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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
 
Form 10-K 
__________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
 
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
__________________________
CNR-20191231_G1.JPG
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)

Registrant’s telephone number, including area code: (866) 419-0042
__________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, $0.01 par value CNR New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
__________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ý No o
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).Yes ý No o
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 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 Accelerated filer ý
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 Act).Yes No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on June 28, 2019 was $252,031,712, which aggregate market value was calculated using the closing sales price reported by the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares of common stock of the registrant outstanding on February 26, 2020 was 126,073,241.
__________________________

DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual Report is incorporated by reference from the registrant’s definitive proxy statement for its 2020 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days of December 31, 2019.




TABLE OF CONTENTS

3
Item 1.
3
Item 1A.
17
Item 1B.
29
Item 2.
29
Item 3.
30
31
Item 5.
31
Item 6.
33
Item 7.
34
Item 7A.
55
Item 8.
57
Item 9.
115
Item 9A.
115
Item 9B.
115
116
Item 10.
116
Item 11.
116
Item 12.
116
Item 13.
116
Item 14.
116
117
Item 15.
117
Item 16.
120

i


FORWARD LOOKING STATEMENTS
This Annual Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will,” “target” or other similar words. We have based our forward-looking statements on 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 or information. 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:
industry cyclicality and seasonality and adverse weather conditions;
challenging economic conditions affecting the nonresidential construction industry;
downturns in the residential new construction and repair and remodeling end markets, or the economy or the availability of consumer credit;
volatility in the United States (“U.S.”) economy and abroad, generally, and in the credit markets;
our ability to successfully develop new products or improve existing products;
the effects of manufacturing or assembly realignments;
seasonality of the business and other external factors beyond our control;
commodity price volatility and/or limited availability of raw materials, including steel, PVC resin, glass and aluminum;
our ability to identify and develop relationships with a sufficient number of qualified suppliers and to avoid a significant interruption in our supply chains;
retention and replacement of key personnel;
enforcement and obsolescence of our intellectual property rights;
costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
changes in building codes and standards;
competitive activity and pricing pressure in our industry;
our ability to make strategic acquisitions accretive to earnings;
our ability to carry out our restructuring plans and to fully realize the expected cost savings;
global climate change, including legal, regulatory or market responses thereto;
breaches of our information system security measures;
damage to our computer infrastructure and software systems;
necessary maintenance or replacements to our enterprise resource planning technologies;
potential personal injury, property damage or product liability claims or other types of litigation;
compliance with certain laws related to our international business operations;
increases in labor costs, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
significant changes in factors and assumptions used to measure certain of our defined benefit plan obligations and the effect of actual investment returns on pension assets;
the cost and difficulty associated with integrating and combining acquired businesses;
1


volatility of the Company’s stock price;
substantial governance and other rights held by the Investors;
the effect on our common stock price caused by transactions engaged in by the Investors, our directors or executives;
our substantial indebtedness and our ability to incur substantially more indebtedness;
limitations that our debt agreements place on our ability to engage in certain business and financial transactions;
our ability to obtain financing on acceptable terms;
downgrades of our credit ratings;
the effect of increased interest rates on our ability to service our debt; and
other risks detailed under the caption “Risk Factors” in Part I, Item 1A of this report.
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 Item 1A of this report. 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.
2


PART I
 
Item 1. Business.
General
Cornerstone Building Brands, Inc. (together with its subsidiaries, unless the context requires otherwise, the “Company,” “Cornerstone,” “we,” “us” or “our”) is a leading North American integrated manufacturer of external building products for the commercial, residential, and repair and remodel construction industries. We design, engineer, and manufacture external building products through our three operating segments, Commercial, Siding, and Windows.
In our Commercial segment, we design, engineer, manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Our Commercial segment also provides metal coil coating services for commercial and construction applications, servicing both internal and external customers. We sell our products for both new construction and repair and retrofit applications.
In our Siding segment, our principal products include vinyl siding and skirting, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, aluminum gutters, aluminum and steel roofing accessories, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl railing, and stone veneer in the United States and Canada. The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).
In our Windows segment, our principal products include vinyl, aluminum-clad vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada. We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. The breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).
NCI Building Systems, Inc. ("NCI") was founded in 1984 and reincorporated in Delaware in 1991. In 1998, we acquired Metal Building Components, Inc. (“MBCI”) and we became the largest domestic manufacturer of nonresidential metal components. In 2006, we acquired Robertson-Ceco II Corporation (“RCC”) which operates the Ceco Building Systems, Star Building Systems and Robertson Building Systems divisions and was a leader in the metal buildings industry. The RCC acquisition created an organization with greater product and geographic diversification, a stronger customer base and a more extensive distribution network than either company had individually, prior to the acquisition.
Since 2011, we executed on a strategy to become the leading provider of Insulated Metal Panels ("IMP") products in North America through our acquisitions of Metl-Span LLC (‘‘Metl-Span’’) in 2012 and CENTRIA, a Pennsylvania general partnership (‘‘CENTRIA’’), in 2015. IMP products possess several physical and cost-effective attributes, such as energy efficiency, that make them compelling alternatives to competing building materials, in particular due to the adoption of stricter standards and codes by numerous states in the United States that are expected to increase the use of IMP products in construction projects. Given these factors, we believe that growth within the IMP market will continue to outpace the broader metal building sector and the nonresidential construction industry as a whole.
At a Special Meeting of the shareholders of NCI held on November 15, 2018 (the “Special Shareholder Meeting”), NCI’s shareholders approved (i) the Agreement and Plan of Merger (the “Merger Agreement”) among NCI, Ply Gem Parent, LLC (“Ply Gem”), and for certain limited purposes set forth in the Merger Agreement, Clayton, Dubilier & Rice, LLC, a Delaware limited liability company, pursuant to which, at the closing of the merger, Ply Gem was merged with and into the Company, with the Company continuing its existence as a corporation organized under the laws of the State of Delaware (the “Merger”) and (ii) the issuance in the Merger of 58,709,067 shares of NCI common stock, par value $0.01 per share (the “NCI Common Stock”) in the aggregate, on a pro rata basis, to the holders of all of the equity interests in Ply Gem (the “Stock Issuance”). The Merger was consummated on November 16, 2018 pursuant to the Merger Agreement.
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Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company and each of Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”), CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund VIII”, and together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”), CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with CD&R Fund VIII and CD&R FF Fund VIII, individually, the “CD&R Investors,” and collectively, the “CD&R Investor Group”), Atrium Intermediate Holdings, LLC, a Delaware limited liability company (“Atrium”), GGC BP Holdings, LLC, a Delaware limited liability company (“GGC”), and AIC Finance Partnership, L.P., a Cayman Islands exempted limited partnership (“AIC”, and together with Atrium and GGC, each individually, a “Golden Gate Investor,” and collectively, the “Golden Gate Investor Group,” and together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) with the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of NCI Common Stock that are held by the Investors following the consummation of the Merger.
On November 16, 2018, in connection with the consummation of the Merger, the Company assumed (i) the obligations of the company formerly known as Ply Gem Midco, Inc. (“Ply Gem Midco”), a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement, (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture (each as defined and further described in "Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations").
On January 12, 2019, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC, a Delaware limited liability company (“Environmental Stoneworks” or “ESW”), the Members of Environmental Materials, LLC (the “Sellers”) and Charles P. Gallagher and Wayne C. Kocourek, solely in their capacity as the Seller Representative (as defined in the Purchase Agreement), pursuant to which, on February 20, 2019, the Company’s wholly-owned subsidiary, Ply Gem Industries, Inc., purchased from the Sellers 100% of the outstanding limited liability company interests of Environmental Stoneworks (the “Environmental Stoneworks Acquisition”). The transaction was financed through borrowings under the Company’s asset-based revolving credit facility. The Environmental Stoneworks Acquisition, when combined with the Company’s existing stone businesses, positions the Company as a market leader in stone veneer.
For additional discussion of the Company’s debt following the Merger, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our principal offices are located at 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513, and our telephone number is (866) 419-0042.
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”). Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with any amendments to those reports, are available free of charge at our corporate website at http://www.cornerstonebuildingbrands.com as soon as practicable after such material is electronically filed with, or furnished to the SEC. In addition, our website includes other items related to corporate governance matters, including our corporate governance guidelines, charters of various committees of our Board of Directors and the code of business conduct and ethics applicable to our employees, officers and directors. You may obtain copies of these documents, free of charge, from our corporate website. However, the information on our website is not incorporated by reference into this Form 10-K.
Segments
Our operating segments operate primarily in the commercial, residential, and repair and remodeling construction markets. Sales and earnings are influenced by general economic conditions, commodity prices and the level of construction activity.
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Commercial
Products
In our Commercial segment, we design, engineer, manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Our Commercial segment also provides metal coil coating services for commercial and construction applications, servicing both internal and external customers. We sell our products for both new construction and repair and retrofit applications.
Coil Coatings – Our complete line of coating finishes includes Epoxies, Acrylics, Polyesters, Silicone Modified Polyesters (SMP), Flurocarbons (PVDF), and Plastisol for light-gauge and heavy-gauge steel coil applications. As one of the largest coil coaters in the country, Metal Coaters specializes in the toll processing of customer-owned light gauge metal to deliver coil coating solutions throughout the United States. Metal Prep is one of the largest providers of pre-painted Hot Rolled Steel in the United States and provides heavy gauge coil coating solutions to the construction industry. We sell our products and processes principally to original equipment manufacturer customers who utilize pre-painted metal, including other manufacturers of engineered building systems and metal components. Our customer base also includes steel mills, metal service centers and painted coil distributors who in-turn supply various manufacturers of engineered building systems, metal components, lighting fixtures, ceiling grids, water heaters, appliances and other manufactured products.
Doors – From steel curtain roll-up and self-storage doors to complete hallway systems, our products are fabricated to meet or exceed operational requirements with little to no maintenance. Our doors are used across the country in freight terminals, commercial buildings, self-storage facilities, and more. Commercial grade steel curtain roll-up doors, self-storage doors, and hallway systems are sold directly to contractors and other customers under the brand “Doors and Buildings Components” (“DBCI”).
Insulated Metal Panels – Insulated Metal Panels act simultaneously as exterior wall, insulation, and finished interior wall, offering protection over the lifespan of a building. Insulated metal panels are panels consisting of rigid foam encased between two sheets of coated metal in a variety of modules, lengths and reveal combinations and are increasingly desirable because of their energy efficiency, noise reduction and aesthetic qualities. We design, manufacture, sell and distribute insulated metal panels for use in various architectural, commercial, industrial and cold storage end market applications under the brand names “Metl-Span” and “CENTRIA”.
Metal Building Systems – Metal building systems consist of engineered structural members and panels that are fabricated and roll-formed in a factory. These systems are custom designed and engineered to meet project requirements and then shipped to a construction site complete and ready for assembly with no additional field welding required. Engineered building systems manufacturers design an integrated system that meets applicable building code and designated end use requirements. These systems consist of primary structural framing, secondary structural members (purlins and girts) and metal roof and wall systems or conventional wall materials manufactured by others, such as masonry and concrete tilt-up panels. We sell engineered building systems to builders, general contractors, developers and end users nationwide under the brand names “Metallic,” “Mid-West Steel Building Company,” “A & S,” “All American,” “Mesco,” “Star,” “Ceco,” “Robertson,” “Garco,” “Heritage” and “SteelBuilding.com.” We market engineered building systems through an in-house sales force to affiliated builder networks of approximately 3,200 builders. We also sell engineered building systems via direct sale to owners and end users as well as through private label companies. The majority of our sales of engineered building systems are made through our authorized builder networks. We enter into an authorized builder agreement with independent general contractors that market our products and services to users. These agreements generally grant the builder the non-exclusive right to market our products in a specified territory. Generally, the agreement is cancelable by either party with between 30 and 60 days’ notice. The agreement does not prohibit the builder from marketing engineered building systems of other manufacturers. In some cases, we may defray a portion of the builder’s advertising costs and provide volume purchasing and other pricing incentives to encourage those businesses to deal exclusively or principally with us. The builder is required to maintain a place of business in its designated territory, provide a sales organization, conduct periodic advertising programs and perform construction, warranty and other services for customers and potential customers. An authorized builder usually is hired by an end-user to erect an engineered building system on the customer’s site and provide general contracting, subcontracting and/or other services related to the completion of the project. We sell our products to the builder, which generally includes the price of the building as a part of its overall construction contract with its customer.
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Metal Roofing and Wall Systems - Metal roofing and wall systems, metal partitions, metal trim, doors and other related accessories. These products are used in new construction and in repair and retrofit applications for industrial, commercial, institutional, agricultural and rural uses. Metal components are used in a wide variety of construction applications, including purlins and girts, roofing, standing seam roofing, walls, doors, trim and other parts of traditional buildings, as well as in architectural applications and engineered building systems. We sell roofing and wall systems directly to regional manufacturers, contractors, subcontractors, distributors, lumberyards, cooperative buying groups and other customers under the brand names “MBCI”, “American Building Components” (“ABC”), and “Metal Depots.” We sell directly to contractors or end users for use in the building industry, including the construction of metal buildings. We also stock and market metal component parts for use in the maintenance and repair of existing buildings. Specific component products we manufacture include metal roof and wall systems, purlins, girts, partitions, header panels and related trim and screws. We market our components products primarily within six market segments: commercial/industrial, architectural, standing seam roof systems, agricultural, residential and cold storage. Customers include small, medium and large contractors, specialty roofers, regional fabricators, regional engineered building fabricators, post frame contractors, material resellers and end users.
Raw materials and suppliers
The principal raw material used in manufacturing of our metal components and engineered building systems is steel which we purchase from multiple steel producers. Our various products are fabricated from steel produced by mills including bars, plates, structural shapes, hot-rolled coils and galvanized or Galvalume®-coated coils (Galvalume® is a registered trademark of BIEC International, Inc.).
The price and supply of steel impacts our business. The steel industry is highly cyclical in nature, and steel prices have been volatile in recent years and may remain volatile in the future. Steel prices are influenced by numerous factors beyond our control, including general economic conditions domestically and internationally, currency fluctuations, the availability of raw materials, competition, labor costs, freight and transportation costs, production costs, import duties and other trade restrictions. Based on the cyclical nature of the steel industry, we expect steel prices will continue to be volatile.
Although we have the ability to purchase steel from a number of suppliers, a production cutback by one or more of our current suppliers could create challenges in meeting delivery schedules to our customers. Because we have periodically adjusted our contract prices, particularly in the engineered building systems segment, we have generally been able to pass increases in our raw material costs through to our customers. We normally do not maintain an inventory of steel in excess of our current production requirements. However, from time to time, we may purchase steel in advance of announced steel price increases.
Competition
We and other manufacturers of metal components and engineered building systems compete in the building industry with all other alternative methods of building construction such as tilt-wall, concrete and wood, single-ply and built up, all of which may be perceived as more traditional, more aesthetically pleasing or having other advantages over our products.
In addition, competition in the metal components and engineered building systems market of the building industry is intense. We believe it is based primarily on:
quality;
service;
on-time delivery;
ability to provide added value in the design and engineering of buildings;
price;
speed of construction; and
personal relationships with customers.
We compete with a number of other manufacturers of metal components, metal coil coaters, and engineered building systems for the building industry, including Nucor, Bluescope, Mueller, Kingspan, and Central States. Many of these competitors operate on a regional basis. We have two primary nationwide competitors in the engineered building systems market and three primary nationwide competitors in the metal components market. However, the metal components market is more fragmented than the engineered building systems market.
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As of December 31, 2019, we operated 37 manufacturing facilities located in the United States, Mexico and Canada, with additional sales and distribution offices throughout the United States and Canada. These facilities are used primarily for the manufacturing of metal components and engineered building systems for the building industry. We believe this broad geographic distribution gives us an advantage over our metal components and engineered building systems competitors because major elements of a customer’s decision are the speed and cost of delivery from the manufacturing facility to the product’s ultimate destination. We operate a fleet of trucks to deliver our products to our customers in a more timely manner than most of our competitors.
Intellectual property
We have a number of United States patents, pending patent applications and other proprietary rights, including those relating to metal roofing systems, metal overhead doors, our pier and header system, our Long Bay® System and our building estimating and design system. The patents on our Long Bay® System expire in 2021. We also have several registered trademarks and pending registrations in the United States.
Seasonality
The Commercial business, and the construction industry in general, are seasonal in nature. Sales normally are lower in the first half of each fiscal year compared to the second half of each fiscal year because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
Backlog
At December 31, 2019 and December 31, 2018, the total backlog of orders, consisting of Engineered Building Systems’ and IMP orders, for our products was $608.0 million and $528.8 million, respectively. Job orders included in backlog are generally cancelable by customers at any time for any reason; however, cancellation charges may be assessed. Occasionally, orders in the backlog are not completed and shipped for reasons that include changes in the requirements of the customers and the inability of customers to obtain necessary financing or zoning variances. We anticipate that less than 23% of this backlog will extend beyond one year.
Siding
Products
In our Siding segment, our principal products include vinyl siding and skirting, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, fabricated aluminum gutters, aluminum and steel roofing accessories, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl railing, and stone veneer in the United States and Canada. We sell our siding and accessories under our Variform®, Napco®, Mastic® Home Exteriors, Mitten®, Ply Gem/Cellwood®, and Durabuilt® brand names and under the Georgia-Pacific brand name through a private label program. Our cellular PVC Trim products are sold under our Ply Gem® Trim and Mouldings brand name. Our vinyl fencing and railing products are sold under the Ply Gem brand name. Our stone veneer products are sold under our Environmental Stoneworks, Canyon Stone and Ply Gem Stone brand names. Our gutter protection products are sold under our Leaf Relief®, Leaf Relief® Snap Tight, Leaf Smart® and Leaf Logic® brand names. The breadth of our product lines shown below and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).
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Mastic® Home Exteriors Variform® Napco® Cellwood ® Durabuilt® Georgia Pacific Mitten® Ply Gem Fence/Rail Ply Gem® Stone Canyon Stone Ply Gem® Trim and Mouldings
Environmental Stone Works (1)
Specialty/Super-Premium
Cedar Discovery®
Structure®
Home Insulation SystemTM
Heritage Cedar®™
Climaforce™
Cedar Select®
American Essence™
Cedar Dimensions™ 670 Series™ Hand Split
650 Series™ Shingle Siding
660 Series™ Round Cut Siding
800 Series Insulated Siding
Cedar Spectrum™Caliber™ High Performance Insulated Siding Sentry Variegated Siding
Mitten 8' Rough Sawn
Shake
Fieldstone Tuscan
Fieldstone Shadow
Ledgestone
Cut Cobblestone
Cobblestone
Ridgestone
Riverstone Brick
Cascade Ledge
True Stack
Manorstone
Canyon Ledge
Castle
Cathedral
Classic
Cobblestone
Country Ledge
Fieldstone
Limestone
Manchester
River Rock
Timber Lodge
Tuscan Field Stone
Southern Ledge
Strip Ledge
Brick
Amargosa
Chiseled
Clipstone
Durata
EZ Column
Bugnato
Coral Stone
Grezzo
Imperial Panel
Luxor Panel
MArquis
Prairie
Prostack
Ripiano
Rocca
Sabia
Stepp Stone
Thin Brick
Tivoli
Travertine
True Stack
Cascade
Castle
Cathedral
Chisel Rock
Coastal Ledge
Cobble
Cut Stone
European Castle
Fieldstone
French Country
Hackett
Ledgestone
Limestone
Manor
Mountain Edge
River Rosk
Rubble
Rustic Ledge
Southern Ledgestone
Stripstone
Teton
Timber Ledge
Tuscan LEdge
Weatheredge
Premium Quest®
Barkwood®
Liberty Elite®
Board + Batten
Designer Series™
Carvedwood 44®
Western Extreme®
Vortex Extreme™
Board & Batten
Camden Pointe®
American Splendor®
American Accents
Board & Batten™
Dimensions®
Board & Batten
480 Series™
Board & Batten
Sentry
Southern Beaded
Woodland Select™ Trim Boards
Corners
Post Wraps
Mouldings
Beadboard
Skirtboard Sheets
J-Notch Trim
Post Accents
Standard Ovation™
Charleston Beaded®
Nottingham®
Ashton Heights®
Victoria Harbor®
American Herald®
American Tradition
American 76 Beaded®
Progressions®
Colonial Beaded
440 Series™
450 Series™ Beaded
Forest Ridge®
Shadow Ridge®
Castle Ridge®
Somerset™ Coastal
Highland Oregon Pride Ply Gem®
Economy Mill Creek®
Eclipse™
Contractors Choice® American Comfort® 410 Series™ Vision Pro®
Chatham Ridge®
Parkside®
Oakside®
Entree

(1)The Environmental Stoneworks product line was integrated in 2019 with the February 2019 acquisition of Environmental Stoneworks.
Customers and distribution
We have a multi-channel distribution network that serves both the new construction and the home repair and remodeling sectors, which exhibit different, often counter-balancing, demand characteristics. In conjunction with our multiple brand and price point strategy, we believe our multi-channel distribution strategy enables us to increase our sales and sector penetration
8


while minimizing channel conflict. We believe our strategy reduces our dependence on any one channel, which provides us with a greater ability to sustain our financial performance through economic fluctuations.
We sell our siding and accessories to specialty distributors (one-step distribution) and to wholesale distributors (two-step distribution). Our specialty distributors sell directly to remodeling contractors and builders. Our wholesale distributors sell to retail home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers. In the specialty channel, we have developed an extensive network of approximately 800 independent distributors, serving over 22,000 contractors and builders nationwide. We are well-positioned in this channel as many of these distributors are both the largest and leading consolidators in the industry. In the wholesale channel, we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a distribution operation of the Georgia-Pacific Corporation), one of the largest building products distributors in the United States. Through BlueLinx, our Georgia-Pacific private label vinyl siding products are sold at major retail home centers, lumberyards and manufactured housing manufacturers. A portion of our siding and accessories is also sold directly to home improvement centers. Our growing customer base of fencing and railing consists of fabricators, distributors, retail home centers and lumberyards. Our customer base of stone veneer products consists of distributors, lumberyards and retailers. We also sell to builders and contractors with a distinct turnkey model that provides product and installation services. In Canada, our complete offering of vinyl siding, accessories, trim, and moldings, along with Ply Gem manufactured and third party sourced complimentary products are primarily distributed through our 18 Mitten branch locations, to retail home centers and lumberyards, and new construction and remodeling contractors.
Production and facilities
Vinyl siding, skirting, soffit and accessories are manufactured in our Martinsburg, West Virginia, Jasper, Tennessee, Stuarts Draft, Virginia, Kearney, Missouri, and Paris, Ontario facilities, while all metal products are produced in our Sidney, Ohio facility. The majority of our injection molded products such as shakes, shingles, scallops, shutters, vents and mounts are manufactured in our Gaffney, South Carolina facility. The cellular polyvinyl chloride ("PVC") trim and mouldings products are manufactured in St. Marys, West Virginia. The vinyl, metal, and injected molded plants have sufficient capacity to support planned levels of sales growth for the foreseeable future. Our fencing and railing products are currently manufactured at our York, Nebraska facility. The fencing and railing plants have sufficient capacity to support our planned sales growth for the foreseeable future. Our stone veneer products are manufactured at our Olathe, Kansas, Denver, Colorado, Mabletown, Georgia, Orwigsburg, Pennsylvania, Selingsgrove, Pennsylvania, North Branch, Minnesota and St. George, Utah facilities. Our manufacturing facilities are among the safest in all of North America with three of them having received the highest federal and/or state OSHA safety award and rating.
Raw materials and suppliers
PVC resin and aluminum are major components in the production of our siding, fencing, and stone products. PVC resin and aluminum are commodity products and are available from both domestic and international suppliers. We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material. Changes in PVC resin and aluminum prices have a direct impact on our cost of products sold. Historically, we have been able to pass on the price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.
Competition
We compete with other national and regional manufacturers of vinyl siding, aluminum, cellular PVC, fencing, and stone products. We believe we are currently the largest manufacturer of vinyl siding in North America. Our vinyl siding competitors include CertainTeed, Alside, Royal Building Products and smaller regional competitors. Our aluminum accessories competitors include Rollex, Euramax, Gentek and other smaller regional competitors. Significant growth in vinyl fencing and railing has attracted many new entrants, and the sector today is fragmented with numerous competitors including U.S. Fence, Homeland, Westech, Bufftech, and Azek. Our cellular PVC trim and moulding competitors include Azek, Inteplast, Kommerling (KOMA), Wolfpac (Versatex), Tapco (Kleer), CertainTeed and Royal Building Products. Our stone veneer competitors include Boral (Cultured Stone and Eldorado Stone), Coronado Stone and smaller regional competitors. Our stone competitive advantage is that we provide a full, turnkey solution including manufacturing, distribution and installation services direct to builders and general contractors. We also compete on product quality, breadth of product offering, sales and service support. In addition to competition from other vinyl siding, fencing and stone products, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry. Increases in competition from other exterior building products manufacturers and alternative building materials could cause us to lose customers and lead to net sales decreases.
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Intellectual property
We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, licenses, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Siding segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. We license the Georgia-Pacific trademark for our Georgia-Pacific private label vinyl siding products sold through BlueLinx. While we do not believe the Siding segment is dependent on any one of our trademarks, we believe that our trademarks are important to the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.
Seasonality
Markets for our products in the Siding segment are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because a portion of our overhead and expenses are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.
We generally carry increased working capital during the first half of a fiscal year to support those months where customer demand exceeds production capacity. We believe that this is typical within the siding industry.
Backlog
Our Siding segment had a backlog of approximately $66.0 million at December 31, 2019. We expect to fill 100% of the orders during 2020 that were included in our backlog at December 31, 2019.
Windows
Products
In our Windows segment, our principal products include vinyl, aluminum-clad vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada. Our products in our Windows segment are sold under the Ply Gem® Windows, Simonton® Windows, Great Lakes® Window, Atrium Windows, American Craftsman, Silver Line, North Star, Tru Bilt and Ply Gem® Canada brands. We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. The breadth of our product lines shown below and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).
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Ply Gem U.S. Windows Great Lakes Window Ply Gem Canada Simonton Atrium North Star Tru Bilt Silver Line American Craftsman
New Construction Replacement Replacement New Construction & Replacement New Construction Replacement New Construction Replacement Replacement Replacement New Construction & Replacement Replacement
Specialty/Super-Premium Mira® Premium Series EcoSMART Design Architectural Series
Signature Series
Stormbreaker Plus
VantagePointeTM 6500
8900
Premium Mira® Premium Series Premium Series Comfort Smart Comfort Series
Design Series
Enviro Series
ProFinish® Brickmould 600
Reflections® 5500
Daylight MaxTM
LumeraTM
Madeira
Impressions 9800
VantagePointeTM 6400
450 8700 1000 Series Custom Door Series
Standard Pro Series
Classic
Pro Series Harbor Light Classic Series
Vista Series
Brickmould 300
ProFinish® Contractor
ProFinish® Master
VantagePointeTM 6100
VantagePointeTM 6200
VantagePointeTM 6600
ClearValue
Verona
Reflections® 5050
Reflections® 5300
130
150
8300 V3 (70) Series
V3 (3000) Series
V3 (8600/8700/8800) Series
V3 (5800) Series
70 (70) Series
70 (3000) Series
70 (8600/8700/8800) Series
70 (5800) Series
70 (2900) Series
Economy Builder Series
1500
Contractor Series ProFinish® Builder
AsureTM
5700 8050 V1 (1200) Series
V1 (2000/2100/2200) Series
V1 (2900) Series
V1 (5500/5700) Series
50 (1200) Series
50 (2000/2100/2200) Series
50 (5500/5700) Series

Customers and distribution
We have a multi-channel distribution and product strategy that enables us to serve both the new construction and the home repair and remodeling markets. By offering this broad product offering and industry leading service, we are able to meet the local needs of our customers on a national scale. This strategy has enabled our customer base (existing and new) to simplify their supply chain by consolidating window suppliers. Our "good, better, best" product and price point strategy allows us to increase our sales and sector penetration while minimizing channel conflict. This strategy reduces our dependence on any one channel, providing us with a greater ability to sustain our financial performance through economic fluctuations.
The new construction product lines are sold for use in new residential and light commercial construction through a highly diversified customer base, which includes independent building material dealers, regional/national lumberyard chains, builder direct/OEMs and retail home centers. Our repair and remodeling window products are primarily sold through independent home improvement dealers, one-step distributors, and big box retail outlets. Dealers typically market directly to homeowners or contractors in connection with remodeling requirements while distributors concentrate on local independent retailers.
In Canada, sales of product lines for new construction are predominantly made through direct sales to builders and contractors, while sales for repair and remodeling are made primarily through retail lumberyards, independent home improvement dealers and direct to consumers through our supply and install services. Ply Gem Canada products are distributed through twelve Ply Gem Canada distribution centers.
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Production and facilities
Our window and door products leverage a network of vertically integrated production and distribution facilities located in Virginia, Ohio, North Carolina, Georgia, Texas, California, Washington, West Virginia, Illinois, New Jersey, Ontario, Canada and Alberta, Canada. Our window manufacturing facilities have benefited from our continued investment and commitment to product development and product quality combined with increasing integration of best practices across our product offerings. In 2010, we began producing vinyl compound for our west coast facilities which improved our operating efficiency and resulted in lower production cost for these items. We continued making upgrades to the automation of our production lines.

While market conditions will dictate future capacity requirements, we have the ability to increase capacity in a cost effective manner by expanding production shifts and lines. Significant housing demand increases to historical levels may require additional capital investment in certain geographical areas to meet this increased demand. Any capacity increase may, however, initially be offset by labor inefficiencies or difficulties obtaining the appropriate labor force. Ongoing capital investments will focus on new product introductions and simplification, production automation, equipment maintenance and cost reductions.
Raw materials and suppliers
PVC compound, wood, aluminum and glass are major components in the production of our window and door products. These products are commodity products available from both domestic and international suppliers. Historically, changes in PVC compound, aluminum billet, glass and wood cutstock prices have had the most significant impact on our material cost of products sold in our Windows segment. We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material. The PVC resin compound that is used in our window lineal production is produced internally. The leveraging of our PVC resin buying power and our PVC resin compounding capabilities benefits all of our window companies. Our window plants have consolidated glass purchases to take advantage of strategic sourcing savings opportunities. In addition, we have continued to vertically integrate aluminum extrusion in our window plants.
Competition
The window and patio door sector remains fragmented, comprised primarily of local and regional manufacturers with limited product offerings. The sector’s competitors in the United States include national brands, such as Jeld-Wen, Pella, MI Home Products and Andersen, and other regional brands, including Weathershield and others. Competitors in Canada include Jeld-Wen, All Weather, Durabuilt, Vinylbilt and numerous regional brands. We generally compete on service, product performance, product offering, sales and support. We believe all of our products are competitively priced and that we are one of the only manufacturers to serve all end markets and price points.
Intellectual property
We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, licenses, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Windows segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe the Windows segment is dependent on any one of our trademarks, we believe that our trademarks are important to the Windows segment and the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.
Seasonality
Markets for our products in the Windows segment are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Accordingly, our working capital is typically higher in the second and third quarters as well. Because much of our overhead and expense are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing lower profit margins when such conditions exist.
Because we have successfully implemented lean manufacturing techniques and many of our windows and doors are made to order, inventories in our Windows segment do not change significantly with seasonal demand.
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Backlog
Our Windows segment had a backlog of approximately $100.9 million at December 31, 2019. We expect to fill 100% of the orders during 2020 that were included in our backlog at December 31, 2019.
Business Strategy
Cornerstone Building Brands is relentlessly committed to our customers and to creating great building solutions that enable communities to grow and thrive. By focusing on operational excellence every day, creating a platform for future growth and investing in market-leading residential and commercial building brands, we deliver unparalleled financial results. We want to play an essential role in our communities where people live, work and play to enable those communities to grow and thrive.
The Company's strategy has several primary elements:
Profitable Growth. The Company intends to expand into new and existing markets by leveraging its customer relationships and full portfolio of leading products. We believe we have a meaningful opportunity for organic growth through product line extension, innovation of new systems and cross selling of products to deepen penetration across our customer channels. Using a highly collaborative selling approach, the Company intends to grow in attractive market sectors, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by Cornerstone Building Brand products.
Operational Excellence. Cornerstone Building Brands operates with a relentless drive for exceptional results and a passion for superior execution. The Company embraces a continuous improvement culture that is charged with increasing efficiency, optimizing costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth. This requires the Company’s ongoing commitment to attract, retain and develop the best talent. This also includes making investments in automation within our manufacturing facilities, transforming the way work gets done, and deploying capital in ways we believe will drive the greatest returns for our shareholders over the long-term.
Capital Deployment to Drive Shareholder Value. The Company is intently focused on providing the highest returns for shareholders through its capital allocation framework, which includes: (1) investing in the core business through capital expenditures and other organic growth initiatives; (2) pursuing strategic acquisitions to broaden its portfolio and capabilities across the residential and commercial markets, with a focus on adjacent exterior building products and related services; and (3) targeting long-term net debt leverage of 2.0x to 2.5x. As part of this framework, the Company may also restructure, reposition or divest underperforming product lines or assets.
Restructuring
We continue to execute on our plans to improve cost efficiency through the optimization of our combined manufacturing plant footprint and the elimination of certain fixed and indirect SG&A costs. During the fiscal year ended December 31, 2019, we incurred restructuring charges of $18.1 million. See Note 5 — Restructuring in the notes to the consolidated financial statements for additional information.
Consolidation
Over the last several years, there has been a consolidation of competitors within the industries of the engineered building systems, metal components, insulated metal panels, metal coil coating, and windows, which include many small local and regional firms. We believe that these industries will continue to consolidate, driven by the needs of manufacturers to increase anticipated long-term manufacturing capacity, achieve greater process integration, add geographic diversity to meet customers’ product and delivery needs, improve production efficiency and manage costs. The vinyl siding industry has already largely consolidated with four companies comprising approximately 90% of the market. When beneficial to our long-term goals and strategy, we have sought to consolidate our business operations with other companies. The resulting synergies from these consolidation efforts have allowed us to reduce costs while continuing to serve our customers’ needs. For more information, see “Acquisitions” below. For a discussion of the possible effects on us of such consolidations, see “Item 1A. Risk Factors.”
Acquisitions
We have a history of making strategic acquisitions within our industry, including the Metl-Span Acquisition, the CENTRIA Acquisition, the Merger and the ESW Acquisition, and we regularly evaluate growth opportunities both through acquisitions and internal investment. We believe that there remain opportunities for growth through consolidation in the Commercial, Siding and Windows segments, and our goal is to continue to grow organically and through opportunistic strategic acquisitions that meet our strict criteria.
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Consistent with our growth strategy, we frequently engage in discussions with potential sellers regarding the possible purchase by us of businesses, assets and operations that are strategic and complementary to our existing operations. Such acquisition efforts may involve participation by us in processes that have been made public, involve a number of potential buyers and are commonly referred to as “auction” processes, as well as situations in which we believe we are the only party or one of the very limited number of potential buyers in negotiations with the potential seller. These acquisition efforts often involve assets that, if acquired, would have a material effect on our financial condition and results of operations.
We also evaluate from time to time possible dispositions of assets or businesses when such assets or businesses are no longer core to our operations and do not fit into our long-term strategy.
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, transfer or sell assets, make acquisitions and engage in mergers. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt.”
Environmental Matters, Health and Safety Matters
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of our employees and the end-users of our products, regulate the materials used in our 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 can result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls or equipment, and civil sanctions.
We could be held liable for costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, operated or used as a disposal site, or at other sites where we or predecessors may have released hazardous materials. We could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
Changes in or new interpretations of existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future including additional investigation, remediation or other obligations with respect to our products or business activities or the imposition of new permit requirements may lead to additional costs that could have a material adverse effect on our business, financial condition or results of operations.
Compliance with federal, state, local and foreign environmental, health and safety laws requires us to incur capital expenditures and increases our operating costs. We do not believe that compliance with environmental, health and safety laws, including existing requirements to investigate and remediate contamination, will have a material adverse effect on our business, financial position or manufacturing processes.
The following are representative environmental, health and safety requirements relating to our operations:
Air Emissions. Our operations are subject to the federal Clean Air Act and comparable state laws. These laws govern emissions of air pollutants from industrial stationary sources, such as our manufacturing facilities, and impose various permitting, air pollution control, emissions monitoring, recordkeeping and reporting requirements. Such laws may require us to obtain pre-approval for constructing or modifying our facilities in ways that have the potential to produce new or increased air emissions, obtain and comply with operating permits that limit air emissions or certain operating parameters, or employ best available control technologies to reduce or minimize emissions from our facilities. We may be required to purchase air pollution control equipment in order to comply with air emissions laws.
Greenhouse Gases. Concern over the effects of global climate change has led to federal, state and international legislative and regulatory efforts to limit greenhouse gas, or GHG, emissions. While GHG regulations do not currently affect our facilities, more stringent federal, regional, state and foreign laws and regulations relating to global climate change and GHG emissions may be adopted in the future. These laws and regulations could impact our facilities, raw material suppliers, the transportation and distribution of our products, and our customers’ businesses, which could reduce demand for our products or cause us to incur additional capital, operating or other costs. Until the timing, scope and extent of any future legislation or regulation becomes known, we cannot predict its effect on our business. In addition, global climate change may increase the frequency or intensity of extreme weather events, such as storms, floods, extreme temperatures and other events that could affect our facilities, raw material suppliers, the transportation and distribution of our products, and demand for our products.
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Hazardous and Solid Industrial Waste. Our operations generate industrial solid wastes, including some hazardous wastes that are subject to the federal Resource Conservation and Recovery Act, or RCRA, and comparable state laws. RCRA imposes requirements for the handling, storage, treatment and disposal of hazardous waste. Industrial wastes we generate in our manufacturing processes, such as used chemicals, may be regulated as hazardous waste, although RCRA has provisions to exempt some of our wastes from classification as hazardous waste. However, our non-hazardous or exempted industrial wastes are still regulated under state law or the less stringent industrial solid waste requirements of RCRA.
RCRA Corrective Action Program. Certain facilities may be subject to the Corrective Action Program under the Solid Waste Disposal Act, as amended by RCRA, and the Hazardous and Solid Waste Amendments (Corrective Action Program). The Corrective Action Program is designed to ensure that certain facilities subject to RCRA have investigated and remediated releases of hazardous substances at their property.
MW Manufacturers Inc. (MW), a subsidiary of Ply Gem Industries, Inc., entered into a September 2011 Administrative Order on Consent with the EPA under the Corrective Action Program to address known releases of hazardous substances at MW’s Rocky Mount, Virginia property. A Phase I RCRA Facility Investigation (RFI) was submitted to the Virginia Department of Environmental Quality (VDEQ) in December 2015, and a Phase II RFI and the Human Health Risk Assessment and Baseline Ecological Risk Assessment were submitted in October 2018. A Limited Corrective Measures Study (LCMS) based on the investigations was submitted to the VDEQ for review and approval in September 2019. We have recorded a liability of $4.5 million for this MW site within other long-term liabilities in our consolidated balance sheets as of December 31, 2019.
CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA (commonly known as Superfund), and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for releases of hazardous substances into the environment. These include the current and past owners or operators of sites where hazardous substances were released, and companies that disposed or arranged for disposal of hazardous substances at off-site locations such as landfills. CERCLA authorizes the EPA and, in certain cases, third parties to take actions in response to threats to the public health and welfare or the environment and to seek to recover from the responsible parties remediation costs.
We currently own or lease, and historically owned or leased, numerous properties that have extensive histories of industrial operations. Hazardous substances may have been released on, under or from these properties, or on, under or from other locations where hazardous wastes have been disposed. Some of these properties have been owned or operated by third parties who may have released hazardous substances for which we could have liability. We could be required to investigate or remediate contaminated property, perform remedial closure activities, or assess and remediate volatile chemical vapors migrating from soil or groundwater into overlying buildings. Our liability for investigating and remediating contamination could be joint and several and could include damages for impacts to natural resources.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska, referred to as the PCE/TCE Northeast Contamination Site (PCE/TCE Site). Kroy Building Products, Inc. (KBP), a subsidiary of Ply Gem Industries, Inc., has been identified as a potentially responsible party (PRP) at the site and has liability for investigation and remediation costs associated with the contamination. On May 17, 2019, KBP and an unrelated respondent, Kroy Industries, Inc., entered into an Administrative Settlement Agreement and Order on Consent with the EPA to conduct a Remedial Investigation/Feasibility Study (RI/FS) of the PCE/TCE Site. A final RI/FS Work Plan was submitted to EPA in November 2019 and approved in December 2019. RI Phase I field work is scheduled to be conducted in 2020. We have recorded a liability of $4.6 million for the PCE/TCE Site within other long-term liabilities in our consolidated balance sheets as of December 31, 2019. We will adjust our remediation liability in future periods, if necessary, as the RI/FS progresses or if additional requirements are imposed. We may be able to recover a portion of costs incurred in connection with the PCE/TCE Site from other parties, though there is no assurance we would receive any funds.
Wastewater Discharges. Our operations are subject to the federal Water Pollution Control Act, also known as the Clean Water Act, or CWA, and analogous state laws. These laws impose requirements and strict controls regarding the discharge of pollutants from industrial activity into waters of the United States. Such laws may require that we comply with stormwater runoff and wastewater discharge standards or obtain permits limiting our discharges of pollutants. Failure to comply with CWA requirements could subject us to monetary penalties, injunctions, restrictions on operations, and administrative or civil enforcement actions. We may be required to incur certain capital expenditures in the future for wastewater discharge or stormwater runoff treatment technology to comply with wastewater permits and water quality standards.
Employee Health and Safety. We are subject to the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health and safety of our workers. Among other things, we are required to maintain and make available to our employees, state and local government authorities, and others information about hazardous materials used or produced by our operations.
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Zoning and Building Code Requirements
The engineered building systems and components we manufacture must meet zoning, building code and uplift requirements adopted by local governmental agencies. We believe that our products are in substantial compliance with applicable zoning, code and uplift requirements. Compliance does not have a material adverse effect on our business.
Research and Development Costs
Total expenditures for research and development were $14.2 million, $3.5 million and $4.3 million for fiscal years 2019, 2018 and 2017, respectively. We incur research and development costs to develop new products, improve existing products and improve safety factors of our products.
Employees
As of December 31, 2019, we have approximately 20,100 employees, of whom approximately 17,200 are manufacturing and engineering personnel. We regard our employee relations as satisfactory. Approximately 12% of our workforce are represented by a collective bargaining agreement or union, which primarily includes the employees at our subsidiary in Mexico, our plant in Calgary, Alberta and our North Brunswick, New Jersey plant.
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Item 1A. Risk Factors.
Risks related to our industry and economic and market conditions
Our industry is cyclical and highly sensitive to macroeconomic conditions. Negative economic events including, but not limited to, recessions, lower consumer confidence, high interest rates, inflation, and lower new construction home starts may materially and adversely affect the outlook for our business, liquidity and results of operations.
The construction industry is highly sensitive to national and regional macroeconomic conditions.
Current market estimates continue to show uneven activity across the nonresidential construction markets. According to Dodge Data & Analytics, Inc. ("Dodge"), low-rise nonresidential construction starts, as measured in square feet and comprising buildings of up to five stories, were down as much as approximately 5% in our fiscal 2019 as compared to our fiscal 2018.
In addition to commercial and residential market indicators, we also depend to a significant extent upon the levels of home repair and remodeling and new construction spending for our residential businesses, which declined significantly beginning in 2008 and continued through 2013 with recovery commencing in 2014. Housing levels in 2019 remained slightly lower relative to historical averages, despite the recovery the last few years, and are affected by such factors as interest rates, inflation, consumer confidence, unemployment and the availability of consumer credit.
Our performance is also dependent upon consumers having the ability to finance home repair and remodeling projects and/or the purchase of new homes. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures, which in turn could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. Trends such as declining home values, increased home foreclosures and tightening of credit standards by lending institutions, negatively impacted the home repair and remodeling and the new construction sectors during the recession which began in 2008. Despite the recent abatement of these negative market factors, any recurrence or worsening of these items may adversely affect our financial condition and operating results.
Historically, any uncertainty about current economic conditions has had a negative effect on our business, and will continue to pose a risk to our business as our customers may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products. Other factors that could influence demand include fuel and other energy costs, conditions in the nonresidential real estate markets, labor and healthcare costs, access to credit, tariffs, and other macroeconomic factors. From time to time, our industry has also been adversely affected in various parts of the country by declines in nonresidential construction starts, including but not limited to, high vacancy rates, changes in tax laws affecting the real estate industry, high interest rates and the unavailability of financing. Sales of our products may be adversely affected by continued weakness in demand for our products within particular customer groups, or a continued decline in the general construction industry or particular geographic regions. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
We cannot predict the timing or severity of any future economic or industry downturns or adverse weather conditions. A prolonged economic downturn or negative weather patterns, particularly in states where many of our sales are made, would have a material adverse effect on our results of operations and financial condition.
Uncertainty and volatility in the financial markets and worldwide economic conditions may adversely affect our operating results.
The markets in which we compete are sensitive to general business and economic conditions in the United States and worldwide, including availability of credit, interest rates, fluctuations in capital, credit and mortgage markets and business and consumer confidence. Adverse developments in global financial markets and general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including our ability and the ability of our customers and suppliers to access capital. There was a significant decline in economic growth, both in the United States and worldwide, that began in the second half of 2007 and continued through 2009. In addition, volatility and disruption in the capital markets during that period reached unprecedented levels, with stock markets falling dramatically and credit becoming very expensive or unavailable to many companies without regard to those companies’ underlying financial strength. There can be no guarantee that any improvement in these areas will continue or be sustained.
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Risks related to our business
An inability to successfully develop new products or improve existing products could negatively impact our ability to attract new customers and/or retain existing customers, including our significant customers.
Our success depends on meeting consumer needs and anticipating changes in consumer preferences with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in sales of existing products. While we devote significant focus to the development of new products, we may not be successful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products more rapidly or effectively, which could adversely affect our sales. Furthermore, market demand may decline as a result of consumer preferences trending away from our categories or trending down within our brands or product categories, which could adversely impact our results of operations, cash flows and financial condition.
Our Windows and Siding segments depend on a core group of significant customers for a substantial portion of net sales and we expect this to continue for the foreseeable future. The loss of, or a significant adverse change in our relationships with our largest customers, or loss of market position of any major customer, whether because of an inability to successfully develop new products or improve existing products, or otherwise, could cause a material decrease in net sales. The loss of, or a reduction in orders from, any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or performance or related matters, or an inability to collect accounts receivable from any major customer could adversely impact our net income and cash flow. In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.
Manufacturing or assembly realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, due to the costs of implementation.
We continually review our manufacturing and assembly operations and sourcing capabilities. Effects of periodic manufacturing realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize. Such programs may include the consolidation and integration of facilities, functions, systems and procedures. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.
Our business may be adversely affected by weather conditions and other external factors beyond our control.
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing reduced profit margins when such conditions exist. For example, unseasonably cold weather or extraordinary amounts of rainfall may decrease construction activity.
Further, other external factors beyond our control could cause disruptions at any of our facilities, including maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any equipment or other operational problems; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, hurricanes, earthquakes or other catastrophic disasters; pandemics, such as Coronavirus; or an act of terrorism. Any prolonged disruption in operations at any of our facilities could cause a significant loss in production. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to customers during the time that it takes for us to reopen or replace a damaged facility, which could cause our customers to purchase from our competitors either temporarily or permanently. If any of these events were to occur, it could adversely affect our business, financial condition, cash flows and results of operations
Price volatility and supply constraints for raw materials could prevent us from meeting delivery schedules to our customers or reduce our profit margins.
Our business is heavily dependent on the price and supply of raw materials including steel, PVC resin, aluminum and glass. Raw material prices have been volatile in recent years and may remain volatile in the future. Raw material prices are influenced by numerous factors beyond our control, including general economic conditions domestically and internationally, currency fluctuations, the availability of raw materials, competition, labor costs, freight and transportation costs, production costs, tariffs, import duties and other trade restrictions. For example, in 2018, the Trump administration implemented new tariffs on imports of steel and aluminum into the United States.
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A sudden increase in demand for steel, PVC resin, aluminum or glass could affect our ability to purchase such raw materials and result in rapidly increasing prices. We have historically been able to substantially pass on significant cost increases in raw materials through price increases to our customers, however we may not be able to do so in the future. Further, if the available supply of any of the raw materials we use declines, we could experience a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our results of operations and financial condition. We can give you no assurance that steel, PVC resin, aluminum or glass will remain available, that prices will not continue to be volatile or that we will be able to purchase these raw materials on favorable or commercially reasonable terms.
Further, we use energy in the manufacturing and transportation of our products. In particular, our manufacturing plants use considerable amounts of electricity and natural gas. Consequently, our operating costs typically increase if energy costs rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. To the extent we are not able to recover these cost increases through price increases or otherwise, our profitability and cash flow will be adversely impacted. We partially hedge our exposure to higher prices through fixed forward positions.
We rely on third-party suppliers for materials in addition to steel, PVC resin, aluminum and glass, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our business and results of operations could be adversely affected.
In addition to steel, PVC resin, aluminum and glass, our operations require other raw materials from third-party suppliers. We generally have multiple sources of supply for our raw materials, however, in some cases, materials are provided by a single supplier. The loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of a key supplier, could adversely impact our financial condition and results of operations. In addition, supply interruptions could arise from shortages of raw materials, labor disputes or weather conditions affecting products or shipments or other factors beyond our control. Short- and long-term disruptions in our supply chain would result in a need to maintain higher inventory levels as we replace similar product, a higher cost of product and ultimately a decrease in our revenues and profitability. To the extent our suppliers experience disruptions, there is a risk for delivery delays, production delays, production issues or delivery of non-conforming products by our suppliers. Even where these risks do not materialize, we may incur costs as we prepare contingency plans to address such risks. In addition, disruptions in transportation lines could delay our receipt of raw materials. If our supply of raw materials is disrupted or our delivery times extended, our results of operations and financial condition could be materially adversely affected. Furthermore, some of our third-party suppliers may not be able to handle commodity cost volatility or changing volumes while still performing up to our specifications.
Failure to retain or replace key personnel could hurt our operations.
Our success depends to a significant degree upon the efforts, contributions and abilities of our senior management, plant managers and other highly skilled personnel, including our sales executives. These executives and managers have many accumulated years of experience in our industry and have developed personal relationships with our customers that are important to our business. If we do not retain the services of our key personnel or if we fail to adequately plan for the succession of such individuals, our customer relationships, results of operations and financial condition may be adversely affected.
If we are unable to enforce our intellectual property rights, or if such intellectual property rights become obsolete, our competitive position could be adversely affected.
As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands. We also have issued patents and rely on trade secret and copyright protection for certain of our technologies. These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our intellectual property rights, which may harm our operating results. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we would have to defend these rights. There is also a risk that third parties, including our current competitors, will claim that our products infringe on their intellectual property rights. These third parties may bring infringement claims against us or our customers, which may harm our operating results.
We also rely on third party license agreements for certain trademarks and technologies we employ. There is a risk that third parties may modify or terminate such licenses, which may harm our operating results. While these license agreements generally provide that the licensors will indemnify us, subject to certain limitations, for certain infringement liabilities, our ability to seek indemnification from the respective licensors is limited by various factors, including the financial condition of the licensor as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from licensors, and any related infringement liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
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There can be no assurance that the efforts we have taken to protect our proprietary rights will be sufficient or effective, that any pending or future patent and trademark applications will lead to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated, misappropriated or infringed by others. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our business and revenue could be materially and adversely affected.
We could incur significant costs as a result of compliance with, violations of or liabilities under applicable environmental, health and safety laws.
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal and management of hazardous substances and wastes, protect the health and safety of our employees and the end-users of our products, regulate the materials used in our products and impose liability for the costs of investigating and remediating, and other damages resulting from, present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits can result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls or equipment, civil and criminal sanctions, permit revocations and facility shutdowns. We could be held liable for the costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, operated or used as a disposal site or other sites at which we or predecessors released hazardous materials. We also could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of or liabilities under environmental, health and safety laws or in connection with releases of hazardous or other materials. In addition, changes in, or new interpretations of, existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future, including additional investigation, remediation or other obligations with respect to our products or business activities or the imposition of new permit requirements, may lead to additional costs that could have a material adverse effect on our business, financial condition or results of operations.
Changes in building codes and standards could increase the cost of our products, lower the demand for our products, or otherwise adversely affect our business.
Our products and markets are subject to extensive and complex local, state, federal, and foreign statutes, ordinances, rules, and regulations. These mandates, including building design and safety and construction standards and zoning requirements, affect the cost, selection, and quality requirements of building components like windows and siding.
These statutes, ordinances, rules, and regulations often provide broad discretion to governmental authorities as to the types and quality specifications of products used in new residential and non-residential construction and home renovations and improvement projects, and governmental authorities can impose different standards. Compliance with these standards and changes in such statutes, ordinances, rules, and regulations may increase the costs of manufacturing our products or may reduce the demand for certain of our products in the affected geographical areas or product markets. Conversely, a decrease in product safety standards could reduce demand for our more modern products if less expensive alternatives that did not meet higher standards became available for use in that market. All or any of these changes could have a material adverse effect on our business, financial condition, and results of operations.
The industries in which we operate are highly competitive.
We compete with all other alternative methods of building construction, which may be viewed as more traditional, more aesthetically pleasing or having other advantages over our products. In addition, competition in the construction markets of the building industry is intense. It is based primarily on quality; service; on-time delivery and project completion; ability to provide added value in the design and engineering of buildings; price; and personal relationships with customers.
In our Commercial segment, we compete with a number of other manufacturers of metal components and engineered building systems and providers of coil coating services ranging from small local firms to large national firms. In addition, we and other manufacturers of metal components and engineered building systems compete with alternative methods of building construction. If these alternative building methods compete successfully against us, such competition could adversely affect us. In addition, several of our competitors have been acquired by steel producers. Competitors owned by steel producers may have a competitive advantage on raw materials that we do not enjoy. Steel producers may prioritize deliveries of raw materials to such competitors or provide them with more favorable pricing, both of which could enable them to offer products to customers at lower prices or accelerated delivery schedules.
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In our Siding and Windows segments, we compete with other national and regional manufacturers of exterior building products. Some of these companies are larger and have greater financial resources than we do. Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do. Competitors could take a greater share of sales and cause us to lose business from our customers. Additionally, our products face competition from alternative materials, such as wood, metal, fiber cement, masonry and composites in siding, and wood, composites and fiberglass in windows. An increase in competition from other exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to net sales decreases.
We face risks related to past and future acquisitions that could adversely affect our results of operations.
We have a history of expansion through acquisitions, and we believe that if our industry continues to consolidate, our future success may depend, in part, on our ability to successfully complete acquisitions. Pursuing and integrating acquisitions involves a number of risks, including:
the risk of incorrect assumptions or estimates regarding the future results of the acquired business or expected cost reductions or other synergies expected to be realized as a result of acquiring the business;
diversion of management’s attention from existing operations;
unexpected losses of key employees, customers and suppliers of the acquired business;
integrating the financial, technological and management standards, processes, procedures and controls of the acquired business with those of our existing operations;
increasing the scope, geographic diversity and complexity of our operations; and
potential litigation or other claims arising from the acquisition.
We can provide no assurance that we will be successful in identifying or completing any future acquisitions or that any businesses or assets that we are able to acquire will be successfully integrated into our existing business. The incurrence of additional debt, contingent liabilities and expenses in connection with any future acquisitions could have a material adverse effect on our financial condition and results of operations. Further, we cannot predict the effect, if any, that any announcement or consummation of an acquisition would have on the trading price of our Common Stock.
In addition, we may be subject to claims arising from the operations of businesses from periods prior to the dates we acquired them. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce any indemnification rights we may have against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, or if we do not have any right to indemnification, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance
Restructuring our operations may harm our profitability, financial condition and results of operations. Our ability to fully achieve the estimated cost savings is uncertain.
We have developed plans to improve cost efficiency and optimize our combined manufacturing plant footprint considering our recent acquisitions and restructuring efforts. Future charges related to the plans may harm our profitability in the periods incurred. Additionally, if we were to incur unexpected charges related to the plans, our financial condition and results of operations may suffer.
Implementation of these plans carry significant risks, including:
actual or perceived disruption of service or reduction in service levels to our customers;
failure to preserve supplier relationships and distribution, sales and other important relationships and to resolve conflicts that may arise;
potential adverse effects on our internal control environment and an inability to preserve adequate internal controls;
diversion of management attention from ongoing business activities and other strategic objectives; and
failure to maintain employee morale and retain key employees.
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Because of these and other factors, we cannot predict whether we will fully realize the cost savings from these plans. If we do not fully realize the expected cost savings from these plans, our business and results of operations may be negatively affected. Also, if we were to experience any adverse changes to our business, additional restructuring activities may be required in the future.
We may be significantly affected by global climate change or by legal, regulatory or market responses to global climate change.
Concern over the effects of global climate change has led to federal, state and international legislative and regulatory efforts to limit greenhouse gas, or GHG, emissions. In the past, the United States Congress has considered various bills to regulate GHG emissions. Though the legislation did not become law, the U.S. Congress could pass climate change legislation in the future. In addition, in the past, the United States Environmental Protection Agency, or EPA, took steps to regulate GHG emissions, though at this time the EPA is not actively regulating GHG emissions. More stringent federal, regional, state and foreign laws and regulations relating to global climate change and GHG emissions may be adopted in the future. These laws and regulations could impact our facilities, raw material suppliers, the transportation and distribution of our products, and our customers, and could reduce demand for our products or cause us to incur additional capital, operating or other costs. Until the timing, scope and extent of any future legislation or regulation becomes known, we cannot predict its effect on our business. In addition, global climate change may increase the frequency or intensity of extreme weather events, such as storms, floods, heat waves, and other events that could affect our facilities and demand for our products. We are mindful of the harmful effects of global climate change and are taking steps to minimize our GHG emissions.
Breaches of our information system security measures could disrupt our internal operations.
We are dependent upon information technology for the distribution of information internally and also to our customers and suppliers. This information technology is subject to theft, damage or interruption from a variety of sources, including but not limited to malicious computer viruses, security breaches and defects in design. Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers’ business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We have in the past faced, and may in the future face attempts by hackers, cybercriminals or others with authorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs is critical to our business. To the extent that any disruptions or security breaches result in a loss or damage to our data, it could cause harm to our reputation or brand. This could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or the use of competing products; lead to state or federal enforcement action, which could result in fines, penalties and/or other liabilities and which may cause us to incur legal fees and costs; and/or result in additional costs associated with responding to a cyberattack. Increased regulation regarding cyber security may increase our costs of compliance, including fines and penalties, as well as costs of cyber security audits. Any of these actions could materially adversely impact our business and results of operations.
We have invested in industry appropriate protections and monitoring practices of our data and information technology to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats. There can be no assurance, however, that our efforts will prevent breakdowns or breaches to our third party providers’ databases or systems that could adversely affect our business.
Damage to our computer infrastructure and software systems could harm our business.
The unavailability of any of our primary information management systems for any significant period of time could have an adverse effect on our operations. In particular, our ability to deliver products to our customers when needed, collect our receivables and manage inventory levels successfully largely depend on the efficient operation of our computer hardware and software systems. Through information management systems, we provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data and monitor operating results. Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could lead to business interruptions that could harm our reputation, increase our operating costs and decrease our profitability. In addition, these systems are vulnerable to, among other things, damage or interruption from power loss, computer system and network failures, loss of telecommunications services, operator negligence, physical and electronic loss of data, or security breaches and computer viruses.
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We have contracted with third-party service providers that provide us with redundant data center services in the event that our major information management systems are damaged. The backup data centers and other protective measures we take could prove to be inadequate. Our inability to restore data completely and accurately could lead to inaccurate and/or untimely filings of our periodic reports with the SEC, tax filings with the Internal Revenue Service (“IRS”) or other required filings, all of which could have a significant negative impact on our corporate reputation and could negatively impact our stock price or result in fines or penalties that could impact our financial results.
Our enterprise resource planning technologies will require maintenance or replacement in order to allow us to continue to operate and manage critical aspects of our business.
We rely heavily on enterprise resource planning technologies (“ERP Systems”) from third parties in order to operate and manage critical internal functions of our business, including accounting, order management, procurement, and transactional entry and approval. Certain of our ERP Systems are no longer supported by their vendor, are reaching the end of their useful life or are in need of significant updates to adequately perform the functions we require. We have limited access to support for older software versions and may be unable to repair the hardware required to run certain ERP Systems on a timely basis due to the unavailability of replacement parts. In addition, we face operational vulnerabilities due to limited access to software patches and software updates on any software that is no longer supported by their vendor. We are planning hardware and software upgrades to our ERP Systems and are in discussions with third-party vendors regarding system updates.
If our ERP Systems become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms, our operational efficiency could be harmed and we may face increased replacement costs. We may also face extended recovery time in the event of a system failure due to lack of resources to troubleshoot and resolve such issues. Our ability to manage our operations could be interrupted and our order management processes and customer support functions could be impaired until equivalent services are identified, obtained and implemented on commercially reasonable terms, all of which could adversely affect our business, results of operations and financial condition.
We risk liabilities and losses due to personal injury, property damage or product liability claims, which may not be covered by insurance.
Our workers are subject to the usual hazards associated with work in manufacturing environments. Operating hazards can cause personal injury and loss of life, as well as damage to or destruction of business personal property, and possible environmental impairment. We are subject to either deductible or self-insured retention (SIR) amounts, per claim or occurrence, under our Property/Casualty insurance programs, as well as an individual stop-loss limit per claim under our group medical insurance plan. We maintain insurance coverage to transfer risk, with aggregate and per-occurrence limits and deductible or retention levels that we believe are consistent with industry practice. The transfer of risk through insurance cannot guarantee that coverage will be available for every loss or liability that we may incur in our operations.
Exposures that could create insured (or uninsured) liabilities are difficult to assess and quantify due to unknown factors, including but not limited to injury frequency and severity, natural disasters, terrorism threats, third-party liability, and claims that are incurred but not reported (“IBNR”). Although we engage third-party actuarial professionals to assist us in determining our probable future loss exposure, it is possible that claims or costs could exceed our estimates or our insurance limits, or could be uninsurable. In such instances we might be required to use working capital to satisfy these losses rather than to maintain or expand our operations, which could materially and adversely affect our operating results and our financial condition.
Further, we face an inherent business risk of exposure to product liability claims, including class action claims and warranties, in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products are defective or prove to be defective, among other things, we may be responsible for damages related to any defective products and may be required to cease production, recall or redesign such products. Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any insurance we maintain may not continue to be available on acceptable terms or such coverage may not be adequate for liabilities actually incurred. Further, any claim or product discontinuance, recall or redesign could result in adverse publicity against us, which could cause sales to decline, or increase warranty costs.
We face risks related to our international operations.
In addition to the United States, we operate our business in Canada and Mexico and make sales in certain other jurisdictions. Our operations in Canada generated approximately 7.0% of our revenues in 2019. As such, our net sales, earnings and cash flow are exposed to risk from changes in foreign exchange rates, which can be difficult to mitigate. Depending on the direction of changes relative to the U.S. dollar, Canadian dollar values can increase or decrease the reported values of our net assets and results of operations. We hedge this foreign currency exposure by evaluating the usage of certain derivative instruments which hedge certain, but not all, underlying economic exposures
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Our international operations require us to comply with certain U.S. and international laws, such as import/export laws and regulations, anti-boycott laws, economic sanctions, laws and regulations, the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws. We operate in parts of the world, including Mexico, that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot provide assurance that our internal controls and procedures will always prevent reckless or criminal acts by our employees or agents, or that the operations of acquired businesses will have been conducted in accordance with our policies and applicable regulations. If we are found to be liable for violations of these laws (either due to our own acts, out of inadvertence or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, including limitations on our ability to conduct our business, which could have a material and adverse effect on our results of operations, financial condition and cash flows.
Increases in labor costs, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.
Our financial performance is affected by the availability of qualified personnel and the cost of labor. As of December 31, 2019, approximately 12% of our employees were represented by labor unions. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs. Our ability to attract and retain qualified manufacturing personnel to operate our manufacturing plants efficiently is critical to our financial performance. Any labor shortage will create operating inefficiencies that could adversely impact our financial performance.
Significant changes in factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our operating results and cash flows.
The recognition of costs and liabilities associated with our pension plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates. These assumptions are generally updated annually.
In recent years, the declining interest rates and changes to mortality assumptions have negatively impacted the funded status of our pension plans. In addition, volatile asset performance, most notably since 2008, has also negatively impacted the funded status of our pension plans. Funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our pension plan obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.
Risks related to the Merger
Fully integrating Ply Gem’s business following the Merger may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our Common Stock.
While the Company’s management has made progress in integrating Ply Gem’s business with our pre-Merger business, integration efforts are still underway. The combination of two independent businesses is a complex, costly and time-consuming process and the Company’s management may face significant, ongoing challenges in implementing such integration, many of which may be beyond the control of management, including, without limitation:
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;
the possibility of faulty assumptions underlying expectations regarding the integration process;
unanticipated issues in integrating accounting, information technology, communications programs, financial procedures and operations, and other systems, procedures and policies;
difficulties in managing a larger surviving corporation, addressing differences in business culture and retaining key personnel;
unanticipated changes in applicable laws and regulations;
coordinating geographically separate organizations; and
unforeseen expenses or delays associated with the Merger.
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Some of these factors are outside the control of the Company, and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in revenue, which could materially impact the business, financial conditions and results of operations of the Company. The integration process may also adversely affect the Company’s relationships with employees, suppliers, customers, distributors, licensors and others with whom the pre-Merger businesses had business or other dealings.
Risks related to our Common Stock and significant stockholders
Our stock price has been and may continue to be volatile.
The trading price of our Common Stock has fluctuated in the past and is subject to significant fluctuations in response to the following factors, some of which are beyond our control:
variations in quarterly operating results;
deviations in our earnings from publicly disclosed forward-looking guidance;
variability in our revenues;
changes in earnings estimates by analysts;
our announcements of significant contracts, acquisitions, strategic partnerships or joint ventures;
uncertainty about current global economic conditions;
sales of our Common Stock by our significant stockholders;
fluctuations in stock market price and volume; and
other general economic conditions.
During 2019, our stock price on the NYSE ranged from a high of $9.30 per share to a low of $3.75 per share. In recent years, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar to ours. Some of these fluctuations have been unrelated to the operating performance of the affected companies. These market fluctuations may decrease the market price of our Common Stock in the future.
The CD&R Investors own a significant amount of our Common Stock and have substantial governance and other rights pursuant to the New Stockholders Agreement.
The CD&R Investor Group collectively owned approximately 49.1% of our outstanding Common Stock as of December 31, 2019. As a significant stockholder, the CD&R Investors could significantly influence the outcome of matters requiring a stockholder vote, including the election of directors, the adoption of any amendment to our certificate of incorporation or bylaws and the approval of mergers and other significant corporate transactions. Their influence over Cornerstone may have the effect of delaying or preventing a change of control or may adversely affect the voting and other rights of other stockholders.
Further, the CD&R Investor Group has substantial governance and other rights pursuant to the New Stockholders Agreement, including the ability, for so long as it beneficially owns at least 7.5% of our outstanding shares of Common Stock, to nominate for election, fill vacancies and appoint replacements for a number of Board members in proportion to the CD&R Investor Group’s percentage beneficial ownership of our outstanding Common Stock, but never to exceed one less than the number of independent, non-CD&R-affiliated directors serving on the Board.
Transactions engaged in by the CD&R Investors, the Golden Gate Investors or our directors or executives involving our Common Stock may have an adverse effect on the price of our Common Stock.
We are party to the New Registration Rights Agreement, which grants the Investors customary demand and piggyback registration rights. We filed two shelf registration statements on Form S-3, declared effective by the SEC on April 8, 2016 and February 28, 2019, registering the resale of shares of our Common Stock held by the CD&R Fund VIII Investor Group and the Golden Gate Investors, respectively. At any time after May 16, 2020, CD&R Pisces may request in writing that the Company effect the registration of all or any part of the shares of Common Stock that CD&R Pisces beneficially owns.
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As of December 31, 2019, the CD&R Fund VIII Investor Group, CD&R Pisces and the Golden Gate Investor Group owned approximately 18.1%, 31.0% and 13.3%, respectively, of our issued and outstanding Common Stock. Future sales of our shares by these stockholders could have the effect of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers could cause other institutions or individuals to engage in short sales of our Common Stock, which may further cause the price of our stock to decline.
From time to time our directors, executive officers, or any of the Investors may sell shares of our Common Stock on the open market or otherwise, for a variety of reasons, which may be related or unrelated to the performance of our business. These sales will be publicly disclosed in filings made with the SEC. Our stockholders may perceive these sales as a reflection on management’s view of the business which may result in a drop in the price of our stock or cause some stockholders to sell their shares of our Common Stock.
Risks related to our indebtedness
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health, reduce our profitability, limit our ability to obtain financing in the future and pursue certain business opportunities and make payments on our indebtedness.
As of December 31, 2019, we had total indebtedness of approximately $3.2 billion.
The amount of our debt or other similar obligations could have important consequences for us, including, but not limited to:
a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and our ability to satisfy our obligations with respect to our outstanding indebtedness may be impaired in the future;
we are exposed to the risk of increased interest rates because a portion of our borrowings is at variable rates of interest;
we may be at a competitive disadvantage compared to our competitors with less debt or with comparable debt at more favorable interest rates and who, as a result, may be better positioned to withstand economic downturns;
our ability to refinance indebtedness may be limited or the associated costs may increase;
our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing may be impaired in the future;
it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of such indebtedness;
we may be more vulnerable to general adverse economic and industry conditions; and
our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be limited, or we may be prevented from making capital investments that are necessary or important to our operations, growth strategy or efforts to improve operating margins of our business units.
If we cannot service our debt, we will be forced to take actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We can give you no assurance that we can do any of these things on satisfactory terms or at all.
Further, the terms of the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement and the Current Indenture provide us and our subsidiaries with the flexibility to incur a substantial amount of additional secured or unsecured indebtedness in the future if we or our subsidiaries are in compliance with certain incurrence ratios set forth therein. Any such incurrence of additional indebtedness may increase the risks created by our current substantial indebtedness. As of December 31, 2019, we were able to borrow up to approximately $425.9 million under the Current ABL Facility. All of these borrowings under the Current ABL Facility would be secured.
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The Current Indenture, the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement contain restrictions and limitations that could significantly impact our ability and the ability of most of our subsidiaries to engage in certain business and financial transactions.
The Current Indenture, the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement (each as defined in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations") contain restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
incur additional indebtedness or issue certain preferred shares;
pay dividends, redeem stock or make other distributions in respect of capital stock;
repurchase, prepay or redeem the 8.00% Senior Notes (as defined in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations") and subordinated indebtedness;
make investments;
incur additional liens;
transfer or sell assets;
create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers;
make negative pledges;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate subsidiaries as unrestricted subsidiaries.
In addition, the Current Cash Flow Revolver (as defined in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations") requires us to maintain a maximum total secured leverage ratio under certain circumstances, and the Current ABL Facility (as defined in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations") requires us to maintain a minimum consolidated fixed charge coverage ratio under certain circumstances. The Current ABL Credit Agreement also contains other covenants customary for asset-based facilities of this nature. Our ability to borrow additional amounts under the Current Cash Flow Revolver and the Current ABL Facility depends upon satisfaction of these covenants. Events beyond our control can affect our ability to meet these covenants.
We are required to make mandatory pre-payments under the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement upon the occurrence of certain events, including the sale of assets and the issuance of debt, in each case subject to certain limitations and conditions set forth in the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement.
In addition, under certain circumstances and subject to the limitations set forth in the Current Cash Flow Credit Agreement, the Current Term Loan Facility (as defined in Item 7. "Management’s Discussion and Analysis of Financial Condition and Result of Operations") may require us to make prepayments of the term loans to the extent we generate excess positive cash flow each year, beginning with the year ended December 31, 2019.
Any future financing arrangements entered into by us may also contain similar covenants and restrictions. As a result of these covenants and restrictions, we may be limited in our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise restricted in our activities. These covenants and restrictions could also adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.
Our failure to comply with obligations under the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement or the Current Indenture, as well as others contained in any future debt instruments from time to time, may result in an event of default under the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement or the Current Indenture, as applicable. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our business, results of operations, financial condition and cash flows could be adversely affected.
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We may have future capital needs and may not be able to obtain additional financing on acceptable terms or at all.
Although we believe that our current cash position and the additional committed funding available under the Current ABL Facility and the Current Cash Flow Revolver is sufficient for our current operations, any reductions in our available borrowing capacity, or our inability to renew or replace our debt facilities, when required or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. Our ability to secure additional financing or financing on favorable terms and to satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit generally, economic and market conditions and financial, business and other factors, many of which are beyond our control.
If financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution.
Our credit ratings are important to our cost of capital. The major debt rating agencies routinely evaluate our debt based on a number of factors, which include financial strength and business risk as well as transparency with rating agencies and timeliness of financial reporting. A downgrade in our debt rating could result in increased interest and other expenses on our existing variable interest rate debt, and could result in increased interest and other financing expenses on future borrowings. Downgrades in our debt rating could also restrict our access to capital markets and affect the value and marketability of our outstanding notes.
Our ability to access future financing also may be dependent on regulatory restrictions applicable to banks and other institutions subject to U.S. federal banking regulations, even if the market would otherwise be willing to provide such financing.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability, decrease our liquidity and impact our solvency.
To the extent LIBOR exceeds 0.00%, our indebtedness under the Current Cash Flow Facilities (as defined in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations") and the Current ABL Facility will bear interest at variable rates, and our future indebtedness may bear interest at variable rates. As a result, increases in interest rates could increase the cost of servicing such debt and materially reduce our profitability and cash flows. As of December 31, 2019, assuming all Current ABL Facility revolving loans were fully drawn, each one percent change in interest rates would result in approximately a $31.7 million change in annual interest expense on the Current Term Loan Facility and the Current ABL Facility. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.

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Item 1B. Unresolved Staff Comments.
There are no unresolved staff comments outstanding with the Securities and Exchange Commission at this time.
Item 2. Properties.
Our corporate headquarters is located in Cary, North Carolina. We own and lease properties in the United States, Canada, Costa Rica and Mexico. The following table lists our principal manufacturing and warehousing facilities as of December 31, 2019:
Facility Product type/Usage
Commercial Segment:
Sheridan, Arkansas Insulated metal panels
Atwater, California Metal building products
Lithia Springs, Georgia Metal building products
Marietta, Georgia Metal coil coating
Mattoon, Illinois Insulated metal panels
Shelbyville, Indiana(1)
Insulated metal panels
Monticello, Iowa Metal building products
Mount Pleasant, Iowa Metal building products
Frankfort, Kentucky Insulated metal panels
Hernando, Mississippi Metal building products
Jackson, Mississippi Metal coil coating
Las Vegas, Nevada(1)
Insulated metal panels
Cambridge, Ohio Metal coil coating
Middletown, Ohio Metal coil coating
Elizabethton, Tennessee Metal building products
Lexington, Tennessee Metal building products
Houston, Texas(2)
Metal building products
Prince George, Virginia Insulated metal panels
Hamilton, Ontario, Canada(1)
Insulated metal panels
Monterrey, Mexico Metal building products
Siding Segment:
Kearney, Missouri(1)
Vinyl siding and other (trim)
Kansas City, Missouri(1)
Warehousing
Sidney, Ohio Metal
Gaffney, South Carolina Injection molded
Gaffney, South Carolina(1)
Warehousing
Jasper, Tennessee Vinyl siding
Harrisonburg, Virginia(1)
Warehousing
Stuarts Draft, Virginia Vinyl siding
Martinsburg, West Virginia(1)
Vinyl siding
Martinsburg, West Virginia(1)
Warehousing
Brantford, Ontario, Canada(1)
Warehousing
Paris, Ontario, Canada Vinyl siding
Windows Segment:
Corona, California(1)
Vinyl windows
Sacramento, California(1)
Vinyl windows
Vacaville, California(1)
Vinyl windows
Lithia Springs, Georgia(1)
Vinyl windows and warehousing
Peachtree City, Georgia(1)
Vinyl windows
Lansing, Illinois(1)
Vinyl windows
Paris, Illinois Vinyl windows
Paris, Illinois(1)
Warehousing
Middlesex, New Jersey(1)
Vinyl windows
North Brunswick, New Jersey(1)
Vinyl windows
Welcome, North Carolina(1)
Vinyl windows
Marion, Ohio(1)
Vinyl windows
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Walbridge, Ohio(1)
Vinyl windows and warehousing
Bryan, Texas(1)
Vinyl & Aluminum windows
Dallas, Texas(1)
Vinyl & Aluminum windows
Rocky Mount, Virginia(1)(2)
Vinyl & Aluminum windows and other (doors) and warehousing
Auburn, Washington(1)
Vinyl windows
Ellenboro, West Virginia Vinyl windows
Pennsboro, West Virginia Vinyl windows
St. Marys, West Virginia Vinyl windows and other (trim)
Vienna, West Virginia(1)
Warehousing
Calgary, Alberta, Canada(1)
Vinyl & Aluminum windows and other (doors) and warehousing
St. Thomas, Ontario, Canada Vinyl windows
(1) Location is leased as of December 31, 2019
(2) Location has multiple principal facilities

Item 3. Legal Proceedings.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action Complaint in the Delaware Court of Chancery against Clayton Dubilier & Rice, LLC (“CD&R”), Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), and certain directors of the Company. Voigt purports to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholders of the Company, and derivatively on behalf of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserts claims for breach of fiduciary duty and unjust enrichment against CD&R Fund VIII and CD&R, and for breach of fiduciary duty against twelve director defendants in connection with the Merger. Voigt seeks damages in an amount to be determined at trial. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to four of the director defendants. Defendants are due to answer on April 3, 2020. The Company intends to vigorously defend the litigation.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019 which resulted in the Company having a $11.2 million liability as of December 31, 2019, of which $3.6 million is held within other current liabilities with the remaining in long-term liabilities in the consolidated balance sheets.
As a manufacturer of products primarily for use in nonresidential and residential building construction, we are 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, we and/or our subsidiaries become involved in various legal proceedings or other contingent matters arising from claims, or potential claims. We insure against these risks to the extent deemed prudent by our management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for general liability. The Company regularly reviews the status of on-going proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance.
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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PRICE RANGE OF COMMON STOCK
Our Common Stock is listed on the NYSE under the symbol “CNR.” As of February 26, 2020, there were 41 holders of record and an estimated 7,060 beneficial owners of our Common Stock. The following table sets forth the quarterly high and low sale prices of our Common Stock, as reported by the NYSE, for the prior two fiscal years and the transition period ended December 31, 2018. We have never paid dividends on our Common Stock and the terms of the agreements governing our indebtedness either limit or restrict our ability to do so.
Fiscal Year 2019 Quarter Ended High Low
March 30 $ 8.69    $ 5.80   
June 29 $ 6.70    $ 4.20   
September 28 $ 6.37    $ 3.75   
December 31 $ 9.30    $ 5.46   
Transition Period Ended High Low
December 31, 2018 $ 13.82    $ 6.66   
Fiscal Year 2018 Quarter Ended High Low
January 28 $ 21.20    $ 15.45   
April 29 $ 18.95    $ 15.60   
July 29 $ 23.35    $ 15.15   
October 28 $ 17.25    $ 12.30   
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our purchases of our Common Stock during the fourth quarter of fiscal 2019:
Period
Total Number  of Shares Purchased(1)
Average 
Price Paid
per Share
Total Number of
Shares Purchased
 as Part of Publicly Announced
Programs
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Programs(2)
September 29, 2019 to October 26, 2019 400    $ 6.44    —    $ 55,573   
October 27, 2019 to November 23, 2019 124,524    $ 6.92    —    $ 55,573   
November 24, 2019 to December 31, 2019 97,209    $ 8.63    —    $ 55,573   
Total 222,133    $ 7.67    —   

(1)The total number of shares purchased includes shares of restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of restricted stock. The required withholding is calculated using the closing sales price on the previous business day prior to the vesting date as reported by the NYSE.
(2)On October 10, 2017 and March 7, 2018, the Company announced that its Board of Directors authorized new stock repurchase programs for up to an aggregate of $50.0 million and $50.0 million, respectively, of the Company’s Common Stock for a cumulative total of $100.0 million. Under these repurchase programs, the Company is authorized to repurchase shares, if at all, at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of these programs. As of December 31, 2019, approximately $55.6 million remained available for stock repurchases under the programs announced on October 10, 2017 and March 7, 2018.
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STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the cumulative stockholder return on our Common Stock from November 2, 2014 to the end of the fiscal year ended December 31, 2019 with the cumulative total return on the (i) S&P SmallCap 600 Index and (ii) S&P Smallcap Building Products peer group. The comparison assumes $100 was invested on November 2, 2014 in our Common Stock and in each of the foregoing indices and assumes reinvestment of dividends.
CNR-20191231_G2.JPG
In accordance with the rules and regulations of the SEC, the above stock performance chart shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934 (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
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Item 6. Selected Financial Data.
The selected financial data for each of the three fiscal years ended December 31, 2019, October 28, 2018 and October 29, 2017 has been derived from the audited consolidated financial statements included elsewhere herein. The selected financial data for the fiscal years ended October 30, 2016 and November 1, 2015 and certain consolidated balance sheet data as of October 29, 2017, October 30, 2016, and November 1, 2015 have been derived from audited consolidated financial statements not included herein. The following data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data.”
2019 2018 2017 2016 2015
(In thousands, except per share data)
Sales $ 4,889,747    $ 2,000,577    $ 1,770,278    $ 1,684,928    $ 1,563,693   
Net income (loss) $ (15,390)  
(1)
$ 63,106   
(3)
$ 54,724   
(4)
$ 51,027   
(5)
$ 17,818   
(6)
Net income (loss) applicable to common shares $ (15,390)  
(1)
$ 62,694   
(3)
$ 54,399   
(4)
$ 50,638   
(5)
$ 17,646   
(6)
Earnings per common share:
Basic $ (0.12)  
(1)
$ 0.95   
(3)
$ 0.77   
(4)
$ 0.70   
(5)
$ 0.24   
(6)
Diluted $ (0.12)  
(1)
$ 0.94   
(3)
$ 0.77   
(4)
$ 0.70   
(5)
$ 0.24   
(6)
Cash flow from operating activities $ 229,608    $ 82,463    $ 63,874    $ 68,479    $ 105,785   
Total assets $ 5,564,346   
(2)
$ 1,110,375    $ 1,031,112    $ 1,025,396    $ 1,049,317   
Total debt $ 3,182,524    $ 407,226    $ 387,290    $ 396,051    $ 434,542   
Stockholders’ equity $ 935,318    $ 330,265    $ 305,247    $ 281,317    $ 271,976   
Diluted average common shares 125,576    66,362    70,778    72,857    73,923   
Note: The Company calculated the after-tax amounts below by applying the applicable statutory tax rate for the respective period to each applicable item.
(1)Includes restructuring charges of $18.1 million ($13.4 million after tax), strategic development and acquisition related costs of $50.2 million ($37.1 million after tax), and a non-cash charge of purchase price allocated to inventory of $16.2 million. Includes results of the Ply Gem merger for the full year, from January 1, 2019 and the ESW acquisition from February 20, 2019.
(2)Includes the adoption of ASU 2016-02, Leases, which resulted in the recognition of additional operating liabilities of $304.1 million with corresponding right-of-use (“ROU”) assets at adoption.
(3)Includes loss on extinguishment of debt of $21.9 million ($15.9 million after tax), loss on disposition of business of $5.7 million ($4.1 million after tax), restructuring charges of $1.9 million ($1.4 million after tax), strategic development and acquisition related costs of $17.2 million ($12.4 million after tax), gain on insurance recovery of $4.7 million ($3.4 million after tax), and a charge of $4.6 million ($3.3 million after tax) related to the acceleration of retirement benefits of our former CEO.
(4)Includes loss on sale of assets of $0.1 million ($0.1 million after tax), restructuring charges of $5.3 million ($3.2 million after tax), strategic development and acquisition related costs of $2.0 million ($1.2 million after tax), loss on goodwill impairment of $6.0 million ($3.7 million after tax), gain on insurance recovery of $9.7 million ($5.9 million after tax), and unreimbursed business interruption costs of $0.5 million ($0.3 million after tax).
(5)Includes gain on sale of assets and asset recovery of $1.6 million ($1.0 million after tax), restructuring charges of $4.3 million ($2.6 million after tax), strategic development and acquisition related costs of $2.7 million ($1.6 million after tax), and gain from bargain purchase of $1.9 million (non-taxable).
(6)Includes gain on legal settlements of $3.8 million ($2.3 million after tax), strategic development and acquisition related costs of $4.2 million ($2.6 million after tax), restructuring charges of $11.3 million ($6.9 million after tax), fair value adjustments to inventory of $2.4 million ($1.5 million after tax), and amortization of acquisition fair value adjustments of $8.4 million ($5.1 million after tax).

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Effective May 23, 2019, NCI Building Systems, Inc. changed its name to Cornerstone Building Brands, Inc. (together with its subsidiaries, unless the context requires otherwise, the “Company,” “Cornerstone,” “NCI,” “we,” “us” or “our”). In connection with the name change, the Company changed its NYSE trading symbol from “NCS” to “CNR”.
Cornerstone Building Brands, Inc. is a leading North American integrated manufacturer of external building products for the commercial, residential, and repair and remodeling construction industries. We design, engineer, manufacture and market external building products through our three operating segments, Commercial, Siding, and Windows.
In our Commercial segment, we manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Our Commercial segment also provides metal coil coating services for commercial and construction applications, servicing both internal and external customers. We sell our products for both new construction and repair and retrofit applications.
In our Siding segment, our principal products include vinyl siding and skirting, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, aluminum gutters, aluminum and steel roofing accessories, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl railing, and stone veneer in the United States and Canada. The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).
In our Windows segment, our principal products include vinyl, aluminum-clad vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada. We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. The breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).
We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit and operating income, as well as whether each segment has achieved its projected sales goals. In assessing our overall financial performance, we regard growth in earnings, as the key indicator of shareholder value. 
Reporting Periods
On November 16, 2018, the Company’s Board of Directors approved a change to the Company's fiscal year end from a 52/53 week year with the Company’s fiscal year end on the Sunday closest to October 31 to a calendar year of the twelve-month period from January 1 to December 31. The Company elected to change its fiscal year end in connection with the Merger to align both Companies’ fiscal year ends. As a result of this change, the Company filed a Transition Report on Form 10-Q that included the financial information for the transition period from October 29, 2018 to December 31, 2018, which period is referred to herein as the "Transition Period". References in this Annual Report on Form 10-K to “fiscal year 2018” or “fiscal 2018” refer to the period from October 30, 2017 through October 28, 2018.
The Company’s current fiscal quarters are based on a four-four-five week calendar with periods ending on the Saturday of the last week in the quarter except for December 31st which will always be the year-end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters.
Environmental Stoneworks Acquisition
On January 12, 2019, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC, a Delaware limited liability company (“Environmental Stoneworks” or “ESW”), the Members of Environmental Materials, LLC (the “Sellers”) and Charles P. Gallagher and Wayne C. Kocourek, solely in their capacity as the Seller Representative (as defined in the Purchase Agreement), pursuant to which, on February 20, 2019, the Company’s wholly-owned subsidiary, Ply Gem Industries, Inc., purchased from the Sellers 100% of the outstanding limited liability company interests of Environmental Stoneworks (the “Environmental Stoneworks Acquisition”) for total consideration of $182.6 million, subject to post-closing adjustments. The transaction was financed through borrowings under the Company’s asset-based revolving credit facility.
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Merger with Ply Gem
At the Special Shareholder Meeting on November 15, 2018, NCI’s shareholders approved (i) the Merger Agreement and (ii) the Stock Issuance. NCI’s shareholders also approved the three additional proposals described in the Company’s proxy statement relating to the Special Shareholder Meeting. The Merger was consummated on November 16, 2018 pursuant to the Merger Agreement.
Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) the New Stockholders Agreement between the Company and each of the Investors, pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) the New Registration Rights Agreement with the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of NCI Common Stock that are held by the Investors following the consummation of the Merger. Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement and the Old Registration Rights Agreement.
On November 16, 2018, in connection with the consummation of the Merger, the Company assumed (i) the obligations of Ply Gem Midco, a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement, (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture.
On April 12, 2018, Ply Gem Midco entered into a Cash Flow Credit Agreement (the “Current Cash Flow Credit Agreement”), by and among Ply Gem Midco, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), and the several banks and other financial institutions from time to time party thereto. As of November 16, 2018, immediately prior to the Merger, the Current Cash Flow Credit Agreement provided for (i) a term loan facility (the “Current Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million and (ii) a cash flow-based revolving credit facility (the “Current Cash Flow Revolver” and together with the Current Term Loan Facility, the “Current Cash Flow Facilities”) of up to $115.0 million. On November 16, 2018, Ply Gem Midco entered into a Lender Joinder Agreement, by and among Ply Gem Midco, the additional commitment lender party thereto and the Cash Flow Agent, which amended the Current Cash Flow Credit Agreement in order to, among other things, increase the aggregate principal amount of the Current Term Loan Facility by $805.0 million (the “Incremental Term Loans”). Proceeds of the Incremental Term Loans were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement (each as defined below) and (c) repay $325.0 million of borrowings outstanding under the Current ABL Facility (as defined below). On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and NCI became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities. The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Current Term Loan Facility on April 12, 2025. There are no amortization payments under the Current Cash Flow Revolver, and all borrowings under the Current Cash Flow Revolver mature on April 12, 2023.
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On April 12, 2018, Ply Gem Midco and certain subsidiaries of Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), by and among Ply Gem Midco, the subsidiary borrowers from time to time party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent (the “ABL Agent”), and the several banks and other financial institutions from time to time party thereto, which provided for an asset-based revolving credit facility (the “Current ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). On October 15, 2018, Ply Gem Midco entered into Amendment No. 2 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lender party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by $36.0 million to $396.0 million overall, and with the (x) ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million. On November 16, 2018, Ply Gem Midco entered into Amendment No. 4 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lenders party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by $215.0 million (the “Incremental ABL Commitments”) to $611.0 million overall, and with the (x) ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and NCI became the Parent Borrower (as defined in the Current ABL Credit Agreement) under the Current ABL Facility. The Company and, at the Company’s option, certain of the Company’s subsidiaries are the borrowers under the Current ABL Facility. As of November 16, 2018, and following consummation of the Merger, (a) Ply Gem Industries, Inc., Atrium Windows and Doors, Inc., NCI Group, Inc. and Robertson-Ceco II Corporation were U.S. subsidiary borrowers under the Current ABL Facility, and (b) Gienow Canada Inc., Mitten Inc., North Star Manufacturing (London) Ltd. and Robertson Building Systems Limited were Canadian borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature on April 12, 2023.
On April 12, 2018, Ply Gem Midco issued $645.0 million aggregate principal amount of 8.00% Senior Notes due 2026 (the “8.00% Senior Notes”). The 8.00% Senior Notes were issued pursuant to an Indenture, dated as of April 12, 2018 (as supplemented from time to time, the “Current Indenture”), by and among Ply Gem Midco, as issuer, the subsidiary guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee. On November 16, 2018, in connection with the consummation of the Merger, the Company entered into a supplemental indenture and assumed the obligations of Ply Gem Midco as issuer under the Current Indenture and the 8.00% Senior Notes. The 8.00% Senior Notes bear interest at 8.00% per annum and will mature on April 15, 2026. Interest is payable semi-annually in arrears on April 15 and October 15.
On November 16, 2018, in connection with the incurrence by Ply Gem Midco of the Incremental Term Loans and the obtaining by Ply Gem Midco of the Incremental ABL Commitments, following consummation of the Merger, the Company (a) terminated all outstanding commitments and repaid all outstanding amounts under the Term Loan Credit Agreement, dated as of February 8, 2018 (the “Pre-merger Term Loan Credit Agreement”), by and among the Company, as borrower, the several banks and other financial institutions from time to time party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and (b) terminated all outstanding commitments and repaid all outstanding amounts under the ABL Credit Agreement, dated as of February 8, 2018 (the “Pre-merger ABL Credit Agreement”), by and among NCI Group, Inc. and Robertson-Ceco II Corporation, as borrowers, the Company, as a guarantor, the other borrowers from time to time party thereto, the several banks and other financial institutions from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent. Outstanding letters of credit under the Pre-merger ABL Credit Agreement were cash collateralized.
In connection with the termination and repayment of the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement, the Company also terminated (i) the Term Loan Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Credit Suisse AG, Cayman Islands Branch, as Collateral Agent, (ii) the ABL Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Wells Fargo Bank, National Association, as Collateral Agent, and (iii) the Intercreditor Agreement, dated as of February 8, 2018, between Credit Suisse AG, Cayman Islands Branch and Wells Fargo Bank, National Association, and acknowledged by the Company and certain of its subsidiaries.
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Fiscal 2019 Summary
During 2019, significant progress was made on key strategic initiatives through the year. Led by commercial discipline, the Company was able to capture price to offset inflationary pressures in material, labor and freight. Leveraging our continuous improvement culture, the Company delivered synergies and cost savings above target. We expanded our manufacturing footprint and broadened our distribution channel network through the successful integrations of the Silver Line, Atrium, and Environmental Stoneworks acquisitions. These acquisitions were value-enhancing for us reinforcing our leadership position in vinyl windows and providing the Company with a significant share in the fastest growing residential cladding market through stone veneer. As a result, we were able to improve margins and generate strong operating cash flow that enabled us to reduce debt and continue to invest in organic growth opportunities.
Our fiscal 2019 financial performance showed year-over-year improvement in net sales, and operating income, while our gross margin percentage declined 80 basis points over the same period. All of these changes were due to the inclusion of Ply Gem for all of fiscal 2019. This improved financial performance was achieved despite challenging market conditions, including rising input costs and seasonally wet weather conditions primarily in Texas and the Southeast during the fourth quarter. During fiscal 2019, we effectively captured Merger synergies and cost initiatives of $109.4 million consisting predominantly of procurement savings, manufacturing efficiencies and back office expense reductions while effectively integrating the legacy NCI and Ply Gem businesses and management teams into one consolidated Cornerstone. In addition to these organizational changes, we were able to maintain our cost and price discipline during 2019 which contributed to the favorable financial and operational performance. Ultimately, these initiatives resulted in favorable financial performance culminating in operating cash flows of $229.6 million, an increase of $147.1 million from the prior year.
Consolidated revenues increased by approximately 144.4% from the prior fiscal year. The net sales increase was driven by the inclusion of Ply Gem’s net sales of $2,875.2 million in the 2019 fiscal year as the Merger was consumated after the 2018 fiscal year end. The following table summarizes net sales by major category for 2019.
Year Ended December 31, 2019
Commercial Net Sales Disaggregation:
Metal building products $ 1,249,757   
Insulated metal panels 441,441   
Metal coil coating 156,695   
Total $ 1,847,893   
Siding Net Sales Disaggregation:
Vinyl siding $ 525,005   
Metal 263,018   
Injection molded 66,578   
Stone 92,228   
Other products & services 164,578   
Total $ 1,111,407   
Windows Net Sales Disaggregation:
Vinyl windows $ 1,838,796   
Aluminum windows 53,622   
Other 38,029   
Total $ 1,930,447   
Total Net Sales: $ 4,889,747   
Consolidated gross margin in fiscal 2019 decreased by 80 basis points from the prior fiscal year to 22.3%. The gross profit percentage decrease can be attributed to the inventory fair value step-ups associated with the Merger of $14.4 million and the ESW Acquisition of $1.8 million as well as the inclusion of Ply Gem’s gross margin results in the year 2019, which were lower than the legacy Commercial business.
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Operating income of $214.7 million for the year ended December 31, 2019 represented an increase of $88.8 million relative to the fiscal year ended October 28, 2018. The operating income increase was due to the inclusion of $106.3 million of Ply Gem operating income that was partially offset by restructuring and acquisition costs relating to the Merger of $50.5 million.
Consolidated selling, general and administrative expenses for fiscal 2018 included a $4.6 million charge related to the acceleration of retirement benefits of our former CEO. Excluding the fiscal 2018 effects of the acceleration of CEO retirement benefits, as a percentage of sales, selling, general and administrative expenses for fiscal 2019 decreased by 230 basis points to 12.8% compared to the prior fiscal year, predominantly the result of our strategic initiatives and restructuring activities.
Net income decreased by $78.5 million to $(15.4) million for fiscal 2019, compared to $63.1 million in the prior year. Diluted earnings per share was $(0.12). Net income was negatively impacted by $207.5 million of increased interest expense associated with our indebtedness, increased amortization expense of $167.9 million related to the Merger, $68.2 million of restructuring and acquisition costs related to the Merger, and $16.2 million of inventory fair value step-ups that negatively impacted cost of goods sold.
Due to the strong operating cash flow we reinvested $121.1 million in capital expenditures, an increase of $73.3 million over prior year, primarily to support organic growth initiatives, automation and advanced manufacturing.
Industry Conditions
Commercial
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales in the Commercial segment normally are lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. Following a significant downturn in 2008 and 2009, the current recovery of low-rise construction has been uneven and slow but is now showing some signs of steady growth. We believe that the economy is recovering and that the nonresidential construction industry will return to mid-cycle levels of activity over the next several years.
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The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1968 as compiled and reported by Dodge Data & Analytics, Inc. ("Dodge"):
CNR-20191231_G3.JPG
Current market estimates continue to show uneven activity across the nonresidential construction markets. According to Dodge, low-rise nonresidential construction starts, as measured in square feet and comprising buildings of up to five stories, contracted approximately 5% in 2019 as compared to 2018, while our volumes declined further than 5%. Products within our addressable market grew at a rate slower than other alternative products within the low-rise nonresidential market.
The leading indicators that we follow and that typically have the most meaningful correlation to nonresidential low-rise construction starts are the American Institute of Architects’ (“AIA”) Architecture Mixed Use Index, Dodge Residential single family starts and the Conference Board Leading Economic Index (“LEI”). Historically, there has been a very high correlation to the Dodge low-rise nonresidential starts when the three leading indicators are combined and then seasonally adjusted.
Residential (Siding and Windows)
Our residential building products are typically installed on a new construction home 90 to 120 days after the start of the home, therefore, there is a lag between the timing of the single-family housing start date and the time in which our products are installed on a home. From an industry perspective, we evaluate the new construction environment by reviewing the U.S. Census Bureau single family housing start statistics to assess the performance of the new construction market for a normal period. For the year ended December 31, 2019, we evaluated U.S. Census Bureau single family housing starts in the period from September 2018 to August 2019 to assess the demand impacts for our products for the year ended December 31, 2019 noting that single family housing starts decreased 3.5% on a lag effected basis due to a general softening in overall economic conditions specifically for new construction. We also examine where these single-family housing starts occur geographically as the Northeast, which decreased 7.6%, and Midwest, which decreased 7.8%, are significant vinyl siding concentrated areas relative to the South and the West. For Canada, we evaluate the Canada Mortgage and Housing Corporate statistics which showed housing starts decreasing 14.4% for the year ended December 31, 2019 compared to 2018.
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The graph below shows the seasonally adjusted annual single family residential new construction starts as of each year end since 1968 as compiled and reported by U.S. Census Bureau:
CNR-20191231_G4.JPG
In addition to new construction, we also evaluate the repair and remodeling market to assess residential market conditions by evaluating the Leading Indicator of Remodeling Activity (“LIRA”). For the year ended December 31, 2019, LIRA reflected that the trailing 12 months of remodeling activity increased 5.9% from 2018. While LIRA is a remodeling economic indicator as it tracks all remodeling activity including kitchen, bathroom and low ticket remodeling, it is not a specific metric for our residential businesses measuring solely windows and siding remodeling growth. Therefore, we utilize this index as a trend indicator for our repair and remodeling business.
Finally, we assess our performance relative to our competitors and the overall siding industry by evaluating the marketing indicators produced by the Vinyl Siding Institute ("VSI"), a third party which summarizes vinyl siding unit sales for the industry. For the year ended December 31, 2019, the VSI reported that siding units increased 3.3% for the industry. Overall, our Siding segment, including stone, is weighted to the repair and remodeling market with approximately 53% of our net sales being attributed to repair and remodeling with the remaining 47% attributed to the new construction market. Historically, we evaluate our net sales performance within the Windows segment by evaluating our net sales for the new construction market and the repair and remodeling market. Overall, our Windows segment is relatively balanced with approximately 50% of our net sales attributed to new construction with the remaining 50% attributed to the repair and remodeling market.
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RESULTS OF OPERATIONS
This section of the Form 10-K generally discusses fiscal 2019 and fiscal 2018 items and year-over-year comparisons between fiscal 2019 and fiscal 2018. Discussions of fiscal 2017 items and year-over-year comparisons between fiscal 2018 and fiscal 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of NCI’s Annual Report on Form 10-K for the fiscal year ended October 28, 2018 as recasted in Exhibit 99.4 to our current report on Form 8-K, filed with the SEC on February 19, 2019 to reflect changes to NCI's reportable business segments and to apply retrospectively the adoption of the Financial Accounting Standards Board Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which the Company adopted during the transition period ended December 31, 2018. Exhibit 99.4 to our current report on Form 8-K filed with the SEC on February 19, 2019 is incorporated by reference herein.
The following table presents, as a percentage of sales, certain selected consolidated financial data for the periods indicated:
Fiscal Year ended
December 31,
2019
October 28,
2018
October 29,
2017
Sales 100.0  % 100.0  % 100.0  %
Cost of sales 77.7    76.9    76.5   
Gross profit 22.3    23.1    23.5   
Selling, general and administrative expenses 12.8    15.4    16.6   
Intangible asset amortization 3.6    0.5    0.5   
Goodwill impairment —    —    0.3   
Restructuring and impairment charges, net 0.4    0.1    0.3   
Strategic development and acquisition related costs 1.0    0.9    0.1   
Loss on disposition of business —    0.3    —   
Gain on insurance recovery —    (0.2)   (0.6)  
Income from operations 4.4    6.3    6.2   
Interest income —    —    —   
Interest expense (4.7)   (1.1)   (1.6)  
Foreign exchange gain (loss) —    —    —   
Loss on extinguishment of debt —    (1.1)   —   
Other income, net —    —    0.1   
Income before income taxes (0.2)   4.2    4.7   
Provision (benefit) for income taxes 0.1    1.0    1.6   
Net income (loss) (0.3) % 3.2  % 3.1  %

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SUPPLEMENTARY SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) Commercial, (ii) Siding, and (iii) Windows. Our operating segments operate in the commercial and residential new construction, and repair and remodeling construction markets. Sales and earnings are influenced by general economic conditions, the level of residential and nonresidential construction activity, commodity costs, such as steel, aluminum, and PVC, other input costs such as labor and freight, and the availability and terms of financing available for construction. The operating segments follow the same accounting policies used for our consolidated financial statements.
Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, and executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include interest income, interest expense and other income (expense). See Note 20 — Segment Information in the notes to the consolidated financial statements for more information on our segments.
The following table represents total sales, external sales and operating income (loss) attributable to these operating segments for the periods indicated (in thousands, except percentages):
Fiscal Year Ended
December 31,
2019
% October 28,
2018
% October 29,
2017
%
Net sales:         
Commercial $ 1,847,893    37.8    $ 2,000,577    100.0    $ 1,770,278    100.0   
Siding 1,111,407    22.7    —    —    —    —   
Windows 1,930,447    39.5    —    —    —    —   
Total net sales $ 4,889,747    100.0    $ 2,000,577    100.0    $ 1,770,278    100.0   
Operating income (loss):         
Commercial $ 201,073    $ 230,365    $ 189,547   
Siding 66,273    —    —   
Windows 92,538    —    —   
Corporate (145,148)   (104,445)   (79,767)  
Total operating income $ 214,736    $ 125,920    $ 109,780   
Unallocated other expense, net (225,351)   (42,825)   (26,642)  
Income (loss) before income taxes $ (10,615)   $ 83,095    $ 83,138   

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RESULTS OF OPERATIONS FOR FISCAL 2019 COMPARED TO FISCAL 2018
Commercial
Fiscal Year Ended
(Amounts in thousands) December 31, 2019 October 28, 2018
Statement of operations data:
Net sales $ 1,847,893    100.0  % $ 2,000,577    100.0  %
Gross profit 457,747    24.8  % 462,682    23.1  %
SG&A expense (including acquisition costs) 245,397    13.3  % 221,737    11.1  %
Amortization of intangible assets 11,277    0.6  % 9,648    0.5  %
Loss on disposition of business, net —    —  % 5,673    0.3  %
Gain on insurance recovery —    —  % (4,741)   (0.2) %
Operating income 201,073    10.9  % 230,365    11.5  %
Net sales for the year ended December 31, 2019 were $1,847.9 million, a decrease of $152.7 million, or 7.6% from the year ended October 28, 2018. The decrease in net sales was mostly driven by lower tonnage volumes due to market hesitation in late 2018 through the first half of 2019. Rising steel prices in early-mid 2018 motivated customers to accelerate delivery of products ahead of price increases. This was compounded by the fact that the price of steel was increasing at a faster rate than other alternative materials like hardwood and concrete. While our addressable market lost market share to these other products, we maintained price discipline and gained market share within our addressable market.
Gross profit for the year ended December 31, 2019 was $457.7 million, a decrease of $4.9 million or 1.1% from the year ended October 28, 2018. The decrease in gross profit was driven primarily by lower leverage of fixed cost structure as a result of the lower tonnage volumes partially offset by higher selling prices. As a percentage of net sales, gross profit was 24.8%, an increase of 170 basis points from the year ended October 28, 2018. The increase was driven by a combination of price discipline, cost reduction initiatives and supply chain/procurement initiatives that have driven more discounts and rebates into material costs.
Selling, general and administrative expenses were $245.4 million, an increase of $23.7 million or 10.7% from the year ended October 28, 2018. The increase is driven in part by $21.8 million of general and administrative costs that are allocated to the Commercial segment that were previously categorized as unallocated corporate costs prior to the Merger. After adjusting for the incremental general and administrative costs, the increase was driven by investments in talent and technology within our insulated metal panel and pre-engineered buildings businesses partially offset by the impact of cost initiatives that have been implemented.
Amortization expense for the year ended December 31, 2019 was $11.3 million, an increase of $1.6 million from the year ended October 28, 2018. The amortization expense is higher due to the amortization of trade names which were previously classified as indefinite lived.
Loss on disposition of business for the year ended October 28, 2018 was $5.7 million. During the second quarter of fiscal 2018 we recorded a loss of $6.7 million on the sale of our China manufacturing facility and during the third quarter of fiscal 2018 we recorded a $1.0 million gain related to the disposal of a non-strategic product line. There was no corresponding loss in fiscal 2019.
Gain on insurance recovery for the year ended October 28, 2018 was $4.7 million related to proceeds from a final settlement with our insurers for property damage at one of our facilities. There was no corresponding gain in fiscal 2019.
Siding
Fiscal Year Ended
(Amounts in thousands) December 31, 2019 October 28, 2018
Statement of operations data:
Net sales $ 1,111,407    100.0  % $ —    —  %
Gross profit 277,583    25.0  % —    —  %
SG&A expense (including acquisition costs) 111,770    10.1  % —    —  %
Amortization of intangible assets 99,540    9.0  % —    —  %
Operating income 66,273    6.0  % —    —  %
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Net sales for the year ended December 31, 2019 were $1,111.4 million. Net sales for the year ended December 31, 2019 were favorably impacted by the inclusion of $150.5 million for the ESW Acquisition, which closed on February 20, 2019. Excluding ESW, our net sales were $960.9 million for the year ended December 31, 2019. Our net sales for the U.S. and Canadian markets were approximately $1,037.1 million and $74.3 million, respectively, for the year ended December 31, 2019. For the year ended December 31, 2019, foreign currency negatively impacted our net sales by $2.4 million. As summarized by the VSI, our unit U.S. net sales for the year ended December 31, 2019 were relatively flat compared to the year ended December 31, 2018 resulting in a market share of approximately 37.2% based on the unit data provided by the VSI. For Canada, our market share was approximately 33.2% of the Canadian vinyl siding market. The Canadian economy continues to be challenged with lower consumer spending driving slower economic growth and development.
Gross profit for the year ended December 31, 2019 was $277.6 million. Gross profit was negatively impacted $14.4 million by the non-cash inventory fair value step-up associated with the Merger and by $1.9 million for the non-cash inventory fair value step-up associated with the ESW acquisition that closed on February 20, 2019 both of which increased costs of goods sold during the year ended December 31, 2019. Gross profit for the year ended December 31, 2019 includes ESW gross profit of $34.1 million. Excluding ESW and the impact of these inventory step-ups, our gross profit would have been $259.7 million for the year ended December 31, 2019. We historically pass along increases in raw material input costs to our customers but normally there is a lag period of approximately 90-120 days between the impact of higher raw material costs and customer pricing actions. For our Siding segment, we focus predominantly on PVC resin, which increased 2.0%, and aluminum (Midwest Ingot) which decreased 13.5% during the year ended December 31, 2019 compared to the year ended December 31, 2018. In addition to raw material costs, we closely monitor labor and freight costs. Labor costs have trended higher recently given the shortage of manufacturing labor personnel and wage inflation pressure. For the year ended December 31, 2019, foreign currency negatively impacted our gross profit by $0.7 million.
As a percentage of net sales, our gross profit percentage was 27.0% excluding ESW and the fair value step-up. Our net sales and profitability are normally higher during the second and third quarters due to weather seasonality which increases building activity in both the new construction and repair and remodeling markets. With increased production volumes during the late spring and summer months, our gross profit trends higher during the second and third quarters.
Selling, general, and administrative expenses were $111.8 million for the year ended December 31, 2019 including $28.5 million of SG&A expenses attributed to ESW. Included within SG&A expenses are sales and marketing expenses, research and development costs, and legal and professional fees and non-manufacturing personnel costs. As a percentage of net sales, SG&A expenses were 8.7% for the year ended December 31, 2019 excluding ESW.
Amortization expense for the year ended December 31, 2019 was $99.5 million or 9.0% of net sales. The amortization expense is directly attributed to the Merger and the ESW acquisition and the resulting fair values assigned to our intangible assets including trade names and customer lists which both have finite amortization periods.
Windows
Fiscal Year Ended
(Amounts in thousands) December 31, 2019 October 28, 2018
Statement of operations data:
Net sales $ 1,930,447    100.0  % $ —    —  %
Gross profit 353,089    18.3  % —    —  %
SG&A expense (including acquisition costs) 193,791    10.0  % —    —  %
Amortization of intangible assets 66,760    3.5  % —    —  %
Operating income 92,538    4.8  % —    —  %
Net sales for the year ended December 31, 2019 were $1,930.4 million. Net sales for the year ended December 31, 2019 included net sales of $419.4 million and $402.3 million for Silver Line and Atrium, respectively. The Silver Line acquisition was completed on October 14, 2018 while the Atrium acquisition was completed on April 12, 2018 with both entities’ net sales included for the Company within the Windows segment for the year ended December 31, 2019. Excluding these 2018 acquisitions, our net sales would have been $1,108.7 million for the year ended December 31, 2019. Our net sales for the U.S. and Canadian markets were approximately $1,741.7 million and $188.7 million, respectively, for the year ended December 31, 2019. For the year ended December 31, 2019, foreign currency negatively impacted our net sales by $4.1 million.
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Gross profit for the year ended December 31, 2019 was $353.1 million. Gross profit for the year ended December 31, 2019 includes Silver Line gross profit of $47.4 million and Atrium gross profit of $98.5 million. The Silver Line acquisition was completed on October 14, 2018 while the Atrium acquisition was completed on April 12, 2018 with both entities’ gross profit included for the Company within the Windows segment for the year ended December 31, 2019. Excluding the impact of the Silver Line and Atrium gross profit, our gross profit would have been $207.2 million for the year ended December 31, 2019. Historically, our gross profit is impacted by raw material costs, specifically PVC resin, aluminum, and glass. PVC resin increased 2.0%, aluminum (Midwest Ingot) decreased 13.5%, and glass increased 1.5% during the year ended December 31, 2019 compared to the year ended December 31, 2018. We pass along increases in raw material input costs to our customers but normally there is a lag period of approximately 90-120 days between the impact of higher raw material costs and customer pricing actions. In addition to raw material costs, we closely monitor labor and freight costs. Labor costs have trended higher recently given the shortage of manufacturing labor personnel and wage inflation pressure. For the year ended December 31, 2019, foreign currency negatively impacted our gross profit by $1.2 million.
As a percentage of net sales, our gross profit percentage was 18.7% excluding Silver Line and Atrium gross profit. We focused our efforts during 2019 on improving our gross profit margins by investing in automation projects at our manufacturing facilities, maintaining our price discipline in certain competitive markets, and focusing on our customer needs and service proposition and integrating our manufacturing facilities and product profiles. These efforts enabled us to achieve the 18.7% gross profit percentage for the year ended December 31, 2019.
Selling, general, and administrative expenses were $193.8 million for the year ended December 31, 2019. SG&A expenses for the year ended December 31, 2019 includes $19.7 million and $41.9 million of Silver Line and Atrium SG&A expenses, respectively. Excluding the impact of Silver Line and Atrium, SG&A expenses would have been $132.2 million. Included within SG&A expenses are sales and marketing expenses, research and development costs, and legal and professional fees and non-manufacturing personnel costs. As a percentage of net sales, SG&A expenses were 11.9% for the year ended December 31, 2019 excluding Silver Line and Atrium as we normally gain leverage on the fixed component of SG&A expenses during the second and third quarters.
Amortization expense for the year ended December 31, 2019 was $66.8 million, or 3.5% of net sales. The amortization expense is directly attributed to the Merger and the fair values assigned to our intangible assets including trade names and customer lists which both have finite amortization periods.
Unallocated Operating Earnings (Losses), Interest, and Provision (Benefit) for Income Taxes
Fiscal Year Ended
(Amounts in thousands) December 31, 2019 October 28, 2018
Statement of operations data:
SG&A expense $ (125,281)   $ (87,281)  
Acquisition related expenses (19,867)   (17,164)  
Operating loss (145,148)   (104,445)  
Interest expense (229,262)   (21,808)  
Interest income 674    140   
Currency translation gain (loss) 2,054    (244)  
Loss on debt extinguishment —    (21,875)  
Other income, net 1,183    962   
Income tax provision (benefit) 4,775    19,989   
Unallocated operating losses include items that are not directly attributed to or allocated to our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the year ended December 31, 2019 increased $40.7 million or 39.0% compared to the year ended October 28, 2018 due primarily to the addition of the Ply Gem corporate cost center, increased stock-based compensation expense and $50.2 million of costs associated with the Merger and other strategic acquisition costs.
Interest expense increased to $229.3 million for the year ended December 31, 2019 compared to $21.8 million for the year ended October 28, 2018. The interest expense increase is primarily due to debt obligations assumed in the Merger. Following the consummation of the Merger, our consolidated debt balance increased to $3.2 billion at December 31, 2019 as compared to $407.2 million at October 28, 2018.
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Foreign exchange gain (loss) for the year ended December 31, 2019 was a $2.1 million gain, compared to a loss of $0.2 million for the year ended October 28, 2018, due to exchange rate fluctuations in the Canadian dollar and Mexican peso relative to the U.S. dollar.
Loss on debt extinguishment was $21.9 million for the year ended October 28, 2018. During the year ended October 28, 2018, we recognized a pretax loss, primarily on the extinguishment of our 8.25% senior notes due 2023, of $21.9 million, of which approximately $15.5 million represented the call premium paid on the redemption of the notes. There was no corresponding loss in fiscal 2019.
Consolidated provision (benefit) for income taxes was an expense of $4.8 million for the year ended December 31, 2019 compared to an expense of $20.0 million for the year ended October 28, 2018. The effective tax rate for the year ended December 31, 2019 was 45.0% compared to 24.1% for the year ended October 28, 2018. The change in the effective tax rate was primarily driven by the continuing effects associated with the enactment of the U.S. Tax Cuts and Jobs Act, limitations on the deduction for net interest expense partially offset by the impact of the reversal of the Canadian valuation allowance for $3.9 million.
LIQUIDITY AND CAPITAL RESOURCES
General
Our cash, cash equivalents and restricted cash increased from $54.5 million to $102.3 million during the transition period ended December 31, 2018 and fiscal 2019. The following table summarizes our consolidated cash flows for fiscal 2019 and 2018, and the Transition Period (in thousands):
Fiscal Year Ended
December 31,
2019
October 28,
2018
October 29,2018 - December 31, 2018
Net cash provided by operating activities $ 229,608    $ 82,463    $ 11,099   
Net cash provided by (used in) investing activities (294,758)   (38,174)   73,492   
Net cash provided by (used in) financing activities 17,540    (55,473)   9,161   
Effect of exchange rate changes on cash and cash equivalents 2,310    (93)   (662)  
Net increase (decrease) in cash, cash equivalents and restricted cash (45,300)   (11,277)   93,090   
Cash, cash equivalents and restricted cash at beginning of period 147,607    65,794    54,517   
Cash, cash equivalents and restricted cash at end of period $ 102,307    $ 54,517    $ 147,607   
Operating Activities
Our business is both seasonal and cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to economic conditions. We rely on cash as well as short-term borrowings, when needed, to meet cyclical and seasonal increases in working capital needs. These needs generally rise during periods of increased economic activity or due to higher levels of inventory and accounts receivable. Working capital needs also fluctuate based on raw material prices.
Net cash provided by operating activities was $229.6 million during fiscal 2019 compared to $82.5 million during fiscal 2018 and $11.1 million provided during the Transition Period. The change in cash flow provided by operations is due to the inclusion of current period operations from Ply Gem subsequent to the Merger on November 16, 2018 and decreasing inventory that was driven by improved purchasing and lower input costs, partially offset by certain acquisition costs related to the Merger. The improved cash flow from operations during fiscal 2019 is due to the inclusion of current period operations from Ply Gem and ESW subsequent to the Merger and normal seasonal trends in the timing of working capital.
Net cash used in accounts receivable was $38.2 million for fiscal 2019 compared to $35.4 million for fiscal 2018. The change in accounts receivable period over period relates to seasonal trends in working capital and timing of collections given the change in fiscal year. Our trailing 90-days sales outstanding (“DSO”) was approximately 41.2 days at December 31, 2019 as compared to 39.3 days and 35.2 days at December 31, 2018 and October 28, 2018, respectively.
The change in cash flows relating to inventory for fiscal 2019 was an increase of $91.8 million compared to a decrease of $58.5 million for fiscal 2018. The change in inventory period over period relates to lower commodity pricing and improved purchasing combined with increases in net payment discounts from the addition of Ply Gem and ESW in fiscal 2019. Our trailing 90-days inventory on-hand (“DIO”) improved to 42.7 days at December 31, 2019 as compared to 54.1 days and 54.9 days at December 31, 2018 and October 28, 2018, respectively.
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Net cash used in accounts payable was $21.1 million for fiscal 2019 compared to $24.5 million provided for fiscal 2018. Our vendor payments can fluctuate significantly based on the timing of disbursements, inventory purchases and vendor payment terms and the inclusion of the cash provided by accounts payable from Ply Gem in fiscal 2019. Our trailing 90-days payable outstanding (“DPO”) at December 31, 2019 was 20.8 days as compared to 24.0 days and 33.4 days at December 31, 2018 and October 28, 2018, respectively.
Net cash used in accrued expenses was $40.4 million for fiscal 2019 compared to $16.3 million net cash provided by accrued expenses for the fiscal year ended October 28, 2018. The change was primarily driven by timing of interest payments and compensation payments.
Investing Activities
Cash used in investing activities was $294.8 million during fiscal 2019 compared to $38.2 million used during fiscal 2018 and $73.5 million provided during the Transition Period. During fiscal 2019, we paid approximately $179.2 million, net of cash acquired, for the acquisition of Environmental Stoneworks and during the Transition Period we had $87.1 million of net cash received from the acquisition of Ply Gem. We used $121.1 million, $47.8 million and $13.6 million for capital expenditures, during fiscal 2019 and 2018, and the Transition Period, respectively.
Financing Activities
Cash provided by financing activities was $17.5 million in fiscal 2019 compared $55.5 million used in financing activities in fiscal 2018 and $9.2 million provided by financing activities in the Transition Period. During fiscal 2019, we borrowed $200.0 million to finance the ESW Acquisition and repaid all but $70.0 million of that amount, paid $25.6 million on quarterly installments on our Current Term Loan, made a $24.9 million payment on the tax receivable agreement and used $1.9 million for the purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units.
During the Transition Period, we repaid $325.0 million on the Current ABL Facility, used $4.1 million for the purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units. Net cash provided in the repayment of the pre-Merger Term Loan Credit Agreement and refinancing of long-term debt in connection with the Merger, including payments of financing costs was $366.4 million. We also made a $22.5 million payment on the tax receivable agreement and a $3.5 million payment for settlements of our appraisal share liability. Finally, we made a $0.7 million payment for contingent consideration that was originally accrued in purchase accounting in 2015 in connection with Ply Gem’s acquisition of Canyon Stone.
During fiscal 2018, we borrowed periodically under our ABL Facility and repaid all of that amount during the period, used $51.8 million to repurchase shares of our outstanding common stock under programs approved by the Board of Directors on September 8, 2016 and October 10, 2017 and for the purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units. Net cash used in the redemption of our Senior Notes and refinancing of long-term debt, including payments of financing cost; as well as payments on the refinanced term loan was $3.2 million. We received $1.3 million in cash proceeds from the exercises of stock options.
We invest our excess cash in various overnight investments which are issued or guaranteed by the federal government.
Equity Investment
On August 14, 2009, we entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the us and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of ours, which was converted into shares of our common stock on May 14, 2013.
In January 2014, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 8.5 million shares of Common Stock at a price to the public of $18.00 per share (the “2014 Secondary Offering”). The underwriters also exercised their option to purchase 1.275 million additional shares of Common Stock. In addition, we entered into an agreement with the CD&R Fund VIII Investor Group to repurchase 1.15 million shares of our Common Stock at a price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2014 Stock Repurchase”). The 2014 Stock Repurchase, which was completed at the same time as the 2014 Secondary Offering, represented a private, non-underwritten transaction between NCI and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors.
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On July 25, 2016, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 9.0 million shares of our Common Stock at a price to the public of $16.15 per share (the “2016 Secondary Offering”). The underwriters also exercised their option to purchase 1.35 million additional shares of our Common Stock from the CD&R Fund VIII Investor Group. The aggregate offering price for the 10.35 million shares sold in the 2016 Secondary Offering was approximately $160.1 million, net of underwriting discounts and commissions. The CD&R Fund VIII Investor Group received all of the proceeds from the 2016 Secondary Offering and no shares in the 2016 Secondary Offering were sold by us or any of our officers or directors (although certain of our directors are affiliated with the CD&R Fund VIII Investor Group).
On July 18, 2016, we entered into an agreement with the CD&R Fund VIII Investor Group to repurchase approximately 2.9 million shares of our Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2016 Stock Repurchase”). The 2016 Stock Repurchase, which was completed concurrently with the 2016 Secondary Offering, represented a private, non-underwritten transaction between us and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors.
On December 11, 2017, the CD&R Fund VIII Investor Group completed a registered underwritten offering of 7,150,000 shares of the our Common Stock at a price to the public of $19.36 per share (the “2017 Secondary Offering”). Pursuant to the underwriting agreement, at the CD&R Fund VIII Investor Group request, we purchased 1.15 million of the 7.15 million shares of our Common Stock from the underwriters in the 2017 Secondary Offering at a price per share equal to the price at which the underwriters purchased the shares from the CD&R Fund VIII Investor Group. The total amount we spent on these repurchases was $22.3 million.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018 (the “Ply Gem-Atrium Merger”).
Pursuant to the terms of the Merger Agreement, on November 16, 2018, we entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between us, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which we granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between us and each of the Investors, pursuant to which we granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares our Common Stock that are held by the Investors following the consummation of the Merger.
At December 31, 2019 and 2018, the CD&R Investor Group owned approximately 49.1% and 49.4%, respectively, of the outstanding shares of our Common Stock.
Debt
Our outstanding indebtedness will mature in 2023 (Current ABL Facility and Current Cash Flow Revolver), 2025 (Current Term Loan Facility), and 2026 (8.00% Senior Notes). We may not be successful in refinancing, extending the maturity or otherwise amending the terms of such indebtedness because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness. Following consummation of the Merger, the Current Term Loan Facility provided for an aggregate principal amount of $2,560.0 million. We have also entered into certain interest rate swap agreements to reduce our variable interest rate risk.
The Current ABL Credit Agreement provides for an asset-based revolving credit facility which allows aggregate maximum borrowings by the ABL borrowers of up to $611.0 million. As set forth in the Current ABL Credit Agreement, extensions of credit under the Current ABL Facility are subject to a monthly borrowing base calculation that is based on specified percentages of the value of eligible inventory, eligible accounts receivable and eligible credit card receivables, less certain reserves and subject to certain other adjustments. Availability under the Current ABL Facility will be reduced by issuance of letters of credit as well as any borrowings outstanding thereunder.
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As of December 31, 2019, we had an aggregate principal amount of $3,238.6 million of outstanding indebtedness, comprising $70.0 million of borrowings under the Current ABL Facility, $2,523.6 million of borrowings under our Current Term Loan Facility and $645.0 million of 8.00% Senior Notes outstanding. We had no revolving loans outstanding under the Current Cash Flow Revolver. Our excess availability under the Current ABL Facility was $425.9 million as of December 31, 2019. In addition, standby letters of credit related to certain insurance policies totaling approximately $30.2 million were outstanding but undrawn under the ABL Facility.
For additional information, see Note 12 — Long-Term Debt in the notes to the consolidated financial statements.
Cash Flow
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. Beyond cash generated from operations, $425.9 million is available with our Current ABL Facility at December 31, 2019, $115.0 million is available with our Current Cash Flow Revolver and we have an unrestricted cash balance of $98.4 million as of December 31, 2019.
We expect to contribute $5.2 million to the Defined Benefit Plans in fiscal 2020 and $0.8 million to OPEB Plans in fiscal 2020.
We expect that cash generated from operations and our availability under the ABL Credit Facility will be sufficient to provide us the ability to fund our operations and to provide the increased working capital necessary to support our strategy and fund planned capital expenditures of approximately 2.0%-2.5% of net sales for fiscal 2020 and expansion when needed.
Our corporate strategy evaluates potential acquisitions that would provide additional synergies in our Commercial, Siding and Windows segments. From time to time, we may enter into letters of intent or agreements to acquire assets or companies in these business lines. The consummation of these transactions could require substantial cash payments and/or issuance of additional debt.
From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase programs. On October 10, 2017 and March 7, 2018, we announced that our Board of Directors authorized new stock repurchase programs for the repurchase of up to an aggregate of $50.0 million and an additional $50.0 million, respectively, of our outstanding Common Stock for a cumulative total of $100.0 million. Under these repurchase programs, we are authorized to repurchase shares, if at all, at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the programs. During fiscal 2019 and the Transition Period, there were no repurchases under the stock repurchase programs. As of December 31, 2019, approximately $55.6 million remained available for stock repurchases, all under the programs announced on October 10, 2017 and March 7, 2018. In addition to repurchases of shares of our common stock under our stock repurchase program, we also withhold shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of restricted stock related to our 2003 Long-Term Stock Incentive Plan.
We may from time to time take steps to reduce our debt or otherwise improve our financial position. These actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital. The amount of prepayments or the amount of debt that may be refinanced, repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding on our consolidated balance sheets.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2019, we were not involved in any unconsolidated SPE transactions.
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CONTRACTUAL OBLIGATIONS
The following table shows our contractual obligations as of December 31, 2019 (in thousands):
Payments due by period
Contractual Obligation Total Less than
1 year
1 – 3 years 3 – 5 years More than
5 years
Total debt(1)
$ 3,238,587    $ 25,600    $ 121,200    $ 51,200    $ 3,040,587   
Interest payments on debt(2)
1,046,018    191,776    374,803    369,186    110,253   
Operating leases 379,852    89,649    143,016    64,842