic development and acquisition related costs | 4,791 | 3,313 | ||||||||||||
| Gain on legal settlements | (76,575) | — | ||||||||||||
| Income from operations | 179,316 | 55,208 | ||||||||||||
| Interest income | 32 | 117 | ||||||||||||
| Interest expense | (44,106) | (56,499) | ||||||||||||
| Foreign exchange gain (loss) | 1,444 | (26) | ||||||||||||
| Other income (expense), net | (37) | 337 | ||||||||||||
| Income (loss) before income taxes | 136,649 | (863) | ||||||||||||
| Provision for income taxes | 34,366 | 792 | ||||||||||||
| Net income (loss) | 102,283 | (1,655) | ||||||||||||
| Net income allocated to participating securities | (757) | — | ||||||||||||
| Net income (loss) applicable to common shares | $ | 101,526 | $ | (1,655) | ||||||||||
| Income (loss) per common share: | ||||||||||||||
| Basic | $ | 0.80 | $ | (0.01) | ||||||||||
| Diluted | $ | 0.79 | $ | (0.01) | ||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||
| Basic | 127,129 | 125,506 | ||||||||||||
| Diluted | 128,466 | 125,506 | ||||||||||||
1
CORNERSTONE BUILDING BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Comprehensive income: | ||||||||||||||
| Net income (loss) | $ | 102,283 | $ | (1,655) | ||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||
| Foreign exchange translation gains | 4,784 | 6,113 | ||||||||||||
Unrealized gain on derivative instruments, net of income tax of $(11,625) and $(2,690), respectively | 60,696 | 9,137 | ||||||||||||
| Amount reclassified from Accumulated other comprehensive income (loss) into earnings | 7,288 | — | ||||||||||||
| Other comprehensive income | 72,768 | 15,250 | ||||||||||||
| Comprehensive income | $ | 175,051 | $ | 13,595 | ||||||||||
See accompanying notes to consolidated financial statements.
2
CORNERSTONE BUILDING BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| April 2, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 542,035 | $ | 394,447 | |||||||
| Restricted cash | 2,211 | 2,211 | |||||||||
Accounts receivable, less allowances of $12,153 and $11,299, respectively | 708,340 | 685,316 | |||||||||
| Inventories, net | 817,715 | 748,732 | |||||||||
| Income taxes receivable | 3,502 | 14,514 | |||||||||
| Investments in debt and equity securities, at market | 2,301 | 2,759 | |||||||||
| Prepaid expenses and other | 99,777 | 135,701 | |||||||||
| Assets held for sale | 3,400 | 3,400 | |||||||||
| Total current assets | 2,179,281 | 1,987,080 | |||||||||
Property, plant and equipment, less accumulated depreciation of $674,324 and $656,492, respectively | 625,106 | 612,295 | |||||||||
| Lease right-of-use assets | 295,692 | 322,608 | |||||||||
| Goodwill | 1,355,161 | 1,358,056 | |||||||||
| Intangible assets, net | 1,477,430 | 1,524,635 | |||||||||
| Deferred income taxes | 2,055 | 1,839 | |||||||||
| Other assets, net | 96,931 | 20,947 | |||||||||
| Total assets | $ | 6,031,656 | $ | 5,827,460 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 26,000 | $ | 26,000 | |||||||
| Accounts payable | 396,408 | 311,737 | |||||||||
| Accrued compensation and benefits | 82,790 | 101,164 | |||||||||
| Accrued interest | 12,186 | 19,775 | |||||||||
| Accrued income taxes | 39,094 | 3,220 | |||||||||
| Current portion of lease liabilities | 57,477 | 73,150 | |||||||||
| Other accrued expenses | 281,376 | 320,389 | |||||||||
| Total current liabilities | 895,331 | 855,435 | |||||||||
| Long-term debt | 3,005,873 | 3,010,843 | |||||||||
| Deferred income taxes | 248,726 | 252,173 | |||||||||
| Long-term lease liabilities | 238,134 | 251,061 | |||||||||
| Other long-term liabilities | 284,469 | 281,609 | |||||||||
| Total long-term liabilities | 3,777,202 | 3,795,686 | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.01 par value; 200,000,000 authorized; 127,329,476 and 127,329,476 shares issued and outstanding at April 2, 2022, respectively; and 126,992,107 and 126,971,036 shares issued and outstanding at December 31, 2021, respectively | 1,273 | 1,270 | |||||||||
| Additional paid-in capital | 1,287,237 | 1,279,931 | |||||||||
| Accumulated earnings (deficit) | 3,457 | (98,826) | |||||||||
| Accumulated other comprehensive income (loss), net | 67,156 | (5,612) | |||||||||
Treasury stock, at cost (0 and 21,071 shares at April 2, 2022 and December 31, 2021, respectively) | — | (424) | |||||||||
| Total stockholders’ equity | 1,359,123 | 1,176,339 | |||||||||
| Total liabilities and stockholders’ equity | $ | 6,031,656 | $ | 5,827,460 | |||||||
See accompanying notes to consolidated financial statements.
3
| CORNERSTONE BUILDING BRANDS, INC. | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (In thousands) | |||||||||||
| (Unaudited) | |||||||||||
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 102,283 | $ | (1,655) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 73,932 | 72,615 | |||||||||
| Non-cash interest expense | 8,928 | 2,314 | |||||||||
| Share-based compensation expense | 11,451 | 3,302 | |||||||||
| Asset impairment | 368 | 493 | |||||||||
| Provision for credit losses | 242 | 676 | |||||||||
| Deferred income taxes | (15,749) | (9,729) | |||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions: | |||||||||||
| Accounts receivable | (23,628) | (47,157) | |||||||||
| Inventories | (68,857) | (62,028) | |||||||||
| Income taxes | 11,012 | 7,976 | |||||||||
| Prepaid expenses and other | 36,446 | (7,755) | |||||||||
| Accounts payable | 84,726 | 49,424 | |||||||||
| Accrued expenses | (28,312) | 8,597 | |||||||||
| Other, net | (2,736) | 2,958 | |||||||||
| Net cash provided by operating activities | 190,106 | 20,031 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | 4,396 | (180) | |||||||||
| Capital expenditures | (33,306) | (21,230) | |||||||||
| Proceeds from sale of property, plant and equipment | — | 715 | |||||||||
| Net cash used in investing activities | (28,910) | (20,695) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments on term loan | (6,500) | (6,404) | |||||||||
| Payments on derivative financing obligations | (3,282) | — | |||||||||
| Other | (3,718) | (1,055) | |||||||||
| Net cash used in financing activities | (13,500) | (7,459) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (108) | 585 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 147,588 | (7,538) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 396,658 | 680,478 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 544,246 | $ | 672,940 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | 45,879 | $ | 40,913 | |||||||
| Taxes paid, net | $ | 1,562 | $ | 1,949 | |||||||
See accompanying notes to consolidated financial statements.
4
| CORNERSTONE BUILDING BRANDS, INC. | |||||||||||||||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 126,992,107 | $ | 1,270 | $ | 1,279,931 | $ | (98,826) | $ | (5,612) | (21,071) | $ | (424) | $ | 1,176,339 | |||||||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | (170,400) | (4,082) | (4,082) | |||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (170,400) | (2) | (4,080) | — | — | 170,400 | 4,082 | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | 472,521 | 5 | (5) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 35,248 | — | 364 | — | — | — | — | 364 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 72,768 | — | — | 72,768 | |||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | (424) | — | — | 21,071 | 424 | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 11,451 | — | — | — | — | 11,451 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 102,283 | — | — | — | 102,283 | |||||||||||||||||||||||||||||||||||||||
| Balance, April 2, 2022 | 127,329,476 | $ | 1,273 | $ | 1,287,237 | $ | 3,457 | $ | 67,156 | — | $ | — | $ | 1,359,123 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 125,425,931 | $ | 1,255 | $ | 1,257,262 | $ | (764,685) | $ | (51,517) | (25,332) | $ | (510) | $ | 441,805 | |||||||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | (111,868) | (1,541) | (1,541) | |||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (1,576) | — | (15) | — | — | 1,576 | 15 | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | 338,939 | 3 | (3) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 44,361 | — | 486 | — | — | — | — | 486 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 15,250 | — | — | 15,250 | |||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | (86) | — | — | 4,261 | 86 | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 3,302 | — | — | — | — | 3,302 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,655) | — | — | — | (1,655) | |||||||||||||||||||||||||||||||||||||||
| Balance, April 3, 2021 | 125,807,655 | $ | 1,258 | $ | 1,260,946 | $ | (766,340) | $ | (36,267) | (131,363) | $ | (1,950) | $ | 457,647 | |||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
CORNERSTONE BUILDING BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 2, 2022
(Unaudited)
NOTE 1 — RECENT DEVELOPMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements for Cornerstone Building Brands, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “Cornerstone Building Brands,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present the Company’s financial position, results of operations and cash flows for the periods indicated. Operating results for the period from January 1, 2022 through April 2, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
Certain reclassifications have been made to the prior period amounts in the unaudited consolidated financial statements to conform to the current presentation.
For additional information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.
Recent Developments
On March 5, 2022, the Company entered into an Agreement and Plan of Merger (the “CD&R Merger Agreement”), by and among Camelot Return Intermediate Holdings, LLC (“Parent”), Camelot Return Merger Sub, Inc. (“Merger Sub”). Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice (“CD&R”). Upon the terms and subject to the conditions of the CD&R Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “CD&R Merger”). As a result of the CD&R Merger, the Company will cease to be publicly-traded, and investment funds managed by CD&R will become the indirect owner of all of the Company’s outstanding shares of common stock that it does not already own. The proposed transaction has been approved by a special committee of independent directors of the Company’s board of directors (the “Special Committee”) previously formed to evaluate and consider any potential or actual proposal from CD&R. The board of directors of the Company, acting on the Special Committee’s recommendation, resolved unanimously to recommend that the stockholders of the Company vote to adopt and approve the CD&R Merger Agreement. The CD&R Merger is expected to close in the second or third quarter of 2022, subject to customary closing conditions. The waiting period under the Hart-Scott-Rodino Act of 1976, as amended, applicable to the proposed CD&R transaction expired on April 18, 2022. The transaction is subject to approval by holders of a majority of the shares not owned by CD&R and its affiliates.
Additional information about the CD&R Merger Agreement and the CD&R Merger will be set forth in the Company’s Definitive Proxy Statement on Schedule 14A that will be filed with the SEC.
Reporting Periods
The Company’s fiscal quarters are based on a four-four-five week calendar with periods ending on the Saturday of the last week in the quarter except that December 31st will always be the year-end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that total the amounts shown in the consolidated statements of cash flows (in thousands):
| April 2, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | 542,035 | $ | 394,447 | |||||||
Restricted cash (1) | 2,211 | 2,211 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | 544,246 | $ | 396,658 | |||||||
(1)Restricted cash primarily relates to indemnification agreements in both periods presented.
6
Accounts Receivable and Related Allowance
The Company reports accounts receivable net of an allowance for expected credit losses. Trade accounts receivable are the result of sales of vinyl windows, aluminum windows, vinyl siding, metal siding, injection molded products, metal building products, metal coating, and other products and services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process and we require payment prior to shipment for certain international shipments.
The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to us by our customers. Such provisions are included in selling, general and administrative expenses. In establishing these reserves, the Company considers changes in the financial position of a customer, age of the accounts receivable balances, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with our customers. Our allowance for credit losses reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Interest on delinquent accounts receivable is included in the trade accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance, all collection efforts have been exhausted, and/or any legal action taken by the Company has concluded.
The following table represents the rollforward of the allowance for credit losses for the periods indicated (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Ending balance, prior period | $ | 11,299 | $ | 13,313 | |||||||
| Provision for expected credit losses | 242 | 676 | |||||||||
| Amounts charged against allowance for credit losses, net of recoveries | 170 | 438 | |||||||||
| Allowance for credit losses of acquired company at date of acquisition | 442 | — | |||||||||
| Ending balance | $ | 12,153 | $ | 14,427 | |||||||
Net Sales
The Company enters into contracts that pertain to products, which are accounted for as separate performance obligations and are typically one year or less in duration. Given the nature of the Company's sales arrangements, we are not required to exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. Revenue is generally recognized when the product has shipped from the Company’s facility and control has transferred to the customer. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. For a portion of the Company’s business, when the Company processes customer owned material, control is deemed to transfer to the customer as the processing is being completed. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.
The Company’s revenues are adjusted for variable consideration, which includes customer volume rebates and prompt payment discounts. The Company measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, and current and forecasted information. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date, while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. Measurement of variable consideration is reviewed by management periodically and revenue is adjusted accordingly. The Company does not have significant financing components. The Company recognizes installation revenue, primarily within the stone veneer business, over the period for which the stone is installed, which is typically a very short duration.
Shipping and handling activities performed by the Company are considered activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
7
In accordance with certain contractual arrangements, the Company receives payment from our customers in advance related to performance obligations that are to be satisfied in the future and recognizes such payments as deferred revenue, primarily related to the Company’s weathertightness warranties (see Note 12 — Warranty).
A portion of the Company’s revenue, exclusively within the Commercial segment, includes multiple-element revenue arrangements due to multiple deliverables. Each deliverable is generally determined based on customer-specific manufacturing and delivery requirements. Because the separate deliverables have value to the customer on a stand-alone basis, they are typically considered separate units of accounting. A portion of the entire job order value is allocated to each unit of accounting. Revenue allocated to each deliverable is recognized upon shipment. The Company uses estimated selling price (“ESP”) based on underlying cost plus a reasonable margin to determine how to separate multiple-element revenue arrangements into separate units of accounting, and how to allocate the arrangement consideration among those separate units of accounting. The Company determines ESP based on normal pricing and discounting practices.
The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands):
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Windows Net Sales Disaggregation: | ||||||||||||||
Vinyl windows(1) | $ | 657,796 | $ | 497,017 | ||||||||||
| Aluminum windows | 24,660 | 20,280 | ||||||||||||
| Other | 19,654 | 9,966 | ||||||||||||
| Total | $ | 702,110 | $ | 527,263 | ||||||||||
| Siding Net Sales Disaggregation: | ||||||||||||||
| Vinyl siding | $ | 161,200 | $ | 150,229 | ||||||||||
| Metal | 73,702 | 71,093 | ||||||||||||
| Injection molded | 18,773 | 17,609 | ||||||||||||
| Stone | 20,322 | 19,831 | ||||||||||||
Other products & services(2) | 58,993 | 57,629 | ||||||||||||
| Total | $ | 332,990 | $ | 316,391 | ||||||||||
| Commercial Net Sales Disaggregation: | ||||||||||||||
Metal building products(3) | $ | 476,458 | $ | 299,938 | ||||||||||
Insulated metal panels(4) | — | 85,603 | ||||||||||||
| Metal coil coating | 55,280 | 37,837 | ||||||||||||
| Total | $ | 531,738 | $ | 423,378 | ||||||||||
| Total Net Sales: | $ | 1,566,838 | $ | 1,267,032 | ||||||||||
(1)The Prime Windows LLC (“Prime Windows”) and Cascade Windows, Inc. (“Cascade Windows”) businesses are included in the results of operations as of their April 30, 2021 and August 20, 2021 acquisition dates, respectively.
(2)Other products & services primarily consist of installation of stone veneer products.
(3)Union Corrugating Company Holdings, Inc. (“UCC”) is included in the results of operations as of its December 3, 2021 acquisition date. The Company’s roll-up sheet doors (“DBCI”) business is only included in the fiscal 2021 results of operations through August 18, 2021, the date on which we divested of this business.
(4)The Company’s insulated metal panels (“IMP”) business is only included in the fiscal 2021 results of operations through August 9, 2021, the date on which we divested of this business.
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NOTE 2 — ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the reference rate transition. The amendments in these ASUs are elective, apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform, and may be adopted as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of electing to apply the amendments.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. This creates an exception to the general recognition and measurement principles in ASC 805. The Company will be required to adopt this guidance in the annual and interim periods for the fiscal year ending December 31, 2023, with early adoption permitted. The amendments in this ASU should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements.
NOTE 3 — ACQUISITIONS
Union Corrugating Company Holdings, Inc.
On December 3, 2021, the Company completed its acquisition of 100% of the issued and outstanding common stock of Union Corrugating Company Holdings, Inc. (“UCC”) for a purchase price of $214.2 million, including a post-closing adjustment of approximately $2.6 million that was finalized in the first quarter of 2022. UCC is a leading provider of residential metal roofing, metal buildings, and roofing components. The addition of UCC advances our growth strategy by expanding our offering to customers in the high growth metal roofing market. This acquisition was funded through cash available on the balance sheet. The Company reports UCC results within the Commercial segment.
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The Company preliminarily determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
| Assets acquired: | |||||
| Cash | $ | 19,594 | |||
| Accounts receivable | 20,821 | ||||
| Other receivables | 16 | ||||
| Inventories | 68,727 | ||||
| Prepaid expenses and other current assets | 1,356 | ||||
| Property, plant and equipment | 24,184 | ||||
| Lease right of use assets | 37,964 | ||||
| Goodwill | 137,800 | ||||
| Other assets | 94 | ||||
| Total assets acquired | 310,556 | ||||
| Liabilities assumed: | |||||
| Accounts payable | 32,732 | ||||
| Accrued expenses | 22,520 | ||||
| Deferred income taxes | 1,289 | ||||
| Current portion of lease liability | 3,859 | ||||
| Other current liabilities | 1,852 | ||||
| Non-current portion of lease liabilities | 34,105 | ||||
| Total liabilities assumed | 96,357 | ||||
| Net assets acquired | $ | 214,199 | |||
The $137.8 million of preliminary goodwill was allocated to the Commercial segment. Goodwill from this acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
Due to the recent closing of the UCC transaction, the purchase price allocation is preliminary and will be finalized when valuations are complete and final assessment of the fair value of acquired assets and assumed liabilities are completed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of accounts receivable, other receivables, inventories, prepaid expenses and other current assets, property, plant and equipment, lease right of use assets, goodwill, intangible assets, other assets, accounts payable, accrued expenses, other current liabilities, other long-term liabilities, lease liabilities, and deferred income taxes.
Cascade Windows
On August 20, 2021, the Company completed its acquisition of Cascade Windows, Inc. (“Cascade Windows”) for $237.7 million in cash, including a post-closing adjustment of approximately $1.8 million that was finalized in the first quarter of 2022. Cascade Windows serves the residential new construction and repair and remodel markets with energy efficient vinyl window and door products from various manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded through cash available on the balance sheet. The Company reports Cascade Windows’ results within the Windows segment.
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The Company preliminarily determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
| Assets acquired: | |||||
| Cash | $ | 2,838 | |||
| Accounts receivable | 16,956 | ||||
| Other receivables | 675 | ||||
| Inventories | 16,278 | ||||
| Prepaid expenses and other current assets | 1,538 | ||||
| Property, plant and equipment | 18,300 | ||||
| Lease right of use assets | 21,849 | ||||
| Intangible assets (trade names/customer relationships) | 137,660 | ||||
| Goodwill | 109,374 | ||||
| Other assets | 500 | ||||
| Total assets acquired | 325,968 | ||||
| Liabilities assumed: | |||||
| Accounts payable | 17,680 | ||||
| Accrued expenses | 7,621 | ||||
| Deferred income taxes | 33,221 | ||||
| Current portion of lease liability | 247 | ||||
| Other current liabilities | 2,349 | ||||
| Non-current portion of lease liabilities | 19,926 | ||||
| Other long-term liabilities | 7,211 | ||||
| Total liabilities assumed | 88,255 | ||||
| Net assets acquired | $ | 237,713 | |||
The $109.4 million of goodwill was allocated to the Windows segment and is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
The purchase price allocation is preliminary and will be finalized when valuations are complete and final assessment of the fair value of acquired assets and assumed liabilities are completed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of accounts receivable, prepaid expenses and other current assets, goodwill, accrued expenses, and other current liabilities.
Prime Windows
On April 30, 2021, the Company acquired Prime Windows LLC (“Prime Windows”) for total consideration of $93.0 million, exclusive of a $2.0 million working capital adjustment that was finalized as of December 31, 2021. Prime Windows serves residential new construction and repair and remodel markets with energy efficient vinyl window and door products from two manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded through borrowings under the Company’s existing credit facilities. Prime Windows’ results are reported within the Windows segment.
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Unaudited Pro Forma Financial Information
The following table provides unaudited supplemental pro forma results for the Company for the three months ended April 3, 2021 as if the UCC, Cascade Windows and Prime Windows acquisitions had occurred on January 1, 2021 (in thousands, except for per share data):
| Three Months Ended | |||||
| April 3, 2021 | |||||
| Net sales | $ | 1,382,660 | |||
| Net loss applicable to common shares | (1,455) | ||||
| Net loss per common share: | |||||
| Basic | $ | (0.01) | |||
| Diluted | $ | (0.01) | |||
The unaudited supplemental pro forma financial information was prepared based on historical information of the Company, UCC, Cascade Windows and Prime Windows. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the UCC, Cascade Windows and Prime Windows acquisitions occurred on January 1, 2021 or of future results.
NOTE 4 — RESTRUCTURING
The Company has various initiatives and programs in place within its business units to reduce selling, general, and administrative expenses (“SG&A”), manufacturing costs and to optimize the Company’s manufacturing footprint. During the three months ended April 2, 2022, the Company incurred restructuring charges of $0.2 million, $0.2 million and $0.4 million in the Windows, Siding and Commercial segments, respectively. Restructuring charges incurred to date since the current restructuring initiatives began in 2019 are $79.4 million. The following table summarizes the costs related to those restructuring plans for the three months ended April 2, 2022 and costs incurred to date since inception of those initiatives and programs (in thousands):
| Three Months Ended | Costs Incurred to Date | |||||||||||||
| April 2, 2022 | (Since inception) | |||||||||||||
| Severance | $ | 304 | $ | 40,231 | ||||||||||
| Asset impairments | 368 | 30,446 | ||||||||||||
| Gain on sale of facilities, net | — | (1,298) | ||||||||||||
| Other restructuring costs | 159 | 10,036 | ||||||||||||
| Total restructuring costs | $ | 831 | $ | 79,415 | ||||||||||
For the three months ended April 2, 2022, total restructuring costs are recorded within restructuring and impairment costs in the consolidated statements of operations. The asset impairments of $0.4 million for the three months ended April 2, 2022 primarily included assets that were recorded at fair value less cost to sell, which was less than the assets’ carrying amount.
The following table summarizes our severance liability, included within other accrued expenses on the consolidated balance sheets, and cash payments made pursuant to the restructuring plans from inception through April 2, 2022 (in
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thousands):
| Windows | Siding | Commercial | Corporate | Total | |||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | — | $ | 85 | $ | — | $ | 2,333 | $ | 2,418 | |||||||||||||||||||
| Costs incurred | 1,094 | 1,834 | 2,721 | 4,009 | 9,658 | ||||||||||||||||||||||||
| Cash payments | (676) | (1,437) | (2,721) | (4,579) | (9,413) | ||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 418 | $ | 482 | $ | — | $ | 1,763 | $ | 2,663 | |||||||||||||||||||
| Costs incurred | 4,294 | 2,705 | 16,561 | 3,013 | 26,573 | ||||||||||||||||||||||||
| Cash payments | (4,406) | (2,352) | (14,570) | (4,346) | (25,674) | ||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 306 | $ | 835 | $ | 1,991 | $ | 430 | $ | 3,562 | |||||||||||||||||||
| Costs incurred | 971 | 264 | 2,004 | 457 | 3,696 | ||||||||||||||||||||||||
| Cash payments | (1,262) | (904) | (2,473) | (587) | (5,226) | ||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 15 | $ | 195 | $ | 1,522 | $ | 300 | $ | 2,032 | |||||||||||||||||||
| Costs incurred | 212 | — | 67 | 25 | 304 | ||||||||||||||||||||||||
| Cash payments | (227) | (195) | (67) | (325) | (814) | ||||||||||||||||||||||||
| Balance, April 2, 2022 | $ | — | $ | — | $ | 1,522 | $ | — | $ | 1,522 | |||||||||||||||||||
We expect to fully execute our restructuring initiatives and programs over the next 12 to 24 months and we may incur future additional restructuring charges associated with these plans.
NOTE 5 — GOODWILL
The Company’s goodwill balance and changes in the carrying amount of goodwill by segment are as follows (in thousands):
| Windows | Siding | Commercial | Total | ||||||||||||||||||||
| Balance, December 31, 2020 | $ | 397,024 | $ | 654,821 | $ | 142,884 | $ | 1,194,729 | |||||||||||||||
| Goodwill recognized from acquisitions | 143,964 | 122 | 140,342 | 284,428 | |||||||||||||||||||
| Divestiture | — | — | (121,464) | (121,464) | |||||||||||||||||||
| Currency translation | 208 | 155 | — | 363 | |||||||||||||||||||
| Balance, December 31, 2021 | $ | 541,196 | $ | 655,098 | $ | 161,762 | $ | 1,358,056 | |||||||||||||||
| Currency translation | 616 | 484 | — | 1,100 | |||||||||||||||||||
| Purchase accounting adjustments from prior year acquisitions | (1,442) | (10) | (2,543) | (3,995) | |||||||||||||||||||
| Balance, April 2, 2022 | $ | 540,370 | $ | 655,572 | $ | 159,219 | $ | 1,355,161 | |||||||||||||||
NOTE 6 — INVENTORIES
The components of inventory are as follows (in thousands):
| April 2, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 507,577 | $ | 485,642 | |||||||
| Work in process and finished goods | 310,138 | 263,090 | |||||||||
| Total inventory | $ | 817,715 | $ | 748,732 | |||||||
As of April 2, 2022, the Company had inventory purchase commitments of $235.3 million.
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NOTE 7 — INTANGIBLES
The table that follows presents the major components of intangible assets as of April 2, 2022 and December 31, 2021 (in thousands). Intangible assets that are fully amortized have been removed from the disclosures.
| Range of Life (Years) | Weighted Average Amortization Period (Years) | Cost | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||
| As of April 2, 2022 | ||||||||||||||||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||||||||||
| Trademarks/Trade names/Other | 3 | – | 15 | 7 | $ | 241,727 | $ | (82,707) | $ | 159,020 | ||||||||||||||||||||||
| Customer lists and relationships | 7 | – | 20 | 8 | 1,845,511 | (527,101) | 1,318,410 | |||||||||||||||||||||||||
| Total intangible assets | 8 | $ | 2,087,238 | $ | (609,808) | $ | 1,477,430 | |||||||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||||||||||
| Trademarks/Trade names/Other | 3 | – | 15 | 7 | $ | 241,727 | $ | (76,574) | $ | 165,153 | ||||||||||||||||||||||
| Customer lists and relationships | 7 | – | 20 | 9 | 1,845,511 | (486,029) | 1,359,482 | |||||||||||||||||||||||||
| Total intangible assets | 8 | $ | 2,087,238 | $ | (562,603) | $ | 1,524,635 | |||||||||||||||||||||||||
The Company expects to recognize amortization expense over the next five fiscal years as follows (in thousands):
| 2022 (excluding the three months ended April 2, 2022) | $ | 147,108 | |||
| 2023 | 195,991 | ||||
| 2024 | 195,565 | ||||
| 2025 | 195,306 | ||||
| 2026 | 193,852 | ||||
NOTE 8 — ASSETS HELD FOR SALE
The Company records assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less costs to sell, the Company considers factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less costs to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less costs to sell. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We determined the estimated fair values of real property assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate. The total carrying value of assets held for sale is $3.4 million and $3.4 million as of April 2, 2022 and December 31, 2021, respectively. Assets held for sale as of April 2, 2022 are under contract. One of the real property assets held for sale with a carrying value of $2.3 million was subsequently sold on April 21, 2022, which is anticipated to result in a gain on sale that will be recorded in the second quarter of fiscal 2022.
NOTE 9 — LEASES
The Company has leases for certain office, manufacturing, warehouse and distribution locations, and vehicles and equipment, including fleet vehicles. Many of these leases have options to terminate prior to or extend beyond the end of the term. The exercise of the majority of lease renewal options is at the Company’s sole discretion. Some lease agreements have variable payments, the majority of which are real estate agreements in which future increases in rent are based on an index. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company
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accounts for lease and non-lease components as a single lease component for all leases other than leases of durable tooling. The Company has elected to exclude leases with an initial term of 12 months or less from the consolidated balance sheets and recognizes related lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the reasonably expected holding period at the commencement date of the leases. Few of the Company’s lease contracts provide a readily determinable implicit rate. As such, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Accounting for leases requires judgment, including determining whether a contract contains a lease, the incremental borrowing rates to utilize for leases without a stated implicit rate, the reasonably certain holding period for a leased asset, and the allocation of consideration to lease and non-lease components. The allocation of the lease and non-lease components for durable tooling is based on the Company’s best estimate of standalone price.
Weighted average information about the Company’s lease portfolio as of April 2, 2022 was as follows:
| Weighted-average remaining lease term | 7.1 years | ||||
| Weighted-average IBR | 5.65 | % | |||
Operating lease costs were as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Operating lease costs | |||||||||||
| Fixed lease costs | $ | 24,201 | $ | 25,967 | |||||||
| Short-term lease costs | 8,235 | 2,343 | |||||||||
| Variable lease costs | 23,871 | 22,383 | |||||||||
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Cash and non-cash activities were as follows (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 22,240 | $ | 27,019 | |||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 6,417 | $ | 5,704 | |||||||
Future minimum lease payments under non-cancelable leases as of April 2, 2022 are as follows (in thousands):
| Operating Leases | |||||
| 2022 (excluding the three months ended April 2, 2022) | $ | 50,586 | |||
| 2023 | 67,366 | ||||
| 2024 | 53,886 | ||||
| 2025 | 45,163 | ||||
| 2026 | 36,896 | ||||
| Thereafter | 109,419 | ||||
| Total future minimum lease payments | 363,316 | ||||
| Less: interest | 67,705 | ||||
| Present value of future minimum lease payments | $ | 295,611 | |||
| As of April 2, 2022 | |||||
| Current portion of lease liabilities | $ | 57,477 | |||
| Long-term portion of lease liabilities | 238,134 | ||||
| Total | $ | 295,611 | |||
NOTE 10 — SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan, as amended (the “2003 Incentive Plan”), is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock awards, stock appreciation rights, cash awards, phantom stock awards, restricted stock unit awards (“RSUs”) and long-term incentive awards with performance conditions (“performance share units” or “PSUs”). Awards are generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). In connection with the Merger (as defined herein) with Ply Gem Parent, LLC (“Ply Gem”), on November 16, 2018, awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, RSUs, and PSUs. A portion of the Founders Awards was not granted under the 2003 Incentive Plan but was instead granted pursuant to a separate equity-based compensation plan, the Long-Term Incentive Plan. These Founders Awards were subject to award agreements with the same terms and provisions as awards of the same type granted under the 2003 Incentive Plan.
As of April 2, 2022, and for all periods presented, the Founders Awards and our share-based awards granted under the 2003 Incentive Plan have consisted of RSUs, PSUs and stock options, none of which can be settled through cash payments. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment through the end of a specified time period and typically vest in annual increments over to five years or earlier upon death, disability or a change in control. As a general rule, stock option awards expire on the earlier of (i) 10 years from the date of grant, (ii) 60 days after termination of employment or service for a reason other than death, disability or retirement, or (iii) 180 days after death, disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Committee may approve.
Our time-based restricted stock awards are typically subject to graded vesting over a service period, which is to five years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically three years. Our share-based compensation arrangements are equity classified and we recognize compensation cost for these awards on a straight-line basis over the requisite service period for each award grant. In the case of performance-based awards, expense is recognized based upon management’s assessment of the probability that such performance conditions will be achieved. Certain of our awards provide for accelerated vesting upon a change of control or upon termination without cause or for good reason.
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Vesting of the PSUs granted under the 2003 Incentive Plan during the three months ended April 2, 2022 and April 3, 2021 are contingent upon achievement of a cumulative three-year EBITDA growth target with an additional modifier based on total stockholders return. The grant-date fair value of the PSUs granted during the three months ended April 3, 2021 was determined by Monte Carlo simulation.
Stock option awards
During the three months ended April 2, 2022, there were thirty-five thousand options exercised with an intrinsic value of $0.3 million and cash received from the options exercised was $0.4 million. During the three months ended April 3, 2021, there were forty-four thousand options exercised with an intrinsic value of $0.1 million and cash received from the options exercised was $0.5 million.
Restricted stock units and performance share units
Annual awards to our key employees generally have a three-year performance period. The fair value of RSUs awarded is based on the Company’s stock price as of the date of grant. During the three months ended April 2, 2022, we granted RSUs to certain key employees with a fair value of $1.7 million representing approximately 0.1 million shares. During the three months ended April 3, 2021, we granted RSUs to key employees with a fair value of $8.5 million, representing 0.6 million shares.
Share-based compensation expense
During the three months ended April 2, 2022 and April 3, 2021, we recorded share-based compensation expense for all awards of $11.5 million and $3.3 million, respectively.
NOTE 11 — EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per common share is as follows (in thousands, except per share data):
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Numerator for Basic and Diluted Earnings Per Common Share | ||||||||||||||
| Net income (loss) applicable to common shares | $ | 101,526 | $ | (1,655) | ||||||||||
| Denominator for Basic and Diluted Earnings Per Common Share | ||||||||||||||
| Weighted average basic number of common shares outstanding | 127,129 | 125,506 | ||||||||||||
| Common stock equivalents: | ||||||||||||||
| Employee stock options | 1,337 | — | ||||||||||||
| Weighted average diluted number of common shares outstanding | 128,466 | 125,506 | ||||||||||||
| Basic income (loss) per common share | $ | 0.80 | $ | (0.01) | ||||||||||
| Diluted income (loss) per common share | $ | 0.79 | $ | (0.01) | ||||||||||
Incentive Plan securities excluded from dilution(1) | 72 | 1,174 | ||||||||||||
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units from the numerator and excludes the dilutive impact of those shares from the denominator. Awards subject to the achievement of performance conditions or market conditions for which such conditions had been met at the end of any of the fiscal periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
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NOTE 12 — WARRANTY
The Company offers a number of warranties associated with the products it sells. The specific terms and conditions of these warranties vary depending on the product sold. The Company’s warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized.
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Beginning balance | $ | 218,356 | $ | 216,230 | |||||||
| Warranties sold | 390 | 644 | |||||||||
| Revenue recognized | (606) | (693) | |||||||||
| Expense | 10,817 | 8,827 | |||||||||
| Settlements | (8,481) | (8,138) | |||||||||
| Ending balance | 220,476 | 216,870 | |||||||||
| Less: current portion | 29,944 | 24,617 | |||||||||
| Total warranty, less current portion | $ | 190,532 | $ | 192,253 | |||||||
The current portion of the warranty liabilities is recorded within other accrued expenses and the long-term portion of the warranty liabilities is recorded within other long-term liabilities in the Company’s consolidated balance sheets.
NOTE 13 — DEFINED BENEFIT PLANS
RCC Pension Plan — With the acquisition of Robertson-Ceco II Corporation (“RCC”) on April 7, 2006, the Company assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds and fixed income securities.
Coil Coating Benefit Plans — On January 16, 2015, the Company assumed noncontributory defined benefit plans covering certain hourly employees (the “Coil Coating Benefit Plans”) and which are closed to new participants. Benefits under the Coil Coating Benefit Plans are calculated based on fixed amounts for each year of service rendered, although benefits accruals for one of the plans previously ceased. Plan assets of the Coil Coating Benefit Plans are invested in fixed income funds. The Company also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”). Currently, the Company’s policy is to fund the Coil Coating Benefit Plans as required by minimum funding standards of the Internal Revenue Code.
Ply Gem Pension Plans — As a result of the merger with Ply Gem Parent, LLC on November 16, 2018, the Company assumed the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc Retirement Plan (the “MW Plan”). The Ply Gem Plan was frozen during 1998, and no further increases in benefits for participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for salaried participants during 2004 and non-salaried participants during 2005. No additional participants may enter the plan, but increases in benefits for participants as a result of increase in service years or compensation will occur. Plan assets of the Ply Gem Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds and fixed income securities.
We refer to the RCC Pension Plan, the Coil Coating Benefit Plans, the Ply Gem Plan and the MW Plan collectively as the “Defined Benefit Plans” in this Note.
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The following tables set forth the components of the net periodic benefit cost (income), before tax for the periods indicated (in thousands):
| Defined Benefit Plans | ||||||||||||||
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Service cost | $ | 11 | $ | 14 | ||||||||||
| Interest cost | 669 | 635 | ||||||||||||
| Expected return on assets | (1,158) | (1,360) | ||||||||||||
| Amortization of prior service cost | — | 16 | ||||||||||||
| Amortization of net actuarial loss | 50 | 104 | ||||||||||||
| Net periodic benefit income | $ | (428) | $ | (591) | ||||||||||
| OPEB Plans | ||||||||||||||
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Service cost | $ | 4 | $ | 4 | ||||||||||
| Interest cost | 44 | 44 | ||||||||||||
| Amortization of net actuarial loss | 14 | 18 | ||||||||||||
| Net periodic benefit cost | $ | 62 | $ | 66 | ||||||||||
In fiscal 2022, the Company expects to contribute $0.5 million to the OPEB Plans. The contributions to the OPEB Plans by retirees vary from none to 25% of the total premiums paid. The Company is not required to make contributions to the Defined Benefit Plans in fiscal 2022.
NOTE 14 — LONG-TERM DEBT
Debt is comprised of the following (in thousands):
| April 2, 2022 | December 31, 2021 | ||||||||||
| Term loan facility due April 2028 | $ | 2,574,000 | $ | 2,580,500 | |||||||
6.125% senior notes due January 2029 | 500,000 | 500,000 | |||||||||
Less: unamortized discounts and unamortized deferred financing costs(1) | (42,127) | (43,657) | |||||||||
| Total long-term debt, net of unamortized discounts and unamortized deferred financing costs | 3,031,873 | 3,036,843 | |||||||||
| Less: current portion of long-term debt | 26,000 | 26,000 | |||||||||
| Total long-term debt, less current portion | $ | 3,005,873 | $ | 3,010,843 | |||||||
(1)Includes the unamortized discounts and unamortized deferred financing costs associated with the term loan facility and the 6.125% senior notes due January 2029. The unamortized deferred financing costs associated with the asset-based and revolving credit facilities of $1.2 million and $1.3 million as of April 2, 2022 and December 31, 2021, respectively, are classified in other assets on the consolidated balance sheets.
Term Loan Facility due April 2028 and Cash Flow Revolver
On April 12, 2018, Ply Gem Midco entered into a Cash Flow Agreement (the "Current Cash Flow Credit Agreement"), which provides for (i) a term loan facility (the “Existing Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million, issued with a discount of 0.5%, and (ii) a cash flow-based revolving credit facility (the “Existing Cash Flow Revolver” and together with the Existing Term Loan Facility, the “Existing Cash Flow Facilities”) of up to $115.0 million.
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On November 16, 2018, the Company entered into an incremental term loan facility in connection with the Merger, which increased the aggregate principal amount of the Existing Term Loan Facility by $805.0 million. The proceeds of this incremental term loan facility were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement and (c) repay $325.0 million of borrowings outstanding under the ABL Facility. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Existing Cash Flow Facilities, and the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Existing Cash Flow Facilities.
On April 15, 2021, the Company entered into a Second Amendment to the Current Cash Flow Credit Agreement (the “Second Amendment"), among the Company, the several banks and other financial institutions party thereto (the "Cash Flow Lenders") and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), which amended the Current Cash Flow Credit Agreement to, among other things:
•Terminate $92.0 million of commitments by Cash Flow Lenders under the Company’s cash flow-based revolving credit facility of up to $115.0 million, maturing on April 12, 2023 (the “Existing Cash Flow Revolver”); and
•Replace such commitments with $92.0 million of extended cash flow-based revolving commitments, maturing on April 12, 2026 (the “Extended Cash Flow Revolver” and together with the Existing Cash Flow Revolver, the “ Current Cash Flow Revolver”).
On April 15, 2021, the Company entered into (i) a Third Amendment to Current Cash Flow Credit Agreement (the “Third Amendment”), among the Company, the subsidiary guarantors parties thereto, the Cash Flow Lenders party thereto and the Cash Flow Agent and (ii) an Increase Supplement (the “Increase Supplement”), between the Company and JPMorgan Chase Bank, N.A., as the increasing lender. The Third Amendment amended the Current Cash Flow Credit Agreement to, among other things, refinance the Existing Term Loan Facility in an original aggregate principal amount of $1,755.0 million with Tranche B Term Loans in an aggregate principal amount of approximately $2,491.6 million, maturing on April 12, 2028. The Increase Supplement supplemented the Current Cash Flow Credit Agreement to, among other things, increase the aggregate principal amount of the Tranche B Term Loan Facility by approximately $108.4 million (the “Incremental Tranche B Term Loans”), for a total principal amount of $2,600.0 million (the “Current Term Loan Facility” and together with the Current Cash Flow Revolver, the “Current Cash Flow Facilities”). Proceeds of the Incremental Tranche B Term Loans were used, together with cash on hand, (i) for the redemption of all of the 8.00% Senior Notes (as defined below) (the “Senior Notes Redemption”) and (ii) to pay any fees and expenses incurred in connection with the extension and refinancing of the Company’s senior credit facilities and the Senior Notes Redemption.
In connection with the Third Amendment and the Increase Supplement to the Current Cash Flow Credit Agreement, the Company incurred $24.8 million in financing costs of which $13.2 million was deferred and are being amortized using the effective interest method.
The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity. The Current Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.50%) plus an applicable margin of 3.25% per annum or (ii) an alternate base rate plus an applicable margin of 2.25% per annum. At April 2, 2022, the interest rates on the Current Term Loan Facility were as follows:
| April 2, 2022 | |||||
| Interest rate | 3.75 | % | |||
| Effective interest rate | 4.02 | % | |||
The Company entered into certain interest rate swap agreements in 2019 and 2021 to effectively convert a portion of its variable rate debt to fixed. See Note 15 — Derivatives.
Loans outstanding under the Current Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.00%) plus an applicable margin ranging from 2.50% to 3.00% per annum depending on the Company’s secured leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on the Company’s secured leverage ratio. There are no amortization payments under the Current Cash Flow Revolver. Additionally, unused commitments under the Current Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio.
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Both the Current Term Loan Facility and Current Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
Subject to certain exceptions, the Current Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Current Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. No payments were required in 2021 under the fiscal year 2020 excess cash flow calculation.
The obligations under the Current Cash Flow Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor (other than ABL Priority Collateral (as defined below)), including the capital stock of each direct material wholly-owned U.S. restricted subsidiary owned by the Company and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Company or any subsidiary guarantor, subject to certain exceptions (the “Cash Flow Priority Collateral”), which security interest will be senior to the security interest in the foregoing assets securing the Current ABL Facility; and
•a perfected security interest in the ABL Priority Collateral, which security interest will be junior to the security interest in the ABL Priority Collateral securing the Current ABL Facility.
The Current Cash Flow Revolver includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
ABL Facility due April 2026
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), which provides for an asset-based revolving credit facility (the “Existing ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). The Company and, at their option, certain of their subsidiaries are the borrowers under the Existing ABL Facility.
On October 15, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $36.0 million, which upsized the Existing ABL Facility to $396.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million.
On November 16, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $215.0 million in connection with the Merger, which upsized the Existing ABL Facility to $611.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Existing ABL Facility, and the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the Existing ABL Facility.
On April 15, 2021, the Company entered into Amendment No. 6 to the Current ABL Credit Agreement, by and among the Company, the subsidiary borrowers party thereto, the several banks and financial institutions party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent, which amended the ABL Credit Agreement in order to, among other things:
•Terminate the existing revolving commitments of each of the Extending ABL Credit Lenders (as defined in therein), originally maturing on April 12, 2023 (the “Existing ABL Commitments”); and
•Replace the Existing ABL Commitments with an extended revolving commitment of $611.0 million, maturing on April 12, 2026 (the “Current ABL Facility”).
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Borrowing availability under the Current ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, eligible accounts receivable and eligible credit card receivables, less certain reserves and subject to certain other adjustments as set forth in the Current ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. As of April 2, 2022, the Company had the following in relation to the Current ABL Facility (in thousands):
| April 2, 2022 | |||||
| Excess availability | $ | 565,697 | |||
| Revolving loans outstanding | — | ||||
| Letters of credit outstanding | 40,069 | ||||
Loans outstanding under the Current ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a LIBOR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the Current ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
The obligations under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by the Company and the U.S. subsidiary guarantors and the proceeds of any of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral, and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the foregoing assets securing the Current Cash Flow Facilities; and
•a perfected security interest in the Cash Flow Priority Collateral, which security interest will be junior to the security interest in the Cash Flow Collateral securing the Current Cash Flow Facilities.
Additionally, the obligations of the Canadian borrowers under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions, and are secured by substantially all assets of the Canadian borrowers and the Canadian subsidiary guarantors, subject to certain exceptions.
The Current ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the Current ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days.
6.125% Senior Notes due January 2029
On September 24, 2020, the Company issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029 (“the 6.125% Senior Notes”). Proceeds from the 6.125% Senior Notes were used to repay outstanding amounts under the Company’s Current ABL Facility and Current Cash Flow Revolver. The 6.125% Senior Notes bear interest at 6.125% per annum and will mature on January 15, 2029. Interest is payable semi-annually in arrears on January 15 and July 15 commencing on January 15, 2021. The effective interest rate for the 6.125% Senior Notes was 6.33% as of April 2, 2022, after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
The 6.125% Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 6.125% Senior Notes are unsecured senior indebtedness and are effectively subordinated to all of the Company’s existing and future senior secured indebtedness, including indebtedness under the Current Term Loan Facility, Current Cash Flow Revolver and Current ABL Facility, and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 6.125% Senior Notes in whole or in part at any time as set forth below:
•prior to September 15, 2023, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date, plus the applicable make-whole premium;
•prior to September 15, 2023, up to 40% of the aggregate principal amount with the proceeds of certain equity offerings at a redemption price of 106.125% plus accrued and unpaid interest, if any, to but not including the redemption date;
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•on or after September 15, 2023 and prior to September 15, 2024, at a price equal to 103.063% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after September 15, 2024 and prior to September 15, 2025, at a price equal to 101.531% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after September 15, 2025, at a price equal to 100.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date.
Redemption of 8.00% Senior Notes
On April 15, 2021, the Company redeemed the outstanding $645.0 million aggregate principal amount of the 8.00% Senior Notes due April 2026 (the “8.00% Senior Notes”) for $670.8 million using cash on hand and proceeds from the Incremental Tranche B Term Loans. The redemption resulted in a pre-tax loss on extinguishment of debt of $41.9 million during the year ended December 31, 2021, comprising a make-whole premium of $25.8 million and a write-off of $16.1 million in unamortized deferred financing costs.
Debt Covenants
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. As of April 2, 2022, the Company was in compliance with all covenants that were in effect on such date.
NOTE 15 — DERIVATIVES
We utilize derivative instruments, including interest rate swap agreements and foreign currency hedging contracts, to manage our exposure to interest rate risk and currency fluctuations. We only hold such instruments for economic hedging purposes, not for speculative or trading purposes. Our derivative instruments are transacted only with highly rated institutions, which reduces our exposure to credit risk in the event of nonperformance.
Interest Rate Swaps
We are exposed to interest rate risk associated with fluctuations in interest rates on our floating-rate Current Term Loan Facility. The objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we have entered into interest rate swap agreements as part of our interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
On a monthly basis, we net settle with our swap counterparties for the difference between the fixed rate specified in each swap agreement and the variable rate as applied to the notional amount of the swap.
In May 2019, the Company entered into four-year interest rate swaps to mitigate variability in forecasted interest payments on $1,500 million of the Company’s Current Term Loan Facility. The interest rate swaps effectively converted a portion of the floating rate interest payment into a fixed rate interest payment. Three interest rate swaps each covered a notional amount of $500 million. The Company designated the interest rate swaps as qualifying hedging instruments and accounted for these derivatives as cash flow hedges.
As discussed in Note 14 — Long-Term Debt, the Company refinanced its Term Loan Facility. Contemporaneously with the refinancing on April 15, 2021, we completed a series of transactions to modify our interest rate swap positions as follows: (i) we dedesignated all existing interest rate swaps as cash flow hedges; (ii) we terminated two existing interest rate swaps with a notional value of $500 million each; (iii) we entered into two receive-fixed interest rate swaps with a notional amount of $250 million each, which are designed to offset the terms of an existing, active interest rate swap with a notional amount of $500 million; and (iv) we entered into two pay-fixed interest rate swaps with a notional amount of $750 million each, effectively blending the liability position of our existing interest rate swap agreements into the new swaps and extending the term of our hedged position to April 2026.
The amount remaining in accumulated other comprehensive loss for the dedesignated and terminated swaps as of April 2, 2022 was approximately $37.4 million and is being amortized as an increase to interest expense over the effective period of the original swap agreements.
The new receive-fixed interest rate swaps remain undesignated to economically offset the dedesignated existing, active swap. The new receive-fixed swaps and the dedesignated existing, active swap mature on July 12, 2023. Cash settlements related to the receive-fixed interest rate swaps are classified as operating activities in the consolidated statements of cash flows.
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The new pay-fixed interest rate swaps also qualify as hybrid instruments in accordance with ASC 815, Derivatives and Hedging, consisting of a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The financing component is accounted for at amortized cost over the life of the swap while the embedded at-market derivative is accounted for at fair value. The new swaps are indexed to one-month LIBOR and are net settled on a monthly basis with the counterparty for the difference between the fixed rate of 2.0369% and 2.0340%, respectively, and the variable rate based upon one-month LIBOR (subject to a floor of 0.5%) as applied to the notional amount of the swaps. In connection with the transactions discussed above, no cash was exchanged between the Company and the counterparty. The liability of the terminated interest rate swaps as well as the inception value of the receive-fixed interest rate swap was blended into the new pay-fixed interest rate swap. The cash flows related to the portion treated as a financing component are classified as financing activities while the cash flows related to the portion treated as an at-market derivative are classified as operating activities in the consolidated statements of cash flows.
The key terms of interest rate swaps are as follows (amounts in thousands):
| April 2, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Effective Date | Fixed Rate Paid (Received) | Notional Amount | Status | Notional Amount | Status | Maturity Date | ||||||||||||||||||||||||||||||||
| Entered into May 2019: | ||||||||||||||||||||||||||||||||||||||
| July 12, 2019 | 2.1570 | % | $ | — | Terminated | $ | — | Terminated | July 12, 2023 | |||||||||||||||||||||||||||||
| July 12, 2019 | 2.1560 | % | — | Terminated | — | Terminated | July 12, 2023 | |||||||||||||||||||||||||||||||
| July 12, 2019 | 2.1680 | % | 500,000 | Active | 500,000 | Active | July 12, 2023 | |||||||||||||||||||||||||||||||
| Entered into April 2021: | ||||||||||||||||||||||||||||||||||||||
| April 15, 2021 | 2.0369 | % | 750,000 | Active | 750,000 | Active | April 15, 2026 | |||||||||||||||||||||||||||||||
| April 15, 2021 | 2.0340 | % | 750,000 | Active | 750,000 | Active | April 15, 2026 | |||||||||||||||||||||||||||||||
| April 15, 2021 | (2.1680) | % | (250,000) | Active | (250,000) | Active | July 12, 2023 | |||||||||||||||||||||||||||||||
| April 15, 2021 | (2.1680) | % | (250,000) | Active | (250,000) | Active | July 12, 2023 | |||||||||||||||||||||||||||||||
| $ | 1,500,000 | $ | 1,500,000 | |||||||||||||||||||||||||||||||||||
The embedded at-market derivative portion of our interest rate swap agreements is recognized at fair value on the consolidated balance sheets. It is valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.
Foreign Currency Forward Contracts
The Company enters into forward contracts to hedge a portion of its non-functional currency inventory purchases. These forward contracts are established to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar. The forward contracts are highly correlated to the changes in the U.S. dollar relative to the Canadian dollar. All of the Company’s foreign currency forward contracts are initially designated as qualifying hedging instruments and accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. Unrealized gains and losses on these contracts are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income or loss to cost of goods sold. The gains and losses on the derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. The Company may dedesignate cash flow hedges in advance of the occurrence of the forecasted transactions.
During the three months ended April 2, 2022 and April 3, 2021, the Company realized a loss of approximately thirty-five thousand dollars and $0.1 million, respectively, within cost of goods sold in the consolidated statements of operations based on the foreign currency forward contracts described above. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings. As of April 2, 2022 and December 31, 2021, the Company had a hedge asset of approximately $0.2 million and $0.7 million respectively, and
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a gain of approximately $0.3 million and $0.8 million in accumulated other comprehensive loss, respectively, on the consolidated balance sheets.
Fair Values of Derivatives on the Consolidated Balance Sheets
The fair values of our derivatives and their presentation on the consolidated balance sheets as of April 2, 2022 and December 31, 2021 were as follows (in thousands):
| April 2, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Financial statement line item | |||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets(1) | $ | 336 | $ | — | $ | 11,543 | $ | — | |||||||||||||||||||||||
Other long-term liabilities(2) | — | 336 | — | 11,543 | ||||||||||||||||||||||||||||
| $ | 336 | $ | 336 | $ | 11,543 | $ | 11,543 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments | Financial statement line item | |||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets(3) | $ | 87,356 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Other accrued expenses(3) | — | 13,127 | — | 13,127 | ||||||||||||||||||||||||||||
Other long-term liabilities(3) | — | 40,067 | — | 28,279 | ||||||||||||||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | 249 | — | 728 | — | |||||||||||||||||||||||||||
| $ | 87,605 | $ | 53,194 | $ | 728 | $ | 41,406 | |||||||||||||||||||||||||
(1)The balances relate to a receive-fixed interest rate swaps for which the fair value option has been elected.
(2)The balances relate to a pay-fixed May 2019 active interest rate swap which has been dedesignated as a cash flow hedge.
(3)The balances relate to the pay-fixed interest rate swaps, including the financing component.
Effect of Derivatives on the Consolidated Statements of Operations
The portion of gains or losses on the derivative instruments previously included in accumulated other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs or becomes probable of not occurring. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives not designated as hedging instruments section below. The effect of our derivatives and their presentation on the consolidated statements of operations for the three months ended April 2, 2022 and April 3, 2021 were as follows (in thousands):
| Three Months Ended | ||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||||||||
| Derivatives not designated as hedging instruments | Financial statement line item | |||||||||||||||||||
| Interest rate swaps | Interest expense(1) | $ | 7,288 | $ | — | |||||||||||||||
| Foreign currency forward contracts | Cost of sales | 35 | 79 | |||||||||||||||||
| $ | 7,323 | $ | 79 | |||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||
| Interest rate swaps | Interest expense | 2,540 | 7,821 | |||||||||||||||||
| $ | 2,540 | $ | 7,821 | |||||||||||||||||
(1)The balance relates to the reclassification from accumulated other comprehensive loss to interest expense due to dedesignation from hedge accounting of all May 2019 interest rate swaps.
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NOTE 16 — CD&R INVESTOR GROUP
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of the Company, which was converted into shares of our common stock on May 14, 2013.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018.
On July 17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ply Gem, and for certain limited purposes as set forth in the Merger Agreement, Clayton, Dubilier & Rice, LLC, pursuant to which, at the closing of the merger, Ply Gem would be merged with and into the Company, with the Company continuing its existence as a corporation organized under the laws of the State of Delaware (the “Merger”). The Merger was consummated on November 16, 2018 pursuant to the Merger Agreement.
Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between the Company and each of the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of the Company’s Common Stock held by the Investors following the consummation of the Merger.
On August 25, 2020, the Company filed a shelf registration statement on Form S-3, declared effective by the SEC on September 2, 2020, registering the resale of shares of the Company’s Common Stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company’s Common Stock held by the CD&R Fund VIII Investor Group and the Golden Gate Investor Group.
Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement. Pursuant to the terms of the New Registration Rights Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Registration Rights Agreement, dated as of October 20, 2009, by and among the Company and the CD&R Fund VIII Investor Group.
On March 5, 2022, the Company entered into an Agreement and Plan of Merger (the “CD&R Merger Agreement”), by and among Camelot Return Intermediate Holdings, LLC (“Parent”), Camelot Return Merger Sub, Inc. (“Merger Sub”). Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice (“CD&R”). Upon the terms and subject to the conditions of the CD&R Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “CD&R Merger”). As a result of the CD&R Merger, the Company will cease to be publicly-traded, and investment funds managed by CD&R will become the indirect owner of all of the Company’s outstanding shares of common stock that it does not already own. The proposed transaction has been approved by a special committee of independent directors of the Company’s board of directors (the “Special Committee”) previously formed to evaluate and consider any potential or actual proposal from CD&R. The board of directors of the Company, acting on the Special Committee’s recommendation, resolved unanimously to recommend that the stockholders of the Company vote to adopt and approve the CD&R Merger Agreement. The CD&R Merger is expected to close in the second or third quarter of 2022, subject to customary closing conditions. The waiting period under the Hart-Scott-Rodino Act of 1976, as amended, applicable to the proposed CD&R transaction expired on April 18, 2022. The CD&R Merger is subject to approval by holders of a majority of the shares not owned by CD&R and its affiliates.
Additional information about the CD&R Merger Agreement and the CD&R Merger will be set forth in the Company’s Definitive Proxy Statement on Schedule 14A that will be filed with the SEC.
As of April 2, 2022 and December 31, 2021, the CD&R Investor Group owned approximately 48.6% and 48.8%, respectively, of the outstanding shares of the Company’s Common Stock.
NOTE 17 — STOCK REPURCHASE PROGRAM
On March 7, 2018, the Company announced that its Board of Directors authorized a new stock repurchase program for the repurchase of up to $50.0 million of the Company’s outstanding Common Stock. Under the repurchase program, the Company
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is authorized to repurchase shares at times and in amounts that it deems appropriate in accordance with all applicable securities laws and regulations. There is no time limit on the duration of the program and shares repurchased pursuant to the repurchase program are usually retired.
During the three months ended April 2, 2022 and April 3, 2021, there were no stock repurchases under the stock repurchase program. As of April 2, 2022, $49.1 million remained available for stock repurchases under the stock repurchase program. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
During the three months ended April 2, 2022 and April 3, 2021, the Company withheld approximately 0.2 million and 0.1 million shares, respectively, of stock to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
During the three months ended April 2, 2022, the Company cancelled approximately 0.2 million shares that had been previously withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards. The cancellations resulted in a $4.1 million decrease in both treasury stock and additional paid in capital during the three months ended April 2, 2022.
NOTE 18 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of April 2, 2022 and December 31, 2021 because of their relatively short maturities. The carrying amounts of the indebtedness under the Current ABL Facility and Current Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. At April 2, 2022, there were no borrowings outstanding under the Current ABL Facility and no outstanding indebtedness under the Current Cash Flow Revolver. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective period ends were (in thousands):
| April 2, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Term Loan Facility | $ | 2,574,000 | $ | 2,490,345 | $ | 2,580,500 | $ | 2,570,823 | |||||||||||||||
6.125% Senior Notes | 500,000 | 465,000 | 500,000 | 531,900 | |||||||||||||||||||
The fair value of the term loan facility was based on recent trading activities of comparable market instruments, which are level 2 inputs, and the fair value of the 6.125% senior notes was based on quoted prices in active markets for the identical liabilities, which are level 1 inputs.
Fair Value Measurements
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used as of April 2, 2022 and December 31, 2021.
Money market: Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds: Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
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Deferred compensation plan liability: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
Interest rate swaps: Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market-based LIBOR yield curves. These interest rate swaps are classified within Level 2 of the fair value hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Foreign currency forward contracts: The fair value of the foreign currency forward contracts are classified within Level 2 of the fair value hierarchy because they are estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of April 2, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| April 2, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Short-term investments in deferred compensation plan(1): | |||||||||||||||||||||||
| Money market | $ | 66 | $ | — | $ | — | $ | 66 | |||||||||||||||
| Mutual funds – Growth | 159 | — | — | 159 | |||||||||||||||||||
| Mutual funds – Blend | 1,511 | — | — | 1,511 | |||||||||||||||||||
| Mutual funds – Foreign blend | 424 | — | — | 424 | |||||||||||||||||||
| Mutual funds – Fixed income | — | 141 | — | 141 | |||||||||||||||||||
Total short-term investments in deferred compensation plan(2) | 2,160 | 141 | — | 2,301 | |||||||||||||||||||
| Foreign currency forward contracts | — | 249 | — | 249 | |||||||||||||||||||
Interest rate swap assets(3) | — | 87,692 | — | 87,692 | |||||||||||||||||||
| Total assets | $ | 2,160 | $ | 88,082 | $ | — | $ | 90,242 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Deferred compensation plan liability(2) | $ | — | $ | 2,704 | $ | — | $ | 2,704 | |||||||||||||||
Interest rate swap liabilities(4) | — | 53,530 | — | 53,530 | |||||||||||||||||||
| Total liabilities | $ | — | $ | 56,234 | $ | — | $ | 56,234 | |||||||||||||||
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| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Short-term investments in deferred compensation plan(1): | |||||||||||||||||||||||
| Money market | $ | 24 | $ | — | $ | — | $ | 24 | |||||||||||||||
| Mutual funds – Growth | 557 | — | — | 557 | |||||||||||||||||||
| Mutual funds – Blend | 1,560 | — | — | 1,560 | |||||||||||||||||||
| Mutual funds – Foreign blend | 467 | — | — | 467 | |||||||||||||||||||
| Mutual funds – Fixed income | — | 151 | — | 151 | |||||||||||||||||||
Total short-term investments in deferred compensation plan(2) | 2,608 | 151 | — | 2,759 | |||||||||||||||||||
| Foreign currency forward contracts | — | 728 | — | 728 | |||||||||||||||||||
Interest rate swap assets(3) | — | 11,543 | — | 11,543 | |||||||||||||||||||
| Total assets | $ | 2,608 | $ | 12,422 | $ | — | $ | 15,030 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Deferred compensation plan liability(2) | $ | — | $ | 2,759 | $ | — | $ | 2,759 | |||||||||||||||
Interest rate swap liabilities(4) | — | 52,949 | — | 52,949 | |||||||||||||||||||
| Total liabilities | $ | — | $ | 55,708 | $ | — | $ | 55,708 | |||||||||||||||
(1)Unrealized holding gains (losses) for the three months ended April 2, 2022 and April 3, 2021 were $(0.3) million and $0.1 million, respectively. These unrealized holding gains (losses) were substantially offset by changes in the deferred compensation plan liability.
(2)The Company records the short-term investments in deferred compensation plan within investments in debt and equity securities, at market, and the deferred compensation plan liability within accrued compensation and benefits on the consolidated balance sheets.
(3)The balance as of April 2, 2022 includes $87.4 million and $0.3 million related to the pay-fixed interest rate swaps and the receive-fixed interest rate swaps for which the fair value option has been elected, respectively. The balance as of December 31, 2021 is related to the receive-fixed interest rate swaps for which the fair value option has been elected.
(4)The balances as of April 2, 2022 and December 31, 2021 include $53.2 million and $41.4 million, respectively, related to the pay-fixed interest rate swaps, and $0.3 million and $11.5 million, respectively, related to the pay-fixed May 2019 active interest rate swap which has been dedesignated as a cash flow hedge.
NOTE 19 — INCOME TAXES
Under FASB ASC 740-270, Income Taxes - Interim Reporting, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date ordinary pre-tax book income (loss). In addition, the Company excludes jurisdictions with a projected loss for the year or the year-to-date ordinary loss where the Company cannot recognize a tax benefit from its estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax book income (loss), the Company includes certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense in future periods in accordance with ASC 740-270.
For the three months ended April 2, 2022, the Company’s estimated annual effective income tax rate of ordinary forecasted pre-tax book income was approximately 28.1%, which varied from the statutory rate primarily due to state income tax expense, valuation allowances, foreign income taxes, and executive compensation. For the three months ended April 2, 2022, the effective tax rate was 25.1%, which varied from the annual effective tax rate due to discrete items recorded during the period, including legal settlement income received, interest recorded on unrecognized tax benefits, adjustments to state income tax rates, and stock compensation.
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Valuation allowance
As of April 2, 2022, the Company remained in a valuation allowance position, in the amount of $14.6 million, against its deferred tax assets for certain state jurisdictions of certain entities as it is currently deemed “more likely than not” that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these state jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowances as necessary.
Unrecognized tax benefits
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences as well as interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities. During the three months ended April 2, 2022, the tax reserves increased by approximately $0.4 million. The increase is primarily due to additional interest expense related to previously recorded unrecognized tax benefits.
The liability for unrecognized tax benefits as of April 2, 2022 was approximately $17.8 million and is recorded in other long-term liabilities in the consolidated balance sheet.
CARES Act
Under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that was signed into law on March 27, 2020, the Company elected to defer employer social security payments of approximately $19.9 million as of December 31, 2020. In December 2021, the Company paid approximately $10 million in deferred employer social security payments and has approximately $10 million recorded in current liabilities on the consolidated balance sheet as of April 2, 2022 that will be paid by December 31, 2022.
NOTE 20 — SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and is evaluated on a regular basis by the chief operating decision maker to make decisions regarding the allocation of resources to the segment and assess the performance of the segment. The Company has three reportable segments: Windows, Siding and Commercial.
These operating segments follow the same accounting policies used for our consolidated financial statements. We evaluate a segment’s performance on a U.S. GAAP basis based primarily upon operating income before corporate expenses.
Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition-related costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, and other income (expense).
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The following table represents summary financial data attributable to the segments for the periods indicated (in thousands):
| Three Months Ended | ||||||||||||||
| April 2, 2022 | April 3, 2021 | |||||||||||||
| Net sales: | ||||||||||||||
| Windows | $ | 702,110 | $ | 527,263 | ||||||||||
| Siding | 332,990 | 316,391 | ||||||||||||
| Commercial | 531,738 | 423,378 | ||||||||||||
| Total net sales | $ | 1,566,838 | $ | 1,267,032 | ||||||||||
| Operating income: | ||||||||||||||
| Windows | $ | 46,245 | $ | 29,362 | ||||||||||
| Siding | 27,423 | 27,528 | ||||||||||||
| Commercial | 80,943 | 41,585 | ||||||||||||
| Corporate | 24,705 | (43,267) | ||||||||||||
| Total operating income | 179,316 | 55,208 | ||||||||||||
| Unallocated other expense, net | (42,667) | (56,071) | ||||||||||||
| Income (loss) before taxes | $ | 136,649 | $ | (863) | ||||||||||
| April 2, 2022 | December 31, 2021 | |||||||||||||
| Total assets: | ||||||||||||||
| Windows | $ | 2,232,057 | $ | 2,223,098 | ||||||||||
| Siding | 2,083,123 | 2,060,275 | ||||||||||||
| Commercial | 1,015,922 | 1,073,264 | ||||||||||||
| Corporate | 700,554 | 470,823 | ||||||||||||
| Total assets | $ | 6,031,656 | $ | 5,827,460 | ||||||||||
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NOTE 21 — CONTINGENCIES
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. The Company regularly reviews the status of ongoing proceedings and other contingent matters. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of April 2, 2022.
Environmental
The Company’s operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of its employees and the end-users of its products; regulate the materials used in its products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could result in substantial fines or penalties, civil sanctions, injunctive relief, consent orders, or requirements to install pollution controls or other abatement equipment.
The Company could be held liable for costs to investigate, remediate or otherwise address contamination at any real property it has ever owned, operated or used as a disposal site, or at other sites where the Company or its predecessors may have released hazardous materials. The Company could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
MW Manufacturers, Inc. (“MW”), a subsidiary of Ply Gem Industries, Inc., entered into a September 2011 Administrative Order on Consent with the U.S. Environmental Protection Agency (“EPA”) under the Corrective Action Program to address known releases of hazardous substances at MW’s Rocky Mount, Virginia property. A Phase I RCRA Facility Investigation (“RFI”) was submitted to the Virginia Department of Environmental Quality (“VDEQ”) in December 2015, and a Phase II RFI and the Human Health Risk Assessment and Baseline Ecological Risk Assessment were submitted in October 2018. A Limited Corrective Measures Study based on the investigations was submitted to the VDEQ for review and approval in September 2019. Upon completion of a 30-day public comment period, the VDEQ issued its Final Decision and Response to Comments approving a final remedy in May 2021. The final remedy consists of continuing groundwater monitoring until the VDEQ’s corrective actions have been met; and implementing and complying with land use restrictions and institutional controls imposed by an environmental covenant. The Company has recorded a liability of $4.5 million for this MW site, of which $1.0 million is in other current liabilities and $3.5 million is in other long-term liabilities on the Company’s consolidated balance sheet as of April 2, 2022.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska, referred to as the PCE/TCE Northeast Contamination Site (“PCE/TCE Site”). Kroy Building Products, Inc. (“KBP”), a subsidiary of Ply Gem Industries, Inc., has been identified as a potentially responsible party at the site and has liability for investigation and remediation costs associated with the contamination. In May 2019, KBP and an unrelated respondent entered into an Administrative Settlement Agreement and Order on Consent with the EPA to conduct a Remedial Investigation/Feasibility Study (“RI/FS”) of the PCE/TCE Site. A final RI/FS Work Plan was approved by the EPA in December 2019. Two phases of RI field sampling were completed through May 2021 and a Monitoring Well Plan was approved by the EPA in November 2021; well installation is planned in 2022. The Company has recorded a liability of $4.4 million within other current liabilities on its consolidated balance sheet as of April 2, 2022. If necessary, the Company will adjust its remediation liability if the RI/FS scope materially changes or the EPA imposes additional investigative requirements. The Company may be able to recover a portion of costs incurred in connection with the PCE/TCE Site from other potentially responsible parties, though there is no assurance we would receive any funds.
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Based on current information, the Company is not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on its results of operations, cash flows or financial position except as otherwise disclosed in the Company’s consolidated financial statements. However, there can be no guarantee that previously known or newly discovered matters will not result in material costs or liabilities.
Litigation
The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019. The Company has a $1.6 million liability related to the settlement in other current liabilities on the Company’s consolidated balance sheet as of April 2, 2022.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action Complaint in the Delaware Court of Chancery against Clayton Dubilier & Rice, LLC (“CD&R”), Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), and certain directors of the Company. Voigt purported to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholders of the Company, and derivatively on behalf of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserted claims for breach of fiduciary duty and unjust enrichment against CD&R Fund VIII and CD&R, and for breach of fiduciary duty against twelve director defendants in connection with the Merger. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to four of the director defendants. Voigt sought damages in an amount to be determined at trial. On August 25, 2021, the parties to the case filed a Stipulation of Compromise and Settlement (“Stipulation”) setting forth their agreement to settle the litigation. The Stipulation provides for CD&R, CD&R Fund VIII, and the eight director defendants to cause their respective insurers to pay a total of $100 million into an escrow account that will be used to pay escrow expenses, satisfy any fee and incentive amounts awarded by the court in favor of plaintiff and plaintiff’s counsel, and distribute the remaining funds to the Company. The Stipulation further provided that plaintiff’s counsel would apply for an award of attorneys’ fees and litigation expenses in an amount of up to 23.5% of the $100 million payment by the insurers, and that any incentive award for the named plaintiff will be paid solely from the amount of plaintiff attorneys’ fees awarded. This Stipulation required court approval. On January 19, 2022, the Court held a hearing, verbally approved the Stipulation, and approved the plaintiff’s counsel’s application for a fee award of 23.5% of the $100 million settlement payment and the incentive award. On January 20, 2022, the Court entered an Order and Final Judgment approving the Stipulation. During the quarter ended April 2, 2022, the matter was resolved as the Company received $76.5 million in cash proceeds from the Stipulation, which was recorded in gain on legal settlements in the consolidated statement of operations.
Other contingencies
The Company’s imports of fabricated structural steel (“FSS”) from its Mexican affiliate, Building Systems de Mexico S.A. de C.V. (“BSM”) were subject to antidumping (“AD”) and countervailing duty (“CVD”) tariff proceedings before the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“USITC”). The proceedings were initiated in February 2019 by the American Institute of Steel Construction (“AISC”) against FSS being imported into the USA from Mexico, Canada, and China. In 2019, the DOC issued preliminary tariff rates and in 2020 finalized CVD and AD tariff rates of 0% and 8.47%, respectively, for the Company’s imports of FSS from BSM. However, in February 2020, in a 3 to 2 vote, the USITC concluded there was no injury or threat of injury to the domestic FSS industry. In March 2020, the USITC opinion was published in the Federal Register, ceasing the Company’s requirement to pay the AD and CVD tariffs. The Company received full reimbursement for the $4.1 million in tariffs previously deposited with United States Customs and Border Protection and recorded a reduction in costs of sales during the fiscal year ended December 31, 2020. This matter was appealed by the AISC and, on September 22, 2021, the U.S. Court of International Trade (“CIT”) issued an opinion upholding the USITC’s determination that there was no injury or threat of injury to the domestic FSS industry caused by the cumulated imports of FSS from Mexico, Canada, and China. The AISC has appealed the CIT decision to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). The Company will continue to vigorously advocate its position, that its import of FSS from BSM should not be subject to any CVD or AD tariffs, in all tribunals including the CAFC as well as the tribunal established pursuant to the North American Free Trade Agreement (“NAFTA”). The Company’s position is in agreement with, and bolstered by, the USITC’s determination that FSS imports do not cause material injury or threaten material injury to the U.S. industry and the CIT’s sustaining of the USITC’s final negative injury determination. We have evaluated this matter in accordance with ASC 450, Contingencies, and concluded that no liability to the Company is probable and estimable as of April 2, 2022.
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NOTE 22 — SUBSEQUENT EVENTS
On April 10, 2022, the Company entered into a Membership Interest Purchase Agreement (the “Coil Coatings Purchase Agreement”) with BlueScope Steel North America Corporation, a Delaware corporation (“BlueScope”) and a subsidiary of BlueScope Steel Limited, to sell the Company’s metal coil coatings business to BlueScope for an aggregate purchase price of $500 million in cash, subject to certain customary adjustments (the “Coil Coatings Transaction”). The Coil Coatings Transaction is subject to the satisfaction of customary closing conditions, including the expiration or termination of the waiting period under the HSR Act. Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Coil Coatings Purchase Agreement, the Coil Coatings Transaction is expected to close in 2022. Pursuant to the CD&R Merger Agreement, an affiliate of CD&R consented to the Company’s entry into the Coil Coatings Purchase Agreement.
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CORNERSTONE BUILDING BRANDS, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the unaudited consolidated financial statements included herein under “Item 1. Unaudited Consolidated Financial Statements” and the audited consolidated financial statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
FORWARD LOOKING STATEMENTS
This Quarterly Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will,” “target” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. These risks, uncertainties and other factors include, but are not limited to:
•our ability to complete the proposed CD&R Merger and the proposed Coil Coatings Transaction on the terms and timeline anticipated, or at all, and the effect of the announcement, pendency and completion of the CD&R Merger and the Coil Coatings Transaction on our ability to maintain relationships with customers and other third parties, on management’s attention to ongoing business concerns, and other risks and uncertainties related to the proposed CD&R Merger and the Coil Coatings Transaction that may affect future results;
•industry cyclicality;
•seasonality of the business and adverse weather conditions;
•challenging economic conditions affecting the residential, non-residential and repair and remodeling construction industry and markets;
•commodity price volatility and/or limited availability of raw materials, including polyvinyl chloride (“PVC”) resin, glass, aluminum, natural gas, and steel due to supply chain disruptions;
•our ability to identify and develop relationships with a sufficient number of qualified suppliers to mitigate risk in the event a significant supplier experiences a significant production or supply chain interruption;
•the increasing difficulty of consumers and builders in obtaining credit or financing;
•increase in the macroeconomic inflationary environment;
•ability to successfully achieve price increases to offset cost increases;
•ability to successfully implement operational efficiency initiatives, including automation;
•ability to successfully integrate our acquired businesses;
•ability to attract and retain employees, including through various initiatives and actions;
•volatility in the United States (“U.S.”) and international economies and in the credit markets;
•the severity, duration and spread of the COVID-19 pandemic, as well as actions that may be taken by the Company or governmental authorities to contain the COVID-19 pandemic or to treat its impact and the resulting impact on supply chain and labor pressures;
•macroeconomic uncertainty and market volatility resulting from geopolitical concerns, including Russia’s invasion of Ukraine;
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•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•our ability to retain and replace key personnel;
•enforcement and obsolescence of our intellectual property rights;
•costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
•competitive activity and pricing pressure in our industry;
•our ability to make strategic acquisitions accretive to earnings and dispositions at favorable prices and terms;
•our ability to fund operations, provide increased working capital necessary to support our strategy and acquisitions using available liquidity;
•our ability to carry out our restructuring plans and to fully realize the expected cost savings;
•global climate change, including compliance with new laws or regulations relating thereto;
•breaches of our information system security measures;
•damage to our computer infrastructure and software systems;
•necessary maintenance or replacements to our enterprise resource planning technologies;
•potential personal injury, property damage or product liability claims or other types of litigation, including stockholder litigation related to the proposed CD&R Merger;
•compliance with certain laws related to our international business operations;
•increases in labor costs, labor market pressures, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
•significant changes in factors and assumptions used to measure certain of our defined benefit plan obligations and the effect of actual investment returns on pension assets;
•ability to compete effectively against competitors with substitutable products;
•additional costs from new regulations which relate to the utilization or manufacturing of our products or services, including changes in building codes and standards;
•our ability to realize the anticipated benefits of acquisitions and dispositions and to use the proceeds from dispositions;
•volatility of the Company’s stock price;
•substantial governance and other rights held by the Investors;
•the effect on our common stock price caused by transactions engaged in by the Investors, our directors or executives;
•our substantial indebtedness and our ability to incur substantially more indebtedness;
•limitations that our debt agreements place on our ability to engage in certain business and financial transactions;
•our ability to obtain financing on acceptable terms;
•exchange rate fluctuations;
•downgrades of our credit ratings;
•the effect of increased interest rates on our ability to service our debt; and
•other risks detailed under the caption “Risk Factors” in this Quarterly Report on Form 10-Q, and in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”), and other filings we make with the SEC.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption “Risk Factors” in this report and the 2021 Form 10-K, and other risks described in documents subsequently filed by the
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Company from time to time with the SEC. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations unless the securities laws require us to do so.
OVERVIEW
Cornerstone Building Brands, Inc. is the largest manufacturer of exterior building products in North America. The Company serves residential and commercial customers across new construction and the repair & remodel markets. Our mission is to be relentlessly committed to our customers and to create great building solutions that enable communities to grow and thrive.
We have developed and continue to implement a well-defined business strategy focused on (i) driving profitable growth in new and existing markets; (ii) leveraging operational excellence across our businesses; and (iii) implementing a capital allocation framework balanced between a focus on opportunistic investment in high return initiatives and continued debt repayment.
We believe that by focusing on operational excellence every day, creating a platform for future growth and investing in market-leading residential and commercial building brands, we will deliver unparalleled financial results. We design, engineer, manufacture, install and market external building products through our three operating segments: Windows, Siding, and Commercial.
Our manufacturing processes are vertically integrated, which we believe provides cost and competitive advantages. As the leading manufacturer of vinyl windows, vinyl siding, metal roofing and wall systems and metal accessories, Cornerstone Building Brands combines a diverse portfolio of products with an expansive national footprint that includes over 22,000 employees at manufacturing, distribution and office locations primarily in North America.
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of material costs relative to other building materials, the level of residential and nonresidential construction activity, repair and remodel demand and the availability and cost of financing for construction projects. Our sales normally are lower in the first and fourth fiscal quarters of each year compared to the second and third fiscal quarters because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
CD&R Merger Agreement
On March 5, 2022, the Company entered into an Agreement and Plan of Merger (the “CD&R Merger Agreement”), by and among Camelot Return Intermediate Holdings, LLC (“Parent”), Camelot Return Merger Sub, Inc. (“Merger Sub”). Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice (“CD&R”). Upon the terms and subject to the conditions of the CD&R Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “CD&R Merger”). As a result of the CD&R Merger, the Company will cease to be publicly-traded, and investment funds managed by CD&R will become the indirect owner of all of the Company’s outstanding shares of common stock that it does not already own. The proposed transaction has been approved by a special committee of independent directors of the Company’s board of directors (the “Special Committee”) previously formed to evaluate and consider any potential or actual proposal from CD&R. The board of directors of the Company, acting on the Special Committee’s recommendation, resolved unanimously to recommend that the stockholders of the Company vote to adopt and approve the CD&R Merger Agreement. The CD&R Merger is expected to close in the second or third quarter of 2022, subject to customary closing conditions. The waiting period under the Hart-Scott-Rodino Act of 1976, as amended, applicable to the proposed CD&R transaction expired on April 18, 2022. The transaction is subject to approval by holders of a majority of the shares not owned by CD&R and its affiliates.
Additional information about the CD&R Merger Agreement and the CD&R Merger will be set forth in the Company’s Definitive Proxy Statement on Schedule 14A/that will be filed with the SEC.
Markets We Serve
Our products are available across several large and attractive end markets, including residential new construction, residential repair and remodel and low-rise non-residential construction. We believe that there are favorable underlying fundamental factors that will drive long-term growth across the end markets in which we operate. We also believe the recent COVID-19 pandemic has driven strong demand for residential repair and remodel activity, residential new construction and select segments of the low-rise non-residential construction market, such as distribution, warehouse, healthcare and educational facilities in suburban regions. We believe our business is well-positioned to benefit from broader societal and population trends favoring suburban regions, as employment and living preferences shift towards such regions.
Cornerstone Building Brands is deeply committed to the communities where our customers and employees live, work and play. We recognize that our customers are increasingly environmentally conscious in their purchasing behavior, and we believe our sustainable solutions favorably address these evolving consumer preferences. For example, certain products in our portfolio
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are high in recycled end content, virtually 100% recyclable at the end of their useful life and often manufactured to meet or exceed specified sustainability targets, such as ENERGY STAR and LEED certifications. We recognize that efficient use of recycled materials helps to conserve natural resources and reduces environmental impact, and we are committed to driving these sustainable practices throughout our business.
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RESULTS OF OPERATIONS
The following table represents key results of operations on a consolidated basis for the periods indicated:
| Three Months Ended | ||||||||||||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | $ change | % change | ||||||||||||||||
| Net sales | $ | 1,566,838 | $ | 1,267,032 | 299,806 | 23.7 | % | |||||||||||||
| Gross profit | 333,907 | 259,729 | 74,178 | 28.6 | % | |||||||||||||||
| % of net sales | 21.3 | % | 20.5 | % | ||||||||||||||||
| Selling, general and administrative expenses | 176,536 | 153,168 | 23,368 | 15.3 | % | |||||||||||||||
| % of net sales | 11.3 | % | 12.1 | % | ||||||||||||||||
| Restructuring and impairment charges, net | 831 | 1,838 | (1,007) | (54.8) | % | |||||||||||||||
| Strategic development and acquisition related costs | 4,791 | 3,313 | 1,478 | 44.6 | % | |||||||||||||||
| Interest expense | 44,106 | 56,499 | (12,393) | (21.9) | % | |||||||||||||||
| Provision for income taxes | 34,366 | 792 | 33,574 | 4,239.1 | % | |||||||||||||||
| Net income (loss) | 102,283 | (1,655) | 103,938 | (6,280.2) | % | |||||||||||||||
Net sales - Consolidated net sales for the three months ended April 2, 2022 increased by approximately 23.7%, as compared to the same period last year. The net sales growth was primarily-driven by favorable price actions across all segments in response to rising commodity costs and other inflationary impacts coupled with $45.1 million impact from strategic acquisitions net of divestitures from portfolio optimization actions.
Gross profit % of net sales - The Company’s gross profit percentage was 21.3% for the three months ended April 2, 2022, which was a 80 basis point increase over the three months ended April 3, 2021. The improvement in gross profit as a % of net sales was driven by strong price mix net of inflation and the net effect of acquisitions and divestitures made during the second half of 2021.
Selling, general, and administrative expenses increased 15.3% during the three months ended April 2, 2022 compared to the three months ended April 3, 2021. The increase was primarily driven by sales commissions and other variable compensation programs related to financial growth measures, increased wages and marketing related professional services to support market recovery and further growth.
Restructuring and impairment charges, net decreased $1.0 million during the three months ended April 2, 2022 compared to the three months ended April 3, 2021, primarily due to lower severance of $0.8 million.
Strategic development and acquisition related costs increased $1.5 million during the three months ended April 2, 2022 compared to the three months ended April 3, 2021, primarily related to increased strategic development activity in the current period partially offset by lower litigation costs from the Voigt lawsuit than the prior year comparable period.
Interest expense decreased $12.4 million or 21.9% during the three months ended April 2, 2022 as compared to the three months ended April 3, 2021 primarily as a result of the actions taken in second quarter of 2021 (redemption of the $645 million 8.00% Senior Notes coupled with the refinancing of the Current Term Loan Facility).
Consolidated provision (benefit) for income taxes was an expense of $34.4 million for the three months ended April 2, 2022 compared to an expense of $0.8 million for the three months ended April 3, 2021. The change in the provision was primarily driven by an increase in pre-tax book income for the three months ended April 2, 2022.
Segment Results of Operations
We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280, Segment Reporting. We have determined that we have three reportable segments, organized and managed principally by the different industry sectors they serve. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition costs, gain on legal settlements, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and
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corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, loss on extinguishment of debt and other income (expense).
One of the primary measurements used by management to measure the financial performance of each segment is Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), adjusted for the following items: income tax (benefit) expense; depreciation and amortization; interest expense, net; restructuring and impairment charges; strategic development and acquisition related costs; gain on legal settlements; share-based compensation expense; non-cash gain (loss) on foreign currency transactions; other non-cash items; and other items.
The presentation of segment results below includes a reconciliation of the changes for each segment reported in accordance with U.S. GAAP to a pro forma basis to allow investors and the Company to meaningfully evaluate the percentage change on a comparable basis from period to period. The pro forma financial information is based on the historical information of Cornerstone Building Brands, which includes historical information of Prime Windows LLC (“Prime Windows”), which the Company acquired on April 30, 2021; Cascade Windows, Inc. (“Cascade Windows”), which the Company acquired on August 20, 2021; the insulated metals panels (“IMP”) and the roll-up sheet doors (“DBCI”) businesses, which the Company divested on August 9, 2021 and August 18, 2021, respectively, and Union Corrugating Company Holdings, Inc. (“UCC”), which the Company acquired on December 3, 2021. The pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the Prime Windows, Cascade Windows and UCC acquisitions; or any integration costs; and from the IMP and DBCI divestitures. Pro forma balances are not necessarily indicative of operating results had the Prime Windows, Cascade Windows and UCC acquisitions and the IMP and DBCI divestitures occurred on January 1, 2021 or of future results.
See Note 20 — Segment Information in the notes to the unaudited consolidated financial statements for more information on our segments.
NON-GAAP FINANCIAL MEASURES
Set forth below are certain “non-GAAP financial measures” as defined under the Securities Exchange Act of 1934. Management believes the use of such non-GAAP financial measures assists investors in understanding the ongoing operating performance of the Company by presenting the financial results between periods on a more comparable basis. Such non-GAAP financial measures should not be construed as an alternative to reported results determined in accordance with U.S. GAAP. We have included reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and provided in accordance with U.S. GAAP.
The following tables present a comparison of net sales as reported to pro forma net sales for Cornerstone Building Brands as if the Prime Windows, Cascade Windows and UCC acquisitions, and the IMP and DBCI divestitures had each occurred on January 1, 2021 rather than the respective date referenced above for each transaction:
Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | ||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Reported | Acquisitions and Divestitures | Pro Forma | Reported | Acquisitions and Divestitures | Pro Forma | |||||||||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||||||||||||||
| Windows | $ | 702,110 | $ | — | $ | 702,110 | $ | 527,263 | $ | 58,421 | $ | 585,684 | |||||||||||||||||||||||
| Siding | 332,990 | — | 332,990 | 316,391 | — | 316,391 | |||||||||||||||||||||||||||||
| Commercial | 531,738 | — | 531,738 | 423,378 | (36,439) | 386,939 | |||||||||||||||||||||||||||||
| Total Net Sales | $ | 1,566,838 | $ | — | $ | 1,566,838 | $ | 1,267,032 | $ | 21,982 | $ | 1,289,014 | |||||||||||||||||||||||
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The following tables reconcile Adjusted EBITDA and pro forma Adjusted EBITDA to operating income (loss) for the periods indicated.
| Consolidated | |||||||||||
| Three Months Ended | |||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | |||||||||
| Net sales | $ | 1,566,838 | $ | 1,267,032 | |||||||
Impact of acquisitions and divestitures(1) | — | 21,982 | |||||||||
| Pro forma net sales | $ | 1,566,838 | $ | 1,289,014 | |||||||
| Operating income, GAAP | $ | 179,316 | $ | 55,208 | |||||||
| Restructuring and impairment charges, net | 831 | 1,838 | |||||||||
| Strategic development and acquisition related costs | 4,791 | 3,313 | |||||||||
| Gain on legal settlements | (76,575) | — | |||||||||
| Depreciation and amortization | 73,932 | 72,615 | |||||||||
Other (2) | 11,620 | 6,174 | |||||||||
| Adjusted EBITDA | 193,915 | 139,148 | |||||||||
Impact of acquisitions and divestitures(1) | — | (2,093) | |||||||||
| Pro Forma Adjusted EBITDA | $ | 193,915 | $ | 137,055 | |||||||
| Adjusted EBITDA as a % of Net Sales | 12.4 | % | 11.0 | % | |||||||
| Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales | 12.4 | % | 10.6 | % | |||||||
(1)Reflects the impact of the net sales and Adjusted EBITDA of Prime Windows LLC, Cascade Windows Inc., and Union Corrugating Company Holdings, Inc., which were acquired on April 30, 2021, August 20, 2021 and December 3, 2021, respectively, and reflects the impact of the divestitures of the IMP and DBCI businesses through the divestiture dates of August 9, 2021 and August 18, 2021, respectively.
(2)Primarily includes $11.5 million and $3.3 million of share-based compensation for the three months ended April 2, 2022 and April 3, 2021, respectively, and $3.0 million in costs for the three months ended April 3, 2021 associated with debt refinancing transactions.
Operating income (loss) for the three months ended April 2, 2022 increased to $179.3 million of operating income as compared to operating income of $55.2 million in the three months ended April 3, 2021 primarily as a result of the gain on legal settlements in the current period of $76.6 million, incremental operating income from acquisitions, net of divestitures made in second half of 2021 (Prime, Cascade, and UCC), and strong price mix net of inflation that offset higher SG&A expenses.
Pro forma Adjusted EBITDA for the three months ended April 2, 2022 was $193.9 million or 12.4% of pro forma net sales, an increase of $56.9 million and 180 basis points from the pro forma period a year ago. Pro forma adjusted EBITDA increased 41.5% from prior year primarily due to strong price mix net of inflation of 108.1% resulting from price actions taken to offset inflationary impacts. This was partially offset by 28.1% from lower volume, 28.0% from manufacturing inefficiencies resulting from the challenges brought on by supply chain disruptions and labor constraints, and 10.5% from higher SG&A expenses.
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| Windows | |||||||||||
| Three Months Ended | |||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | |||||||||
| Net Sales | $ | 702,110 | $ | 527,263 | |||||||
Impact of acquisitions(1) | — | 58,421 | |||||||||
| Pro forma net sales | $ | 702,110 | $ | 585,684 | |||||||
| Operating income, GAAP | $ | 46,245 | $ | 29,362 | |||||||
| Restructuring and impairment charges, net | 212 | 932 | |||||||||
| Strategic development and acquisition related costs | 554 | — | |||||||||
| Depreciation and amortization | 35,130 | 30,798 | |||||||||
| Other | 238 | (87) | |||||||||
| Adjusted EBITDA | 82,379 | 61,005 | |||||||||
Impact of acquisitions(1) | — | 6,582 | |||||||||
| Pro Forma Adjusted EBITDA | $ | 82,379 | $ | 67,587 | |||||||
| Adjusted EBITDA as a % of Net Sales | 11.7 | % | 11.6 | % | |||||||
| Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales | 11.7 | % | 11.5 | % | |||||||
(1)Reflects the impact of the net sales and Adjusted EBITDA of Prime Windows LLC and Cascade Windows Inc., which were acquired on April 30, 2021 and August 20, 2021, respectively.
Pro forma net sales for the three months ended April 2, 2022 were 19.9% higher than pro forma net sales in the same period a year ago. Disciplined price actions in response to rising commodity costs and other inflationary impacts drove a 22.4% increase in pro forma net sales as compared to the same period last year. Volumes were 2.5% lower with one fewer fiscal day.
Operating income (loss) for the three months ended April 2, 2022 increased to $46.2 million operating income as compared to operating income of $29.4 million for the three months ended April 3, 2021, primarily due to positive price mix net of inflation, which more than offset the manufacturing impacts from supply chain disruptions and higher costs to serve our customers.
Pro forma Adjusted EBITDA for the three months ended April 2, 2022 was $82.4 million or 11.7% of pro forma net sales, an improvement of 20 basis points from the pro forma period a year ago. Pro forma Adjusted EBITDA increased 21.9% over the prior year quarter, primarily due to 70.1% of positive price mix net of inflation that was partially offset 39.3% from manufacturing inefficiencies, 7.6% from an increase in SG&A expenses, and 1.4% from lower volume impact.
| Siding | |||||||||||
| Three Months Ended | |||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | |||||||||
| Net Sales | $ | 332,990 | $ | 316,391 | |||||||
| Operating income, GAAP | $ | 27,423 | $ | 27,528 | |||||||
| Restructuring and impairment charges, net | 208 | 141 | |||||||||
| Strategic development and acquisition related costs | — | 323 | |||||||||
| Depreciation and amortization | 29,062 | 29,148 | |||||||||
| Other | (221) | (19) | |||||||||
| Adjusted EBITDA | $ | 56,472 | $ | 57,121 | |||||||
| Adjusted EBITDA as a % of Net Sales | 17.0 | % | 18.1 | % | |||||||
Net sales for the three months ended April 2, 2022 were 5.2% higher than the net sales in the same period a year ago. For the quarter, price/mix increase of 21.1% more than offset lower volume of 15.9%.
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Operating income (loss) for the three months ended April 2, 2022 decreased to $27.4 million of operating income, as compared to operating income of $27.5 million for the three months ended April 3, 2021.
Adjusted EBITDA for the three months ended April 2, 2022 was $56.5 million or 17.0% of net sales, a decrease of 1.1% compared to the same period in the prior year, primarily due to 25.9% from lower volume, 4.4% from increased SG&A expenses, and 3.0% from increased manufacturing costs to serve customers and inefficiencies from supply chain and labor disruptions. Partially offsetting these increased costs was positive price mix net of inflation of 32.2%.
| Commercial | |||||||||||
| Three Months Ended | |||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | |||||||||
| Net Sales | $ | 531,738 | $ | 423,378 | |||||||
Impact of acquisition and divestitures(1) | — | (36,439) | |||||||||
| Pro forma net sales | $ | 531,738 | $ | 386,939 | |||||||
| Operating income, GAAP | $ | 80,943 | $ | 41,585 | |||||||
| Restructuring and impairment charges, net | 159 | 672 | |||||||||
| Strategic development and acquisition related costs | — | 58 | |||||||||
| Depreciation and amortization | 8,168 | 11,360 | |||||||||
| Other | 298 | (257) | |||||||||
| Adjusted EBITDA | 89,568 | 53,418 | |||||||||
Impact of acquisition and divestitures(1) | — | (8,675) | |||||||||
| Pro Forma Adjusted EBITDA | $ | 89,568 | $ | 44,743 | |||||||
| Adjusted EBITDA as a % of Net Sales | 16.8 | % | 12.6 | % | |||||||
| Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales | 16.8 | % | 11.6 | % | |||||||
(1)Reflects the net adjustments of IMP and DBCI, which were divested on August 9, 2021 and August 18, 2021, respectively; and reflects the impact of the net sales and Adjusted EBITDA of Union Corrugating Company Holdings, Inc, which was acquired on December 3, 2021.
Pro forma net sales for the three months ended April 2, 2022 were 37.4% higher than the same period a year ago, driven by disciplined price actions to mitigate rising steel costs of approximately 53.7%, partially offset by lower volumes of 16.3%.
Operating income (loss) for the three months ended April 2, 2022 increased to $80.9 million of operating income, as compared to operating income of $41.6 million for the three months ended April 3, 2021. The increase was primarily due to positive price mix net of inflation, which more than offset the manufacturing impacts from supply chain disruptions and higher costs to serve our customers.
Pro forma Adjusted EBITDA for the three months ended April 2, 2022 was $89.6 million or 16.8% of pro forma net sales, an improvement of 520 basis points from the same period a year ago. Pro forma Adjusted EBITDA increased by 100.2% primarily due to favorable price mix net of commodity and other inflation impacts of 184.0%, partially offset 50.8% from lower volume, 18.1% from manufacturing inefficiencies caused by lower production levels and manufacturing labor capacity constraints, and 14.9% from higher SG&A expenses.
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Unallocated Operating Gain (Loss)
| Three Months Ended | |||||||||||
| (Amounts in thousands) | April 2, 2022 | April 3, 2021 | |||||||||
| Statements of operations data: | |||||||||||
| SG&A expenses | $ | (47,558) | $ | (40,334) | |||||||
| Strategic development and acquisition related costs | (4,237) | (2,933) | |||||||||
| Gain on legal settlement | 76,500 | — | |||||||||
| Operating gain (loss) | $ | 24,705 | $ | (43,267) | |||||||
Unallocated operating gain (loss) includes items that are not directly attributed to or allocated to our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating gain for the three months ended April 2, 2022 was $24.7 million, as compared to a $43.3 million unallocated operating loss during the three months ended April 3, 2021. The change is primarily due to a gain on a legal settlement of $76.5 million during the three months ended April 2, 2022, partially offset by increase driven by sales commissions and other variable compensation programs related to financial growth measures, increased wages, and marketing related professional services to support market recovery and further growth. Unallocated operating gain (loss) includes $11.5 million and $3.3 million of share-based compensation expense for the three months ended April 2, 2022 and April 3, 2021, respectively.
LIQUIDITY AND CAPITAL RESOURCES
General
Our ongoing principal source of funds is cash generated from operations, supplemented by borrowings against our asset-based lending and revolving credit facility, as necessary. We typically invest our excess cash in various overnight investments that are issued or guaranteed by the U.S. federal government. Our cash, cash equivalents and restricted cash increased from $396.7 million as of December 31, 2021 to $544.2 million as of April 2, 2022. The following table summarizes our consolidated cash flows for the three months ended April 2, 2022 and April 3, 2021 (in thousands):
| Three Months Ended | |||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||
| Net cash provided by operating activities | $ | 190,106 | $ | 20,031 | |||||||
| Net cash used in investing activities | (28,910) | (20,695) | |||||||||
| Net cash used in financing activities | (13,500) | (7,459) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (108) | 585 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 147,588 | (7,538) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 396,658 | 680,478 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 544,246 | $ | 672,940 | |||||||
Operating Activities
During the first quarter, the Company generated strong cash flow from operations of $190.1 million, an increase of $170.1 million from the prior year. The improvement was driven by legal settlement proceeds, higher earnings generation, and effective working capital management.
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The following table shows the impact of working capital items on cash during the three months ended April 2, 2022 and April 3, 2021, respectively (in thousands):
| Three Months Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | Change | |||||||||||||||
| Net cash provided (used in) by: | |||||||||||||||||
| Accounts receivable | $ | (23,628) | $ | (47,157) | $ | 23,529 | |||||||||||
| Inventories | (68,857) | (62,028) | (6,829) | ||||||||||||||
| Accounts payable | 84,726 | 49,424 | 35,302 | ||||||||||||||
| Net cash provided by (used in) working capital items | $ | (7,759) | $ | (59,761) | $ | 52,002 | |||||||||||
The cash generated from working capital between periods was primarily driven by the investments in net working capital during the first quarter of 2021 to support the strong demand recovery from the COVID-19 pandemic and increased valuations from rising commodity costs and other inflationary aspects. See the consolidated statements of cash flows in the unaudited consolidated financial statements for additional information.
Investing Activities
Net cash used in investing activities was $28.9 million during the three months ended April 2, 2022 compared to $20.7 million used in investing activities during the three months ended April 3, 2021. The increase is primarily driven by $12.1 million of additional capital investments. See the consolidated statements of cash flows in the unaudited consolidated financial statements for additional information.
Financing Activities
Net cash used in financing activities was $13.5 million during the three months ended April 2, 2022 compared to $7.5 million used in financing activities during the three months ended April 3, 2021. The additional outflow of cash during the period was due to $3.3 million of payments related to financing component of interest rate swaps and $2.5 million of payments related to tax withholding for share-based compensation.
Debt
Below is a reconciliation of the Company’s net debt (in thousands) as of the dates indicated. Management considers net debt to be more representative of the Company’s financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed.
| April 2, 2022 | December 31, 2021 | ||||||||||
| Asset-based revolving credit facility due April 2026 | $ | — | $ | — | |||||||
| Term loan facility due April 2028 | 2,574,000 | 2,580,500 | |||||||||
| Cash flow revolver due April 2026 | — | — | |||||||||
| 6.125% senior notes due January 2029 | 500,000 | 500,000 | |||||||||
| Total Debt | 3,074,000 | 3,080,500 | |||||||||
| Less: Cash and cash equivalents | 542,035 | 394,447 | |||||||||
| Net Debt | $ | 2,531,965 | $ | 2,686,053 | |||||||
We may not be successful in refinancing, extending the maturity or otherwise amending the terms of our outstanding indebtedness in the future because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness.
For additional information, see Note 14 — Long-Term Debt in the notes to the unaudited consolidated financial statements.
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Additional Liquidity Considerations
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. The following table summarizes key liquidity measures under the Current ABL Credit Agreement and the Current Cash Flow Credit Agreement in effect as of April 2, 2022 and December 31, 2021 (in thousands):
| April 2, 2022 | December 31, 2021 | ||||||||||
| Asset-based revolving credit facility due April 2026 | $ | 611,000 | $ | 611,000 | |||||||
| Eligible borrowing base | 611,000 | 611,000 | |||||||||
| Less: Borrowings | — | — | |||||||||
| Less: LCs outstanding and priority payables | 45,000 | 45,000 | |||||||||
| Net ABL availability | 566,000 | 566,000 | |||||||||
| Plus: Cash flow revolver due April 2026 | 115,000 | 115,000 | |||||||||
| Plus: Cash and cash equivalents | 542,035 | 394,447 | |||||||||
| Total Liquidity | $ | 1,223,035 | $ | 1,075,447 | |||||||
We expect to contribute $0.5 million to the postretirement medical and life insurance plans in the year ending December 31, 2022.
We expect that cash generated from operations and our availability under the ABL Credit Facility and Current Cash Flow Revolver will be sufficient to provide us the ability to fund our operations and to provide the increased working capital necessary to support our strategy and fund planned capital expenditures for fiscal 2022 and expansion when needed.
Consistent with our growth strategy, we evaluate potential acquisitions that would provide additional synergies in our Windows, Siding and Commercial segments. From time to time, we may enter into letters of intent or agreements to acquire assets or companies in these segments. The consummation of these transactions could require substantial cash payments and/or issuance of additional debt.
From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase program. On March 7, 2018, we announced that our Board of Directors authorized a new stock repurchase program for the repurchase of up to an aggregate of $50.0 million of our outstanding Common Stock. Under this repurchase program, we are authorized to repurchase shares at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program. During the three months ended April 2, 2022, there were no stock repurchases under the stock repurchase program. As of April 2, 2022, approximately $49.1 million remained available for stock repurchases under the program. In addition to repurchases of shares of our common stock under our stock repurchase program, we also withhold shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of share-based compensation.
We may from time to time take steps to reduce our debt or otherwise improve our financial position. These actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital. The amount of prepayments or the amount of debt that may be refinanced, repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding on our consolidated balance sheets.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are most important to the portrayal of our financial position and results of operations. These estimates require our most subjective judgments about the effect of matters that are inherently uncertain. Our most critical accounting estimates include those that pertain to accounting for acquisitions, intangible assets and goodwill; warranty; and income taxes, which are described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 — Accounting Pronouncements in the notes to the unaudited consolidated financial statements for information on recent accounting pronouncements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Prices for our raw material inputs are influenced by numerous factors beyond our control, including general economic conditions, domestically and internationally, the availability of raw materials, competition, labor costs, freight and transportation costs, production costs, import duties and other trade restrictions.
Windows and Siding Businesses
We are subject to market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum and glass. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly. We manage the exposure to commodity pricing risk by increasing our selling prices for corresponding material cost increases, continuing to diversify our product mix, strategic buying programs and vendor partnering. The average market price for PVC resin was estimated to have increased approximately 27.2% for the three months ended April 2, 2022 compared to the three months ended April 3, 2021.
Commercial Business
We are subject to market risk exposure related to volatility in the price of steel. For the three months ended April 2, 2022, material costs (predominantly steel costs) constituted approximately 61% of our Commercial segment cost of sales. Our business is heavily dependent on the price and supply of steel. Our various products are fabricated from steel produced by mills to forms including bars, plates, structural shapes, sheets, hot-rolled coils and galvanized or Galvalume® — coated coils (Galvalume® is a registered trademark of BIEC International, Inc.). The steel industry is highly cyclical in nature, and steel prices have been volatile in recent years and may remain volatile in the future.
With material costs (predominantly steel costs) accounting for approximately 61% of our Commercial segment's cost of sales for the three months ended April 2, 2022, a one percent change in the cost of steel could have resulted in a pre-tax impact on cost of sales of approximately $2.4 million for the three months ended April 2, 2022. The impact to our financial results of operations of such an increase would be significantly dependent on the competitive environment and the costs of other alternative building products, which could impact our ability to pass on these higher costs.
Other Commodity Risks
In addition to market risk exposure related to the volatility in the price of our raw materials, we are subject to market risk exposure related to volatility in the price of natural gas. As a result, we occasionally enter into both index-priced and fixed-price contracts for the purchase of natural gas. We have evaluated these contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the criteria for characterization as a derivative instrument may be exempted from hedge accounting treatment as normal purchases and normal sales and, therefore, these forward contracts are not marked to market. At April 2, 2022, all our contracts for the purchase of natural gas met the scope exemption for normal purchases and normal sales.
Interest Rates
We are subject to market risk exposure related to changes in interest rates on our Current Cash Flow Facilities and Current ABL Facility, which provides for borrowings of up to $2,715.0 million on the Current Cash Flow Facilities and up to $611.0 million on the Current ABL Facility. These instruments bear interest at an agreed upon percentage point spread from either LIBOR or an alternative rate. Assuming the Current Cash Flow Revolver is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $6.8 million per year for the Current Cash Flow Facilities. Assuming the Current ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $1.5 million per year. The fair value of our term loan credit facility at April 2, 2022 and December 31, 2021 was approximately $2,490.3 million and $2,570.8 million, respectively, compared to the face value of $2,574.0 million and $2,580.5 million, respectively. In April 2021, we entered into cash flow interest rate swap hedge contracts for a total notional amount of $1.5 billion to mitigate the exposure risk of our floating interest rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate payment. At April 2, 2022, our cash flow hedge swap contracts had a fair value asset of $87.4 million that is recorded in other assets, net, and a fair value liability related to the financing component of the interest rate swaps of $53.2 million of which $40.1 million is recorded as a non-current liability and $13.1 million is recorded in accrued expenses on our consolidated balance sheet.
See Note 14 — Long-Term Debt and Note 15 — Derivatives in the notes to the unaudited consolidated financial statements for information on the material terms of our long-term debt and interest rate swaps.
Foreign Currency Exchange Rates
We are exposed to the effect of exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenue and expenses.
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The functional currency for our Canadian operations is the Canadian dollar. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in accumulated other comprehensive income (loss) in stockholders’ equity. The net foreign currency exchange gain included in net income (loss) for the three months ended April 2, 2022 and April 3, 2021 was $0.9 million and $0.3 million, respectively. Net foreign currency translation adjustment, net of tax, and included in other comprehensive income (loss) for the three months ended April 2, 2022 and April 3, 2021 was $4.8 million and $6.1 million, respectively.
The functional currency for our Mexico operations is the U.S. dollar. Adjustments resulting from the remeasurement of the local currency financial statements into the U.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income (loss) in the current period. Net foreign currency remeasurement gain (loss) for the three months ended April 2, 2022 and April 3, 2021 was $0.5 million and $(0.3) million, respectively.
We have entered into foreign currency forward contracts with a financial institution to hedge primarily inventory purchases in Canada. At April 2, 2022, we have a total notional amount of approximately $38.9 million hedged at fixed USD/CAD rates ranging from 1.2120 to 1.2600 with value dates through December 2022. In the future, we may enter into additional foreign currency hedging contracts, to further mitigate the exposure risk of currency fluctuation against the Canadian dollar and/or the Mexican peso. See Note 15 — Derivatives in the notes to the unaudited consolidated financial statements for information on our currency hedges.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of April 2, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management believes that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and based on the evaluation of our disclosure controls and procedures as of April 2, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at such reasonable assurance level.
Internal Control over Financial Reporting
We are currently in the process of assessing the internal controls of Union Corrugating Company Holdings, Inc. (“UCC”), Cascade Windows Inc. (“Cascade Windows”) and Prime Windows LLC (“Prime Windows”) as part of the post-close acquisition integration process. UCC, Cascade Windows and Prime Windows have been excluded from our assessment of internal control over financial reporting as of April 2, 2022. The total assets and revenues excluded from management’s assessment represent 11.8% and 6.7%, respectively, of the consolidated financial statements as of and for the three months ended April 2, 2022.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended April 2, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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CORNERSTONE BUILDING BRANDS, INC.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Three complaints have been filed by purported stockholders of the Company relating to the CD&R Merger. The actions are captioned Stein v. Cornerstone Building Brands, Inc., et al., Case No. 1:22-cv-02981 (Apr. 11, 2022), filed in the United States District Court for the Southern District of New York, Hopkins v. Cornerstone Building Brands, Inc., et al., Case No. 1:22-cv-02258 (Apr. 20, 2022), filed in the United States District Court for the Eastern District of New York, and Whitfield v. Cornerstone Building Brands, Inc., et al., Case No. 2:22-cv-01547 (Apr. 20, 2022), filed in the United States District Court for the Eastern District of Pennsylvania. The complaints name the Company and the members of the Company’s board of directors as defendants and allege that the preliminary proxy statement filed with the SEC on April 7, 2022 contains alleged material misstatements and omissions in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 of the Exchange Act. The complaints seek, among other relief, an injunction preventing the closing of the CD&R Merger unless and until the information sought is disclosed, rescission of the merger agreement to the extent already implemented or recissory damages and attorneys’ and experts’ fees. The Company believes the claims asserted in the complaints are without merit.
Additional lawsuits may be filed against the Company, members of the Company’s board of directors or the Company’s officers in connection with the CD&R Merger, which could prevent or delay completion of the CD&R Merger and result in substantial costs to the Company, including any costs associated with indemnification.
See also Part I, Item 1, “Unaudited Consolidated Financial Statements”, Note 21 — Contingencies, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The risks disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and information provided elsewhere in this report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known or we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations. Except for such additional information and the risk factors set forth below, we believe there have been no other material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The consummation of the CD&R Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the CD&R Merger Agreement may be terminated and the CD&R Merger may not be completed.
The CD&R Merger is subject to certain customary closing conditions, including: (i) the approval by holders of a majority of all outstanding Shares (including those held by CD&R and its affiliates) and the approval by holders of a majority of the outstanding Shares held by the Unaffiliated Stockholders (together, the “Requisite Stockholder Approvals”); (ii) the absence of an injunction or law restraining, enjoining, rendering illegal or otherwise prohibiting consummation of the CD&R Merger; (iii) subject to customary materiality qualifiers, the accuracy of the representations and warranties contained in the CD&R Merger Agreement, including the representation that the Company has not suffered a “Material Adverse Effect” (as defined in the CD&R Merger Agreement) since January 1, 2022; and (iv) material performance by the other party of its covenants under the CD&R Merger Agreement. The failure to satisfy all of the required conditions could delay the completion of the CD&R Merger by a significant period of time or prevent it from occurring. Any delay in completing the CD&R Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the CD&R Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the CD&R Merger will be satisfied or waived or that the CD&R Merger will be completed within the expected timeframe or at all.
Failure to complete the CD&R Merger could adversely affect the stock price and future business and financial results of the Company.
There can be no assurance that the conditions to the closing of the CD&R Merger will be satisfied or waived or that the CD&R Merger will be completed. If the CD&R Merger is not completed within the expected timeframe or at all, the ongoing business of the Company could be adversely affected and the Company will be subject to a variety of risks and possible consequences associated with the failure to complete the Merger, including the following: (i) upon termination of the CD&R Merger Agreement under specified circumstances, the Company is required to pay Parent a termination fee of $105,000,000; (ii) the Company will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing
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fees, regardless of whether the CD&R Merger closes; (iii) under the CD&R Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the closing of the CD&R Merger, which may adversely affect its ability to execute certain of its business strategies; (iv) the Company may lose key employees during the period in which the Company and CD&R are pursuing the CD&R Merger, which may adversely affect the Company in the future if it is not able to hire and retain qualified personnel to replace departing employees; and (v) the proposed CD&R Merger, whether or not it closes, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company as an independent company.
If the CD&R Merger is not completed, these risks could materially affect the business and financial results of the Company and its stock price, including to the extent that the current market price of the Company’s common stock is positively affected by a market assumption that the CD&R Merger will be completed.
While the CD&R Merger is pending, the Company will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of the Company.
In connection with the pending CD&R Merger, some customers, vendors or other third parties of the Company may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with the Company, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of the Company, regardless of whether the CD&R Merger is completed. In addition, due to certain restrictions in the CD&R Merger Agreement on the conduct of business prior to completing the CD&R Merger, the Company may be unable (without the other party’s prior written consent), during the pendency of the CD&R Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause the Company to forego certain opportunities it might otherwise pursue. In addition, the pendency of the CD&R Merger may make it more difficult for the Company to effectively retain and incentivize key personnel and may cause distractions from the Company’s strategy and day-to-day operations for its current employees and management.
The Company will incur substantial transaction fees and CD&R Merger-related costs in connection with the CD&R Merger that could adversely affect the business and operations of the Company if the CD&R Merger is not completed.
The Company expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial CD&R Merger-related costs associated with completing the CD&R Merger, and which could adversely affect the business operations of the Company if the CD&R Merger is not completed.
The termination fee and restrictions on solicitation contained in the CD&R Merger Agreement may discourage other companies from trying to acquire the Company.
The CD&R Merger Agreement prohibits the Company from initiating, soliciting, proposing or knowingly encouraging or knowingly facilitating any competing acquisition proposals, subject to certain limited exceptions. The CD&R Merger Agreement also contains certain termination rights, including, but not limited to, the right of the Company to terminate the CD&R Merger Agreement to accept a Superior Proposal (as defined in the CD&R Merger Agreement), subject to and in accordance with the terms and conditions of the CD&R Merger Agreement, and provides that, upon termination of the CD&R Merger Agreement by the Company to enter into an alternative acquisition agreement with respect to a Superior Proposal, the Company will be required to pay Parent a termination fee of $105,000,000 in cash. Upon termination of the CD&R Merger Agreement by the Company or Parent under specified conditions, Parent will be required to pay the Company a termination fee of $210,000,000 in cash. The termination fees and restrictions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company’s stockholders than CD&R has offered in the CD&R Merger.
Litigation against the Company, CD&R, or the members of their respective boards, could prevent or delay the completion of the CD&R Merger or result in the payment of damages following completion of the CD&R Merger.
It is a condition to the CD&R Merger that no injunction or other order preventing the consummation of the CD&R Merger shall have been issued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. As of the date of this Quarterly Report on Form 10-Q, a lawsuit has been filed by purported stockholders of the Company challenging the CD&R Merger or the other transactions contemplated by the CD&R Merger Agreement, which have named the Company and/or members of the the Company’s board of directors as defendants. It is possible that additional lawsuits may be filed by the Company’s stockholders challenging the CD&R Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the CD&R Merger on the agreed-upon terms, such an injunction may delay the consummation of the CD&R Merger in the expected timeframe, or may prevent the CD&R Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and
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resources from the closing of the CD&R Merger and ongoing business activities, which could adversely affect the operations of the Company.
Uncertainty about the CD&R Merger may adversely affect the relationships between the Company and its customers, vendors and employees, whether or not the CD&R Merger is completed.
In response to the announcement of the CD&R Merger, existing or prospective customers, vendors and other third party relationships of the Company may delay, defer or cease providing goods or services, delay or defer other decisions concerning the Company, refuse to extend credit to the Company, or otherwise seek to change the terms on which they do business with the Company. Any such delays or changes to terms could materially harm the Company’s business.
In addition, as a result of the CD&R Merger, current and prospective employees could experience uncertainty about their future with the Company. These uncertainties may impair the Company’s ability to retain, recruit or motivate key management and technical, manufacturing, and other personnel.
If the CD&R Merger is not consummated by September 5, 2022, or, under certain conditions, December 13, 2022, either the Company or Parent may terminate the CD&R Merger Agreement, subject to certain exceptions.
Either the Company or Parent may terminate the CD&R Merger Agreement if the Merger has not been consummated by September 5, 2022, or if all conditions to closing other than those relating to antitrust approvals and those that by their nature are to be satisfied at the closing have been satisfied, then December 13, 2022. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the CD&R Merger Agreement and that failure was the principal cause of, or directly resulted in, the failure to consummate the CD&R Merger on time. In the event the CD&R Merger Agreement is terminated by either party due to the failure of the CD&R Merger to close by September 5, 2022 (or December 13, 2022, as applicable), the Company will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the CD&R Merger.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table shows our purchases of our Common Stock during the three months ended April 2, 2022:
(1)The total number of shares includes shares of restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards. The required withholding is calculated using the closing sales price on the previous business day prior to the vesting date as reported by the NYSE.
(2)On March 7, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to an aggregate of $50.0 million of the Company’s Common Stock. Under this repurchase program, the Company is authorized to repurchase shares at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program. At April 2, 2022, approximately $49.1 million remained available for stock repurchases under the program.
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Item 6. Exhibits.
Index to Exhibits
| Exhibit No. | Description | |||||||
| 2.1 | ||||||||
| *10.1 | ||||||||
| *†10.2 | ||||||||
| *31.1 | ||||||||
| *31.2 | ||||||||
| **32.1 | ||||||||
| **32.2 | ||||||||
| *101.INS | Inline XBRL Instance Document | |||||||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| *101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
| *101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
| * | Filed herewith | |||||||
| ** | Furnished herewith | |||||||
| † | Management contracts or compensatory plans or arrangements | |||||||
| + | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CORNERSTONE BUILDING BRANDS, INC. | ||||||||
| Date: May 3, 2022 | By: | /s/ Rose Lee | ||||||
| Rose Lee | ||||||||
| President and Chief Executive Officer | ||||||||
| Date: May 3, 2022 | By: | /s/ Jeffrey S. Lee | ||||||
| Jeffrey S. Lee | ||||||||
| Executive Vice President, Chief Financial Officer and Chief Accounting Officer | ||||||||
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