NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Unaudited)
NOTE
1
— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements for NCI Building Systems, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “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 our financial position, results of operations and cash flows for the periods indicated. Operating results for the period from October 29, 2018 through
December 31, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.
For additional information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
October 28, 2018
filed with the Securities and Exchange Commission (the “SEC”) on December 19, 2018.
Reporting Periods
On November 16, 2018, the Board of Directors approved a change to the Company's fiscal year end from a 52/53 week year with the Company’s fiscal year end on the Sunday closest to October 31 to a calendar year of the 12 month period from January 1 to December 31. The Company elected to change its fiscal year end in connection with the Merger (as defined below) to align the Company’s fiscal year end with Ply Gem’s (as defined below). As a result of this change, this Transition Report on Form 10-Q includes the financial information for the transition period from October 29, 2018 to December 31, 2018, referred to herein as the "transition period". References in this Transition Report on Form 10-Q to fiscal year 2018 or fiscal 2018 refer to the period from October 30, 2017 through October 28, 2018. The results of operations for the first quarter of fiscal 2018 are presented as the comparable period. The Company did not recast the consolidated financial statements for the period from October 30, 2017 to December 31, 2017 because the financial reporting processes in place at that time included certain procedures that were completed only on a quarterly basis. Consequently, to recast this period would have been impractical and would not have been cost-justified.
From this point forward the Company’s fiscal quarters are based on a four-four-five week calendar with periods ending on the Saturday of the last week in the quarter except that December 31st will always be the year end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters.
Change in Operating Segments
For the transition period ended December 31, 2018, the Company began reporting results under
three
reportable segments: (i) Commercial; (ii) Siding; and (iii) Windows to align with how the Company manages its business, reviews operating performance and allocates resources following the Merger. The Commercial segment will include the aggregate operating results of the legacy NCI businesses, and the Siding and Windows segments will include the operating results of the legacy Ply Gem operating segments.
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):
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
October 28,
2018
|
Cash and cash equivalents
|
$
|
143,847
|
|
|
$
|
54,272
|
|
Restricted cash
(1)
|
3,760
|
|
|
245
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
$
|
147,607
|
|
|
$
|
54,517
|
|
|
|
(1)
|
Restricted cash at December 31, 2018 includes
$3.4 million
related to collateral for letters of credit.
|
Net Sales
The Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers
, as of October 29, 2018 for the transition period ended December 31, 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.
We enter into contracts that pertain to products, which are accounted for as separate performance obligations and are typically one year or less in duration. We do 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. We have elected to apply the practical expedient provided for in ASU No. 2014-09 and have 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 our weathertightness warranties (see Note 11 —
Warranty).
The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands):
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October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
Commercial Net Sales Disaggregation:
|
|
|
|
Metal building products
|
$
|
198,483
|
|
|
$
|
275,816
|
|
Insulated metal panels
|
52,044
|
|
|
97,513
|
|
Metal coil coating
|
35,995
|
|
|
48,020
|
|
Total
|
$
|
286,522
|
|
|
$
|
421,349
|
|
|
|
|
|
Siding Net Sales Disaggregation:
|
|
|
|
Vinyl siding
|
$
|
43,142
|
|
|
$
|
—
|
|
Metal
|
23,104
|
|
|
—
|
|
Injection molded
|
5,123
|
|
|
—
|
|
Stone
|
2,499
|
|
|
—
|
|
Other products
|
9,106
|
|
|
—
|
|
Total
|
$
|
82,974
|
|
|
$
|
—
|
|
|
|
|
|
Windows Net Sales Disaggregation:
|
|
|
|
Vinyl windows
|
$
|
181,624
|
|
|
$
|
—
|
|
Aluminum windows
|
4,700
|
|
|
—
|
|
Other
|
4,050
|
|
|
—
|
|
Total
|
$
|
190,374
|
|
|
$
|
—
|
|
|
|
|
|
Total Net Sales:
|
$
|
559,870
|
|
|
$
|
421,349
|
|
NOTE
2
— ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance. The core principle of the guidance 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. During 2016, the FASB also issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
; ASU 2016-11,
Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
; and ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients;
and ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
(collectively, the “new revenue standard”)
,
all of which were issued to improve and clarify the guidance in ASU 2014-09. These ASUs are effective for our transition period ended December 31, 2018, using either a full or modified retrospective transition approach. We performed an assessment of the differences between the new revenue standard and current accounting practices. As part of our implementation process, we identified significant revenue streams and evaluated a sample of contracts within each significant revenue stream in order to determine the effect of the standard on our revenue recognition practices. We completed this evaluation and have established new policies, procedures, and internal controls in our adoption of the new revenue standard. We adopted this guidance on a modified retrospective basis, pursuant to which we recorded a
$2.6 million
adjustment to increase the opening balance of accumulated deficit as of October 29, 2018 (the first day of our transition period ending December 31, 2018) for the impact of applying the new revenue standard. The adjustment related to changes in the timing of revenue recognition for our weathertightness warranties in our Commercial segment. Additional disaggregated revenue disclosures are included in Note
1
—
Summary of Significant Accounting Policies
.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. We adopted this guidance on a retrospective basis. The application of ASU 2016-15 did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We adopted this guidance on a modified retrospective basis, pursuant to which we recorded a
$0.7 million
adjustment to increase the opening balance of accumulated deficit as of October 29, 2018 (the first day of our transition period ended December 31, 2018) for the impact of applying the new standard.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. We adopted this guidance on a retrospective basis in the transition period ended December 31, 2018. The adoption of this guidance resulted in restricted cash activity previously included in financing activities on our consolidated statement of cash flows to be included as part of the beginning and ending balances of cash and cash equivalents and restricted cash in our consolidated statements of cash flows.
In March 2017, the FASB issued ASU 2017-07,
Compensation
—
Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line items that include the service cost. We adopted this guidance in the transition period ended December 31, 2018 on a retrospective basis to adopt the requirement for separate presentation of the income statement service cost and other components, and on a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The adoption of ASU 2017-07 did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides clarity on the accounting for modifications of stock-based awards. We adopted this guidance on a prospective basis in the transition period ended December 31, 2018 for share-based payment awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will require lessees to record most leases on the balance sheet and modifies the classification criteria and accounting for sales-type leases and direct financing leases for lessors. ASU 2016-02 will be effective for our fiscal year ending December 31, 2019, including interim periods within that fiscal year. ASU 2016-02, as amended by ASU 2018-11,
Leases:
Targeted Improvements,
requires entities to use a modified retrospective approach, either, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, or under an alternative transition option, for leases existing at, or entered into after, the adoption date. While we are evaluating the impact that the adoption of this guidance will have on our consolidated financial statements, we currently believe that most of our operating leases will be reflected on the consolidated balance sheet upon adoption. We have selected a lease accounting tool to assist in the accounting under the new leasing standard and are now finalizing implementation of the tool, the required transition adjustments and the associated internal control over financial reporting.
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. ASU 2016-13 will be effective for our fiscal year ending December 31, 2020, including interim periods within that fiscal year. We are evaluating the impact that the adoption of this ASU will have on our consolidated financial position, result of operations and cash flows.
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.
We will be required to adopt this guidance retrospectively in the annual and interim periods for our fiscal year ending December 31, 2020, with early adoption permitted. We are evaluating the impact of adopting this guidance.
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. We will be required to adopt this guidance for our fiscal year ending December 31, 2020, with early adoption permitted. Certain provisions are applied prospectively while others are applied retrospectively. We are evaluating the impact of adopting this guidance.
In August 2018, the FASB issued ASU 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software—General (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. We will be required to adopt this guidance in the annual and interim periods for our fiscal year ending December 31, 2020, with early adoption permitted. The amendments in this ASU may be applied either retrospectively or prospectively. We are evaluating the impact ASU 2018-15 will have on our consolidated financial statements.
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 and the notes thereto going forward.
NOTE
3
— ACQUISITIONS
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”). On November 15, 2018, at a special meeting of NCI shareholders, NCI’s shareholders approved, among other items, the Merger Agreement and the issuance in the Merger of
58,709,067
shares of NCI common stock, par value
$0.01
per share (“NCI Common Stock”) in the aggregate, on a pro rata basis, to the holders of all of the equity interests in Ply Gem (the “Stock Issuance”), representing approximately
47%
of the total number of shares of NCI Common Stock outstanding following the consummation of the Merger on November 16, 2018 (the “Closing Date”). The total value of shares of NCI Common Stock issued pursuant to the Stock Issuance was approximately
$713.9 million
based on the number of shares issued multiplied by the NCI Common Stock closing share price of
$12.16
on the Closing Date. There are approximately
70,834
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 December 31, 2018. For accounting and legal purposes, NCI was the accounting and legal acquirer of Ply Gem as of the Closing Date and Ply Gem’s results have been included within NCI from the Closing Date.
Ply Gem is a leading manufacturer of exterior building products in North America, operating in
two
segments: Siding and Windows. These
two
segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl railing, stone veneer, roofing, and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. Ply Gem also manufactures vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products.
Ply Gem strategically fits into NCI’s existing footprint and broadens its service offering to existing and new customers within the building product industry. The Company accounted for the Merger 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 Ply Gem based upon fair values as of the Closing Date.
In connection with the Merger, on November 16, 2018, NCI assumed (i) the obligations of the company formerly known as Ply Gem Midco, Inc. (“Ply Gem Midco”), a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement (as defined below), (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement (as defined below) and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture (as defined below).
On April 12, 2018, Ply Gem Midco entered into a Cash Flow Credit Agreement (the “Current Cash Flow Credit Agreement”), by and among Ply Gem Midco, JP Morgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), and the several banks and other financial institutions from time to time party thereto. As of November 16, 2018, immediately prior to consummation of the Merger, the Current Cash Flow Credit Agreement provided for (i) a term loan facility (the “Current Term Loan Facility”) in an original aggregate principal amount of
$1,755.0 million
and (ii) a cash flow-based revolving credit facility (the “Current Cash Flow Revolver” and together with the Current Term Loan Facility, the “Current Cash Flow Facilities”) of up to
$115.0 million
. On November 16, 2018, Ply Gem Midco entered into a Lender Joinder Agreement, by and among Ply Gem Midco, the additional commitment lender party thereto and the Cash Flow Agent, which amended the Current Cash Flow Credit Agreement in order to, among other things, increase the aggregate principal amount of the Current Term Loan Facility by
$805.0 million
(the “Incremental Term Loans”). Proceeds of the Incremental Term Loans were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement (each as defined below) and (c) repay
$325.0 million
of borrowings outstanding under the Current ABL Facility (as defined below). On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and NCI became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities. The Current Term Loan Facility amortizes in nominal quarterly installments equal to
one percent
of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Current Term Loan Facility on April 12, 2025. There are no amortization payments under the Current Cash Flow Revolver, and all borrowings under the Current Cash Flow Revolver mature on April 12, 2023. At November 16, 2018, following consummation of the Merger, there was
$2,555.6 million
outstanding under the Current Term Loan Facility and there w
ere
no
a
mounts drawn on the Current Cash Flow Revolver.
On April 12, 2018, Ply Gem Midco and certain subsidiaries of Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), by and among Ply Gem Midco, the subsidiary borrowers from time to time party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent (the “ABL Agent”), and the several banks and other financial institutions from time to time party thereto, which provided for an asset-based revolving credit facility (the “Current ABL Facility”)
of up to
$360.0 million
, consisting of (i)
$285.0 million
available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii)
$75.0 million
available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). On October 15, 2018, Ply Gem Midco entered into Amendment No. 2 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lender party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by
$36.0 million
to
$396.0 million
overall, and with the (x) ABL U.S. Facility being increased from
$285.0 million
to
$313.5 million
and (y) the ABL Canadian Facility being increased from
$75.0 million
to
$82.5 million
. On November 16, 2018, Ply Gem Midco entered into Amendment No. 4 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lenders party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by
$215.0 million
(the “Incremental ABL Commitments”) to
$611.0 million
overall, and with the (x) ABL U.S. Facility being increased from
$313.5 million
to approximately
$483.7 million
and (y) the ABL Canadian Facility being increased from
$82.5 million
to approximately
$127.3 million
. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and NCI became the Parent Borrower (as defined in the Current ABL Credit Agreement) under the Current ABL Facility. The Company and, at the Company’s option, certain of the Company’s subsidiaries are the borrowers under the Current ABL Facility. As of November 16, 2018, and following consummation of the Merger, (a) Ply Gem Industries, Inc., Atrium Windows and Doors, Inc., NCI Group, Inc. and Robertson-Ceco II Corporation were U.S. subsidiary borrowers under the Current ABL Facility, and (b) Gienow Canada Inc., Mitten Inc., North Star Manufacturing (London) Ltd. and Robertson Building Systems Limited were Canadian borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature on April 12, 2023. At November 16, 2018, following consummation of the Merger, there were
no
amounts drawn and
$24.7 million
of letters of credit issued under the Current ABL Facility.
On April 12, 2018, Ply Gem Midco issued
$645.0 million
aggregate principal amount of
8.00%
Senior Notes due 2026 (the “
8.00%
Senior Notes”). The
8.00%
Senior Notes were issued pursuant to an Indenture, dated as of April 12, 2018 (as supplemented from time to time, the “Current Indenture”), by and among Ply Gem Midco, as issuer, the subsidiary guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee. On November 16, 2018, in connection with the consummation of the Merger, the Company entered into a supplemental indenture and assumed the obligations of Ply Gem Midco as issuer under the Current Indenture and the
8.00%
Senior Notes. The
8.00%
Senior Notes bear interest at
8.00%
per annum and will mature on April 15, 2026. Interest is payable semi-annually in arrears on April 15 and October 15.
On November 16, 2018, in connection with the incurrence by Ply Gem Midco of the Incremental Term Loans and the obtaining by Ply Gem Midco of the Incremental ABL Commitments, following consummation of the Merger, the Company (a) terminated all outstanding commitments and repaid all outstanding amounts under the Term Loan Credit Agreement, dated as of February 8, 2018 (the “Pre-merger Term Loan Credit Agreement”), by and among the Company, as borrower, the several banks and other financial institutions from time to time party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and (b) terminated all outstanding commitments and repaid all outstanding amounts under the ABL Credit Agreement, dated as of February 8, 2018 (the “Pre-merger ABL Credit Agreement”), by and among NCI Group, Inc. and Robertson-Ceco II Corporation, as borrowers, the Company, as a guarantor, the other borrowers from time to time party thereto, the several banks and other financial institutions from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent. Outstanding letters of credit under the Pre-merger ABL Credit Agreement were cash collateralized.
In connection with the termination and repayment of the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement, the Company also terminated (i) the Term Loan Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Credit Suisse AG, Cayman Islands Branch, as collateral agent, (ii) the ABL Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Wells Fargo Bank, National Association, as collateral agent, and (iii) the Intercreditor Agreement, dated as of February 8, 2018, between Credit Suisse AG, Cayman Islands Branch and Wells Fargo Bank, National Association, and acknowledged by the Company and certain of its subsidiaries.
Purchase Price Allocation
The Company’s total purchase consideration in the Merger was equal to
$728.9 million
and is comprised of the Stock Issuance of
$713.9 million
and a cash payment of
$15.0 million
by the Company to settle certain third party fees and expenses incurred by Ply Gem. The Company determined the fair values of the tangible and intangible assets acquired and the liabilities assumed in the Merger, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows (in thousands):
|
|
|
|
|
|
Assets acquired:
|
|
|
Cash
|
|
$
|
102,121
|
|
Accounts receivable
|
|
345,605
|
|
Inventories
|
|
303,756
|
|
Prepaid expenses and other current assets
|
|
52,795
|
|
Property, plant and equipment
|
|
377,383
|
|
Intangible assets (trade names/customer relationships)
|
|
1,565,000
|
|
Goodwill
|
|
1,494,053
|
|
Other assets
|
|
3,262
|
|
Total assets acquired
|
|
4,243,975
|
|
Liabilities assumed:
|
|
|
Accounts payable
|
|
139,955
|
|
Tax receivable agreement liability
|
|
47,355
|
|
Other accrued expenses (inclusive of $27.5 million for current warranty liabilities)
|
|
245,031
|
|
Debt (inclusive of current portion)
|
|
2,655,159
|
|
Other long-term liabilities (accrued long-term warranty)
|
|
76,337
|
|
Deferred income taxes
|
|
316,156
|
|
Other long-term liabilities
|
|
35,037
|
|
Total liabilities assumed
|
|
3,515,030
|
|
Net assets acquired
|
|
$
|
728,945
|
|
There was
$854.6 million
of goodwill allocated to the Siding segment and
$639.4 million
allocated to the Windows segment and none of the goodwill 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.
The final acquisition accounting allocation for the Merger remains subject to further adjustments. The specific accounts subject to ongoing acquisition accounting adjustments include various income tax assets and liabilities, accounts receivable, inventories, prepaid expenses and other current assets, goodwill, intangibles, accounts payable, accrued expenses, accrued warranties and other liabilities. Therefore, the measurement period remains open as of December 31, 2018, and the preliminary acquisition accounting allocation detailed above is subject to further adjustment. The Company anticipates completing these acquisition accounting adjustments during the third quarter of fiscal 2019.
For the transition period ended
December 31, 2018
, Ply Gem contributed net sales of approximately
$273.3 million
and a net loss of
$43.6 million
from the Closing Date, which has been included within the Company’s consolidated statement of operations. If the Ply Gem acquisition would have occurred at the beginning of the transition period ended December 31, 2018, the Company’s consolidated net sales would have been
$753.3 million
for the transition period ended December 31, 2018 with a net loss of
$47.0 million
, basic loss per common share of
$(0.37)
, and diluted loss per common share of
$(0.37)
. If the Merger would have occurred at the beginning of the quarter ended January 28, 2018, the Company’s consolidated net sales would have been
$1,137.5 million
for the three months ended January 28, 2018 with a net loss of
$80.7 million
, basic loss per common share of
$(0.64)
, and diluted loss per common share of
$(0.64)
. The unaudited supplemental pro forma financial information was prepared based on the historical information of NCI, Ply Gem, Atrium and Silver Line. The pro forma adjustments include adjustments to depreciation and amortization expense based on the acquisition date fair values of Ply Gem’s property, plant and equipment and intangible assets, net; incremental interest expense associated with the new financing structure post Merger; an increase in cost of sales following the Merger resulting from a step up in value of inventory acquired from Ply Gem; share consideration issued in connection with the Merger; and the inclusion of certain acquisition, compensation and financing-related costs related to the Merger.
The Company incurred approximately
$29.1 million
of acquisition expenses related to the Merger during the transition period ended December 31, 2018, primarily for various third-party consulting and due-diligence services, and financial advisors’ fees, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
NOTE 4 — GOODWILL
The changes in the goodwill balances during the transition period ended December 31, 2018 relate to the Merger (see Note
3
—
Acquisitions
for more information on the Merger) and currency translation. The Company’s goodwill balance and changes in the carrying amount of goodwill by segment follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Siding
|
|
Windows
|
|
Total
|
Balance, October 28, 2018
|
$
|
148,291
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
148,291
|
|
Goodwill recognized from Merger
|
—
|
|
|
854,606
|
|
|
639,447
|
|
|
1,494,053
|
|
Currency translation
|
—
|
|
|
(1,220
|
)
|
|
(913
|
)
|
|
(2,133
|
)
|
Balance, December 31, 2018
|
$
|
148,291
|
|
|
$
|
853,386
|
|
|
$
|
638,534
|
|
|
$
|
1,640,211
|
|
NOTE
5
— RESTRUCTURING
The Company developed plans in the fourth quarter of the fiscal year ended November 1, 2015 (“fiscal 2015”) primarily to improve selling, general and administrative (“SG&A”) and manufacturing cost efficiency and to optimize our combined manufacturing footprint given the Company’s acquisitions, dispositions and restructuring efforts. Under these plans, during the transition period ended
December 31, 2018
and the three months ended
January 28, 2018
, we incurred restructuring charges of
$1.3 million
and $
1.1 million
, respectively, in the Commercial segment.
The following table summarizes the costs and charges associated with the restructuring plans during the
transition period ended
December 31, 2018
, as well as the cost incurred to date (since inception), which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Cost Incurred To Date (since inception)
|
General severance
|
$
|
1,253
|
|
|
$
|
12,487
|
|
Plant closing severance
|
—
|
|
|
3,310
|
|
Asset impairments
|
—
|
|
|
7,140
|
|
Gain on sale of facility
|
—
|
|
|
(2,049
|
)
|
Other restructuring costs
|
—
|
|
|
1,415
|
|
Total restructuring costs
|
$
|
1,253
|
|
|
$
|
22,303
|
|
The following table summarizes our severance liability and cash payments made pursuant to the restructuring plans from inception through
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Severance
|
|
Plant Closing
Severance
|
|
Total
|
Balance at November 2, 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs incurred
|
3,887
|
|
|
1,575
|
|
|
5,462
|
|
Cash payments
|
(2,941
|
)
|
|
(1,575
|
)
|
|
(4,516
|
)
|
Accrued severance
(1)
|
739
|
|
|
—
|
|
|
739
|
|
Balance at November 1, 2015
|
$
|
1,685
|
|
|
$
|
—
|
|
|
$
|
1,685
|
|
Costs incurred
(1)
|
2,725
|
|
|
165
|
|
|
2,890
|
|
Cash payments
|
(3,928
|
)
|
|
(165
|
)
|
|
(4,093
|
)
|
Balance at October 30, 2016
|
$
|
482
|
|
|
$
|
—
|
|
|
$
|
482
|
|
Costs incurred
|
2,350
|
|
|
1,539
|
|
|
3,889
|
|
Cash payments
|
(2,549
|
)
|
|
(1,539
|
)
|
|
(4,088
|
)
|
Balance at October 29, 2017
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
283
|
|
Costs incurred
|
2,272
|
|
|
31
|
|
|
2,303
|
|
Cash payments
|
(2,134
|
)
|
|
(31
|
)
|
|
(2,165
|
)
|
Balance at October 28, 2018
|
$
|
421
|
|
|
$
|
—
|
|
|
$
|
421
|
|
Costs incurred
|
1,253
|
|
|
—
|
|
|
1,253
|
|
Cash payments
|
(1,674
|
)
|
|
—
|
|
|
(1,674
|
)
|
Balance at December 31, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
During the second and fourth quarters of fiscal 2015, we entered into transition and separation agreements with certain executive officers. Each terminated executive officer was entitled to severance benefit payments issuable in
two
installments. The termination benefits were measured initially at the separation dates based on the fair value of the liability as of the termination date and were recognized ratably over the future service period. Costs incurred during fiscal 2016 exclude
$0.7 million
of amortization expense associated with these termination benefits.
|
The Company is substantially complete with the fiscal 2015 restructuring plans.
NOTE 6 — INVENTORIES
The components of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
October 28,
2018
|
Raw materials
|
$
|
311,183
|
|
|
$
|
205,902
|
|
Work in process and finished goods
|
225,492
|
|
|
48,629
|
|
|
$
|
536,675
|
|
|
$
|
254,531
|
|
During the transition period ended December 31, 2018, the Company incurred approximately
$21.6 million
in additional cost of goods sold related to the fair value write-up of the Ply Gem inventory as of November 16, 2018.
NOTE 7 — INTANGIBLES
The table that follows presents the major components of intangible assets as of December 31, 2018 and October 28, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life (Years)
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names
|
8
|
–
|
15
|
|
$
|
226,967
|
|
|
$
|
(15,483
|
)
|
|
$
|
211,484
|
|
Customer lists and relationships
|
9
|
–
|
20
|
|
1,503,410
|
|
|
(58,448
|
)
|
|
1,444,962
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
13,455
|
|
|
—
|
|
|
13,455
|
|
Total intangible assets
|
|
|
|
|
$
|
1,743,832
|
|
|
$
|
(73,931
|
)
|
|
$
|
1,669,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life (Years)
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
As of October 28, 2018
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names
|
|
15
|
|
|
$
|
29,167
|
|
|
$
|
(12,657
|
)
|
|
$
|
16,510
|
|
Customer lists and relationships
|
12
|
–
|
20
|
|
136,210
|
|
|
(38,646
|
)
|
|
97,564
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
13,455
|
|
|
—
|
|
|
13,455
|
|
Total intangible assets
|
|
|
|
|
$
|
178,832
|
|
|
$
|
(51,303
|
)
|
|
$
|
127,529
|
|
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
$7.3 million
as of
December 31, 2018
and
October 28, 2018
, respectively. All of these assets continued to be actively marketed for sale or were under contract as of
December 31, 2018
.
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
$5.0 million
as of
December 31, 2018
.
NOTE 9 — 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 and long-term incentive awards with performance conditions (“Performance Share Awards”). 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, on November 16, 2018 awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, restricted stock units (“RSUs”) and performance share units (“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
December 31, 2018
, and for all periods presented, the Founders Awards and our share-based awards under the Incentive Plan have consisted of restricted stock grants, RSUs, PSUs and stock option grants, none of which can be settled through cash payments, and Performance Share Awards, which are settled in cash. 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 of 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
year 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
or
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. We recognize compensation cost for such awards over the period from grant date to the date the employee first becomes eligible for retirement.
Stock option awards
During the
transition period ended
December 31, 2018
, we granted
3.1 million
stock options in connection with the Founders Awards. The options will vest
20%
per year on the first through fifth anniversaries of the award. The grant date fair value of options granted during the
transition period ended
December 31, 2018
was
$5.19
per share. We did
not
grant stock options during the three months ended
January 28, 2018
.
No
options were exercised during the
transition period ended
December 31, 2018
.
Restricted stock units and performance share units
Founders Awards granted to our senior executives and certain key employees include RSUs and PSUs. The RSUs vest upon continued employment
20%
per year on the first through fifth anniversary of the award. Vesting of the PSUs is contingent upon continued employment and the achievement of synergies captured from the Merger. At the end of the performance period, the number of actual shares to be awarded varies between
0%
and
200%
of target amounts. 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 NCI 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 NCI 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 NCI 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 NCI without cause or by the executive for good reason, the unvested restricted stock is forfeited. If a change in control of NCI 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 NCI 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. During the
transition period ended
December 31, 2018
, we granted
1.8 million
RSUs and
0.6 million
(at “target” levels of achievement) PSUs with a total aggregate fair value of
$29.1 million
in connection with the Founders Awards.
Annual awards to our key employees generally have a
three
-year performance period. Long-term incentive awards are granted in December 2018 included
100%
RSUs. The fair value of RSUs is based on the Company’s stock price as of the date of grant. During the
transition period ended
December 31, 2018
, we granted awards to key employees with equity fair values of
$2.1 million
. We did
not
grant awards with cash value to key employees during the
transition period ended
December 31, 2018
. During the three months ended
January 28, 2018
, we granted time-based restricted stock units with a fair value of
$6.7 million
, representing
0.3 million
shares.
Our Board of Directors approved the treatment of existing awards as if a change in control had occurred, per the respective agreements governing each award. As such, on November 16, 2018, upon consummation of the Merger, certain awards granted in fiscal 2016 and earlier vested, resulting in the issuance of
0.5 million
shares, net of shares withheld. Certain other PSUs that were issued in fiscal 2017 and fiscal 2018 converted to RSUs at
100%
and continue to vest in accordance with the original schedule. On December 15, 2018, the RSUs which remained subsequent to the change in control vested in accordance with the original schedule resulting in the issuance of
0.2 million
shares, net of shares withheld for taxes.
During the
transition period ended
December 31, 2018
we recorded share-based compensation expense for all awards of
$4.5 million
, which included
$1.3 million
of awards of the Company’s former CEO that were accelerated due to the Merger. During the three months ended January 28, 2018, we recorded share-based compensation expense for all awards of
$5.9 million
, which included accelerated awards of
$3.6 million
due to the retirement of the Company’s former CEO.
NOTE 10 — 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):
|
|
|
|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
Numerator for Basic and Diluted Earnings Per Common Share
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
$
|
(76,190
|
)
|
|
$
|
5,211
|
|
Denominator for Basic and Diluted Income Per Common Share
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
107,813
|
|
|
66,434
|
|
Common stock equivalents:
|
|
|
|
Employee stock options
|
—
|
|
|
71
|
|
PSUs and Performance Share Awards
|
—
|
|
|
41
|
|
Weighted average diluted number of common shares outstanding
|
107,813
|
|
|
66,546
|
|
|
|
|
|
Basic income (loss) per common share
|
$
|
(0.71
|
)
|
|
$
|
0.08
|
|
Diluted income (loss) per common share
|
$
|
(0.71
|
)
|
|
$
|
0.08
|
|
|
|
|
|
Incentive Plan securities excluded from dilution
(1)
|
2,053
|
|
|
1
|
|
|
|
(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 11 — 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. Upon the sale of a weathertightness warranty, we record the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on our consolidated balance sheets depending on when the revenues are expected to be recognized. 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. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary.
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the transition period ended
December 31, 2018
and three months ended
January 28, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
Beginning balance
|
$
|
30,659
|
|
|
$
|
32,418
|
|
Acquisition - Ply Gem
|
103,842
|
|
|
—
|
|
Warranties sold
|
3,194
|
|
|
747
|
|
Revenue recognized
|
(442
|
)
|
|
(724
|
)
|
Costs incurred and other
|
(2,738
|
)
|
|
(36
|
)
|
Ending balance
|
$
|
134,515
|
|
|
$
|
32,405
|
|
Less: current portion
|
34,112
|
|
|
7,072
|
|
Total, less current portion
|
$
|
100,403
|
|
|
$
|
25,333
|
|
The Company records the current warranty obligation within other accrued expenses and the long-term warranty obligation within other long-term liabilities within the Company’s consolidated balance sheets at December 31, 2018 and October 28, 2018.
NOTE 12 — 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”).
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, 2019. 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 table sets forth the components of the net periodic benefit cost, before tax, and funding contributions, for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
|
Defined
Benefit
Plans
|
|
OPEB
Plans
|
|
Total
|
|
Defined
Benefit
Plans
|
|
OPEB
Plans
|
|
Total
|
Service cost
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
22
|
|
|
$
|
7
|
|
|
$
|
29
|
|
Interest cost
|
469
|
|
|
41
|
|
|
510
|
|
|
494
|
|
|
62
|
|
|
556
|
|
Expected return on assets
|
(580
|
)
|
|
—
|
|
|
(580
|
)
|
|
(729
|
)
|
|
—
|
|
|
(729
|
)
|
Amortization of prior service credit
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
15
|
|
|
—
|
|
|
15
|
|
Amortization of net actuarial loss
|
356
|
|
|
—
|
|
|
356
|
|
|
248
|
|
|
—
|
|
|
248
|
|
Net periodic benefit cost
|
$
|
243
|
|
|
$
|
46
|
|
|
$
|
289
|
|
|
$
|
50
|
|
|
$
|
69
|
|
|
$
|
119
|
|
We expect to contribute
$2.3 million
to the Defined Benefit Plans in the year ending December 31, 2019. 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.
In accordance with ASC Topic 805,
Business Combinations
, we have remeasured the projected benefit obligation and fair value of the plan assets of the Ply Gem Plan and MW Plan. The difference between these two amounts was recorded as an assumed liability. We have used the December 31, 2018 actuarial reports to estimate the fair value of the projected benefit obligation and plan assets. The recognition of the net pension asset or liability in the allocation of the purchase price eliminates any previously unrecognized gain or loss and prior service cost. Actuarial assumptions below are based on the December 31, 2018 actuarial report. The following disclosures are for Ply Gem Plan and MW Plan only and are presented to address the above referenced changes due to the Merger.
The following table sets forth the funded status of the combined Ply Gem plans and the amounts recognized in the consolidated balance sheet (in thousands):
|
|
|
|
|
|
December 31, 2018
|
Fair value of assets
|
$
|
30,804
|
|
Benefit obligation
|
43,711
|
|
Funded status
|
$
|
(12,907
|
)
|
Actuarial Assumptions —
Ply Gem Plan and MW Plan assets consist of cash and cash equivalents, fixed income mutual funds, equity mutual funds, as well as other investments. The discount rate for the projected benefit obligation was chosen based upon rates of returns available for high-quality fixed-income securities as of the plans’ measurement date. The Company reviewed several bond indices, comparative data, and the plans’ anticipated cash flows to determine a single discount rate which would approximate the rate in which the obligation could be effectively settled. The expected long-term rate of return on assets is based on the historical rate of return on the plans. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation for the period indicated are as follows:
|
|
|
|
|
December 31, 2018
|
Discount rate for projected benefit obligation
|
4.25
|
%
|
Discount rate for pension costs
|
3.50
|
%
|
Expected long-term average return on plan assets
|
7.00
|
%
|
The combined Ply Gem plans weighted-average asset allocations at December 31, 2018 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Target
Allocation
|
|
Actual
Allocation
|
|
Weighted Average
Expected Long-Term
Rate of Return
|
U.S. large cap funds
|
25
|
%
|
|
21
|
%
|
|
3
|
%
|
U.S. mid cap funds
|
5
|
%
|
|
7
|
%
|
|
1
|
%
|
U.S. small cap funds
|
3
|
%
|
|
3
|
%
|
|
1
|
%
|
International equity
|
15
|
%
|
|
15
|
%
|
|
1
|
%
|
Fixed income
|
45
|
%
|
|
48
|
%
|
|
1
|
%
|
Other investments
|
7
|
%
|
|
6
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
7
|
%
|
Benefit Plan Payments —
The following table shows expected benefit payments for the next five fiscal years and the aggregate five years thereafter from the combined Ply Gem plans. These benefit payments consist of qualified defined benefit plan payments that are made from the respective plan trusts and do not represent an immediate cash outflow to the Company. We expect the following benefit payments to be made, which reflect expected future service, as appropriate (in thousands):
|
|
|
|
|
Fiscal Year
|
Expected Benefit Payments
|
2019
|
$
|
2,475
|
|
2020
|
2,538
|
|
2021
|
2,582
|
|
2022
|
2,650
|
|
2023
|
2,720
|
|
2024-2028
|
14,105
|
|
Other Ply Gem Retirement Plan —
The Company also has an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees. The projected benefit obligation relating to this unfunded plan totaled approximately
$0.3 million
at December 31, 2018. The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of December 31, 2018. Pension expense for the combined Ply Gem plans was approximately
$0.1 million
for the November 16, 2018 to December 31, 2018 period.
NOTE
13
— LONG-TERM DEBT AND NOTE PAYABLE
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
October 28,
2018
|
Asset-based revolving credit facility due April 2023
|
$
|
—
|
|
|
$
|
—
|
|
Asset-based revolving credit facility due February 2023
|
—
|
|
|
—
|
|
Term loan facility due April 2025
|
2,549,207
|
|
|
—
|
|
Term loan facility due February 2025
|
—
|
|
|
412,925
|
|
Cash flow revolver due April 2023
|
—
|
|
|
—
|
|
8.00% senior notes due April 2026
|
645,000
|
|
|
—
|
|
Less: unamortized discounts and unamortized deferred financing costs
(1)
|
(83,444
|
)
|
|
(5,699
|
)
|
Total long-term debt, net of unamortized discounts and unamortized deferred financing costs
|
3,110,763
|
|
|
407,226
|
|
Less: current portion of long-term debt
|
25,600
|
|
|
4,150
|
|
Total long-term debt, less current portion
|
$
|
3,085,163
|
|
|
$
|
403,076
|
|
|
|
(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
$3.1 million
and
$1.1 million
as of
December 31, 2018
and
October 28, 2018
, respectively, are classified in other assets on the consolidated balance sheets.
|
Recent Debt Transactions
In connection with the Merger, on November 16, 2018, NCI assumed (i) the obligations of Ply Gem Midco, a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement, (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture.
February 2018 Debt Redemption and Refinancing
On February 8, 2018, the Company entered into the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement, the proceeds of which, together, were used to redeem the
8.25%
senior notes due 2023 (the “
8.25%
Senior Notes”) and to refinance the Company’s then-existing term loan credit facility and the Company’s then-existing asset-based revolving credit facility.
Term Loan Credit Agreement due February 2025
On February 8, 2018, the Company entered into the Pre-merger Term Loan Credit Agreement which provided for a term loan credit facility in an original aggregate principal amount of
$415.0 million
(the “Pre-merger Term Loan Credit Facility”). Proceeds from borrowings under the Pre-merger Term Loan Credit Facility were used, together with cash on hand, (i) to refinance the then existing term loan credit agreement, (ii) to redeem and repay the
8.25%
Senior Notes and (iii) to pay any fees, premiums and expenses incurred in connection with the refinancing. On November 16, 2018, the Company repaid the remaining
$412.9 million
aggregate principal amount of the term loans outstanding under the Pre-merger Term Loan Credit Facility for approximately
$413.7 million
, reflecting remaining principal and interest, using proceeds from the incremental term loan facility entered into in connection with the Merger.
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 NCI 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
December 31, 2018
, the interest rates on the Current Term Loan Facility were follows:
|
|
|
|
|
Rate
|
Interest rate
|
6.18
|
%
|
Effective interest rate
|
6.88
|
%
|
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.
The Current Term Loan Facility may be prepaid at the Company’s option at any time, subject to minimum principal amount requirements. Prepayments of the Current Term Loan Facility in connection with a repricing transaction (as defined in the Current Cash Flow Credit Agreement) on or prior to April 12, 2019 are subject to a
1.00%
prepayment premium. Prepayments may otherwise be made without premium or penalty (other than customary breakage costs). The 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
. The annual excess cash flow assessment will begin with the Company’s 2019 fiscal year.
|
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, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and NCI became the Parent Borrower (as defined in the 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 December 31, 2018, the Company had the following in relation to the Current ABL Facility (in thousands):
|
|
|
|
|
|
December 31, 2018
|
Excess availability
|
$
|
491,367
|
|
Revolving loans outstanding
|
—
|
|
Letters of credit outstanding
|
33,930
|
|
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 December 31, 2018, the weighted average interest rate on the Current ABL Facility was
3.92%
.
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
9.22%
as of December 31, 2018, 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, NCI 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.
|
Redemption of
8.25%
Senior Notes
On January 16, 2015, the Company issued
$250.0 million
in aggregate principal amount of the
8.25%
Senior Notes. On February 8, 2018, the Company redeemed the outstanding
$250.0 million
aggregate principal amount of the
8.25%
Senior Notes for approximately
$265.5 million
using the proceeds from borrowings under the Pre-merger Term Loan Credit Facility.
Loss on Extinguishment of Debt
As a result of the Merger, during the transition period ended December 31, 2018, the Company incurred a
$3.3 million
pretax loss on the extinguishment of the Pre-merger Term Loan Credit Facility and the Pre-merger ABL Credit Agreement, of which approximately
$2.4 million
represented unamortized debt issuance costs on the Pre-merger Term Loan Credit Facility.
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
December 31, 2018
, the Company was in compliance with all covenants that were in effect on such date.
Insurance Note Payable
As of
October 28, 2018
, the Company had an outstanding note payable in the amount of
$0.5 million
related to financed insurance premiums. Insurance premium financings are generally secured by the unearned premiums under such policies. The Company had
no
notes payables outstanding at
December 31, 2018
.
NOTE
14
— 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, which was converted into shares of our common stock on May 14, 2013.
On December 11, 2017, the CD&R Fund VIII Investor Group completed a registered underwritten offering of
7,150,000
shares of NCI Common Stock at a price to the public of
$19.36
per share (the “2017 Secondary Offering”). Pursuant to the underwriting agreement, at the CD&R Fund VIII Investor Group request, the Company purchased
1.15 million
of the
7.15 million
shares of the NCI Common Stock from the underwriters in the 2017 Secondary Offering at a price per share equal to the price at which the underwriters purchased the shares from the CD&R Fund VIII Investor Group. The total amount the Company spent on these repurchases was
$22.3 million
.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018 (the “Ply Gem-Atrium Merger”).
Pursuant to the terms of the Merger Agreement, on November 16, 2018, 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”), the Golden Gate Investor Group, and together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) 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 NCI Common Stock that are held by the Investors following the consummation of the Merger.
Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement. 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
December 31, 2018
, the CD&R Investor Group owned approximately
49.4%
of the outstanding shares of NCI Common Stock. At
October 28, 2018
, the CD&R Fund VIII Investor Group owned approximately
34.4%
of the outstanding shares of NCI Common Stock.
NOTE 15 — STOCK REPURCHASE PROGRAM
On September 8, 2016, the Company announced that its Board of Directors authorized a stock repurchase program for the repurchase of up to an aggregate of
$50.0 million
of the Company’s outstanding Common Stock. 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
$50.0 million
, respectively, of the Company’s outstanding Common Stock. 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
transition period ended
December 31, 2018
, there were
no
repurchases under the stock repurchase programs. During the three months ended January 28, 2018, the Company repurchased approximately
2.7 million
shares for
$46.7 million
under the stock repurchase programs, which included
1.15 million
shares for
$22.3 million
purchased pursuant to the CD&R Fund VIII Investor Group’s 2017 Secondary Offering (see Note
14
—
CD&R Investor Group
). As of
December 31, 2018
, approximately
$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
transition period ended
December 31, 2018
and the three months ended January 28, 2018, the Company withheld
0.3 million
and
0.2 million
shares, respectively, of stock to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
The Company cancelled
0.3 million
shares during the
transition period ended
December 31, 2018
, resulting in a
$3.6 million
decrease in both additional paid in capital and treasury stock. During the three months ended January 28, 2018, the Company cancelled
2.7 million
shares repurchased under the stock repurchase programs, resulting in a
$46.7 million
decrease in both additional paid in capital and treasury stock during the quarter.
NOTE 16 — 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
December 31, 2018
and
October 28, 2018
, 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
December 31, 2018
, there was
no
outstanding indebtedness under the Current ABL Facility and 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
October 28, 2018
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Term Loan Facilities
|
$
|
2,549,207
|
|
|
$
|
2,319,778
|
|
|
$
|
412,925
|
|
|
$
|
412,409
|
|
8.00% Senior Notes
|
645,000
|
|
|
599,850
|
|
|
—
|
|
|
—
|
|
The fair values of the term loan facility was based on recent trading activities of comparable market instruments, which are level 2 inputs and the fair value of the
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
December 31, 2018
and
October 28, 2018
.
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.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2018
and
October 28, 2018
, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan:
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Mutual funds – Growth
|
960
|
|
|
—
|
|
|
—
|
|
|
960
|
|
Mutual funds – Blend
|
1,537
|
|
|
—
|
|
|
—
|
|
|
1,537
|
|
Mutual funds – Foreign blend
|
717
|
|
|
—
|
|
|
—
|
|
|
717
|
|
Mutual funds – Fixed income
|
—
|
|
|
553
|
|
|
—
|
|
|
553
|
|
Total short-term investments in deferred compensation plan
|
3,218
|
|
|
553
|
|
|
—
|
|
|
3,771
|
|
Total assets
|
$
|
3,218
|
|
|
$
|
553
|
|
|
$
|
—
|
|
|
$
|
3,771
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
|
$
|
—
|
|
|
$
|
3,139
|
|
|
$
|
—
|
|
|
$
|
3,139
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3,139
|
|
|
$
|
—
|
|
|
$
|
3,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan:
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
$
|
369
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
369
|
|
Mutual funds – Growth
|
1,118
|
|
|
—
|
|
|
—
|
|
|
1,118
|
|
Mutual funds – Blend
|
2,045
|
|
|
—
|
|
|
—
|
|
|
2,045
|
|
Mutual funds – Foreign blend
|
812
|
|
|
—
|
|
|
—
|
|
|
812
|
|
Mutual funds – Fixed income
|
—
|
|
|
941
|
|
|
—
|
|
|
941
|
|
Total short-term investments in deferred compensation
plan
|
4,344
|
|
|
941
|
|
|
—
|
|
|
5,285
|
|
Total assets
|
$
|
4,344
|
|
|
$
|
941
|
|
|
$
|
—
|
|
|
$
|
5,285
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability
|
$
|
—
|
|
|
$
|
4,639
|
|
|
$
|
—
|
|
|
$
|
4,639
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
4,639
|
|
|
$
|
—
|
|
|
$
|
4,639
|
|
NOTE 17 — INCOME TAXES
The reconciliation of income tax computed at the statutory tax rate to the effective income tax rate is as follows (in thousands):
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|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
Income tax provision (benefit) at the federal statutory rate
|
$
|
(20,340
|
)
|
|
$
|
1,485
|
|
State income taxes
|
(2,945
|
)
|
|
212
|
|
Domestic production activities deduction
|
—
|
|
|
(98
|
)
|
Non-deductible expenses
|
485
|
|
|
42
|
|
Tax credits
|
—
|
|
|
(35
|
)
|
China valuation allowance
|
—
|
|
|
11
|
|
Revaluation of U.S. deferred income tax due to statutory rate reduction
|
—
|
|
|
(1,045
|
)
|
One-time repatriation tax on foreign earnings
|
—
|
|
|
723
|
|
Transaction costs
|
1,543
|
|
|
—
|
|
Other
|
590
|
|
|
(177
|
)
|
Provision (benefit) for income taxes
|
$
|
(20,667
|
)
|
|
$
|
1,118
|
|
The increase in the effective tax rate for the
transition period ended
December 31, 2018
is a result of the net impact of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) which was enacted by the United States on December 22, 2017. U.S. Tax Reform incorporates significant changes to U.S. corporate income tax laws including, among other things, a reduction in the federal statutory corporate income tax rate from
35%
to
21%
, an exemption for dividends received from certain foreign subsidiaries, a one-time repatriation tax on deemed repatriated earnings from foreign subsidiaries, immediate expensing of certain depreciable tangible assets, limitations on the deduction for net interest expense and certain executive compensation and the repeal of the Domestic Production Activities Deduction. The Company’s statutory federal corporate income tax rate for three months ended January 28, 2018 was
23.3%
.
Valuation allowance
As of December 31, 2018, the Company remains in a valuation allowance position, in the amount of
$19.5 million
, against its deferred tax assets for certain state and Canadian jurisdictions for its Ply Gem 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 states and Canadian 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. As a result of the Merger (see Note
3
—
Acquisitions
for more information on the Merger), net operating losses may be subject to limitation under Section 382.
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 transition period ended December 31, 2018, the tax reserves increased by approximately
$0.1 million
after excluding the reserves from the Ply Gem Merger. The increase is due to interest expense related to unrecognized tax benefits and new uncertain tax positions partially offset by lapsing statutes of limitations.
The liability for unrecognized tax benefits as of December 31, 2018 was approximately
$5.0 million
and is recorded in other long-term liabilities in the accompanying consolidated balance sheet. The corresponding amount of gross unrecognized tax benefit was approximately
$16.5 million
. The difference between the total unrecognized tax benefits and the amount of the liability for unrecognized tax benefits represents unrecognized tax benefits that have been netted against deferred tax assets related to net operating losses in accordance with ASC 740 in addition to accrued penalties and interest.
Tax receivable agreement (“TRA”) liability
The TRA liability generally provides for the payment by Ply Gem to a third party entity of
85%
of the amount of cash savings, if any, in the U.S. federal, state and local income tax that Ply Gem actually realizes in periods ending after Ply Gem’s initial public offering as a result of (i) net operating loss carryovers (“NOLs”) from periods ending before January 1, 2013, (ii) deductible expenses attributable to the initial public offering and (iii) deductions related to imputed interest. This liability carried over to NCI in connection with the consummation of the Merger on November 16, 2018. Ply Gem’s future taxable income estimate was used to determine the cumulative NOLs that are expected to be utilized and the TRA liability was accordingly adjusted using the
85%
TRA rate as Ply Gem retains the benefit of
15%
of the tax savings. As of December 31, 2018, the Company had a
$24.8 million
current liability for the amount due pursuant to the Tax Receivable Agreement. During December 2018, the Company made a
$22.5 million
payment to the Tax Receivable Entity in settlement of the NOL usage on the 2017 tax returns.
NOTE
18
— SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities and by 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. For the transition period ended December 31, 2018, the Company began reporting results under
three
reportable segments: Commercial, Siding and Windows. The Company’s prior reportable segments, Engineered Building Systems, Metal Components, Insulated Metal Panels, and Metal Coil Coating, are now collectively in the Commercial segment. Prior periods for all periods presented have been recast to conform to the current segment presentation. The Siding segment will include the operating results of the legacy Ply Gem operating segment of Siding, Fencing, and Stone, and the Windows segment will include the operating results of the legacy Ply Gem operating segment of Windows and Doors.
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, loss on extinguishment of debt and other (expense) income.
The following table represents summary financial data attributable to the segments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
October 29, 2018 - December 31, 2018
|
|
Three Months Ended January 28, 2018
|
Net sales:
|
|
|
|
|
|
Commercial
|
$
|
286,522
|
|
|
$
|
421,349
|
|
Siding
|
82,974
|
|
|
—
|
|
Windows
|
190,374
|
|
|
—
|
|
Total net sales
|
$
|
559,870
|
|
|
$
|
421,349
|
|
Operating income (loss):
|
|
|
|
|
|
Commercial
|
$
|
11,784
|
|
|
$
|
37,799
|
|
Siding
|
(15,979
|
)
|
|
—
|
|
Windows
|
(8,023
|
)
|
|
—
|
|
Corporate
|
(51,198
|
)
|
|
(24,901
|
)
|
Total operating income (loss)
|
(63,416
|
)
|
|
12,898
|
|
Unallocated other expense, net
|
(33,441
|
)
|
|
(6,531
|
)
|
Income (loss) before income taxes
|
$
|
(96,857
|
)
|
|
$
|
6,367
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
October 28, 2018
|
Total assets:
|
|
|
|
|
|
Commercial
|
$
|
951,046
|
|
|
$
|
1,024,433
|
|
Siding
|
2,061,562
|
|
|
—
|
|
Windows
|
1,851,125
|
|
|
—
|
|
Corporate
|
277,454
|
|
|
85,942
|
|
Total assets
|
$
|
5,141,187
|
|
|
$
|
1,110,375
|
|
NOTE
19
— 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 December 31, 2018 are
$5.0 million
. The Company has recorded approximately
$0.3 million
of this environmental liability within current liabilities at December 31, 2018 and approximately
$4.7 million
within other long-term liabilities in the Company’s consolidated balance sheets at December 31, 2018. 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
$5.0 million
within other long-term liabilities in its consolidated balance sheets as of December 31, 2018.
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
As a result of the Merger, the Company has increased the quantity of litigation claims, as discussed below. 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.
Certain shareholders holding approximately
1,172,009
shares of Ply Gem Holdings, Inc. common stock (the “Shares”) exercised appraisal rights to demand appraisal of their Shares in connection with the Ply Gem-Atrium Merger. By exercising appraisal rights, these shareholders seek an appraisal for, and to be paid the “fair value” in cash of, their Shares (as determined by the Court of Chancery of the State of Delaware) instead of receiving the merger consideration of
$21.64
in cash, without interest, per share (the “Merger Consideration”) paid pursuant to the Ply Gem-Atrium Merger Agreement. During July 2018, Ply Gem Holdings paid
$41.4 million
in connection with this appraisal rights matter in order to reduce the interest accruing on the claim. On December 6, 2018, the Company settled the appraisal action for
$3.5 million
to avoid the substantial burden, expense, inconvenience and distraction of continued litigation and this amount has been recognized as a financing activity within the Company’s consolidated statement of cash flows.
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. Aurora alleges that Atrium’s breach of the Agreement has resulted in damages in excess of
$48.0 million
. Arbitration of the matter is currently expected to occur in 2019.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action complaint in the Delaware Court of Chancery against CD&R, 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. The 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 the director defendants in connection with the Merger. Voigt seeks damages in an amount to be determined at trial. The Company intends to vigorously defend the litigation.
Other contingencies
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 December 31, 2018.
NOTE 20 — SUBSEQUENT EVENT
Unit Purchase Agreement with Environmental Materials, LLC
On January 17, 2019, the Company announced that it entered into a Unit Purchase Agreement on January 12, 2019 with Environmental Materials, LLC (“Environmental Stoneworks”) and certain of its affiliates to purchase
100%
of the outstanding limited liability company interests of Environmental Stoneworks. Under the terms of the Unit Purchase Agreement, NCI will pay
$186.0 million
for the interests and plans to finance the transaction through a combination of cash on hand and borrowings under its existing revolving credit facilities. The purchase price is subject to certain customary post-closing adjustments including debt and working capital. During calendar year 2017, Environmental Stoneworks generated approximately
$160.0 million
in revenues. The transaction closing is subject to a number of customary conditions, including, among others, the termination or expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction is expected to close during the first quarter of 2019.
NCI BUILDING SYSTEMS, INC.