NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2020
(Unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements for Cornerstone Building Brands, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “Cornerstone,” “NCI”, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present the Company’s financial position, results of operations and cash flows for the periods indicated. Operating results for the period from January 1, 2020 through April 4, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020.
Certain reclassifications have been made to the prior period segments amounts in the notes to the consolidated financial statements to conform to the current presentation. The net effect of these reclassifications was not material to the consolidated financial statements (See Note 19 — Segment Information).
For additional information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2020.
On July 17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ply Gem Parent, LLC (“Ply Gem”), and for certain limited purposes as set forth in the Merger Agreement, Clayton, Dubilier & Rice, LLC (“CD&R”), pursuant to which, at the closing of the merger, Ply Gem would be merged with and into NCI, with NCI continuing its existence as a corporation organized under the laws of the State of Delaware (the “Merger”). In connection with the Merger, 58,709,067 shares of NCI common stock were issued to the holders of all of the equity interests in Ply Gem (the “Stock Issuance”), representing approximately 47% of the total number of shares of NCI Common Stock outstanding following the consummation of the Merger on November 16, 2018. There are approximately 57,103 shares of NCI Common Stock of the original 58,709,067 that have not yet been issued pending holder identification and have been accrued as purchase consideration within other current liabilities in the consolidated balance sheet at April 4, 2020.
Reporting Periods
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 that December 31st will always be the year-end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that total the amounts shown in the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
$
|
475,701
|
|
|
$
|
98,386
|
|
|
Restricted cash(1)
|
7,924
|
|
|
3,921
|
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
$
|
483,625
|
|
|
$
|
102,307
|
|
(1)Restricted cash primarily relates to escrow balances held for an outstanding earn-out agreement and working capital and other indemnification agreements.
Accounts Receivables and Related Allowance
The Company reports accounts receivable net of the allowance for doubtful accounts. Trade accounts receivable are the result of sales of metal building products, insulated metal panels, metal coating, vinyl siding, metal siding, injection molded products, vinyl windows, aluminum windows, and other products and services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process and we require payment prior to shipment for certain international shipments.
The Company establishes reserves for doubtful accounts on a customer by customer basis when we believe the required payment of specific amounts owed is unlikely to occur. Bad debt provisions are included in selling, general and administrative expenses. In establishing these reserves, the Company considers changes in the financial position of a customer, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with our customers. Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. We determine past due status as of the contractual payment date. Interest on delinquent accounts receivable is included in the trade accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance, all collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
The following table represents the rollforward of the reserve for uncollectible accounts for the period indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
Balance, December 31, 2019
|
|
|
|
|
|
|
$
|
9,962
|
|
|
Cumulative effect of accounting change(1)
|
|
|
|
|
|
|
678
|
|
|
Provision for expected credit losses
|
|
|
|
|
|
|
725
|
|
|
Amounts charged against allowance for credit losses, net of recoveries
|
|
|
|
|
|
|
(354)
|
|
|
Allowance for credit losses of acquired company at date of acquisition
|
|
|
|
|
|
|
810
|
|
|
Balance, April 4, 2020
|
|
|
|
|
|
|
$
|
11,821
|
|
(1)Cumulative effect of accounting change reflects the modified retrospective effect of adopting ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (See Note 2 — Accounting Pronouncements).
Net Sales
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as of October 29, 2018. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company enters into contracts that pertain to products, which are accounted for as separate performance obligations and are typically one year or less in duration. The Company does not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. The Company has elected to apply the practical expedient provided for in ASU No. 2014-09 and has not disclosed information regarding remaining performance obligations that have original expected durations of one year or less. Revenue is generally recognized when the product has shipped from our facility and control has transferred to the customer. For a portion of our business, when we process customer owned material, control is deemed to transfer to the customer as the processing is being completed.
Our revenues are adjusted for variable consideration, which includes customer volume rebates and prompt payment discounts. We measure variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, and current and forecasted information. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. Measurement of variable consideration is reviewed by management periodically and revenue is adjusted accordingly. We do not have significant financing components.
Shipping and handling activities performed by us are considered activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
In accordance with certain contractual arrangements, we receive payment from our customers in advance related to performance obligations that are to be satisfied in the future and recognize such payments as deferred revenue, primarily related to the Company's weathertightness warranties (see Note 12 — Warranty).
The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
March 30,
2019
|
|
Windows Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Vinyl windows
|
|
|
|
|
$
|
419,022
|
|
|
$
|
393,930
|
|
|
Aluminum windows
|
|
|
|
|
19,476
|
|
|
11,708
|
|
|
Other
|
|
|
|
|
9,952
|
|
|
15,956
|
|
|
Total
|
|
|
|
|
$
|
448,450
|
|
|
$
|
421,594
|
|
|
|
|
|
|
|
|
|
|
|
Siding Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Vinyl siding
|
|
|
|
|
$
|
109,548
|
|
|
$
|
105,957
|
|
|
Metal
|
|
|
|
|
52,666
|
|
|
52,980
|
|
|
Injection molded
|
|
|
|
|
13,239
|
|
|
11,838
|
|
|
Stone
|
|
|
|
|
18,810
|
|
|
22,314
|
|
|
Other products & services
|
|
|
|
|
46,780
|
|
|
25,188
|
|
|
Total
|
|
|
|
|
$
|
241,043
|
|
|
$
|
218,277
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Metal building products
|
|
|
|
|
$
|
292,436
|
|
|
$
|
273,425
|
|
|
Insulated metal panels
|
|
|
|
|
99,229
|
|
|
106,372
|
|
|
Metal coil coating
|
|
|
|
|
32,653
|
|
|
45,164
|
|
|
Total
|
|
|
|
|
$
|
424,318
|
|
|
$
|
424,961
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales:
|
|
|
|
|
$
|
1,113,811
|
|
|
$
|
1,064,832
|
|
NOTE 2 — ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an entity to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now incorporate forward-looking information based on expected losses to estimate credit losses. Effective January 1, 2020, the Company adopted this guidance on a modified retrospective basis, pursuant to which it recorded a $0.7 million adjustment to increase the opening balance of accumulated deficit as of January 1, 2020 for the impact of applying the new standard. The adjustment related to recording an incremental credit loss to the accounts receivable allowance for doubtful accounts at the beginning of the first period in which the accounting standard is effective. Additional credit loss disclosures are included in Note 1 — Summary of Significant Accounting Policies.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements under ASC 820, Fair Value Measurement. Effective January 1, 2020, the Company adopted this guidance. The application of ASU 2018-13 did not have a material effect on consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which removes disclosures no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. Effective January 1, 2020, the Company adopted this guidance. The application of ASU 2018-14 did not have a material effect on consolidated financial statements.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company will be required to adopt this guidance in the annual and interim periods for our fiscal year ending December 31, 2021, with early adoption permitted. The Company is evaluating the impact of adopting this guidance.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in this ASU are elective, apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform, and are effective as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of electing to apply the amendments in this guidance.
Additionally, there were various other accounting standards and interpretations issued that the Company has not yet been required to adopt, none of which is expected to have a material impact on the Company’s consolidated financial statements going forward.
NOTE 3 — ACQUISITIONS
Kleary Acquisition
On March 2, 2020, the Company acquired 100% of the issued and outstanding shares of the common stock of Kleary Masonry, Inc. ("Kleary") for total consideration of $40.0 million. The transaction was financed with cash on hand and through borrowings under the Company’s asset-based revolving credit facility. Kleary primarily services residential customers with manufactured stone installations and commercial customers with manufactured wall installations in the Sacramento, California area. Kleary's results are reported within the Siding business segment.
The acquisition of Kleary strengthens the Company's position as a market leader in stone veneer. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Kleary based upon fair values as of the closing date.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
Cash
|
$
|
143
|
|
|
Accounts receivable
|
7,235
|
|
|
Inventories
|
715
|
|
|
Prepaid expenses and other current assets
|
330
|
|
|
Property, plant and equipment
|
1,042
|
|
|
Lease right of use assets
|
445
|
|
|
Intangible assets (trade names/customer relationships)
|
22,350
|
|
|
Goodwill
|
10,615
|
|
|
|
|
|
Total assets acquired
|
42,875
|
|
|
Liabilities assumed:
|
|
|
Accounts payable
|
1,126
|
|
|
Other accrued expenses
|
1,195
|
|
|
|
|
|
|
|
|
Lease liabilities
|
445
|
|
|
Other long-term liabilities
|
109
|
|
|
Total liabilities assumed
|
2,875
|
|
|
Net assets acquired
|
$
|
40,000
|
|
The $10.6 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.
During the three months ended April 4, 2020, the Company incurred $0.2 million of acquisition-related costs for Kleary, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
The final acquisition accounting allocation for the acquisition of Kleary remains subject to further adjustments. The specific accounts subject to ongoing acquisition accounting adjustments include accounts receivable, inventories, prepaid expenses and other current assets, goodwill, intangibles, accounts payable, accrued expenses, accrued warranties and other liabilities. Therefore, the measurement period remained open as of April 4, 2020, and the preliminary acquisition accounting allocation detailed above is subject to further adjustment. The Company anticipates completing these acquisition accounting adjustments during the first quarter of fiscal 2021.
Unaudited Pro Forma Financial Information
During the three months ended April 4, 2020, Kleary contributed net sales of $3.5 million and net income of $0.7 million which has been included within the Company’s consolidated statement of operations. The following table provides unaudited supplemental pro forma results for Cornerstone, prepared in accordance with ASC 805, for the three months ended April 4, 2020 and March 30, 2019 as if the Kleary and Environmental Stoneworks (defined below) acquisitions had occurred on January 1, 2019 (in thousands except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
March 30,
2019
|
|
|
|
|
|
Net sales
|
$
|
1,122,169
|
|
|
$
|
1,088,608
|
|
|
|
|
|
|
Net loss applicable to common shares
|
(540,870)
|
|
|
(63,003)
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(4.29)
|
|
|
$
|
(0.50)
|
|
|
|
|
|
|
Diluted
|
$
|
(4.29)
|
|
|
$
|
(0.50)
|
|
|
|
|
|
The unaudited supplemental pro forma financial information was prepared based on the historical information of Cornerstone, Environmental Stoneworks and Kleary. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the two acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the Environmental Stoneworks and Kleary acquisitions occurred on January 1, 2019 or of future results.
Environmental Stoneworks
On January 12, 2019, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC, a Delaware limited liability company (“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 certain post-closing adjustments, for ESW. 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. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of ESW based upon fair values as of the closing date.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
Restricted cash
|
$
|
3,379
|
|
|
|
Accounts receivable
|
16,825
|
|
|
|
Inventories
|
13,062
|
|
|
|
Prepaid expenses and other current assets
|
3,677
|
|
|
|
Property, plant and equipment
|
14,295
|
|
|
|
Lease right of use assets
|
11,372
|
|
|
|
Intangible assets (trade names/customer relationships)
|
91,170
|
|
|
|
Goodwill
|
63,543
|
|
|
|
Deferred taxes
|
474
|
|
|
|
Other assets
|
157
|
|
|
|
Total assets acquired
|
217,954
|
|
|
|
Liabilities assumed:
|
|
|
|
Accounts payable
|
5,910
|
|
|
|
Other accrued expenses
|
14,666
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities
|
11,365
|
|
|
|
Other long-term liabilities
|
3,450
|
|
|
|
Total liabilities assumed
|
35,391
|
|
|
|
Net assets acquired
|
$
|
182,563
|
|
|
The $63.5 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.
NOTE 4 — RESTRUCTURING
The Company has various initiatives and programs in place within its business units to reduce selling, general, and administrative expenses ("SG&A"), manufacturing costs and to optimize the Company's combined manufacturing footprint. During the three months ended April 4, 2020, the Company incurred restructuring charges of $1.5 million, $1.1 million and $11.7 million in the Windows, Siding and Commercial segments, respectively. Corporate headquarters incurred a restructuring gain of $0.3 million primarily as a result of a reversal of an estimated restructuring accrual. Restructuring charges incurred to date since inception of the current restructuring initiatives began in 2019 is $25.5 million. The following table summarizes our restructuring plan costs and charges related to the restructuring plans for the period indicated, which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
April 4,
2020
|
|
Severance
|
|
|
$
|
9,542
|
|
|
Asset impairments
|
|
|
3,079
|
|
|
|
|
|
|
|
Other restructuring costs
|
|
|
1,371
|
|
|
Total restructuring costs
|
|
|
$
|
13,992
|
|
The restructuring costs are recorded within restructuring and impairment costs for $13.8 million and cost of goods sold for $0.2 million in the Company’s consolidated statement of operations. The asset impairments of $3.1 million are comprised of equipment costs of $1.6 million and right of use asset impairments for $1.5 million related predominantly to the closure of the Company's Ambridge, Pennsylvania Commercial facility.
The following table summarizes our severance liability and cash payments made pursuant to the restructuring plans from inception through April 4, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
Siding
|
|
Commercial
|
|
Corporate
|
|
Total
|
|
Balance, December 31, 2018
|
$
|
—
|
|
|
|
$
|
85
|
|
|
|
$
|
—
|
|
|
$
|
2,333
|
|
|
$
|
2,418
|
|
|
Costs incurred
|
1,094
|
|
|
|
1,834
|
|
|
|
2,721
|
|
|
4,009
|
|
|
9,658
|
|
|
Cash payments
|
(676)
|
|
|
|
(1,437)
|
|
|
|
(2,721)
|
|
|
(4,579)
|
|
|
(9,413)
|
|
|
Balance, December 31, 2019
|
$
|
418
|
|
|
|
$
|
482
|
|
|
|
$
|
—
|
|
|
$
|
1,763
|
|
|
$
|
2,663
|
|
|
Costs incurred
|
400
|
|
|
|
200
|
|
|
|
8,966
|
|
|
—
|
|
|
9,566
|
|
|
Cash payments
|
(426)
|
|
|
|
(289)
|
|
|
|
(4,136)
|
|
|
(932)
|
|
|
(5,783)
|
|
|
Balance, April 4, 2020
|
$
|
392
|
|
|
|
$
|
393
|
|
|
|
$
|
4,830
|
|
|
$
|
831
|
|
|
$
|
6,446
|
|
These severance liabilities are included within other accrued expenses on the consolidated balance sheets.
NOTE 5 — GOODWILL
The Company’s goodwill balance and changes in the carrying amount of goodwill by segment follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windows
|
|
Siding
|
|
Commercial
|
|
Total
|
|
Balance, December 31, 2019
|
$
|
714,023
|
|
|
$
|
807,280
|
|
|
$
|
148,291
|
|
|
$
|
1,669,594
|
|
|
Goodwill recognized from Kleary Acquisition
|
—
|
|
|
10,615
|
|
|
—
|
|
|
10,615
|
|
|
Impairment
|
(320,990)
|
|
|
(176,774)
|
|
|
(5,407)
|
|
|
(503,171)
|
|
|
Currency translation
|
2,861
|
|
|
1,757
|
|
|
—
|
|
|
4,618
|
|
|
Purchase accounting adjustments
|
—
|
|
|
1,776
|
|
|
—
|
|
|
1,776
|
|
|
Balance, April 4, 2020
|
$
|
395,894
|
|
|
$
|
644,654
|
|
|
$
|
142,884
|
|
|
$
|
1,183,432
|
|
The Company performs an annual impairment assessment of goodwill and indefinite-lived intangibles. Additionally, we assess goodwill and indefinite-lived intangibles for impairment whenever events or changes in circumstances indicate that the fair values may be below the carrying values of such assets. The Company performs this annual and interim impairment tests at the following levels: Windows, Siding, Metal Coil Coating, Engineered Building Products, Metal Components, and Insulated Metal Panels (Business Envelope Solutions). Unforeseen events, changes in circumstances and market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in a non-cash impairment charge. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant declines in stock price for a sustained period, and significant sustained negative industry or economic trends.
The fair value of the Company's reporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples. A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment. The results from each of these models are then weighted and combined into a single estimate of fair value for the Company's reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisition multiples are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements.
As a result of the recent decline in the Company’s market valuation and near-term economic uncertainties related to the COVID-19 pandemic, the Company determined that an interim goodwill impairment test was necessary as of April 4, 2020. The Company determined that deterioration in discount rates and market multiples during the three months ended April 4, 2020 from the COVID-19 driven economic uncertainty when combined with lower forecasted discounted cash flows, decreased the fair values of the Company’s reporting units. The Company performed an impairment evaluation by comparing the fair market value of its reporting units, as determined using an equally weighted discounted cash flow model and market approach, to its carrying value. It was determined that the Siding, Windows and Metal Coil Coating reporting units' carrying value each exceeded their fair value. As a result of this analysis, the Company recorded a goodwill impairment charge of approximately $321.0 million for the Windows reporting unit, $176.8 million for the Siding reporting unit, and $5.4 million for the Metal Coil Coating reporting unit (which is within the Commercial segment). Any adjustment to the impairment for finalization of estimates will be recorded in a subsequent period. This non-cash charge does not affect the Company’s cash position, liquidity, debt covenant compliance, nor will it have any impact on future operations. However, there can be no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods. The Company will continue to perform its required annual goodwill impairment test during the fourth quarter and further declines in the Company's end markets could result in additional goodwill impairment charges.
In addition to ASC Topic 350, Intangibles-goodwill and other, the Company evaluated its property and equipment and intangible assets for impairment in accordance with ASC Topic 360, Property, plant and equipment. This analysis was triggered by a decrease in projected cash flows due to the depressed construction market. The impairment test results did not indicate that an impairment existed at April 4, 2020 other than the $3.1 million described in Note 4 - Restructuring.
NOTE 6 — INVENTORIES
The components of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
December 31,
2019
|
|
Raw materials
|
$
|
241,891
|
|
|
$
|
239,063
|
|
|
Work in process and finished goods
|
218,514
|
|
|
200,131
|
|
|
|
$
|
460,405
|
|
|
$
|
439,194
|
|
As of April 4, 2020, the Company had inventory purchase commitments of $98.1 million.
NOTE 7 — INTANGIBLES
The table that follows presents the major components of intangible assets as of April 4, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life (Years)
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
As of April 4, 2020
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names
|
5
|
–
|
15
|
|
$
|
248,809
|
|
|
$
|
(39,571)
|
|
|
$
|
209,238
|
|
|
Customer lists and relationships
|
9
|
–
|
20
|
|
1,744,529
|
|
|
(249,396)
|
|
|
1,495,133
|
|
|
Total intangible assets
|
|
|
|
|
$
|
1,993,338
|
|
|
$
|
(288,967)
|
|
|
$
|
1,704,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names
|
5
|
–
|
15
|
|
$
|
252,942
|
|
|
$
|
(38,010)
|
|
|
$
|
214,932
|
|
|
Customer lists and relationships
|
9
|
–
|
20
|
|
1,737,060
|
|
|
(211,292)
|
|
|
1,525,768
|
|
|
Total intangible assets
|
|
|
|
|
$
|
1,990,002
|
|
|
$
|
(249,302)
|
|
|
$
|
1,740,700
|
|
NOTE 8 — ASSETS HELD FOR SALE
We record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less cost to sell, we consider factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. The total carrying value of assets held for sale was $2.6 million and $1.8 million as of April 4, 2020 and December 31, 2019, respectively. Assets held for sale at April 4, 2020 are actively marketed for sale or were under contract.
Due to uncertainties in the estimation process, actual results could differ from the estimates used in our historical analysis. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We determined the estimated fair values of assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate. Certain assets held for sale are valued at fair value and are measured at fair value on a nonrecurring basis. Assets held for sale are reported at fair value, if, on an individual basis, the fair value of the asset is less than carrying value. The fair value of assets held for sale is estimated using Level 3 inputs, such as broker quotes for like-kind assets or other market indications of a potential selling value that approximates fair value. Assets held for sale, reported at fair value, less costs to sell, totaled $2.6 million as of April 4, 2020.
NOTE 9 — LEASES
The Company leases certain manufacturing, warehouse and distribution locations, vehicles and equipment, including fleet vehicles. Many of these leases have options to terminate prior to or extend beyond the end of the term. The exercise of the majority of lease renewal options is at the Company’s sole discretion. Some lease agreements have variable payment terms, the majority of these are real estate agreements in which future increases in rent are based on an index. Lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the reasonably expected holding period at commencement date. Few of the Company’s lease contracts provide a readily determinable implicit rate. For lease contracts without a readily determinable implicit rate, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Weighted average information about the Company’s lease portfolio as of April 4, 2020 was as follows:
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
5.8 years
|
|
Weighted-average IBR
|
6.08
|
%
|
Operating lease costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
March 30, 2019
|
|
Operating lease costs
|
|
|
|
|
|
|
|
|
Fixed lease costs
|
|
|
|
|
$
|
27,930
|
|
|
$
|
21,050
|
|
|
Variable lease costs(1)
|
|
|
|
|
19,588
|
|
|
10,554
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes short-term lease costs, which are immaterial.
|
|
|
|
|
|
|
|
Cash and non-cash activities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
March 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
|
|
|
$
|
30,274
|
|
|
$
|
21,663
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
|
|
$
|
4,261
|
|
|
$
|
304,056
|
|
Future minimum lease payments under non-cancelable leases as of April 4, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
2020 (excluding the three months ended April 4, 2020)
|
$
|
61,809
|
|
|
2021
|
79,769
|
|
|
2022
|
64,858
|
|
|
2023
|
39,674
|
|
|
2024
|
29,650
|
|
|
Thereafter
|
83,212
|
|
|
Total future minimum lease payments
|
358,972
|
|
|
Less: interest
|
57,005
|
|
|
Present value of future minimum lease payments
|
$
|
301,967
|
|
|
|
|
|
As of April 4, 2020
|
|
|
Current portion of lease liabilities
|
$
|
69,307
|
|
|
Long-term portion of lease liabilities
|
232,660
|
|
|
Total
|
$
|
301,967
|
|
NOTE 10 — SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan, as amended (the “Incentive Plan”), is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock awards, stock appreciation rights, cash awards, phantom stock awards, restricted stock unit awards ("RSUs") and long-term incentive awards with performance conditions (“performance share units” or "PSUs"). Awards are generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). In connection with the Merger with Ply Gem Parent, LLC ("Ply Gem"), on November 16, 2018 awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, RSUs, and PSUs. A portion of the Founders Awards was not granted under the Incentive Plan but was instead granted pursuant to a separate equity-based compensation plan, the Long-Term Incentive Plan consisting of award agreements for select Founders Awards. However, these awards were subject to the same terms and provisions as awards of the same type granted under the Incentive Plan.
As of April 4, 2020, and for all periods presented, the Founders Awards and our share-based awards under the Incentive Plan have consisted of RSUs, PSUs and stock option grants, none of which can be settled through cash payments. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest in annual increments over three to five years or earlier upon death, disability or a change in control. Restricted stock awards do not vest upon attainment of a specified retirement age, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.
As a general rule, option awards terminate on the earlier of (i) 10 years from the date of grant, (ii) 60 days after termination of employment or service for a reason other than death, disability or retirement, or (iii) 180 days after death, disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Committee may approve. Awards may be paid in cash, shares of our Common Stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Committee.
Our time-based restricted stock awards are typically subject to graded vesting over a service period, which is three to five years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically three years. Our share-based compensation arrangements are equity classified and we recognize compensation cost for these awards on a straight-line basis over the requisite service period for each award grant. In the case of performance-based awards, expense is recognized based upon management’s assessment of the probability that such performance conditions will be achieved. Certain of our awards provide for accelerated vesting upon a change of control or upon termination without cause or for good reason.
Vesting of the PSUs granted in the Founders Awards is contingent upon the achievement of synergies captured from the Merger and continued employment during a three-year performance period beginning on the grant date. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. Vesting of the PSUs granted during the three months ended April 4, 2020 is contingent upon achievement of a cumulative three-year EBITDA growth target with an additional modifier based on total shareholder return. The grant-date fair value of the PSUs granted during the three months ended April 4, 2020 was determined by a lattice model valuation. The PSUs vest pro rata if an executive’s employment terminates after 50% of the service period has passed and prior to the end of the performance period due to death, disability, or termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, are forfeited and cancelled. If a change in control of the Company occurs, and the plan is not accepted by the successor entity, prior to the end of the performance period, the PSU payout is calculated and paid assuming that the maximum benefit had been achieved. If the plan is accepted, awards will continue to vest as RSUs with a double trigger acceleration upon termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates due to death or disability while any of the restricted stock is unvested, then all of the unvested restricted stock shall become vested. If an executive’s employment is terminated by the Company without cause or by the executive for good reason, the unvested restricted stock is forfeited. If a change in control of the Company occurs, and the plan is not accepted by the successor entity, prior to the end of the performance period, the restricted stock fully vests. If the plan is accepted, awards will continue to vest with a double trigger acceleration upon termination by the Company without cause or by the executive for good reason. The fair value of the awards is based on the Company’s stock price as of the date of grant.
Stock option awards
During the three months ended April 4, 2020, we granted 1.0 million stock options. The average grant date fair value of options granted during the three months ended April 4, 2020 was $1.96 per share. We did not grant stock options during the three months ended March 30, 2019. No options were exercised during the three months ended April 4, 2020 and March 30, 2019.
Restricted stock units and performance share units
Annual awards to our key employees generally have a three-year performance period. The fair value of RSUs awarded is based on the Company’s stock price as of the date of grant. During the three months ended April 4, 2020, we granted RSUs to key employees with a fair value of $4.3 million representing approximately 0.9 million shares. During the three months ended March 30, 2019, we granted RSUs to key employees with a fair value of $1.0 million, representing 0.1 million shares. During the three months ended April 4, 2020, we granted PSUs with a total fair value of approximately $5.3 million to key employees. We did not grant PSUs during the three months ended March 30, 2019,
Share-based compensation expense
During the three months ended April 4, 2020 and March 30, 2019, we recorded share-based compensation expense for all awards of $3.4 million and $4.0 million, respectively.
NOTE 11 — EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per common share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
March 30,
2019
|
|
Numerator for Basic and Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares
|
|
|
|
|
$
|
(542,073)
|
|
|
$
|
(60,017)
|
|
|
Denominator for Basic and Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
|
|
126,093
|
|
|
125,503
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
—
|
|
|
—
|
|
|
PSUs and Performance Share Awards
|
|
|
|
|
—
|
|
|
—
|
|
|
Weighted average diluted number of common shares outstanding
|
|
|
|
|
126,093
|
|
|
125,503
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
|
|
$
|
(4.30)
|
|
|
$
|
(0.48)
|
|
|
Diluted loss per common share
|
|
|
|
|
$
|
(4.30)
|
|
|
$
|
(0.48)
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan securities excluded from dilution(1)
|
|
|
|
|
2,851
|
|
|
5,665
|
|
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units related to our Incentive Plan from the numerator and excludes the dilutive impact of those shares from the denominator. Awards subject to the achievement of performance conditions or market conditions for which such conditions had been met at the end of any of the fiscal periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
NOTE 12 — WARRANTY
The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. The Company's warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized.
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the three months ended April 4, 2020 and March 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
April 4, 2020
|
|
March 30, 2019
|
|
Beginning balance
|
$
|
216,173
|
|
|
$
|
134,515
|
|
|
Acquisition
|
109
|
|
|
—
|
|
|
Purchase accounting adjustments
|
—
|
|
|
2,690
|
|
|
Warranties sold
|
662
|
|
|
757
|
|
|
Revenue recognized
|
(680)
|
|
|
(721)
|
|
|
Expense
|
9,051
|
|
|
6,720
|
|
|
Settlements
|
(9,507)
|
|
|
(6,517)
|
|
|
Ending balance
|
215,808
|
|
|
137,444
|
|
|
Less: current portion
|
26,920
|
|
|
34,288
|
|
|
Total, less current portion
|
$
|
188,888
|
|
|
$
|
103,156
|
|
The current portion of the warranty liabilities are recorded within other accrued expenses and the long-term portion of the warranty liabilities are recorded within other long-term liabilities in the Company’s consolidated balance sheets.
NOTE 13 — DEFINED BENEFIT PLANS
RCC Pension Plan — With the acquisition of Robertson-Ceco II Corporation (“RCC”) on April 7, 2006, we assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds, fixed income securities and master limited partnerships.
CENTRIA Benefit Plans — As a result of the CENTRIA Acquisition on January 16, 2015, we assumed noncontributory defined benefit plans covering certain hourly employees (the “CENTRIA Benefit Plans”) which are closed to new participants. Benefits under the CENTRIA Benefit Plans are calculated based on fixed amounts for each year of service rendered, although benefits accruals for one of the plans previously ceased. Plan assets of the CENTRIA Benefit Plans are invested in broadly diversified portfolios of domestic and international equity mutual funds, bonds, mortgages and other funds. CENTRIA also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”). During the three months ended April 4, 2020, the Company closed its metal coil coating facility in Ambridge, Pennsylvania. The benefit plan associated with the Ambridge facility was frozen prior to the Company's acquisition of CENTRIA in fiscal 2015.
In addition to the CENTRIA Benefit Plans, CENTRIA contributes to a multi-employer plan, the Steelworkers Pension Trust. The minimum required annual contribution to this plan is $0.3 million. The current contract expires on June 1, 2022. If we were to withdraw our participation from this multi-employer plan, CENTRIA may be required to pay a withdrawal liability representing an amount based on the underfunded status of the plan. The plan is not significant to the Company’s consolidated financial statements.
Ply Gem Pension Plans — As a result of the Merger on November 16, 2018, we assumed the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc Retirement Plan (the “MW Plan”). The Ply Gem Plan was frozen during 1998, and no further increases in benefits for participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for salaried participants during 2004 and non-salaried participants during 2005. No additional participants may enter the plan, but increases in benefits for participants as a result of increase in service years or compensation will occur.
We refer to the RCC Pension Plan, the CENTRIA Benefit Plans, the Ply Gem Plan and the MW Plan collectively as the “Defined Benefit Plans” in this Note.
The following tables set forth the components of the net periodic benefit cost, before tax for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
March 30, 2019
|
|
|
|
|
|
Service cost
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
Interest cost
|
802
|
|
|
974
|
|
|
|
|
|
|
Expected return on assets
|
(1,398)
|
|
|
(1,234)
|
|
|
|
|
|
|
Amortization of prior service cost
|
16
|
|
|
15
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
753
|
|
|
704
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
184
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB Plans
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
March 30, 2019
|
|
|
|
|
|
Service cost
|
$
|
4
|
|
|
$
|
6
|
|
|
|
|
|
|
Interest cost
|
59
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
27
|
|
|
—
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
90
|
|
|
$
|
72
|
|
|
|
|
|
We expect to contribute $5.2 million to the Defined Benefit Plans and $0.8 million to OPEB Plans in the year ending December 31, 2020. Our policy is to fund the CENTRIA Benefit Plans as required by minimum funding standards of the Internal Revenue Code. The contributions to the OPEB Plans by retirees vary from none to 25% of the total premiums paid.
NOTE 14 — LONG-TERM DEBT
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
December 31,
2019
|
|
Asset-based revolving credit facility due April 2023
|
$
|
415,000
|
|
|
$
|
70,000
|
|
|
Term loan facility due April 2025
|
2,517,182
|
|
|
2,523,587
|
|
|
Cash flow revolver due April 2023
|
115,000
|
|
|
—
|
|
|
8.00% senior notes due April 2026
|
645,000
|
|
|
645,000
|
|
|
Less: unamortized discounts and unamortized deferred financing costs(1)
|
(53,972)
|
|
|
(56,063)
|
|
|
Total long-term debt, net of unamortized discounts and unamortized deferred financing costs
|
3,638,210
|
|
|
3,182,524
|
|
|
Less: current portion of long-term debt
|
25,600
|
|
|
25,600
|
|
|
Total long-term debt, less current portion
|
$
|
3,612,610
|
|
|
$
|
3,156,924
|
|
(1)Includes the unamortized deferred financing costs associated with the term loan facilities and senior notes. The unamortized deferred financing costs associated with the asset-based revolving credit facilities of $2.2 million and $2.4 million as of April 4, 2020 and December 31, 2019, respectively, are classified in other assets on the consolidated balance sheets.
Term Loan Facility due April 2025 and Cash Flow Revolver due April 2023
On April 12, 2018, Ply Gem Midco entered into the Current Cash Flow Credit Agreement, which provides for (i) a term loan facility (the “Current Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million, issued with a discount of 0.5%, and (ii) a cash flow-based revolving credit facility (the “Current Cash Flow Revolver” and together with the Term Loan Facility, the “Current Cash Flow Facilities”) of up to $115.0 million. 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.
On November 16, 2018, the Company entered into an incremental term loan facility in connection with the Merger, which increased the aggregate principal amount of the Current Term Loan Facility by $805.0 million. The proceeds of this incremental term loan facility were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement and (c) repay $325.0 million of borrowings outstanding under the ABL Facility. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities.
The Current Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.00%) plus an applicable margin of 3.75% per annum or (ii) an alternate base rate plus an applicable margin of 2.75% per annum. At April 4, 2020, the interest rates on the Current Term Loan Facility were as follows:
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
Interest rate
|
4.56
|
%
|
|
Effective interest rate
|
6.51
|
%
|
The Company entered into certain interest rate swap agreements during 2019 to convert a portion of its variable rate debt to fixed. See Note 17 - Fair Value of Financial Instruments and Fair Value Measurements.
Loans outstanding under the Current Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.00%) plus an applicable margin ranging from 2.50% to 3.00% per annum depending on the Company’s secured leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on the Company’s secured leverage ratio. Additionally, unused commitments under the Current Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio. At April 4, 2020, the weighted average interest rate on the Current Cash Flow Revolver was 4.45%.
The Current Term Loan Facility and Current Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
Subject to certain exceptions, the Current Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. For 2019, no payments were required under the excess cash flow calculation.
The obligations under the Current Cash Flow Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor (other than ABL Priority Collateral (as defined below)), including the capital stock of each direct material wholly-owned U.S. restricted subsidiary owned by the Company and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Company or any subsidiary guarantor, subject to certain exceptions (the “Cash Flow Priority Collateral”), which security interest will be senior to the security interest in the foregoing assets securing the Current ABL Facility; and
•a perfected security interest in the ABL Priority Collateral, which security interest will be junior to the security interest in the ABL Priority Collateral securing the Current ABL Facility.
The Current Cash Flow Revolver includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
ABL Credit Agreement due February 2023
On February 8, 2018, the subsidiaries of the Company, NCI Group, Inc. and Robertson-Ceco II Corporation, and the Company as a guarantor, entered into the Pre-merger ABL Credit Agreement. The Pre-merger ABL Credit Agreement provided for an asset-based revolving credit facility (the “Pre-merger ABL Credit Facility”) which allowed aggregate maximum borrowings by the ABL borrowers of up to $150.0 million, letters of credit of up to $30.0 million and up to $20.0 million for swingline borrowings. Borrowing availability was determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of accounts receivable, eligible credit card receivables and eligible inventory, less certain reserves and subject to certain other adjustments. Availability was reduced by issuance of letters of credit as well as any borrowings. All borrowings under the Pre-merger ABL Credit Facility would have matured on February 8, 2023. This facility was terminated in connection with the Merger and replaced with the Current ABL Facility (defined below).
ABL Facility due April 2023
On April 12, 2018, Ply Gem Midco entered into the Current ABL Credit Agreement, which provides 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”). The Company and, at their option, certain of their subsidiaries are the borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature on April 12, 2023.
On October 15, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $36.0 million, which upsized the Current ABL Facility to $396.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million.
On November 16, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $215.0 million in connection with the Merger, which upsized the Current ABL Facility to $611.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the Current ABL Facility.
Borrowing availability under the Current ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, eligible accounts receivable and eligible credit card receivables, less certain reserves and subject to certain other adjustments as set forth in the Current ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. As of April 4, 2020, the Company had the following in relation to the Current ABL Facility (in thousands):
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
Excess availability
|
$
|
118,029
|
|
|
Revolving loans outstanding
|
415,000
|
|
|
Letters of credit outstanding
|
29,031
|
|
Loans outstanding under the Current ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a LIBOR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the Current ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee. At April 4, 2020, the weighted average interest rate on the Current ABL Facility was 2.72%.
The obligations under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by the Company and the U.S. subsidiary guarantors and the proceeds of any of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral, and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the foregoing assets securing the Current Cash Flow Facilities; and
•a perfected security interest in the Cash Flow Priority Collateral, which security interest will be junior to the security interest in the Cash Flow Collateral securing the Current Cash Flow Facilities.
Additionally, the obligations of the Canadian borrowers under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions, and are secured by substantially all assets of the Canadian borrowers and the Canadian subsidiary guarantors, subject to certain exceptions.
The Current ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the Current ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days.
8.00% Senior Notes due April 2026
On April 12, 2018, Ply Gem Midco issued $645.0 million at a discount of 2.25% in aggregate principal amount of 8.00% Senior Notes due April 2026 (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. The effective interest rate for the 8.00% Senior Notes was 8.64% as of April 4, 2020, after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
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.
The 8.00% Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 8.00% Senior Notes are unsecured senior indebtedness and rank equally in right of payment with the Current Cash Flow Facilities and Current ABL Facility. The 8.00% Senior Notes are effectively subordinated to all of the Company’s secured debt, including the Current Cash Flow Facilities and Current ABL Facility, and are senior in right of payment to all subordinated obligations of the Company.
The Company may redeem the 8.00% Senior Notes in whole or in part at any time as set forth below:
•prior to April 15, 2021, the Company may redeem the 8.00% Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date, plus the applicable make-whole premium;
•prior to April 15, 2021, the Company may redeem up to 40.0% of the original aggregate principal amount of the 8.00% Senior Notes with proceeds of certain equity offerings, at a redemption price of 108%, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after April 15, 2021, the Company may redeem the 8.00% Senior Notes at specified redemption prices starting at 104% and declining ratably to 100.0% by April 15, 2023, plus accrued and unpaid interest, if any, to but not including the redemption date.
Debt Covenants
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. As of April 4, 2020, the Company was in compliance with all covenants that were in effect on such date.
NOTE 15 — CD&R INVESTOR GROUP
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of the Company, which was converted into shares of our common stock on May 14, 2013.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018 (the “Ply Gem-Atrium Merger”).
Pursuant to the terms of the Merger agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between the Company and each of the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of the Company’s Common Stock 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. Pursuant to the terms of the New Registration Rights Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Registration Rights Agreement, dated as of October 20, 2009 (the “Old Registration Rights Agreement”), by and among the Company and the CD&R Fund VIII Investor Group.
As of April 4, 2020 and December 31, 2019, the CD&R Investor Group owned approximately 49.1% of the outstanding shares of the Company’s Common Stock.
NOTE 16 — STOCK REPURCHASE PROGRAM
On October 10, 2017 and March 7, 2018, the Company announced that its 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 the Company’s outstanding 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 it deems appropriate in accordance with all applicable securities laws and regulations. Shares repurchased pursuant to the repurchase programs are usually retired. There is no time limit on the duration of the programs.
During the three months ended April 4, 2020 and March 30, 2019, there were no repurchases under the stock repurchase programs. As of April 4, 2020, $55.6 million remained available for stock repurchases under the programs. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
During the three months ended April 4, 2020 and March 30, 2019, the Company withheld approximately thirty-eight thousand and twenty thousand shares, respectively, of stock to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
During the three months ended April 4, 2020, the Company cancelled approximately thirty-eight thousand shares related to shares withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, resulting in a $0.3 million decrease in both treasury stock and additional paid in capital. During the three months ended March 30, 2019, the Company cancelled 0.1 million shares related to shares withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards and shares repurchased under the stock repurchase programs, resulting in a $0.6 million decrease in both treasury stock and additional paid in capital.
NOTE 17 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable, accounts payable and notes payable approximate fair value as of April 4, 2020 and December 31, 2019, respectively, because of their relatively short maturities. The carrying amounts of the indebtedness under the Current ABL Facility and Current Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. At April 4, 2020, there was $415.0 million of borrowings outstanding under the Current ABL Facility and $115.0 million outstanding indebtedness under the Current Cash Flow Revolver. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective period ends were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
|
Term Loan Facilities
|
$
|
2,517,182
|
|
|
$
|
2,057,796
|
|
|
$
|
2,523,587
|
|
|
$
|
2,514,906
|
|
|
8.00% Senior Notes
|
645,000
|
|
|
548,250
|
|
|
645,000
|
|
|
670,800
|
|
The fair values of the term loan facility were based on recent trading activities of comparable market instruments, which are level 2 inputs and the fair value of the 8.00% senior notes was based on quoted prices in active markets for the identical liabilities, which are level 1 inputs.
Fair Value Measurements
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used as of April 4, 2020 and December 31, 2019.
Money market: Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds: Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
Assets held for sale: Assets held for sale are valued based on current market conditions, prices of similar assets in similar condition and expected proceeds from the sale of the assets, representative of Level 3 inputs.
Deferred compensation plan liability: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
Interest rate swap liability: Interest rate swap liabilities are based on cash flow hedge contracts that have fixed rate structures and are measured against market-based LIBOR yield curves. These interest rate swaps were classified within Level 2 of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of April 4, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2020
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan(1):
|
|
|
|
|
|
|
|
|
Money market
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
Mutual funds – Growth
|
684
|
|
|
—
|
|
|
—
|
|
|
684
|
|
|
Mutual funds – Blend
|
1,315
|
|
|
—
|
|
|
—
|
|
|
1,315
|
|
|
Mutual funds – Foreign blend
|
405
|
|
|
—
|
|
|
—
|
|
|
405
|
|
|
Mutual funds – Fixed income
|
—
|
|
|
368
|
|
|
—
|
|
|
368
|
|
|
Total short-term investments in deferred compensation plan(2)
|
2,523
|
|
|
368
|
|
|
—
|
|
|
2,891
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
2,523
|
|
|
$
|
368
|
|
|
$
|
—
|
|
|
$
|
2,891
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability(2)
|
$
|
—
|
|
|
$
|
2,911
|
|
|
$
|
—
|
|
|
$
|
2,911
|
|
|
Interest rate swap liability(3)
|
—
|
|
|
80,191
|
|
|
—
|
|
|
80,191
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
83,102
|
|
|
$
|
—
|
|
|
$
|
83,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan(1):
|
|
|
|
|
|
|
|
|
Money market
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Mutual funds – Growth
|
1,044
|
|
|
—
|
|
|
—
|
|
|
1,044
|
|
|
Mutual funds – Blend
|
1,769
|
|
|
—
|
|
|
—
|
|
|
1,769
|
|
|
Mutual funds – Foreign blend
|
572
|
|
|
—
|
|
|
—
|
|
|
572
|
|
|
Mutual funds – Fixed income
|
—
|
|
|
389
|
|
|
—
|
|
|
389
|
|
|
Total short-term investments in deferred compensation plan(2)
|
3,387
|
|
|
389
|
|
|
—
|
|
|
3,776
|
|
|
Total assets
|
$
|
3,387
|
|
|
$
|
389
|
|
|
$
|
—
|
|
|
$
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability(2)
|
$
|
—
|
|
|
$
|
3,847
|
|
|
$
|
—
|
|
|
$
|
3,847
|
|
|
Interest rate swap liability(3)
|
—
|
|
|
29,988
|
|
|
—
|
|
|
29,988
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
33,835
|
|
|
$
|
—
|
|
|
$
|
33,835
|
|
(1)Unrealized holding gains (losses) for the three months ended April 4, 2020 and March 30, 2019 were $(0.8) million and $0.3 million, respectively. These unrealized holding gains (losses) were substantially offset by changes in the deferred compensation plan liability.
(2)The Company records the short-term investments in deferred compensation plan within investments in debt and equity securities, at market, and the deferred compensation plan liability within accrued compensation and benefits on the consolidated balance sheets.
(3)In May 2019, the Company entered into four year interest rate swaps to mitigate variability in forecasted interest payments on $1,500.0 million of the Company’s term loan secured variable debt. The interest rate swaps effectively convert a portion of the floating rate interest payments into a fixed rate interest payment. There are three interest rate swaps that cover $500.0 million of notional debt each and fix the interest rate at 5.918%, 5.906% and 5.907%, respectively. The Company designated the interest rate swaps as qualifying hedging instruments and accounts for these derivatives as cash flow hedges. The interest rate swap liability is included within other long-term liabilities on the consolidated balance sheets.
NOTE 18 — INCOME TAXES
Under FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date pre-tax book income (loss). In addition, the Company excludes jurisdictions with a projected loss for the year or the year-to-date loss where the Company cannot recognize a tax benefit from its estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company includes certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense in future periods in accordance with ASC 740-270.
For the three months ended April 4, 2020, the Company's estimated annual effective income tax rate was approximately 23.1%, which varied from the statutory rate primarily due to state income tax expense, valuation allowances, and foreign income taxes. For the three months ended April 4, 2020, the effective tax rate was 3.2%, which varied from the annual effective tax rate due to the following discrete items recorded during the period: unrecognized tax benefits, adjustments to state income tax rates, and goodwill impairment.
Valuation allowance
As of April 4, 2020, the Company remains in a valuation allowance position, in the amount of $11.1 million, against its deferred tax assets for certain state jurisdictions for certain entities as it is currently deemed “more likely than not” that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these state jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowances as necessary.
Unrecognized tax benefits
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities. During the three months ended April 4, 2020, the tax reserves increased by approximately $0.2 million. The increase is primarily due to additional interest expense related to previously recorded unrecognized tax benefits.
The liability for unrecognized tax benefits as of April 4, 2020 was approximately $12.1 million and is recorded in other long-term liabilities in the accompanying consolidated balance sheet.
CARES Act
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP). Specifically, the CARES Act amends IRC §163(j) for tax years 2019 and 2020. The CARES Act increases the 30% adjusted taxable income threshold to 50% and allows taxpayers to elect to use their 2019 adjusted taxable income as their adjusted taxable income in the 2020 §163(j) calculation. The combination of these two factors will allow the Company to deduct additional interest expense for income tax purposes that would have been previously disallowed. The Company continues to evaluate the impact of the CARES Act on our financial position, results of operations, and cash flows.
NOTE 19 — SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and is evaluated on a regular basis by the chief operating decision maker to make decisions regarding the allocation of resources to the segment and assess the performance of the segment. The Company has three reportable segments: Windows, Siding and Commercial.
These operating segments follow the same accounting policies used for our consolidated financial statements. We evaluate a segment’s performance based primarily upon operating income before corporate expenses.
Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses include share-based compensation expenses, acquisition costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense and other income (expense).
The following table represents summary financial data attributable to the segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
March 30,
2019
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Windows
|
|
|
|
|
$
|
448,450
|
|
|
$
|
421,594
|
|
|
Siding
|
|
|
|
|
241,043
|
|
|
218,277
|
|
|
Commercial
|
|
|
|
|
424,318
|
|
|
424,961
|
|
|
Total net sales
|
|
|
|
|
$
|
1,113,811
|
|
|
$
|
1,064,832
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
Windows
|
|
|
|
|
$
|
(313,190)
|
|
|
$
|
(4,319)
|
|
|
Siding
|
|
|
|
|
(168,867)
|
|
|
(11,654)
|
|
|
Commercial(1)
|
|
|
|
|
16,841
|
|
|
24,310
|
|
|
Corporate(1)
|
|
|
|
|
(35,575)
|
|
|
(35,702)
|
|
|
Total operating loss
|
|
|
|
|
(500,791)
|
|
|
(27,365)
|
|
|
Unallocated other expense, net
|
|
|
|
|
(59,296)
|
|
|
(56,549)
|
|
|
Loss before taxes
|
|
|
|
|
$
|
(560,087)
|
|
|
$
|
(83,914)
|
|
(1)Commercial operating income for the three months ended March 30, 2019 includes $8.3 million of costs previously included in Corporate operating loss to conform to current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4,
2020
|
|
December 31,
2019
|
|
Total assets:
|
|
|
|
|
Windows
|
$
|
1,834,123
|
|
|
$
|
2,166,220
|
|
|
Siding
|
2,149,969
|
|
|
2,289,310
|
|
|
Commercial
|
907,581
|
|
|
963,291
|
|
|
Corporate
|
500,756
|
|
|
145,525
|
|
|
Total assets
|
$
|
5,392,429
|
|
|
$
|
5,564,346
|
|
NOTE 20 — CONTINGENCIES
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims or potential claims. The Company insures against these risks to the extent deemed prudent by its management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts the Company deems prudent and for which the Company is responsible for payment. In determining the amount of self-insurance, it is the Company’s policy to self-insure those losses that are predictable, measurable and recurring in nature. The Company regularly reviews the status of ongoing 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.
Environmental
The Company is subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage, treatment, disposal and transport of hazardous waste and other materials, investigation and remediation of contaminated sites, and protection of worker health and safety. From time to time, the Company’s facilities are subject to investigation by governmental authorities. In addition, the Company has been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which it or its predecessors are alleged to have sent hazardous materials for recycling or disposal. The Company may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of the Company’s properties from activities conducted by it or previous occupants. The amount of any liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.
One of the Company’s subsidiaries entered into an Administrative Order on Consent (the “Consent Order”), effective September 12, 2011, with the United States Environmental Protection Agency (“EPA”), under the Resource Conservation and Recovery Act (“RCRA”), with respect to its Rocky Mount, Virginia property. During 2011, as part of the Consent Order, the Company provided the EPA, among other things, a RCRA Facility Investigation Workplan (the “Workplan”). In 2012, the EPA approved the Workplan, which the Company is currently implementing. Current estimates of remaining costs for predicted assessment, remediation and monitoring activities as of April 4, 2020 are $4.5 million. The Company has recorded approximately $0.3 million of this environmental liability within current liabilities at April 4, 2020 and approximately $4.2 million within other long-term liabilities in the Company’s consolidated balance sheets at April 4, 2020. The Company may incur costs that exceed its recorded environmental liability. The Company will adjust its environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska referred to as the “PCE/TCE Northeast Contamination Site”. A subsidiary of the Company has been named a potentially responsible party (“PRP”) with respect to the PCE/TCE Northeast Contamination Site. As a PRP, the Company could have liability for investigation and remediation costs associated with the contamination. Given the current status of this matter, the Company has recorded a liability of $4.6 million within other long-term liabilities in its consolidated balance sheets as of April 4, 2020.
The Company is a party to various acquisition and other agreements pursuant to which third parties agreed to indemnify the Company for certain costs relating to environmental liabilities. For example, the Company may be able to recover some of its Rocky Mount, Virginia investigation and remediation costs from U.S. Industries, Inc. and may be able to recover a portion of costs incurred in connection with the York, Nebraska contamination matter from Novelis Corporation as successor to Alcan Aluminum Corporation, the former owner of the York, Nebraska location. The Company’s ability to seek indemnification from parties that have agreed to indemnify it may be limited. There can be no assurance that the Company would receive any funds from these parties, and any related environmental liabilities or costs could have a material adverse effect on our financial condition and results of operations.
Based on current information, the Company is not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on its results of operations, cash flows or financial position except as otherwise disclosed in the Company’s consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters will not result in material costs or liabilities.
Litigation
The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019. The Company has a $7.6 million liability as of April 4, 2020 related to this settlement, of which $3.6 million is held within other current liabilities with the remaining in long-term liabilities in the consolidated balance sheets.
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. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to four of the director defendants. Voigt seeks damages in an amount to be determined at trial.
Other contingencies
The Company’s imports of fabricated structural steel (“FSS”) from its Mexican affiliate, Building Systems de Mexico S.A. de C.V. (“BSM”) were subject to antidumping (“AD”) and countervailing duty (“CVD”) tariff proceedings before the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“USITC”). The proceedings were initiated in February 2019 by the American Institute of Steel Construction against FSS being imported into the USA from Mexico, Canada, and China. In 2019, the DOC issued preliminary tariff rates and in 2020 finalized CVD and AD tariff rates of 0% and 8.47%, respectively, for the Company’s imports of FSS from BSM. However, in February 2020, in a 3 to 2 vote, the USITC concluded there was no injury or threat of injury to the domestic FSS industry. In March 2020 the USITC opinion was published in the Federal Register, ceasing the Company's requirement to pay the AD and CVD tariffs. The Company is seeking full recovery of approximately $4.1 million in tariffs previously deposited with United States Customs and Border Protection for its importation of FSS from BSM. The reversal of the tariff costs will be reflected in costs of goods sold in the period in which the Company receives the funds. This matter has been appealed and the Company will continue to vigorously advocate its position that its import of FSS from BSM should not be subject to any CVD or AD tariffs.
The Company is subject to other contingencies, including legal proceedings and claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of April 4, 2020.
NOTE 21 — SUBSEQUENT EVENT
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The pandemic has significantly impacted the economic conditions in the U.S., accelerating during the first half of March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the economy. As of the date of this filing, the Company has been impacted by temporary facility closures and reduced hours of operations.
In New Jersey, the Company’s North Brunswick facility was closed at the beginning of April due to concerns regarding the concentration of COVID-19 cases in the Northeast, and the Company reopened that facility in early May. In addition, the Company's Peachtree City facility in Georgia was recently temporarily closed for extensive COVID-19 cleaning. Substantially all production requirements were shifted to other Windows manufacturing facilities as a result of these temporary closures.
The Company cannot reasonably estimate the length or severity of this pandemic, however, as a result of these developments the Company expects an adverse impact on its sales, results of operations, and cash flows for fiscal 2020. In response to these developments, the Company announced several cost reduction actions in April 2020 including a voluntary severance program, an additional workforce reduction, furloughs, hiring freezes, and a deferral of any annual wage adjustments.
CORNERSTONE BUILDING BRANDS, INC.