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: September 30, 2023
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)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
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 ¨ No ý
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
APPLICABLE ONLY TO CORPORATE ISSUERS
There are no longer publicly traded shares of common stock of Cornerstone Building Brands, Inc.
TABLE OF CONTENTS
i
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
| Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||
| Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,424,758 | $ | 1,274,883 | $ | 365,445 | $ | 4,132,064 | $ | 1,274,883 | $ | 3,736,084 | |||||||||||||||||||||||||||||
| Cost of sales | 1,091,691 | 1,041,260 | 292,047 | 3,219,299 | 1,041,260 | 2,929,699 | |||||||||||||||||||||||||||||||||||
| Gross profit | 333,067 | 233,623 | 73,398 | 912,765 | 233,623 | 806,385 | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 228,621 | 184,826 | 86,063 | 703,428 | 184,826 | 562,836 | |||||||||||||||||||||||||||||||||||
| Loss (gain) on divestitures | 10,080 | 1,762 | — | 10,080 | 1,762 | (401,413) | |||||||||||||||||||||||||||||||||||
| Gain on legal settlements | — | — | — | — | — | (76,575) | |||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 94,366 | 47,035 | (12,665) | 199,257 | 47,035 | 721,537 | |||||||||||||||||||||||||||||||||||
| Interest expense | (91,013) | (65,813) | (11,401) | (277,438) | (65,813) | (101,078) | |||||||||||||||||||||||||||||||||||
| Foreign exchange (loss) gain | (3,753) | 12,489 | (454) | 2,694 | 12,489 | 686 | |||||||||||||||||||||||||||||||||||
| Gain (loss) on extinguishment of debt | — | — | 24,801 | (184) | — | 28,354 | |||||||||||||||||||||||||||||||||||
| Other income, net | 4,027 | 172 | 114 | 8,832 | 172 | 101 | |||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 3,627 | (6,117) | 395 | (66,839) | (6,117) | 649,600 | |||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) | 890 | (1,672) | (1,049) | (18,435) | (1,672) | 165,814 | |||||||||||||||||||||||||||||||||||
| Net income (loss) | 2,737 | (4,445) | 1,444 | (48,404) | (4,445) | 483,786 | |||||||||||||||||||||||||||||||||||
| Net loss allocated to participating securities | — | — | (11) | — | — | (3,575) | |||||||||||||||||||||||||||||||||||
| Net income (loss) applicable to common shares | $ | 2,737 | $ | (4,445) | $ | 1,433 | $ | (48,404) | $ | (4,445) | $ | 480,211 | |||||||||||||||||||||||||||||
| Income per common share: | |||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 0.01 | $ | 3.77 | |||||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.01 | $ | 3.73 | |||||||||||||||||||||||||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||||||||||||||||||||||||||
| Basic | 127,544 | 127,316 | |||||||||||||||||||||||||||||||||||||||
| Diluted | 129,127 | 128,894 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
1
CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
| Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||
| Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||||||||||||||||||||
Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 2,737 | $ | (4,445) | $ | 1,444 | $ | (48,404) | $ | (4,445) | $ | 483,786 | |||||||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (6,059) | (29,743) | 115 | (6,539) | (29,743) | (1,367) | |||||||||||||||||||||||||||||||||||
Unrealized (loss) gain on derivative instruments, net of income tax of $114, $(14,890), $(472), $(1,105), $(14,890) and $(16,432) | (373) | 40,988 | (778) | 3,589 | 40,988 | 62,462 | |||||||||||||||||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive (loss) income into earnings relating to derivative instruments | — | — | 1,682 | — | — | 16,258 | |||||||||||||||||||||||||||||||||||
| Changes in retirement related benefit plans | — | — | — | — | — | (1,122) | |||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income | (6,432) | 11,245 | 1,019 | (2,950) | 11,245 | 76,231 | |||||||||||||||||||||||||||||||||||
Comprehensive (loss) income | $ | (3,695) | $ | 6,800 | $ | 2,463 | $ | (51,354) | $ | 6,800 | $ | 560,017 | |||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
2
CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| Successor | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 475,820 | $ | 553,551 | |||||||
| Accounts receivable, net | 730,079 | 665,936 | |||||||||
| Inventories | 512,417 | 551,828 | |||||||||
| Other current assets | 75,553 | 125,306 | |||||||||
| Total current assets | 1,793,869 | 1,896,621 | |||||||||
| Property, plant and equipment, net | 848,991 | 618,064 | |||||||||
| Lease right-of-use assets | 344,410 | 365,552 | |||||||||
| Goodwill | 1,620,185 | 1,688,548 | |||||||||
| Intangible assets, net | 2,258,760 | 2,519,023 | |||||||||
| Other assets, net | 107,356 | 105,842 | |||||||||
| Total assets | $ | 6,973,571 | $ | 7,193,650 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 29,000 | $ | 29,000 | |||||||
| Current portion of lease liabilities | 61,489 | 61,899 | |||||||||
| Accounts payable | 270,307 | 288,938 | |||||||||
| Accrued income and other taxes | 38,777 | 21,867 | |||||||||
| Employee-related liabilities | 119,234 | 184,187 | |||||||||
| Rebates, warranties and other customer-related liabilities | 168,206 | 157,752 | |||||||||
| Other current liabilities | 117,595 | 149,596 | |||||||||
| Total current liabilities | 804,608 | 893,239 | |||||||||
| Long-term debt | 3,369,464 | 3,366,588 | |||||||||
| Long-term lease liabilities | 266,162 | 302,339 | |||||||||
| Deferred income tax liabilities | 606,512 | 653,745 | |||||||||
| Other long-term liabilities | 242,570 | 248,794 | |||||||||
| Total liabilities | $ | 5,289,316 | $ | 5,464,705 | |||||||
Commitments and contingencies (Note 12) | |||||||||||
| Equity: | |||||||||||
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at September 30, 2023 and December 31, 2022 | $ | — | $ | — | |||||||
| Additional paid-in capital | 1,764,596 | 1,757,932 | |||||||||
| Accumulated deficit | (111,900) | (63,496) | |||||||||
| Accumulated other comprehensive income | 31,559 | 34,509 | |||||||||
| Total equity | 1,684,255 | 1,728,945 | |||||||||
| Total liabilities and equity | $ | 6,973,571 | $ | 7,193,650 | |||||||
See accompanying notes to the condensed consolidated financial statements.
3
| CORNERSTONE BUILDING BRANDS, INC. | |||||||||||||||||||||||||||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2023 (Successor) | 1,000 | $ | — | $ | 1,762,739 | $ | (114,637) | $ | 37,991 | — | $ | — | $ | 1,686,093 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (6,432) | — | — | (6,432) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 1,857 | — | — | — | — | 1,857 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 2,737 | — | — | — | 2,737 | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 (Successor) | 1,000 | $ | — | $ | 1,764,596 | $ | (111,900) | $ | 31,559 | — | $ | — | $ | 1,684,255 | |||||||||||||||||||||||||||||||||
| Balance, July 2, 2022 (Predecessor) | 127,544,041 | $ | 1,275 | $ | 1,292,458 | $ | 383,516 | $ | 69,600 | — | $ | — | $ | 1,746,849 | |||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 1,019 | — | — | 1,019 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 937 | — | — | — | — | 937 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,444 | — | — | — | 1,444 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 24, 2022 (Predecessor) | 127,544,041 | $ | 1,275 | $ | 1,293,395 | $ | 384,960 | $ | 70,619 | — | $ | — | $ | 1,750,249 | |||||||||||||||||||||||||||||||||
| Pushdown fair value adjustments | — | $ | — | $ | 1,978,011 | $ | (384,960) | $ | (70,619) | — | $ | — | $ | 1,522,432 | |||||||||||||||||||||||||||||||||
| Payments to public shareholders | (65,413,135) | (654) | (1,611,780) | — | — | — | — | (1,612,434) | |||||||||||||||||||||||||||||||||||||||
| Recapitalization of outstanding common shares | (62,129,906) | (621) | 621 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Contributions from parent, net | — | — | 95,194 | — | — | — | — | 95,194 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 25, 2022 (Successor) | 1,000 | — | 1,755,441 | — | — | — | — | 1,755,441 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 11,245 | — | — | 11,245 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (4,445) | — | — | — | (4,445) | |||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2022 (Successor) | 1,000 | $ | — | $ | 1,755,441 | $ | (4,445) | $ | 11,245 | — | $ | — | $ | 1,762,241 | |||||||||||||||||||||||||||||||||
4
| CORNERSTONE BUILDING BRANDS, INC. | |||||||||||||||||||||||||||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued) | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 (Successor) | 1,000 | $ | — | $ | 1,757,932 | $ | (63,496) | $ | 34,509 | — | $ | — | $ | 1,728,945 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (2,950) | — | — | (2,950) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 6,834 | — | — | — | — | 6,834 | ||||||||||||||||||||||||||||||||||||||||
| Other | — | — | (170) | — | — | — | — | (170) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (48,404) | — | — | — | (48,404) | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 (Successor) | 1,000 | $ | — | $ | 1,764,596 | $ | (111,900) | $ | 31,559 | — | $ | — | $ | 1,684,255 | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 (Predecessor) | 126,992,107 | $ | 1,270 | $ | 1,279,931 | $ | (98,826) | $ | (5,612) | (21,071) | $ | (424) | $ | 1,176,339 | |||||||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | (192,773) | (4,627) | (4,627) | |||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | (192,773) | (2) | (4,625) | — | — | 192,773 | 4,627 | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | 611,178 | 6 | (6) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock options exercised | 133,529 | 1 | 1,420 | — | — | — | — | 1,421 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 76,231 | — | — | 76,231 | |||||||||||||||||||||||||||||||||||||||
| Deferred compensation obligation | — | — | (424) | — | — | 21,071 | 424 | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 17,099 | — | — | — | — | 17,099 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 483,786 | — | — | — | 483,786 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 24, 2022 (Predecessor) | 127,544,041 | $ | 1,275 | $ | 1,293,395 | $ | 384,960 | $ | 70,619 | — | $ | — | $ | 1,750,249 | |||||||||||||||||||||||||||||||||
| Pushdown fair value adjustments | — | $ | — | $ | 1,978,011 | $ | (384,960) | $ | (70,619) | — | $ | — | $ | 1,522,432 | |||||||||||||||||||||||||||||||||
| Payments to public shareholders | (65,413,135) | (654) | (1,611,780) | — | — | — | — | (1,612,434) | |||||||||||||||||||||||||||||||||||||||
| Recapitalization of outstanding common shares | (62,129,906) | (621) | 621 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Contributions from parent, net | — | — | 95,194 | — | — | — | — | 95,194 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 25, 2022 (Successor) | 1,000 | — | 1,755,441 | — | — | — | — | 1,755,441 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 11,245 | — | — | 11,245 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (4,445) | — | — | — | (4,445) | |||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2022 (Successor) | 1,000 | $ | — | $ | 1,755,441 | $ | (4,445) | $ | 11,245 | — | $ | — | $ | 1,762,241 | |||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
| CORNERSTONE BUILDING BRANDS, INC. | ||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Successor | Predecessor | |||||||||||||||||||
| Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net (loss) income | $ | (48,404) | $ | (4,445) | $ | 483,786 | ||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 331,077 | 56,260 | 166,177 | |||||||||||||||||
| Amortization of debt issuance costs, debt discount and fair values | 68,192 | 17,443 | 19,952 | |||||||||||||||||
| Share-based compensation expense | 6,834 | 8,838 | 17,099 | |||||||||||||||||
| Gain on extinguishment of debt | 184 | — | (28,354) | |||||||||||||||||
| Unrealized gain on foreign currency exchange rates | (2,200) | — | — | |||||||||||||||||
| Asset impairments | — | — | 368 | |||||||||||||||||
| Loss (gain) on divestiture | 10,080 | 1,762 | (401,413) | |||||||||||||||||
| Loss (gain) on sale of assets | 260 | — | (2,670) | |||||||||||||||||
| Amortization of inventory and other fair value step-ups | — | 30,317 | 1,238 | |||||||||||||||||
| Provision for credit losses | 5,249 | 1,111 | 3,811 | |||||||||||||||||
| Deferred income taxes | (90,903) | (34,609) | (26,688) | |||||||||||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | ||||||||||||||||||||
| Accounts receivable | (62,914) | 921 | (101,937) | |||||||||||||||||
| Inventories | 46,758 | 55,457 | (12,956) | |||||||||||||||||
| Income taxes | 22,100 | (15,775) | 14,116 | |||||||||||||||||
| Prepaid expenses and other | 14,052 | (6,199) | 31,367 | |||||||||||||||||
| Accounts payable | (21,146) | 12,636 | 64,044 | |||||||||||||||||
| Accrued expenses | (84,882) | (112,026) | 121,871 | |||||||||||||||||
| Other, net | (13,178) | (43,482) | 854 | |||||||||||||||||
| Net cash provided by (used in) operating activities | 181,159 | (31,791) | 350,665 | |||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Acquisitions, net of cash acquired | (67,834) | — | 4,252 | |||||||||||||||||
| Capital expenditures | (125,700) | (24,402) | (64,848) | |||||||||||||||||
| (Payments) proceeds from divestitures, net of cash divested | (10,080) | — | 510,883 | |||||||||||||||||
| Proceeds from sale of property, plant and equipment | — | — | 6,070 | |||||||||||||||||
| Net cash (used in) provided by investing activities | (203,614) | (24,402) | 456,357 | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Contributions from Parent, net | — | 95,194 | — | |||||||||||||||||
| Payments to public stockholders | — | (1,612,434) | — | |||||||||||||||||
| Proceeds from term loans | — | 300,000 | — | |||||||||||||||||
| Payments on term loans | (21,750) | (6,500) | (13,000) | |||||||||||||||||
| Proceeds from senior notes | — | 710,000 | — | |||||||||||||||||
| Repurchases of senior notes | (33,885) | — | (70,560) | |||||||||||||||||
| Payments of financing costs | — | (84,686) | — | |||||||||||||||||
| Payments on derivative financing obligations | — | — | (7,321) | |||||||||||||||||
| Other | — | — | (3,206) | |||||||||||||||||
| Net cash used in financing activities | (55,635) | (598,426) | (94,087) | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (104) | 240 | (5) | |||||||||||||||||
| Net decrease in cash and cash equivalents | (78,194) | (654,379) | 712,930 | |||||||||||||||||
| Cash and cash equivalents at beginning of period | 554,014 | 1,109,588 | 396,658 | |||||||||||||||||
| Cash and cash equivalents cash at end of period | $ | 475,820 | $ | 455,209 | $ | 1,109,588 | ||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
6
CORNERSTONE BUILDING BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 1 — Basis of Presentation
Description of Business
Cornerstone Building Brands, Inc. (“Cornerstone Building Brands” or, collectively with its subsidiaries, unless the context requires otherwise, the “Company”) is a holding company incorporated in Delaware. The Company is the largest exterior building products manufacturer by sales in North America and serves residential and commercial customers across new construction and the repair and remodel end markets. The Company is organized in three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions.
Organization and Ownership Structure
On July 25, 2022 and pursuant to an Agreement and Plan of Merger dated March 5, 2022 (the “Merger Agreement”) by and among the Company, Camelot Return Intermediate Holdings, LLC (“Camelot Parent”) and Camelot Return Merger Sub, Inc. (“Merger Sub”), investment funds managed by Clayton, Dubilier and Rice, LLC (“CD&R”) became the indirect owners of all the issued and outstanding shares of common stock of Cornerstone Building Brands. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “Merger”), with the Company surviving the Merger as a subsidiary of Camelot Parent (the “Surviving Corporation”). At the effective time of the Merger (the “Effective Time”), the Company became a privately held company and its shares were no longer traded on the New York Stock Exchange.
At the Effective Time, in accordance with the terms and conditions set forth in the Merger Agreement, each share of Company common stock outstanding immediately prior to the Effective Time of the Merger (other than (i) shares of Company common stock that were cancelled or converted into shares of common stock of the Surviving Corporation in accordance with the Merger Agreement and (ii) shares of Company common stock held by stockholders of the Company (other than CD&R, certain investment funds managed by CD&R and other affiliates of CD&R that held shares of Company common stock) who did not vote in favor of the Merger Agreement or the Merger and who have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware), was converted into the right to receive cash in an amount equal to $24.65 in cash per share, without interest and subject to any required withholding taxes.
On July 25, 2022, the Company amended its Certificate of Incorporation to authorize 1,000 shares of common stock, par value of $0.01. Each share of common stock will have one vote and all shares of common stock vote together as a single class.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements have been prepared with the Company's accounting policies and on the same basis as those financial statements included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2022 and should be read in conjunction with those Consolidated Financial Statements and the Notes thereto. Certain disclosures normally included in the Company’s Consolidated Financial Statements prepared in accordance with U.S. GAAP have been omitted on a basis consistent with the rules and regulations of the SEC.
The accompanying Condensed Consolidated Financial Statements include the accounts and operations of the Company and its majority-owned subsidiaries and all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. All significant intercompany accounts and transactions have been eliminated in consolidation. Through application of pushdown accounting, the Company’s Condensed Consolidated Financial Statements are presented as Predecessor for periods prior to the Merger and Successor for subsequent periods. The Company has reclassified certain prior year amounts to conform to the current year’s presentation. The results reported in these Condensed Consolidated Financial Statements should not be regarded as necessarily indicative of results that may be expected for the entire year.
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Note 2 — Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Condensed Consolidated Financial Statements and accompanying notes. These estimates include, but are not limited to: establishing the allowance for expected credit losses; allowance for obsolete inventory; the impairment of goodwill and intangible assets; establishing useful lives for and evaluating the recovery of long-lived assets; recognizing the fair value of assets acquired and liabilities assumed in business combinations; accounting for rebates and product warranties; the valuation and expensing for share-based compensation; certain assumptions made in accounting for pension benefits; accounting for contingencies and uncertainties and accounting for income taxes. Actual results may differ from the estimates used in preparing the Condensed Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents mainly consist of highly liquid, unrestricted savings, checking, money market funds with maturities of less than three months and other bank accounts.
The following table sets forth the components of cash and cash equivalents:
| Successor | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Cash | $ | 215,693 | $ | 553,551 | |||||||
| Money market funds (Level 1 securities) | 260,127 | — | |||||||||
| Total cash and cash equivalents | $ | 475,820 | $ | 553,551 | |||||||
Accounts Receivable, Net
The Company reports accounts receivable net of an allowance for expected credit losses. The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to the Company by its customers. In establishing the allowance, 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 its customers. The Company’s allowance for expected credit losses was $6.5 million and $2.1 million at September 30, 2023 and December 31, 2022.
Fair Value Measurements
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value as of September 30, 2023 and December 31, 2022 given the instruments’ relatively short maturities. The carrying amounts of the indebtedness under revolving credit facilities approximate fair value as the interest rates are variable and reflective of market rates. Fair values for our other debt instruments are measured using Level 1 and Level 2 inputs. U.S. GAAP 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.
8
Note 3 — Mergers and Acquisitions
CD&R Merger Transaction
On July 25, 2022, Merger Sub merged with and into the Company, with the Company surviving the Merger as a subsidiary of Camelot Parent. CD&R previously held 61.9 million shares of Company common stock immediately prior to the Merger. As a result of the Merger, CD&R became the indirect owners of all the issued and outstanding shares of Company common stock that CD&R did not already own.
The Merger was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market value at the date of the Merger.
The Merger was funded in part with proceeds from the following issuances:
•$300.0 million aggregate principal amount term loan facility, due August 2028;
•$710.0 million of 8.750% Senior Secured Notes due August 2028;
•$564.4 million of cash from the Company;
•$464.4 million aggregate principal amount of 2.99% senior payment-in-kind notes due 2029 (“2.99% Senior Notes”) that were issued by Camelot Return Parent, LLC (“Camelot Return Parent”), an indirect parent of the Company, and are held by Arawak X, L.P., an affiliate of CD&R; and
•$195.0 million from preferred shares of Camelot Return Parent.
Neither the Company nor any of its subsidiaries is a guarantor of or is obligated to make any payments related to the 2.99% Senior Notes issued by Camelot Return Parent.
The calculation of the total consideration paid is as follows:
| Consideration | |||||
| Common shares purchased | 65,613,349 | ||||
| Common share closing price | $ | 24.65 | |||
| Merger consideration, common shares purchased | $ | 1,617,369 | |||
Effective settlement of pre-existing relationships (1) | 128,721 | ||||
| Total merger consideration | 1,746,090 | ||||
Fair value of common shares previously held by CD&R and other adjustments (2) | 1,526,591 | ||||
| Total equity value | $ | 3,272,681 | |||
(1) Consists mainly of employee share-based compensation awards that were outstanding at that time the Merger was consummated.
(2) Consists of 61.9 million common shares, held by CD&R prior to the Merger which were rolled over or acquired by Camelot Parent.
9
The following table summarizes the fair value of net assets acquired:
| Fair Value | |||||
| Merger consideration | $ | 1,746,090 | |||
| Fair value of common shares previously held by CD&R and other adjustments | 1,526,591 | ||||
| Total equity value | $ | 3,272,681 | |||
| Cash and cash equivalent | $ | 1,087,586 | |||
| Accounts receivable | 793,858 | ||||
| Inventories | 767,460 | ||||
| Property, plant and equipment | 873,167 | ||||
| Lease right-of-use assets | 275,050 | ||||
| Goodwill | 1,599,327 | ||||
| Intangible assets | 2,436,000 | ||||
| Other assets | 119,920 | ||||
| Total assets acquired | 7,952,368 | ||||
| Accounts payable | 329,896 | ||||
| Accrued liabilities | 634,915 | ||||
| Long-term debt | 2,467,210 | ||||
| Long-term lease liabilities | 252,262 | ||||
| Deferred income tax liabilities | 706,768 | ||||
| Other liabilities | 288,636 | ||||
| Total liabilities assumed | 4,679,687 | ||||
| Net assets acquired | $ | 3,272,681 | |||
During the three months ended July 1, 2023, the Company made measurement period adjustments, which were mainly composed of a $291.5 million increase to property, plant and equipment and a $174.7 million decrease to intangible assets. The effect of measurement period adjustments on the estimated fair value elements were reflected as if the adjustments had been made as of the date of the Merger, including a $66.5 million cumulative catch-up to depreciation and amortization expense recorded during the three months ended July 1, 2023 resulting from the update in the fair market value of property, plant and equipment and intangible assets. The table below presents the Consolidated Statements of (Loss) Income line items impacted by the aforementioned adjustments for previously reported periods.
| Increase / (Decrease) due to Depreciation and Amortization | |||||||||||||||||
Consolidated Statements of (Loss) Income Line Item | July 25, 2022 through December 31, 2022 | Three Months Ended April 1, 2023 | Cumulative Catch-Up Recorded During Three Months Ended July 1, 2023 | ||||||||||||||
| Cost of sales | $ | 38,852 | $ | 26,303 | $ | 65,155 | |||||||||||
| Gross profit | $ | (38,852) | $ | (26,303) | $ | (65,155) | |||||||||||
| Selling, general and administrative expenses | $ | (1,632) | $ | 2,963 | $ | 1,331 | |||||||||||
Income (loss) from operations | $ | (37,220) | $ | (29,266) | $ | (66,486) | |||||||||||
As part of pushdown accounting, the Company recorded goodwill to the reporting units expected to benefit from the business combination. The goodwill is mainly attributable to costs savings in manufacturing productivity; freight and logistics; procurement; and other operating costs, as well as operational improvements in recent acquisitions to be achieved subsequent to the Merger. The goodwill recorded is not deductible for income tax purposes. The following table sets forth the allocation of goodwill by the Company’s reportable segments as of the date of the Merger:
| Aperture Solutions | Surface Solutions | Shelter Solutions | Total Goodwill | |||||||||||||||||
| $ | 714,394 | $ | 681,822 | $ | 203,111 | $ | 1,599,327 | |||||||||||||
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The Company identified intangible assets for customer lists and relationships and trademarks, trade names and other. Intangible assets are amortized on a straight-line basis over their expected useful lives. The fair value and weighted average estimated useful life of identifiable intangible assets consists of the following:
| Fair Value | Weighted Average Useful Life (in years) | ||||||||||
| Customer lists and relationships | $ | 1,816,000 | 17 | ||||||||
| Trademarks, trade names and other | 620,000 | 15 | |||||||||
| Total | $ | 2,436,000 | |||||||||
The Company incurred transaction costs of $29.4 million associated with the Merger, of which $0.7 million was recognized in the period from July 25, 2022 through December 31, 2022 and $28.7 million was recognized in the period from January 1, 2022 through July 24, 2022. These costs are included in selling, general and administrative expenses on the Condensed Consolidated Statements of (Loss) Income.
Unaudited Pro Forma Financial Information
Had the Merger occurred at the beginning of 2022, unaudited pro forma revenues and net income for the three and nine months ended September 30, 2023 and October 1, 2022 would not have been materially different than the amounts reported as the pro forma adjustments would primarily reflect the amortization of intangibles and depreciation of property, plant and equipment that received a step up in basis and the cost to finance the transaction, net of the related tax effects. The unaudited supplemental pro forma financial information would not give effect to the potential impact of current financial conditions, operating efficiencies or cost savings that may result from the Merger or any integration costs. Unaudited pro forma balances would not necessarily be indicative of operating results had the Merger occurred on January 1, 2022 or of future results.
Acquisition of M.A.C. Métal Architectural Inc.
On August 17, 2023, the Company completed the acquisition of M.A.C. Métal Architectural Inc. (“MAC Metal”), which became an indirect wholly-owned subsidiary of the Company. Headquartered in Saint-Hubert, Quebec, MAC Metal serves the North American residential and commercial markets with high-end steel siding and roofing products. MAC Metal will be included in the Company’s Surface Solutions reportable segment. The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification, 805, Business Combinations (Topic 805).
The provisional purchase price was $87.1 million (CAD$118.5 million), comprised of an upfront cash payment of $70.3 million (CAD$95.6 million) and earn-out contingent consideration of $16.8 million (CAD$22.9 million). The transaction is subject to a final working capital adjustment. The earn-out is payable over two consecutive twelve-month periods, starting in the month following the close of the acquisition and payments are based upon achieving certain adjusted EBITDA-based metrics, as defined in the purchase agreement. The purchase price was provisionally allocated to the assets acquired and liabilities assumed, which related primarily to inventory of $8.6 million, property, plant and equipment of $18.8 million, goodwill of $25.2 million, intangible assets such as, customer lists and trademarks, of $27.0 and $14.4 million, contingent consideration of $16.8 million and noncurrent deferred income tax liabilities of $14.2 million. The estimated fair-value of the contingent consideration is recognized in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet.
Note 4 — Inventories
The following table sets forth the components of inventories:
| Successor | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | 306,174 | $ | 312,380 | |||||||
| Work in process | 54,704 | 67,424 | |||||||||
| Finished goods | 151,539 | 172,024 | |||||||||
| Total inventories | $ | 512,417 | $ | 551,828 | |||||||
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Note 5 — Goodwill and Intangible Assets
Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment:
| Aperture Solutions | Surface Solutions | Shelter Solutions | Total | ||||||||||||||||||||
| Balance, December 31, 2022 (Successor) | $ | 624,009 | $ | 790,452 | $ | 274,087 | $ | 1,688,548 | |||||||||||||||
| Go private measurement period adjustments | 87,498 | (110,791) | (70,976) | (94,269) | |||||||||||||||||||
| Acquisition related measurement period adjustments ¹ | — | 25,234 | — | 25,234 | |||||||||||||||||||
| Currency translation | 717 | (45) | — | 672 | |||||||||||||||||||
| Balance, September 30, 2023 (Successor) | $ | 712,224 | $ | 704,850 | $ | 203,111 | $ | 1,620,185 | |||||||||||||||
(1) Measurement period adjustments have been recorded in conjunction with the acquisition of MAC Metal during the period. See Note 3 — Mergers and Acquisitions for additional information.
Intangible Assets, Net
The following table sets forth the major components of intangible assets:
| Life (Years) | Weighted Average Amortization Period Remaining (Years) | Cost | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||||||
As of September 30, 2023 (Successor) | |||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships | 3 | – | 19 | 17 | $ | 1,843,145 | $ | (169,452) | $ | 1,673,693 | |||||||||||||||||||||||||
| Trademarks, trade names and other | 15 | 14 | 634,497 | (49,430) | 585,067 | ||||||||||||||||||||||||||||||
| Total intangible assets | $ | 2,477,642 | $ | (218,882) | $ | 2,258,760 | |||||||||||||||||||||||||||||
As of December 31, 2022 (Successor) | |||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships | 13 | 13 | $ | 2,088,548 | $ | (73,330) | $ | 2,015,218 | |||||||||||||||||||||||||||
| Trademarks, trade names and other | 13 | 13 | 522,137 | (18,332) | 503,805 | ||||||||||||||||||||||||||||||
| Total intangible assets | $ | 2,610,685 | $ | (91,662) | $ | 2,519,023 | |||||||||||||||||||||||||||||
Intangible assets are amortized on a straight-line basis. The following table sets forth the amortization expense related to intangible assets:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | |||||||||||||||||||||||||||||||||||||||
| Amortization expense | $ | 44,690 | $ | 37,024 | $ | 12,395 | $ | 126,292 | $ | 37,024 | $ | 109,451 | ||||||||||||||||||||||||||||||||
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Note 6 — Product Warranties
The following table sets forth the changes in the carrying amount of product warranties liability:
| Successor | Predecessor | |||||||||||||||||||
| Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||
| Balance, beginning of period ¹ | $ | 202,463 | $ | 203,011 | $ | 218,356 | ||||||||||||||
| Acquisitions | — | — | 189 | |||||||||||||||||
| Divestiture | — | — | (4,345) | |||||||||||||||||
| Warranties sold | 1,016 | 369 | 1,052 | |||||||||||||||||
| Revenue recognized | (1,843) | (510) | (1,383) | |||||||||||||||||
| Expense | 25,367 | 8,191 | 26,910 | |||||||||||||||||
| Settlements | (27,982) | (8,374) | (21,311) | |||||||||||||||||
| Balance, end of period | $ | 199,021 | $ | 202,687 | $ | 219,468 | ||||||||||||||
| Reflected as: | ||||||||||||||||||||
| Current liabilities – Rebates, warranties and other customer-related liabilities | $ | 34,224 | $ | 24,871 | $ | 26,888 | ||||||||||||||
| Noncurrent liabilities – Other long-term liabilities | 164,797 | 177,816 | 192,580 | |||||||||||||||||
| Total product warranty liability | $ | 199,021 | $ | 202,687 | $ | 219,468 | ||||||||||||||
(1) In connection with the Merger, the beginning balance for the Successor period reflects acquisition-related adjustments of 16.5 million.
Note 7 — Long-Term Debt
The following table sets forth the components of long-term debt:
| Successor | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effective Interest Rate | Principal Outstanding | Unamortized Fair Value Adjustment (1) | Unamortized Discount and Issuance Costs | Carrying Amount | Principal Outstanding | Unamortized Fair Value Adjustment(1) | Unamortized Discount and Issuance Costs | Carrying Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Term loan facility, due April 2028 | 8.57 | % | $ | 2,535,000 | $ | (307,011) | $ | — | $ | 2,227,989 | $ | 2,554,500 | $ | (348,769) | $ | — | $ | 2,205,731 | |||||||||||||||||||||||||||||||||||
| Term loan facility, due August 2028 | 9.69 | % | 297,750 | — | (19,193) | 278,557 | 300,000 | — | (21,538) | 278,462 | |||||||||||||||||||||||||||||||||||||||||||
6.125% Senior Notes, due January 2029 | 13.51 | % | 318,699 | (89,985) | — | 228,714 | 365,541 | (111,524) | — | 254,017 | |||||||||||||||||||||||||||||||||||||||||||
8.750% Senior Secured Notes, due August 2028 | 10.61 | % | 710,000 | — | (46,796) | 663,204 | 710,000 | — | (52,622) | 657,378 | |||||||||||||||||||||||||||||||||||||||||||
| Total long-term debt | $ | 3,861,449 | $ | (396,996) | $ | (65,989) | $ | 3,398,464 | $ | 3,930,041 | $ | (460,293) | $ | (74,160) | $ | 3,395,588 | |||||||||||||||||||||||||||||||||||||
| Reflected as: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current liabilities - Current portion of long-term debt | $ | 29,000 | $ | 29,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-current liabilities - Long-term debt | 3,369,464 | 3,366,588 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total long-term debt | $ | 3,398,464 | $ | 3,395,588 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value - Senior notes - Level 1 | $ | 929,464 | $ | 907,993 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value - Term loans - Level 2 | 2,762,958 | 2,580,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total fair value | $ | 3,692,422 | $ | 3,487,993 | |||||||||||||||||||||||||||||||||||||||||||||||||
(1) On July 25, 2022, as a result of the pushdown accounting related to the Merger, the carrying values of the term loan facility due April 2028 and the 6.125% Senior Notes due January 2029 (as defined below) were adjusted to fair value.
13
Revolving Credit Facilities
The following table sets forth the Company’s availability under its credit facilities:
| Successor | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Available | Borrowings | Letters of Credit and Priority Payables | Available | Borrowings | Letters of Credit and Priority Payables | ||||||||||||||||||||||||||||||
| Asset-based lending facility | $ | 850,000 | $ | — | $ | 47,000 | $ | 850,000 | $ | — | $ | 48,000 | |||||||||||||||||||||||
Cash flow revolver (1) | 92,000 | — | — | 115,000 | — | — | |||||||||||||||||||||||||||||
| First-in-last-out tranche asset-based lending facility | 95,000 | — | — | 95,000 | — | — | |||||||||||||||||||||||||||||
| Total | $ | 1,037,000 | $ | — | $ | 47,000 | $ | 1,060,000 | $ | — | $ | 48,000 | |||||||||||||||||||||||
(1) Cash flow revolver commitments of $23.0 million matured in April 2023 and $92.0 million will mature in April 2026.
Term Loan Facility due April 2028 and Cash Flow Revolver
In April 2018, Ply Gem Midco, Inc. (“Ply Gem Midco”) entered into a Cash Flow Agreement (as amended from time to time, the “Cash Flow Credit Agreement”), which provides for (i) a term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $2,600.0 million, issued with a discount of 0.5% and (ii) a cash flow-based revolving credit facility (the “Cash Flow Revolver”) of up to $115.0 million with $92.0 million remaining as of September 30, 2023. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Borrower (as defined in the Cash Flow Credit Agreement) under the Term Loan Facility and Cash Flow Revolver (together the “Cash Flow Facilities”). On April 11, 2023, the Company amended the Cash Flow Credit Agreement to replace the adjusted LIBOR rate with the Secured Overnight Financing Rate (“SOFR”) rate.
The 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 Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) a Term SOFR rate with a credit spread adjustment of 0.10% (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.
Loans outstanding under the Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) a Daily Simple SOFR rate or a Term SOFR rate with (only in the case of Term SOFR rate borrowings with an interest period greater than one month) a credit spread adjustment of 0.10% (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 Cash Flow Revolver. Additionally, unused commitments under the 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.
Subject to certain exceptions, the Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (i) certain asset sales, (ii) certain debt offerings and (iii) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the 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 2022 under the year 2021 excess cash flow calculation.
Both the Term Loan Facility and 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.
14
ABL Facility due July 2027
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (as amended from time to time, the “ABL Credit Agreement”), which provides for (a) an asset-based revolving credit facility of up to $850.0 million (amended from time to time the “ABL Facility”), a portion of which is (i) available to United States (“U.S.”) borrowers and (ii) available to U.S. and Canadian borrowers. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the ABL Facility, and (b) a first-in-last-out tranche asset-based revolving credit facility of up to $95.0 million (the “ABL FILO Facility”) available to U.S. borrowers.
Borrowing availability under the ABL Facility and the ABL FILO Facility (collectively, the “ABL Facilities”) is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.
Loans outstanding under the ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR 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 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.
Loans outstanding under the ABL FILO Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 2.25% to 2.75% per annum depending on the average daily excess availability under the ABL FILO Facility or (ii) an alternate base rate plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL FILO Facility. Additionally, unused commitments under the ABL FILO Facility are subject to a 0.25% per annum fee.
Side Car Term Loan Facility due August 2028
On July 25, 2022, the Company entered into a Term Loan Credit Agreement (as amended from time to time, the “Side Car Term Loan Credit Agreement”) which provides for a term loan facility (the “Side Car Term Loan Facility”) in an original aggregate principal amount of $300.0 million. The Side Car Term Loan Credit Agreement will mature on August 1, 2028.
Loans outstanding under the Side Car Term Loan Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate plus 5.625% (subject to a SOFR floor of 0.50%) or (ii) an alternate base rate plus 4.625%. Borrowings under the Side Term Loan Credit Agreement amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount.
The Side Car Term Loan Facility may be prepaid at the Company’s option at any time, subject to certain prepayment premiums if prepaid prior to August 1, 2026.
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”). 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.
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 Term Loan Facility, the Cash Flow Revolver, the Side Car Term Loan Facility, the 8.750% Senior Secured Notes (as defined below) and the ABL Facilities, 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 subject to certain prepayment premiums if the 6.125% Senior Notes were to be redeemed prior to September 15, 2025.
Repurchase of 6.125% Senior Notes
The Company repurchased an aggregate principal amount of $— and $46.8 million of 6.125% Senior Notes for $— and $33.9 million in cash during the three and nine months ended September 30, 2023. The repurchases, which resulted in a write-off of associated unamortized debt discount and deferred financing costs, resulted in a loss of $0.2 million for the nine months ended September 30, 2023.
15
8.750% Senior Secured Notes due August 2028
On July 25, 2022, the Company issued $710.0 million in aggregate principal amount of 8.750% Senior Secured Notes due August 2028 (the “8.750% Senior Secured Notes”). The 8.750% Senior Secured Notes bear interest at 8.750% per annum and will mature on August 1, 2028. Interest is payable semi-annually in arrears on January 15 and July 15 of each year.
The 8.750% Senior Secured Notes are secured senior indebtedness and rank equal in right of payment with all existing and future senior indebtedness and are senior in right of payment to all existing and future subordinated indebtedness of the Company, including the 6.125% Senior Notes.
The Company may redeem the 8.750% Senior Secured Notes in whole or in part at any time subject to certain prepayment premiums if the 8.750% Senior Secured Notes were to be redeemed prior to August 1, 2026.
Other Information
The obligations under the Company’s debt agreements are generally guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions. In addition, the obligations of the Canadian borrowers under the ABL Facility are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions. In addition, the obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are guaranteed by Camelot Parent, which guarantee is non-recourse and limited to the equity interests of the Company. The obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are also secured by a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor and in the capital stock of the Company, subject to certain exceptions and subject to priority of security interests provided therein.
Covenant Compliance
The 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 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. The Cash Flow Credit Agreement 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.
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. The Company is in compliance with all of its covenants as of September 30, 2023.
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Interest Rate Swaps
The Company uses certain interest rate swaps to manage a portion of the interest rate risk on its term loans. The following table sets forth the terms of the Company’s interest rate swap agreements:
| April 2021 Swaps | |||||
| Notional amount | $ | 1,500,000 | |||
| Forecasted term loan interest payments being hedged | 1-month SOFR | ||||
| SOFR floor (per annum - matches floor in hedged item) | 0.40% | ||||
| Fixed rate paid on notional amount | 2.0038% | ||||
Origination date | April 17, 2023 | ||||
| Maturity - Fixed rate paid | April 15, 2026 | ||||
| Fair value at September 30, 2023: | |||||
| Other assets, net | $ | 97,059 | |||
| Other current liabilities | $ | — | |||
| Fair value at December 31, 2022: | |||||
| Other assets, net | $ | 95,361 | |||
| Other current liabilities | $ | 7,000 | |||
Level in fair value hierarchy (1) | Level 2 | ||||
(1)Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market based SOFR 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.
Note 8 — Accumulated Other Comprehensive Income
The following tables set forth the change in accumulated other comprehensive income attributable to the Company by each component of accumulated other comprehensive income, net of applicable income taxes:
| Foreign Currency Translation Adjustments | Derivative Instruments | Unrecognized Gain (Loss) on Retirement Benefits | Total Accumulated Other Comprehensive Income | ||||||||||||||||||||
| Balance, July 1, 2023 (Successor) | $ | (7,269) | $ | 44,924 | $ | 336 | $ | 37,991 | |||||||||||||||
| Activity | (6,059) | (373) | — | (6,432) | |||||||||||||||||||
| Balance, September 30, 2023 (Successor) | $ | (13,328) | $ | 44,551 | $ | 336 | $ | 31,559 | |||||||||||||||
| Balance, July 2, 2022 (Predecessor) | $ | 21,259 | $ | 54,409 | $ | (6,068) | $ | 69,600 | |||||||||||||||
| Activity | 115 | 904 | — | 1,019 | |||||||||||||||||||
| Balance, July 24, 2022 (Predecessor) | $ | 21,374 | $ | 55,313 | $ | (6,068) | $ | 70,619 | |||||||||||||||
| Balance, July 25, 2022 (Successor) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Activity | (29,743) | 40,988 | — | 11,245 | |||||||||||||||||||
| Balance, October 1, 2022 (Successor) | $ | (29,743) | $ | 40,988 | $ | — | $ | 11,245 | |||||||||||||||
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| Foreign Currency Translation Adjustment | Derivative Instruments | Unrecognized Gain (Loss) on Retirement Benefits | Total Accumulated Other Comprehensive Income | ||||||||||||||||||||
| Balance, December 31, 2022 (Successor) | $ | (6,789) | $ | 40,962 | $ | 336 | $ | 34,509 | |||||||||||||||
| Activity | (6,539) | 3,589 | — | (2,950) | |||||||||||||||||||
| Balance, September 30, 2023 (Successor) | $ | (13,328) | $ | 44,551 | $ | 336 | $ | 31,559 | |||||||||||||||
| Balance, December 31, 2021 (Predecessor) | $ | 22,741 | $ | (23,407) | $ | (4,946) | $ | (5,612) | |||||||||||||||
| Activity | (1,367) | 78,720 | (1,122) | 76,231 | |||||||||||||||||||
| Balance, July 24, 2022 (Predecessor) | $ | 21,374 | $ | 55,313 | $ | (6,068) | $ | 70,619 | |||||||||||||||
| Balance, July 25, 2022 (Successor) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Activity | (29,743) | 40,988 | — | 11,245 | |||||||||||||||||||
| Balance, October 1, 2022 (Successor) | $ | (29,743) | $ | 40,988 | $ | — | $ | 11,245 | |||||||||||||||
Note 9 — Share-Based Compensation
Merger Transaction
Prior to July 24, 2022, under its long-term stock incentive plan, the Company had several share-based compensation award types, including stock options, restricted stock units and performance share unit awards (collectively, the “Pre-Merger Awards”). In connection with the Merger, outstanding vested stock option awards were canceled and converted to the right to receive a fixed amount of cash equal to the intrinsic value of the awards and were paid in August 2022. Performance share units (“PSUs”) granted to certain key, non-executive employees in March 2021 were paid in cash in September 2022 with the applicable total shareholder return metric determined using a per share price equal to the Merger Consideration and the EBITDA-based metric determined based on target performance.
Resulting from the Merger, unvested restricted stock units were cancelled and converted into a contingent contractual right to receive a payment in cash equal to the Merger consideration per award and unvested stock options were cancelled and converted into a contingent contractual right to receive a payment in cash equal to the intrinsic value of the awards, subject to the same vesting conditions as the original awards.
Resulting from the Merger, unvested PSUs that were granted to key employees and executives in March 2020 and to executives in March 2021 were cancelled and converted into a contingent contractual right to receive a cash payment from the Company equal to the product of the number of PSUs earned under the terms of the applicable award agreement, with the applicable total stockholder return metric determined using a per share price equal to the Merger consideration and the EBITDA-based metric determined based on actual performance as of the end of the three-year performance period applicable to such PSUs. PSUs granted in March 2020 vested and were paid out in cash during the three months ended April 1, 2023. PSUs granted in March 2021 to executives are expected to be paid out in cash in the first quarter of 2024. The Pre-Merger Awards are accounted for under ASC Topic 710.
As of September 30, 2023, the Company has liabilities of $18.2 million and $0.5 million classified within employee-related liabilities and other long-term liabilities on its Condensed Consolidated Balance Sheet related to the Pre-Merger Awards that will be settled in cash. For the nine months ended September 30, 2023, the Company paid out $92.2 million of cash to settle Pre-Merger Awards, which mainly related to those PSUs granted in March 2020 and vested in March 2023.
Incentive Units
Beginning in the fourth quarter of 2022, pursuant to an incentive unit grant agreement, certain participants were granted incentive units in Camelot Return Ultimate, L.P. (the “Partnership”). The incentive units provide the holder with the opportunity to receive, upon certain vesting events and subject to Partnership repurchase rights and conditions, a return based upon the appreciation of the Partnership’s equity value from the date of grant. The incentive units vest over a five-year period on a straight-line basis. For the nine months ended September 30, 2023, 130 thousand incentive units were granted at an average grant date fair value of $49.76 per incentive unit.
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Compensation Expense
For the three months ended September 30, 2023, the Company recognized $1.9 million and $2.6 million of expense from incentive units and Pre-Merger Awards. For the nine months ended September 30, 2023, the Company recognized $6.9 million and $1.1 million of expense from incentive units and Pre-Merger Awards.
As of September 30, 2023, the Company estimates that unrecognized expense is expected to be recognized over a weighted-average period of 3.2 years totaling $40.9 million, of which $32.7 million relates to incentive units and $8.1 million relates to Pre-Merger Awards.
Note 10 — Income Taxes
For the Predecessor and Successor periods, the Company’s effective tax rate includes state income taxes, foreign tax rate differentials and changes in the valuation allowance.
The following table sets forth the effective tax rate for the three and nine month periods ended September 30, 2023 and October 1, 2022:
| Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||
Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 24.5 | % | 27.3 | % | (265.6) | % | 27.6 | % | 27.3 | % | 25.5 | % | |||||||||||||||||||||||||||||||||||
Note 11 — Reportable Segment and Geographical Information
The Company is organized in three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions, which operate principally in the U.S. with limited operations in Canada.
•The Aperture Solutions reportable segment offers a broad line of windows and doors at multiple price-points for residential new construction and repair and remodel end markets in the U.S. and Canada. Its main products include vinyl, aluminum, wood-composite and aluminum clad-wood windows and patio doors, as well as steel, wood-composite and fiberglass entry doors.
•The Surface Solutions reportable segment offers a broad suite of surface solutions products and accessories at multiple price-points for the residential new construction and repair and remodel end markets as well as stone installation services. Its main products include vinyl siding and accessories, cellular polyvinyl chloride trim, vinyl fencing and railing, stone veneer and gutter protection products.
•The Shelter Solutions reportable segment designs, engineers, manufactures and distributes extensive lines of metal products for the low-rise commercial construction market under multiple brand names and through a nationwide network of manufacturing plants and distribution centers. The Company defines low-rise commercial construction as building applications of up to five stories.
Management monitors the operations results of its reportable segments separately for purposes of making decisions about resources and evaluating performance. Management evaluates performance on the basis of segment earnings before interest, income taxes, depreciation and amortization (“Adjusted reportable segment EBITDA”).
Corporate operating expenses are not allocated to reportable segments. Corporate and Other consists specifically of corporate operating expenses that are generally not allocated to reportable segments, related-party management fees, and other items that are not assigned or allocated to reportable segments. Any intercompany revenues or expenses are eliminated in consolidation.
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The following table sets forth net sales, Adjusted reportable segment EBITDA and a reconciliation to income before income taxes:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | |||||||||||||||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||||||||||||||||||
| Aperture Solutions | $ | 637,669 | $ | 569,994 | $ | 164,039 | $ | 1,889,913 | $ | 569,994 | $ | 1,643,619 | ||||||||||||||||||||||||||||||||
| Surface Solutions | 357,400 | 288,080 | 85,034 | 961,513 | 288,080 | 839,130 | ||||||||||||||||||||||||||||||||||||||
| Shelter Solutions | 429,689 | 416,809 | 116,372 | 1,280,638 | 416,809 | 1,253,335 | ||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,424,758 | $ | 1,274,883 | $ | 365,445 | $ | 4,132,064 | $ | 1,274,883 | $ | 3,736,084 | ||||||||||||||||||||||||||||||||
| Adjusted reportable segment EBITDA: | ||||||||||||||||||||||||||||||||||||||||||||
| Aperture Solutions | $ | 91,946 | $ | 74,235 | $ | 15,045 | $ | 260,032 | $ | 74,235 | $ | 202,682 | ||||||||||||||||||||||||||||||||
| Surface Solutions | 79,205 | 32,978 | 8,576 | 167,011 | 32,978 | 143,880 | ||||||||||||||||||||||||||||||||||||||
| Shelter Solutions | 79,002 | 70,736 | 21,219 | 268,386 | 70,736 | 209,156 | ||||||||||||||||||||||||||||||||||||||
| Total Adjusted reportable segment EBITDA | 250,153 | 177,949 | 44,840 | 695,429 | 177,949 | 555,718 | ||||||||||||||||||||||||||||||||||||||
| Corporate and other | (62,534) | (74,654) | (39,216) | (165,095) | (74,654) | 331,996 | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (93,253) | (56,260) | (18,289) | (331,077) | (56,260) | (166,177) | ||||||||||||||||||||||||||||||||||||||
| Interest expense | (91,013) | (65,813) | (11,401) | (277,438) | (65,813) | (101,078) | ||||||||||||||||||||||||||||||||||||||
| Foreign exchange (loss) gain | (3,753) | 12,489 | (454) | 2,694 | 12,489 | 686 | ||||||||||||||||||||||||||||||||||||||
| Gain (loss) on extinguishment of debt | — | — | 24,801 | (184) | — | 28,354 | ||||||||||||||||||||||||||||||||||||||
Other income, net | 4,027 | 172 | 114 | 8,832 | 172 | 101 | ||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 3,627 | $ | (6,117) | $ | 395 | $ | (66,839) | $ | (6,117) | $ | 649,600 | ||||||||||||||||||||||||||||||||
The following table sets forth net sales disaggregated by reportable segment:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | |||||||||||||||||||||||||||||||||||||||
| Aperture Solutions: | ||||||||||||||||||||||||||||||||||||||||||||
| Vinyl windows | $ | 605,259 | $ | 538,447 | $ | 153,296 | $ | 1,794,514 | $ | 538,447 | $ | 1,542,525 | ||||||||||||||||||||||||||||||||
| Aluminum windows and other | 32,410 | 31,547 | $ | 10,743 | 95,399 | 31,547 | 101,094 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 637,669 | $ | 569,994 | $ | 164,039 | $ | 1,889,913 | $ | 569,994 | $ | 1,643,619 | ||||||||||||||||||||||||||||||||
| Surface Solutions: | ||||||||||||||||||||||||||||||||||||||||||||
| Vinyl siding | $ | 176,957 | $ | 139,459 | $ | 43,318 | $ | 471,983 | $ | 139,459 | $ | 415,534 | ||||||||||||||||||||||||||||||||
| Metal siding | 95,348 | 64,855 | 19,112 | 241,851 | 64,855 | 185,097 | ||||||||||||||||||||||||||||||||||||||
| Injection molded siding | 16,561 | 12,405 | 3,650 | 44,603 | 12,405 | 41,841 | ||||||||||||||||||||||||||||||||||||||
| Stone | 19,098 | 20,933 | 4,947 | 56,567 | 20,933 | 51,904 | ||||||||||||||||||||||||||||||||||||||
| Stone veneer installation and other | 49,436 | 50,428 | 14,007 | 146,509 | 50,428 | 144,754 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 357,400 | $ | 288,080 | $ | 85,034 | $ | 961,513 | $ | 288,080 | $ | 839,130 | ||||||||||||||||||||||||||||||||
| Shelter Solutions: | ||||||||||||||||||||||||||||||||||||||||||||
| Metal building products | $ | 429,689 | $ | 416,809 | $ | 116,372 | $ | 1,280,638 | $ | 416,809 | $ | 1,140,259 | ||||||||||||||||||||||||||||||||
| Metal coil coating | — | — | — | — | — | 113,076 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 429,689 | $ | 416,809 | $ | 116,372 | $ | 1,280,638 | $ | 416,809 | $ | 1,253,335 | ||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,424,758 | $ | 1,274,883 | $ | 365,445 | $ | 4,132,064 | $ | 1,274,883 | $ | 3,736,084 | ||||||||||||||||||||||||||||||||
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The following table sets forth total assets disaggregated by reportable segment:
| Successor | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Total assets: | |||||||||||
| Aperture Solutions | $ | 2,856,935 | $ | 2,153,378 | |||||||
| Surface Solutions | 2,267,523 | 2,099,244 | |||||||||
| Shelter Solutions | 1,154,697 | 973,718 | |||||||||
| Corporate | 694,416 | 1,967,310 | |||||||||
| Total assets | $ | 6,973,571 | $ | 7,193,650 | |||||||
Note 12 — Commitments and 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 may 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, including applicable benefits and pension plans, 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. 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.
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 contaminants into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect employee health and safety, public health and welfare and the end-users of its products; regulate the chemicals 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 impact the Company's current and future operations.
The Company believes it is in material compliance with all applicable laws and regulations and has recorded a liability of $8.8 million at September 30, 2023 and December 31, 2022 for certain subsurface investigation and remedial matters.
Litigation
The Company is a party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company is also included in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines or penalties and other costs in substantial amounts and are described below.
Stockholder Litigation
In January 2023, purported former stockholders filed two separate complaints challenging the fairness of the CD&R Merger. The complaints are captioned Firefighters’ Pension System of the City of Kansas City, Missouri Trust and Gary D. Voigt v. Affeldt et al., C.A. No. 2023-0091-JTL (Del. Ch.) and Whitebark Value Partners LP and Robert Garfield v. Clayton Dubilier & Rice, LLC et al., C.A. No. 2023-0092-JTL (Del. Ch.). In both complaints, the plaintiffs allege that CD&R and its affiliates controlled the Company prior to the transaction and that certain directors and officers of the Company, as well as CD&R and its affiliates, breached their fiduciary duties and engaged in conduct resulting in a sale of the Cornerstone Building Brands public stockholders’ shares to CD&R at an unfair price. The plaintiffs seek unspecified monetary damages, attorneys’ fees, expenses, and costs. The court consolidated the two cases, and on May 3, 2023, selected Whitebark Value Partners LP as lead plaintiff. The Company does not believe these claims have merit and intend to vigorously defend against them. On July 14, 2023, the defendants moved to dismiss the operative complaint. Oral argument on the motion to dismiss is scheduled for January 10, 2024. The Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. The Company does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on its financial condition.
21
In June 2023, a purported former stockholder filed a class action complaint in the United States District Court for the District of Delaware alleging that the Company’s disclosures issued in connection with the CD&R Merger were materially misleading in violation of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934. The complaint is captioned Water Island Merger Arbitrage Institutional Commingled Master Fund, L.P. v. Cornerstone Building Brands et al., Case No. 1:23-cv-00701 (D. Del.). The complaint alleges that the Company’s directors and officers issued misleading disclosures, which caused stockholders to approve the CD&R Merger at an unfair price. The plaintiff seeks unspecified monetary damages, interest, attorneys’ fees, expenses, and costs. The Company does not believe these claims have merit and intend to vigorously defend against them. The Company cannot predict with any degree of certainty the outcome of this matter or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. The Company does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on its financial condition.
Note 13 — 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 income 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:
| Predecessor | |||||||||||
| Period from July 3, 2022 through July 24, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||
| Numerator for Basic and Diluted Earnings Per Common Share | |||||||||||
| Net income applicable to common shares | $ | 1,433 | $ | 480,211 | |||||||
| Denominator for Basic and Diluted Earnings Per Common Share: | |||||||||||
| Weighted average basic number of common shares outstanding | 127,544 | 127,316 | |||||||||
| Common stock equivalents: | |||||||||||
| Employee stock options | 1,583 | 1,578 | |||||||||
| Weighted average diluted number of common shares outstanding | 129,127 | 128,894 | |||||||||
| Basic earnings per common share | $ | 0.01 | $ | 3.77 | |||||||
| Diluted earnings per common share | $ | 0.01 | $ | 3.73 | |||||||
Incentive plan securities excluded from dilution (1) | — | 30 | |||||||||
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
The Company calculates earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain non-forfeitable 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 related to our Incentive Plan 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 periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
Earnings per common share is not presented for the Successor period as the Company’s common stock is no longer publicly traded either on a stock exchange or in the over-the-counter market.
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Note 14 — Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information:
| Successor | Predecessor | |||||||||||||||||||
| Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | ||||||||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||
| Interest paid, net of amounts capitalized | $ | 235,065 | $ | 27,482 | $ | 103,074 | ||||||||||||||
| Income taxes paid | $ | 33,523 | $ | 108,962 | $ | 56,243 | ||||||||||||||
| Supplemental non-cash investing and financing activities- | ||||||||||||||||||||
| Pushdown fair value adjustments | $ | — | $ | 1,522,432 | $ | — | ||||||||||||||
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CORNERSTONE BUILDING BRANDS, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is management’s discussion and analysis of certain significant factors that have affected our consolidated financial condition and results of operations during the periods presented (the “MD&A”). This information should be read in conjunction with the Condensed Consolidated Financial Statements included herein “Item 1. Condensed Consolidated Financial Statements” and the 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, 2022 (the “2022 Form 10-K”).
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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:
•seasonality of the business and adverse weather conditions;
•challenging macroeconomic conditions affecting the residential, commercial and repair and remodeling construction industry and markets, including increasing interest rates, and demand in new construction and repair and remodeling;
•commodity price volatility and/or limited availability of raw materials, including steel, polyvinyl chloride (“PVC”) resin, aluminum, and glass due to supply chain disruptions;
•increases in the macroeconomic inflationary environment and our ability to react accordingly;
•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;
•our ability to successfully implement operational efficiency initiatives, including to increase automation and mitigate increases in our manufacturing costs;
•our ability to successfully achieve price increases to offset cost increases;
•ability to compete effectively against competitors;
•our ability to successfully integrate our acquired businesses and to realize anticipated benefits;
•our ability to employ, train and retain qualified personnel;
•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;
•increases in energy costs;
•increases in freight and transportation costs;
•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 and its variants (collectively, the “COVID-19 pandemic”), as well as actions that may be taken by the Company or governmental authorities due to any resurgence of the COVID-19 pandemic or to treat its impact and the resulting impact on supply chain and labor pressures;
•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•enforcement and obsolescence of our intellectual property rights;
24
•costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
•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;
•global climate change, and compliance with new or changed laws or regulations relating to environmental, social and governance (“ESG”);
•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 Merger (as defined herein);
•compliance with certain laws related to our international business operations;
•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;
•additional costs from new regulations which relate to the utilization or manufacturing of our products or services, including changes in building codes and standards;
•increases in tariffs or import and trade restrictions;
•our controlling stockholder’s interests differing from the interests of holders of our indebtedness;
•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;
•uncertainty as to the acceptance of Secured Overnight Financing Rate (“SOFR”) and phasing out of London Interbank Offered Rate (“LIBOR”) interest rates; and
•other risks detailed under the caption “Risk Factors” in this Quarterly Report on Form 10-Q, in Part I, Item 1A in the 2022 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 2022 Form 10-K, and other risks described in documents subsequently filed by the 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.
Company Overview
Our Company
Cornerstone Building Brands, Inc. (“Cornerstone Building Brands”, together with its subsidiaries, unless the context requires otherwise, the “Company,” “we,” “us” or “our”) is a holding company incorporated in Delaware. We are the largest manufacturer of exterior building products in North America by sales and serve residential and commercial customers across both the new construction and repair and remodel markets.
Our operations are organized as three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions. We have:
•One of the broadest product offerings and the most well-regarded brand portfolio in our industry. Our total addressable market is diverse and expands across multiple geographies, end markets, channels, customers and products providing us with significant benefits.
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•A leading market position in various North American markets we serve, including, among others, vinyl windows, vinyl siding, stone veneer installations, metal accessories, metal roofing and wall systems and engineered metal building systems.
•An extensive coast-to-coast network of manufacturing, distribution and branch office facilities throughout North America.
•A vertically integrated manufacturing process that enables us to deliver better service and positions us to be a cost-advantaged manufacturer.
We are mindful of the harmful effects of global climate change and the contributions to climate change from manufacturing operations and the end-use of building construction products. We have made and continue to make progress on our work related to ESG matters.
Merger Transaction
On July 25, 2022 and pursuant to an Agreement and Plan of Merger dated March 5, 2022 (the “Merger Agreement”) by and among the Company, Camelot Return Intermediate Holdings, LLC (“Camelot Parent”), and Camelot Return Merger Sub, Inc. (“Merger Sub”), investment funds managed by Clayton, Dubilier and Rice, LLC (“CD&R”) became the indirect owners of all the issued and outstanding shares of common stock of Cornerstone Building Brands. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “Merger”), with the Company surviving the Merger as a subsidiary of Camelot Parent (the “Surviving Corporation”). At the effective time of the Merger (the “Effective Time”), we became a privately held company and our shares were no longer traded on the New York Stock Exchange.
At the Effective Time, in accordance with the terms and conditions set forth in the Merger Agreement, each share of Company common stock outstanding immediately prior to the Effective Time of the Merger (other than (i) shares of Company common stock that were cancelled or converted into shares of common stock of the Surviving Corporation in accordance with the Merger Agreement and (ii) shares of Company common stock held by stockholders of the Company (other than CD&R, certain investment funds managed by CD&R and other affiliates of CD&R that held shares of Company common stock) who did not vote in favor of the Merger Agreement or the Merger and who have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware), was converted into the right to receive cash in an amount equal to $24.65 in cash per share, without interest and subject to any required withholding taxes.
Non-GAAP Financial Measures
We use several measures derived from consolidated financial information, but not presented in our Condensed Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). These measures are considered non-GAAP financial measures. Specifically, in this report, we refer to adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and Adjusted EBITDA as a percentage of net sales, which are non-GAAP financial measures (collectively, our “non-GAAP financial measures”). Our non-GAAP financial measures are not intended to replace the presentation of the comparable measures under U.S. GAAP. However, we believe the presentation of the non-GAAP financial measures, when considered together with the comparable U.S. GAAP financial measure, along with a reconciliation to its respective U.S. GAAP financial measure, enables investors to better understand the factors and trends affecting our underlying business that could not be obtained absent these disclosures. Additionally, we believe that the presentation of our non-GAAP financial measures enables investors to evaluate trends in the business excluding certain items which are not entirely a result of our core operations.
Furthermore, the presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our business and facilitates the comparison of past and present operations. The non-GAAP financial measures we use may differ from non-GAAP financial measures used by other companies, and other companies may not define non-GAAP financial measures we use in the same way, even if similarly titled.
Predecessor and Successor Periods
The MD&A provides an overview of our financial condition as of September 30, 2023 and the results of operations for the periods subsequent to July 25, 2022 (“Successor”) and for periods prior to July 25, 2022 (“Predecessor”). Our Condensed Consolidated Statements of (Loss) Income as reported in our Condensed Consolidated Financial Statements for these periods are prepared in accordance with U.S. GAAP.
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To enhance the analysis of our operating results for the periods presented, we have included a discussion of selected financial and operating data of the Predecessor and Successor on a combined basis. The presentation consists of the mathematical addition of selected financial and operating data of the Successor for the period from July 25, 2022 through October 1, 2022 with the comparable financial and operating data of the Predecessor for the periods from July 3, 2022 through July 24, 2022 and January 1, 2022 through July 24, 2022. There are no other adjustments made in the combined presentation. The mathematical combination of selected financial and operating data is included below under the heading “Combined” and this data is a non-GAAP presentation. Management believes that this selected financial and operating data provides investors with useful information upon which to assess our operating performance.
Reconciliation of Net Income (Loss) to Adjusted EBITDA and Adjusted EBITDA as a Percentage of Net Sales
The following table presents the reconciliation of net income (loss) to Adjusted EBITDA and computes Adjusted EBITDA as a percentage of net sales:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 2,737 | $ | (4,445) | $ | 1,444 | $ | (3,001) | $ | (48,404) | $ | (4,445) | $ | 483,786 | $ | 479,341 | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 93,253 | 56,260 | 18,289 | 74,549 | 331,077 | 56,260 | 166,177 | 222,437 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 91,013 | 65,813 | 11,401 | 77,214 | 277,438 | 65,813 | 101,078 | 166,891 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) | 890 | (1,672) | (1,049) | (2,721) | (18,435) | (1,672) | 165,814 | 164,142 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings before interest, income taxes, depreciation and amortization | 187,893 | 115,956 | 30,085 | 146,041 | 541,676 | 115,956 | 916,855 | 1,032,811 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Strategic development and acquisition related costs | 3,997 | 2,735 | 28,895 | 31,630 | 20,534 | 2,735 | 49,560 | 52,295 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired inventory step-up amortization | — | 30,317 | — | 30,317 | — | 30,317 | — | 30,317 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loss (gain) on divestitures | 10,080 | 1,762 | — | 1,762 | 10,080 | 1,762 | (401,413) | (399,651) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on legal settlements | — | — | — | — | — | — | (76,575) | (76,575) | ||||||||||||||||||||||||||||||||||||||||||||||||
Long-term incentive plan compensation (1) | 4,696 | 8,837 | 937 | 9,774 | 8,469 | 8,837 | 17,099 | 25,936 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange loss (gain) | 3,753 | (12,489) | 454 | (12,035) | (2,694) | (12,489) | (686) | (13,175) | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Gain) loss on extinguishment of debt | — | — | (24,801) | (24,801) | 184 | — | (28,354) | (28,354) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Employee separation and facility closure charges | 7,701 | 2,399 | 975 | 3,374 | 19,132 | 2,399 | 92 | 2,491 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (4,027) | (172) | (114) | (286) | (8,832) | (172) | (101) | (273) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 2,642 | 105 | 151 | 256 | 7,888 | 105 | 1,820 | 1,925 | ||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA (2) | $ | 216,735 | $ | 149,450 | $ | 36,582 | 186,032 | $ | 596,437 | $ | 149,450 | $ | 478,297 | 627,747 | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA as a percentage of net sales | 15.2 | % | 11.7 | % | 10.0 | % | 11.3 | % | 14.4 | % | 11.7 | % | 12.8 | % | 12.5 | % | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
(1)Reflects expenses related to long-term incentive compensation plans, which primarily includes awards that were granted prior to the Merger (“Pre-Merger Awards”) and incentive unit grants that occurred subsequent to the Merger.
(2)The above periods, to the extent applicable, exclude the operations of divestitures as noted below in the “Impact of Divestitures and Acquisitions” section.
Seasonality
Our sales volume is generally higher during our second and third quarters, which is historically the peak season for construction and remodeling in North America. Seasonal variations in our operational results may be negatively impacted by inclement weather and other conditions. Working capital requirements have generally been greatest during the first half of our fiscal year due to the timing of the buildup of inventory to support the heavier construction season.
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Impact of Divestitures and Acquisitions
In our MD&A, the impact of divestitures, when presented, is quantified as the portion of the preceding twelve months post- or pre-transaction where no comparable period is available. Specifically, in our Shelter Solutions reportable segment, we completed the sale of our coil coatings business in June 2022. In our Surface Solutions reportable segment, we completed the acquisition of M.A.C. Métal Architectural Inc. in August 2023.
Results of Operations
The following table represents key results of operations on a consolidated basis for the interim periods indicated, and the changes between periods:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined * | Successor | Predecessor | Combined * | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,424,758 | $ | 1,274,883 | $ | 365,445 | $ | 1,640,328 | $ | 4,132,064 | $ | 1,274,883 | $ | 3,736,084 | $ | 5,010,967 | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | 333,067 | 233,623 | 73,398 | 307,021 | 912,765 | 233,623 | 806,385 | 1,040,008 | ||||||||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 23.4 | % | 18.3 | % | 20.1 | % | 18.7 | % | 22.1 | % | 18.3 | % | 21.6 | % | 20.8 | % | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 228,621 | 184,826 | 86,063 | 270,889 | 703,428 | 184,826 | 562,836 | 747,662 | ||||||||||||||||||||||||||||||||||||||||||||||||
| % of net sales | 16.0% | 14.5 | % | 23.6 | % | 16.5% | 17.0% | 14.5 | % | 15.1 | % | 14.9% | ||||||||||||||||||||||||||||||||||||||||||||
Loss (gain) on divestitures | 10,080 | 1,762 | — | 1,762 | 10,080 | 1,762 | (401,413) | (399,651) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on legal settlements | — | — | — | — | — | — | (76,575) | (76,575) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 94,366 | 47,035 | (12,665) | 34,370 | 199,257 | 47,035 | 721,537 | 768,572 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (91,013) | (65,813) | (11,401) | (77,214) | (277,438) | (65,813) | (101,078) | (166,891) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange (loss) gain | (3,753) | 12,489 | (454) | 12,035 | 2,694 | 12,489 | 686 | 13,175 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gain (loss) on extinguishment of debt | — | — | 24,801 | 24,801 | (184) | — | 28,354 | 28,354 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other income, net | 4,027 | 172 | 114 | 286 | 8,832 | 172 | 101 | 273 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 3,627 | (6,117) | 395 | (5,722) | (66,839) | (6,117) | 649,600 | 643,483 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) | 890 | (1,672) | (1,049) | (2,721) | (18,435) | (1,672) | 165,814 | 164,142 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 2,737 | $ | (4,445) | $ | 1,444 | $ | (3,001) | $ | (48,404) | $ | (4,445) | $ | 483,786 | $ | 479,341 | ||||||||||||||||||||||||||||||||||||||||
| Non-GAAP financial measures*: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 216,735 | $ | 149,450 | $ | 36,582 | $ | 186,032 | $ | 596,437 | $ | 149,450 | $ | 478,297 | $ | 627,747 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA as a percentage of net sales | 15.2 | % | 11.7 | % | 10.0 | % | 11.3 | % | 14.4 | % | 11.7 | % | 12.8 | % | 12.5 | % | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Net sales decreased $215.6 million, or 13.1% for the three month period ended September 30, 2023 compared to the comparable prior year period, and decreased $878.9 million, or 17.5% for the nine month period ended September 30, 2023 compared to the comparable prior year period, mainly due to lower volume across all reportable segments and the impact from the strategic divestiture of our coil coatings business in June 2022.
Gross profit as a percentage of net sales was 23.4% for the three month period ended September 30, 2023, compared to 18.7% for the comparable prior year period, and 22.1% for the nine month period ended September 30, 2023, compared to 20.8% for the comparable prior year period. These increases are driven by favorable product mix, price net of inflation and manufacturing net efficiencies.
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Selling, general and administrative expenses decreased $42.3 million, or 15.6%, for the three month period ended September 30, 2023 compared to the comparable prior year period, and decreased $44.2 million, or 5.9%, for the nine month period ended September 30, 2023 compared to the comparable prior year period. These decreases are mainly due to a decrease in Merger related transaction costs, including employee compensation expenses, partially offset by an increase in depreciation and amortization resulting from the update in the fair market value of property, plant and equipment and intangible assets acquired, shortened useful lives and a higher depreciable base as a result of the Merger.
Gain on divestitures mainly consists of a net gain recognized in connection with the strategic divestiture of our coil coatings business, with the original gain recognized in June 2022 of $394.2 million, offset by a $10.1 million expense in the third quarter of 2023 resulting from a settlement to finalize working capital.
Gain on legal settlements consists of a gain recognized in March 2022 of $76.6 million related to shareholder litigation.
Interest expense increased by $13.8 million for the three month period and $110.5 million for the nine month period ended September 30, 2023, each compared to the comparable prior year period. The following table sets forth the components of interest expense:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense on outstanding borrowings (1) | $ | 85,772 | $ | 49,285 | $ | 8,876 | $ | 58,161 | $ | 246,933 | $ | 49,285 | $ | 76,451 | $ | 125,736 | ||||||||||||||||||||||||||||||||||||||||
| Interest (income) expense attributable to interest rate swaps | (15,345) | 1,221 | 1,929 | 3,150 | (29,350) | 1,221 | 20,586 | 21,807 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of debt discount, debt issuance costs and purchase accounting fair value adjustment | 20,242 | 15,204 | 391 | 15,595 | 59,207 | 15,204 | 3,696 | 18,900 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 344 | 103 | 205 | 308 | 648 | 103 | 345 | 448 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest expense | $ | 91,013 | $ | 65,813 | $ | 11,401 | $ | 77,214 | $ | 277,438 | $ | 65,813 | $ | 101,078 | $ | 166,891 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
(1)The incremental interest expense incurred for the three and nine months ended September 30, 2023 compared to the three and nine months ended October 1, 2022 is mainly a result of the additional financing obtained to consummate the Merger.
Foreign exchange (gain) loss were $3.8 million of loss and $2.7 million of gain for the three and nine month periods ended September 30, 2023 compared to $12.0 million and $13.2 million of gains for the three and nine months ended in the comparable prior year period. The changes period over period are attributable to foreign exchange rate changes on intercompany loans based in Canadian currency.
Gain (loss) on extinguishment of debt includes a loss of $0.2 million, which included a $13.1 million write-off of unamortized deferred financing costs from the repurchase of our 6.125% Senior Notes due January 2029 (the “6.125% Senior Notes”) during the nine month period ended September 30, 2023. A gain of $28.4 million for the nine month period in the comparable prior year period ended October 1, 2022 resulted from the repurchase of our 6.125% Senior Notes. No repurchases were made during the three month period ended September 30, 2023.
Income tax provision (benefit) increased by $3.6 million for the three month period ended September 30, 2023 compared to the comparable prior year period and decreased by $182.6 million for the nine month period ended September 30, 2023 compared to the comparable prior year period mainly due to lower pre-tax earnings for the reasons discussed above.
29
Reportable Segment Results of Operations
The following table sets forth the continuing results of operations for our reportable segments:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aperture Solutions | $ | 637,669 | $ | 569,994 | $ | 164,039 | $ | 734,033 | $ | 1,889,913 | $ | 569,994 | $ | 1,643,619 | $ | 2,213,613 | ||||||||||||||||||||||||||||||||||||||||
| Surface Solutions | 357,400 | 288,080 | 85,034 | 373,114 | 961,513 | 288,080 | 839,130 | 1,127,210 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shelter Solutions | 429,689 | 416,809 | 116,372 | 533,181 | 1,280,638 | 416,809 | 1,253,335 | 1,670,144 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,424,758 | $ | 1,274,883 | $ | 365,445 | $ | 1,640,328 | $ | 4,132,064 | $ | 1,274,883 | $ | 3,736,084 | $ | 5,010,967 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted reportable segment EBITDA*: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aperture Solutions | $ | 91,946 | $ | 74,235 | $ | 15,045 | $ | 89,280 | $ | 260,032 | $ | 74,235 | $ | 202,682 | $ | 276,917 | ||||||||||||||||||||||||||||||||||||||||
| Surface Solutions | 79,205 | 32,978 | 8,576 | 41,554 | 167,011 | 32,978 | 143,880 | 176,858 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shelter Solutions | 79,002 | 70,736 | 21,219 | 91,955 | 268,386 | 70,736 | 209,156 | 279,892 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (62,534) | (74,654) | (39,216) | (113,870) | (165,095) | (74,654) | 331,996 | 257,342 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (93,253) | (56,260) | (18,289) | (74,549) | (331,077) | (56,260) | (166,177) | (222,437) | ||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations | $ | 94,366 | $ | 47,035 | $ | (12,665) | $ | 34,370 | $ | 199,257 | $ | 47,035 | $ | 721,537 | $ | 768,572 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Aperture Solutions
The following table sets forth the continuing results of operations for the Aperture Solutions reportable segment:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 637,669 | $ | 569,994 | $ | 164,039 | $ | 734,033 | $ | 1,889,913 | $ | 569,994 | $ | 1,643,619 | $ | 2,213,613 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted reportable segment EBITDA* | $ | 91,946 | $ | 74,235 | $ | 15,045 | $ | 89,280 | $ | 260,032 | $ | 74,235 | $ | 202,682 | $ | 276,917 | ||||||||||||||||||||||||||||||||||||||||
| % of net sales | 14.4 | % | 13.0 | % | 9.2 | % | 12.2 | % | 13.8 | % | 13.0 | % | 12.3 | % | 12.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 42,701 | $ | 27,943 | $ | 8,305 | $ | 36,248 | $ | 146,633 | $ | 27,943 | $ | 79,816 | $ | 107,759 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Net sales for the three month period ended September 30, 2023 decreased $96.4 million, or 13.1%, and for the nine month period ended September 30, 2023 decreased $323.7 million, or 14.6%, mainly driven by lower volumes, partially offset by favorable price and product mix.
Adjusted segment EBITDA for the three month period ended September 30, 2023 increased $2.7 million and for the nine month period ended September 30, 2023 decreased $16.9 million, mainly due to lower volume, partially offset by favorable price net of inflation, product mix and manufacturing net efficiencies.
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Surface Solutions
The following table sets forth the continuing results of operations for the Surface Solutions reportable segment:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 357,400 | $ | 288,080 | $ | 85,034 | $ | 373,114 | $ | 961,513 | $ | 288,080 | $ | 839,130 | $ | 1,127,210 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted reportable segment EBITDA* | $ | 79,205 | $ | 32,978 | $ | 8,576 | $ | 41,554 | $ | 167,011 | $ | 32,978 | $ | 143,880 | $ | 176,858 | ||||||||||||||||||||||||||||||||||||||||
| % of net sales | 22.2 | % | 11.4 | % | 10.1 | % | 11.1 | % | 17.4 | % | 11.4 | % | 17.1 | % | 15.7 | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 25,545 | $ | 22,679 | $ | 8,041 | $ | 30,720 | $ | 65,284 | $ | 22,679 | $ | 65,225 | $ | 87,904 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Net sales for the three month period ended September 30, 2023 decreased by $15.7 million, or 4.2%, and for the nine month period ended September 30, 2023 decreased $165.7 million, or 14.7%, mainly driven by changes in price from movement in input costs.
Adjusted reportable segment EBITDA for the three month period ended September 30, 2023 increased $37.7 million, mainly due to the net impact of price, mix and movement in input costs.
Adjusted reportable segment EBITDA for the nine month period ended September 30, 2023 decreased $9.8 million, mainly due to lower volume, partially offset by the net impact of price, mix and movement in input costs.
Shelter Solutions
The following table sets forth the continuing results of operations for the Shelter Solutions reportable segment:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 429,689 | $ | 416,809 | $ | 116,372 | $ | 533,181 | $ | 1,280,638 | $ | 416,809 | $ | 1,253,335 | $ | 1,670,144 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted reportable segment EBITDA* | $ | 79,002 | $ | 70,736 | $ | 21,219 | $ | 91,955 | $ | 268,386 | $ | 70,736 | $ | 209,156 | $ | 279,892 | ||||||||||||||||||||||||||||||||||||||||
| % of net sales | 18.4 | % | 17.0 | % | 18.2 | % | 17.2 | % | 21.0 | % | 17.0 | % | 16.7 | % | 16.8 | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 24,361 | $ | 4,391 | $ | 1,552 | $ | 5,943 | $ | 115,044 | $ | 4,391 | $ | 18,016 | $ | 22,407 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Net sales for the three month period ended September 30, 2023 decreased $103.5 million, or 19.4%, and for the nine month period ended September 30, 2023 decreased $389.5 million, or 23.3%, mainly driven by changes in price from movement in input costs.
Adjusted reportable segment EBITDA for the three month period ended September 30, 2023 decreased $13.0 million and for the nine month period ended September 30, 2023 decreased by $11.5 million, mainly due to lower volume and the impact of the strategic divestitures of our coil coatings business in June 2022, partially offset by the net impact of price, mix and movement in input costs.
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Corporate and Other
The following table sets forth Corporate and other:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate costs | $ | 33,418 | $ | 28,499 | $ | 8,258 | $ | 36,757 | $ | 98,992 | $ | 28,499 | $ | 77,421 | $ | 105,920 | ||||||||||||||||||||||||||||||||||||||||
| Strategic development and acquisition related costs | 3,997 | 2,735 | 28,895 | 31,630 | 20,534 | 2,735 | 49,560 | 52,295 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired inventory step-up amortization | — | 30,317 | 30,317 | — | 30,317 | — | 30,317 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on legal settlements | — | — | — | — | — | — | (76,575) | (76,575) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loss (gain) on divestitures | 10,080 | 1,762 | — | 1,762 | 10,080 | 1,762 | (401,413) | (399,651) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term incentive plan compensation | 4,696 | 8,837 | 937 | 9,774 | 8,469 | 8,837 | 17,099 | 25,936 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Employee separation and facility closure charges | 7,701 | 2,399 | 975 | 3,374 | 19,132 | 2,399 | 92 | 2,491 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 2,642 | 105 | 151 | 256 | 7,888 | 105 | 1,820 | 1,925 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Corporate and other | $ | 62,534 | $ | 74,654 | $ | 39,216 | $ | 113,870 | $ | 165,095 | $ | 74,654 | $ | (331,996) | $ | (257,342) | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Corporate costs decreased by $3.3 million and $6.9 million for the three and nine month periods ended September 30, 2023 mainly due to lower compensation related costs.
Depreciation and Amortization
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | Successor | Predecessor | Combined* | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands) | Period from July 2, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from July 3, 2022 through July 24, 2022 | Period from July 3, 2022 through October 1, 2022 | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 40,818 | $ | 18,852 | $ | 677 | $ | 19,529 | $ | 159,955 | $ | 18,852 | $ | 6,356 | $ | 25,208 | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 7,745 | 384 | 5,217 | 5,601 | 44,830 | 384 | 50,370 | 50,754 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total depreciation | 48,563 | 19,236 | 5,894 | 25,130 | 204,785 | 19,236 | 56,726 | 75,962 | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization: Selling, general and administrative expenses | 44,690 | 37,024 | 12,395 | 49,419 | 126,292 | 37,024 | 109,451 | 146,475 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total depreciation and amortization | $ | 93,253 | $ | 56,260 | $ | 18,289 | $ | 74,549 | $ | 331,077 | $ | 56,260 | $ | 166,177 | $ | 222,437 | ||||||||||||||||||||||||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Depreciation and amortization increased by $18.7 million for the three month period ended September 30, 2023 compared to the comparable prior year period primarily due to shortened useful lives and a higher depreciable base as a result of the Merger.
Depreciation and amortization increased by $108.6 million for the nine month period ended September 30, 2023 mainly due to the Company recording a cumulative catch-up adjustment resulting in increases of $65.2 million and $1.3 million to cost of sales and selling, general and administrative expenses to account for the update in fair value of these assets as if the adjustments had been made as of the date of the Merger, as well as shortened useful lives and a higher depreciable base as a result of the Merger.
32
Liquidity and Capital Resources
Our main liquidity and capital resource needs are payments to service our debt, ongoing operations and working capital requirements, capital expenditures and the cost of acquisitions. Our primary source of liquidity is cash generated from our continuing operations, as well as borrowings under our credit facilities. We believe that funds provided by these sources will be adequate to meet our liquidity and capital resource needs for at least the next 12 months under current operating conditions.
We may from time to time take steps to reduce our debt. These actions may include repurchases or opportunistic refinancing of debt. The amount of debt, if any, that may be repurchased or refinanced 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 such debt, and we would continue to reflect the debt as outstanding in our condensed consolidated balance sheets.
The following table sets forth our total net liquidity position as of September 30, 2023:
| (Amounts in thousands) | Amount | ||||
| Cash and cash equivalents | $ | 475,820 | |||
| Revolving credit facilities: | |||||
Asset-based lending facility (1) | 850,000 | ||||
| Cash flow revolving facility | 92,000 | ||||
First-in-last-out tranche asset-based lending facility (1) | 95,000 | ||||
| Total revolving credit facilities | 1,037,000 | ||||
| Less: | |||||
| Debt issued under the facilities | — | ||||
| Letters of credit outstanding and priority payables | 47,000 | ||||
| Net credit facility | 990,000 | ||||
| Net liquidity | $ | 1,465,820 | |||
(1) Borrowing availability under the ABL Facilities is determined based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is also reduced by issuance of letters of credit.
Cash Flows
Nine Months Ended | ||||||||||||||||||||||||||
| Successor | Predecessor | Combined* | ||||||||||||||||||||||||
| (Amounts in thousands) | Period from January 1, 2023 through September 30, 2023 | Period from July 25, 2022 through October 1, 2022 | Period from January 1, 2022 through July 24, 2022 | Period from January 1, 2022 through October 1, 2022 | ||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 181,159 | $ | (31,791) | $ | 350,665 | $ | 318,874 | ||||||||||||||||||
| Net cash (used in) provided by investing activities | $ | (203,614) | $ | (24,402) | $ | 456,357 | $ | 431,955 | ||||||||||||||||||
| Net cash flows used in financing activities | $ | (55,635) | $ | (598,426) | $ | (94,087) | $ | (692,513) | ||||||||||||||||||
*Refer to Non-GAAP Financial Measures for further discussion.
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities consists mainly of: (i) cash collections on credit sales to our customers, (ii) purchases of commodity based raw materials, (iii) labor and other employee-related expenditures, (iv) other non-labor costs, such as, among other items, supplies, insurance, advertising and marketing costs, (v) interest paid on our long-term debt, and (vi) payments for income taxes.
33
Net cash provided by operating activities was $181.2 million for the nine months ended September 30, 2023, a decrease from the $318.9 million provided by operations in the prior year on lower volumes, higher interest paid, higher payments on accounts payable, payments made to satisfy incentive plan payouts, and cash paid for income taxes, partially offset by the timing of customer collections.
Net Cash (Used In) Provided by Investing Activities
Our main uses of cash for investing activities are for payments for property and equipment and acquisitions of businesses.
Net cash used in investing activities was $203.6 million for the nine months ended September 30, 2023 compared to $432.0 million provided by investing activities for the nine months ended October 1, 2022. The $635.6 million decrease is mainly driven by $67.8 million paid toward acquisitions during the nine months ended September 30, 2023, as well as $500.0 million received in proceeds from the sale of the Company’s coil coatings business in June 2022.
Net Cash Used In Financing Activities
Our main uses of cash for financing activities include activity to consummate the Merger, repurchases and payments on long-term debt, distributions to owners, and payments for financing fees. Our main sources of cash from financing activities include the proceeds from issuances of debt and contributions from owners.
Net cash used in financing activities was $55.6 million for the nine months ended September 30, 2023 compared to $692.5 million used in financing activities for the nine months ended October 1, 2022. This $636.9 million increase is mainly driven by significant activity associated with the Merger during the nine months ended October 1, 2022, which included the purchase of publically held shares totaling $1.6 billion, the issuance of $710.0 million in aggregate principal amount of 8.75% Senior Secured Notes, a $300.0 million Side Car Term Loan Facility, the payment of $85.0 million of financing costs and the receipt of $95.0 million in net contributions.
Contingent Liabilities and Commitments
Leases
We have leases for certain manufacturing, warehouse, distribution locations, offices, vehicles and equipment. As of September 30, 2023 the Company had total future lease payments of $479.5 million, with $61.5 million payable within 12 months.
Debt
We have certain long-term debt instruments outstanding. As of September 30, 2023 the Company had total future payments of $3.9 billion, with $29.0 million payable within 12 months. See Note 7 — Long-Term Debt in the Notes to the Condensed Consolidated Financial Statements for additional information.
Critical Accounting Estimates
There have been no material changes in our critical accounting policies and estimates during the nine months ended September 30, 2023. Refer to the 2022 Form 10-K for a description of the Company’s critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in our exposure to market risk during the nine months ended September 30, 2023. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a description of the Company’s market risks.
34
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 September 30, 2023. 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 by 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 September 30, 2023, 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
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 September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
CORNERSTONE BUILDING BRANDS, INC.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
See Part I, Item 1, “Condensed Consolidated Financial Statements”, Note 12 — Commitments and 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). The risks disclosed in the 2022 Form 10-K 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 that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations. Except for such additional information, we believe there have been no other material changes in our risk factors from those disclosed in the 2022 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As of July 25, 2022, the Company’s common stock is no longer publicly traded either on a stock exchange or in the over-the-counter market.
36
Item 6. Exhibits.
Index to Exhibits
| Exhibit No. | Description | |||||||
*10.1 | ||||||||
| *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 | |||||||
37
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: November 3, 2023 | By: | /s/ Jeffrey S. Lee | ||||||
| Jeffrey S. Lee | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| Date: November 3, 2023 | By: | /s/ Wayne F. Irmiter | ||||||
| Wayne F. Irmiter | ||||||||
| Senior Vice President and Chief Accounting Officer | ||||||||
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