NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(Unaudited)
NOTE 1 — RECENT DEVELOPMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements for Cornerstone Building Brands, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “Cornerstone Building Brands,” “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the unaudited consolidated financial statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present the Company’s financial position, results of operations and cash flows for the periods indicated. Operating results for the period from January 1, 2022 through July 2, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
For additional information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.
Recent Developments
On July 25, 2022, the Company, Camelot Return Intermediate Holdings, LLC (“Parent”) and Camelot Return Merger Sub, Inc. (“Merger Sub”) completed the transactions contemplated by that certain Agreement and Plan of Merger, dated as of March 5, 2022 (the “Merger Agreement”), by and among the Company, Parent and Merger Sub. Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice, LLC (“CD&R”). Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “CD&R Merger”), with the Company surviving the Merger as a subsidiary of Parent (the “Surviving Corporation”). Prior to the completion of the CD&R Merger, CD&R and its affiliates collectively owned approximately 49% of the issued and outstanding shares of Company common stock, par value $0.01 per share (“Company common stock”). As a result of the CD&R Merger, investment funds managed by CD&R became the indirect owners of all of the issued and outstanding shares of Company common stock that CD&R did not already own. With the completion of the CD&R Merger, shares of Company common stock were removed from trading on the New York Stock Exchange (“NYSE”) and we became a privately held company.
Reporting Periods
The Company’s fiscal quarters are based on a four-four-five week calendar with periods ending on the Saturday of the last week in the quarter except that December 31st will always be the year-end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that total the amounts shown in the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | |
| | July 2,
2022 | | December 31,
2021 |
| Cash and cash equivalents | $ | 1,119,244 | | | $ | 394,447 | |
Restricted cash (1) | 2,211 | | | 2,211 | |
| Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | 1,121,455 | | | $ | 396,658 | |
(1)Restricted cash primarily relates to indemnification agreements in both periods presented.
Accounts Receivable and Related Allowance
The Company reports accounts receivable net of an allowance for expected credit losses. Trade accounts receivable are the result of sales of vinyl windows, aluminum windows, vinyl siding, metal siding, injection molded products, metal building products, metal coating, and other products and services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process and we require payment prior to shipment for certain international shipments.
The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to us by our customers. Such provisions are included in selling, general and administrative expenses. In establishing these reserves, the Company considers changes in the financial position of a customer, age of the accounts receivable balances, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with our customers. Our allowance for credit losses reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Interest on delinquent accounts receivable is included in the trade accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance, all collection efforts have been exhausted, and/or any legal action taken by the Company has concluded.
The following table represents the rollforward of the allowance for credit losses for the periods indicated (in thousands): | | | | | | | | | | | |
| Six Months Ended |
| July 2,
2022 | | July 3,
2021 |
| Ending balance, prior period | $ | 11,299 | | | $ | 13,313 | |
| Provision for expected credit losses | 3,158 | | | 1,428 | |
| Amounts charged against allowance for credit losses, net of recoveries | (649) | | | (750) | |
Held for sale adjustment(1) | — | | | (3,651) | |
| Allowance for credit losses of acquired company at date of acquisition | 442 | | | — | |
Divestitures(2) | (80) | | | — | |
| Ending balance | $ | 14,170 | | | $ | 10,340 | |
(1)Represents the allowance for credit losses related to assets held for sale related to the Company’s former insulated metal panels (“IMP”) and roll-up sheet door (“DBCI”) businesses which were divested on August 9, 2021 and August 18, 2021, respectively.
(2)Represents the allowance for credit losses related to the Company’s coil coatings business which was divested on June 28, 2022.
Net Sales
The Company enters into contracts that pertain to products, which are accounted for as separate performance obligations and are typically one year or less in duration. Given the nature of the Company's sales arrangements, we are not required to exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. Revenue is generally recognized when the product has shipped from the Company’s facility and control has transferred to the customer. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.
The Company’s revenues are adjusted for variable consideration, which includes customer volume rebates and prompt payment discounts. The Company measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, and current and forecasted information. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date, while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. Measurement of variable consideration is reviewed by management periodically and revenue is adjusted accordingly. The Company does not have significant financing components. The Company recognizes installation revenue, primarily within the stone veneer business, over the period for which the stone is installed, which is typically a very short duration.
Shipping and handling activities performed by the Company are considered activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
In accordance with certain contractual arrangements, the Company receives payment from our customers in advance related to performance obligations that are to be satisfied in the future and recognizes such payments as deferred revenue, primarily related to the Company’s weathertightness warranties (see Note 13 — Warranty).
A portion of the Company’s revenue, exclusively within the Commercial segment, includes multiple-element revenue arrangements due to multiple deliverables. Each deliverable is generally determined based on customer-specific manufacturing and delivery requirements. Because the separate deliverables have value to the customer on a stand-alone basis, they are typically considered separate units of accounting. A portion of the entire job order value is allocated to each unit of accounting. Revenue allocated to each deliverable is recognized upon shipment. The Company uses estimated selling price (“ESP”) based on underlying cost plus a reasonable margin to determine how to separate multiple-element revenue arrangements into separate units of accounting, and how to allocate the arrangement consideration among those separate units of accounting. The Company determines ESP based on normal pricing and discounting practices.
The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Windows Net Sales Disaggregation: | | | | | | | |
Vinyl windows(1) | $ | 731,433 | | | $ | 548,590 | | | $ | 1,389,229 | | | $ | 1,045,607 | |
| Aluminum windows | 26,283 | | | 21,636 | | | 50,943 | | | 41,916 | |
| Other | 19,754 | | | 9,518 | | | 39,408 | | | 19,484 | |
| Total | $ | 777,470 | | | $ | 579,744 | | | $ | 1,479,580 | | | $ | 1,107,007 | |
| | | | | | | |
| Siding Net Sales Disaggregation: | | | | | | | |
| Vinyl siding | $ | 211,016 | | | $ | 175,873 | | | $ | 372,216 | | | $ | 326,102 | |
| Metal | 92,283 | | | 79,500 | | | 165,985 | | | 150,593 | |
| Injection molded | 19,418 | | | 21,680 | | | 38,191 | | | 39,289 | |
| Stone | 26,635 | | | 23,803 | | | 46,957 | | | 43,634 | |
Other products & services(2) | 71,754 | | | 61,331 | | | 130,747 | | | 118,960 | |
| Total | $ | 421,106 | | | $ | 362,187 | | | $ | 754,096 | | | $ | 678,578 | |
| | | | | | | |
| Commercial Net Sales Disaggregation: | | | | | | | |
Metal building products(3) | $ | 547,429 | | | $ | 318,856 | | | $ | 1,023,887 | | | $ | 618,794 | |
Insulated metal panels(4) | — | | | 89,683 | | | — | | | 175,286 | |
Metal coil coating(5) | 57,796 | | | 49,651 | | | 113,076 | | | 87,488 | |
| Total | $ | 605,225 | | | $ | 458,190 | | | $ | 1,136,963 | | | $ | 881,568 | |
| | | | | | | |
| Total Net Sales: | $ | 1,803,801 | | | $ | 1,400,121 | | | $ | 3,370,639 | | | $ | 2,667,153 | |
(1)The Prime Windows LLC (“Prime Windows”) and Cascade Windows, Inc. (“Cascade Windows”) businesses are included in the results of operations as of their April 30, 2021 and August 20, 2021 acquisition dates, respectively.
(2)Other products & services primarily consist of installation of stone veneer products.
(3)Union Corrugating Company Holdings, Inc. (“UCC”) is included in the results of operations as of its December 3, 2021 acquisition date. The Company’s roll-up sheet doors (“DBCI”) business is only included in the fiscal 2021 results of operations through August 18, 2021, the date on which we divested of this business.
(4)The Company’s insulated metal panels (“IMP”) business is only included in the fiscal 2021 results of operations through August 9, 2021, the date on which we divested of this business.
(5)The coil coatings business is only included in the results of operations through June 28, 2022, the date on which we divested of this business.
NOTE 2 — ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the reference rate transition. The amendments in these ASUs are elective, apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of rate reform, and may be adopted as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of electing to apply the amendments.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. This creates an exception to the general recognition and measurement principles in ASC 805. The Company will be required to adopt this guidance in the annual and interim periods for the fiscal year ending December 31, 2023, with early adoption permitted. The amendments in this ASU should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements.
NOTE 3 — ACQUISITIONS
Union Corrugating Company Holdings, Inc.
On December 3, 2021, the Company completed its acquisition of 100% of the issued and outstanding common stock of Union Corrugating Company Holdings, Inc. (“UCC”) for a purchase price of $214.2 million, including a post-closing adjustment of $2.6 million that was finalized in the first quarter of 2022. UCC is a leading provider of residential metal roofing, metal buildings, and roofing components. The addition of UCC advances our growth strategy by expanding our offering to customers in the high growth metal roofing market. This acquisition was funded through cash available on the balance sheet. The Company reports UCC results within the Commercial segment.
The Company preliminarily determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
| | | | | |
| Assets acquired: | |
| Cash | $ | 19,594 | |
| Accounts receivable | 20,821 | |
| Other receivables | 16 | |
| Inventories | 68,727 | |
| Prepaid expenses and other current assets | 1,356 | |
| Property, plant and equipment | 24,184 | |
| Lease right of use assets | 37,964 | |
| |
| Goodwill | 137,859 | |
| Other assets | 94 | |
| Total assets acquired | 310,615 | |
| Liabilities assumed: | |
| Accounts payable | 32,732 | |
| Accrued expenses | 22,579 | |
| Deferred income taxes | 1,289 | |
| Current portion of lease liabilities | 3,859 | |
| Other current liabilities | 1,852 | |
| Non-current portion of lease liabilities | 34,105 | |
| |
| Total liabilities assumed | 96,416 | |
| Net assets acquired | $ | 214,199 | |
The $137.9 million of preliminary goodwill was allocated to the Commercial segment. Goodwill from this acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
Due to the recent closing of the UCC transaction, the purchase price allocation is preliminary and will be finalized when valuations are complete and final assessment of the fair value of acquired assets and assumed liabilities are completed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of accounts receivable, other receivables, inventories, prepaid expenses and other current assets, property, plant and equipment, lease right of use assets, goodwill, intangible assets, other assets, accounts payable, accrued expenses, other current liabilities, other long-term liabilities, lease liabilities, and deferred income taxes.
Cascade Windows
On August 20, 2021, the Company completed its acquisition of Cascade Windows, Inc. (“Cascade Windows”) for $237.7 million in cash, including a post-closing adjustment of $1.8 million that was finalized in the first quarter of 2022. Cascade Windows serves the residential new construction and repair and remodel markets with energy efficient vinyl window and door products from various manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded through cash available on the balance sheet. The Company reports Cascade Windows’ results within the Windows segment.
The Company preliminarily determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):
| | | | | |
| Assets acquired: | |
| Cash | $ | 2,838 | |
| Accounts receivable | 16,956 | |
| Other receivables | 675 | |
| Inventories | 15,392 | |
| Prepaid expenses and other current assets | 1,381 | |
| Property, plant and equipment | 18,300 | |
| Lease right of use assets | 21,849 | |
| Intangible assets (trade names/customer relationships) | 137,660 | |
| Goodwill | 110,375 | |
| Other assets | 500 | |
| Total assets acquired | 325,926 | |
| Liabilities assumed: | |
| Accounts payable | 17,680 | |
| Accrued expenses | 7,621 | |
| Deferred income taxes | 33,179 | |
| Current portion of lease liabilities | 247 | |
| Other current liabilities | 2,349 | |
| Non-current portion of lease liabilities | 19,926 | |
| Other long-term liabilities | 7,211 | |
| Total liabilities assumed | 88,213 | |
| Net assets acquired | $ | 237,713 | |
The $110.4 million of goodwill was allocated to the Windows segment and is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
The purchase price allocation is preliminary and will be finalized when valuations are complete and final assessment of the fair value of acquired assets and assumed liabilities are completed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of accounts receivable, prepaid expenses and other current assets, inventory, goodwill, accrued expenses, and other current liabilities.
Prime Windows
On April 30, 2021, the Company acquired Prime Windows LLC (“Prime Windows”) for total consideration of $93.0 million, exclusive of a $2.0 million working capital adjustment that was finalized as of December 31, 2021. Prime Windows serves residential new construction and repair and remodel markets with energy efficient vinyl window and door products from two manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded through borrowings under the Company’s existing credit facilities. Prime Windows’ results are reported within the Windows segment.
Unaudited Pro Forma Financial Information
The following table provides unaudited supplemental pro forma results for the Company for the six months ended July 3, 2021 as if the UCC, Cascade Windows and Prime Windows acquisitions had occurred on January 1, 2021 (in thousands, except for per share data):
| | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Six Months Ended |
| | | July 3, 2021 | | | | July 3, 2021 |
| Net sales | | | $ | 1,519,250 | | | | | $ | 2,901,910 | |
| Net income applicable to common shares | | | 18,655 | | | | | 17,238 | |
| Net income per common share: | | | | | | | |
| Basic | | | $ | 0.15 | | | | | $ | 0.14 | |
| Diluted | | | $ | 0.15 | | | | | $ | 0.14 | |
The unaudited supplemental pro forma financial information was prepared based on historical information of the Company, UCC, Cascade Windows and Prime Windows. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the UCC, Cascade Windows and Prime Windows acquisitions occurred on January 1, 2021 or of future results.
NOTE 4 — DIVESTITURES
On June 28, 2022, the Company completed the sale of the coil coatings business to BlueScope Steel Limited for initial cash proceeds of $500.0 million, subject to working capital and other customary adjustments. In connection with the transaction, the Company entered into long-term supply agreements to secure a continued supply of light gauge coil coating and painted hot roll steel. For the three and six months ended July 2, 2022, the Company recognized a pre-tax gain of $394.2 million for the coil coatings divestiture, which is included in gain on divestitures in the consolidated statements of operations. The Company incurred $8.6 million and $9.6 million of divestiture-related costs for the three and six months ended July 2, 2022, respectively, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations. The divested business did not represent a strategic shift that has a major effect on our operations and financial results, and, as such, it was not presented as discontinued operations. The coil coatings business results prior to the sale are reported within the Commercial segment.
During the three months ended July 2, 2022, the Company received additional cash proceeds of $7.2 million as a settlement of working capital related to the 2021 sale of the IMP business. These proceeds were recognized in gain on divestitures in the consolidated statements of operations.
NOTE 5 — RESTRUCTURING
The Company has various initiatives and programs in place within its business units to reduce selling, general, and administrative expenses (“SG&A”) and manufacturing costs and to optimize the Company’s manufacturing footprint. During the six months ended July 2, 2022, the Company incurred restructuring charges (gains) of $0.7 million, $0.5 million and $(2.2) million in the Windows, Siding and Commercial segments, respectively, and $0.1 million in restructuring charges at Corporate headquarters. Net restructuring charges incurred to date since the current restructuring initiatives began in 2019 are $77.7 million. The following table summarizes the costs related to those restructuring plans for the three and six months ended July 2, 2022 and costs incurred to date since inception of those initiatives and programs (in thousands):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Costs Incurred to Date |
| | July 2, 2022 | | July 2, 2022 | | (Since inception) |
| Severance | $ | 829 | | | $ | 1,133 | | | $ | 41,060 | |
| Asset impairments | — | | | 368 | | | 30,446 | |
| Gain on sale of facilities, net | (2,624) | | | (2,624) | | | (3,922) | |
| Other restructuring costs | 81 | | | 240 | | | 10,117 | |
| Total restructuring costs | $ | (1,714) | | | $ | (883) | | | $ | 77,701 | |
For the three and six months ended July 2, 2022, total restructuring costs are recorded within restructuring and impairment costs in the consolidated statements of operations. The asset impairments of $0.4 million for the six months ended July 2, 2022 primarily included assets that were recorded at fair value less cost to sell, which was less than the assets’ carrying amount.
The following table summarizes our severance liability, included within other accrued expenses on the consolidated balance sheets, and cash payments made pursuant to the restructuring plans from inception through July 2, 2022 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Windows | | Siding | | Commercial | | Corporate | | Total |
| Balance, December 31, 2018 | $ | — | | | $ | 85 | | | $ | — | | | $ | 2,333 | | | $ | 2,418 | |
| Costs incurred | 1,094 | | | 1,834 | | | 2,721 | | | 4,009 | | | 9,658 | |
| Cash payments | (676) | | | (1,437) | | | (2,721) | | | (4,579) | | | (9,413) | |
| Balance, December 31, 2019 | $ | 418 | | | $ | 482 | | | $ | — | | | $ | 1,763 | | | $ | 2,663 | |
| Costs incurred | 4,294 | | | 2,705 | | | 16,561 | | | 3,013 | | | 26,573 | |
| Cash payments | (4,406) | | | (2,352) | | | (14,570) | | | (4,346) | | | (25,674) | |
| Balance, December 31, 2020 | $ | 306 | | | $ | 835 | | | $ | 1,991 | | | $ | 430 | | | $ | 3,562 | |
| Costs incurred | 971 | | | 264 | | | 2,004 | | | 457 | | | 3,696 | |
| Cash payments | (1,262) | | | (904) | | | (2,473) | | | (587) | | | (5,226) | |
| Balance, December 31, 2021 | $ | 15 | | | $ | 195 | | | $ | 1,522 | | | $ | 300 | | | $ | 2,032 | |
| Costs incurred | 707 | | | 293 | | | 67 | | | 66 | | | 1,133 | |
| Cash payments | (631) | | | (488) | | | (67) | | | (340) | | | (1,526) | |
| Balance, July 2, 2022 | $ | 91 | | | $ | — | | | $ | 1,522 | | | $ | 26 | | | $ | 1,639 | |
We expect to fully execute our restructuring initiatives and programs over the next 12 to 24 months and we may incur future additional restructuring charges associated with these plans.
NOTE 6 — GOODWILL
The Company’s goodwill balance and changes in the carrying amount of goodwill by segment are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Windows | | Siding | | Commercial | | Total |
| Balance, December 31, 2020 | $ | 397,024 | | | $ | 654,821 | | | $ | 142,884 | | | $ | 1,194,729 | |
| Goodwill recognized from acquisitions | 143,964 | | | 122 | | | 140,342 | | | 284,428 | |
| Divestiture | — | | | — | | | (121,464) | | | (121,464) | |
| | | | | | | |
| Currency translation | 208 | | | 155 | | | — | | | 363 | |
| Purchase accounting adjustments | — | | | — | | | — | | | — | |
| Balance, December 31, 2021 | $ | 541,196 | | | $ | 655,098 | | | $ | 161,762 | | | $ | 1,358,056 | |
| | | | | | | |
| | | | | | | |
| Currency translation | (789) | | | (588) | | | — | | | (1,377) | |
| Purchase accounting adjustments from prior year acquisitions | (408) | | | (10) | | | (2,484) | | | (2,902) | |
| Balance, July 2, 2022 | $ | 539,999 | | | $ | 654,500 | | | $ | 159,278 | | | $ | 1,353,777 | |
NOTE 7 — INVENTORIES
The components of inventory are as follows (in thousands): | | | | | | | | | | | |
| | July 2, 2022 | | December 31, 2021 |
| Raw materials | $ | 400,864 | | | $ | 485,642 | |
| Work in process and finished goods | 306,793 | | | 263,090 | |
| Total inventory | $ | 707,657 | | | $ | 748,732 | |
As of July 2, 2022, the Company had inventory purchase commitments of $174.8 million.
NOTE 8 — INTANGIBLES
The table that follows presents the major components of intangible assets as of July 2, 2022 and December 31, 2021 (in thousands). Intangible assets that are fully amortized have been removed from the disclosures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of July 2, 2022 | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | |
| Trademarks/Trade names/Other | 3 | – | 12 | | 6 | $ | 236,135 | | | $ | (87,073) | | | $ | 149,062 | |
| Customer lists and relationships | 7 | – | 15 | | 8 | 1,808,811 | | | (558,515) | | | 1,250,296 | |
| Total intangible assets | | | | | 8 | $ | 2,044,946 | | | $ | (645,588) | | | $ | 1,399,358 | |
|
| As of December 31, 2021 | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | |
| Trademarks/Trade names/Other | 3 | – | 15 | | 7 | $ | 241,727 | | | $ | (76,574) | | | $ | 165,153 | |
| Customer lists and relationships | 7 | – | 20 | | 9 | 1,845,511 | | | (486,029) | | | 1,359,482 | |
| Total intangible assets | | | | | 8 | $ | 2,087,238 | | | $ | (562,603) | | | $ | 1,524,635 | |
The Company expects to recognize amortization expense over the next five fiscal years as follows (in thousands):
| | | | | |
| 2022 (excluding the six months ended July 2, 2022) | $ | 96,962 | |
| 2023 | 193,924 | |
| 2024 | 193,349 | |
| 2025 | 193,068 | |
| 2026 | 191,645 | |
NOTE 9 — ASSETS HELD FOR SALE
The Company records assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less costs to sell, the Company considers factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less costs to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less costs to sell. Our assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We determined the estimated fair values of real property assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate. During the second quarter of 2022, the Company sold the assets held for sale at December 31, 2021 which had a carrying value of $3.4 million and received $6.1 million in proceeds, resulting in a gain on sales of $2.7 million. The gain on sales is included in restructuring and impairment, net in the consolidated statements of operations for the three and six months ended July 2, 2022. There were no remaining assets held for sale as of July 2, 2022.
NOTE 10 — LEASES
The Company has leases for certain office, manufacturing, warehouse and distribution locations, and vehicles and equipment, including fleet vehicles. Many of these leases have options to terminate prior to or extend beyond the end of the term. The exercise of the majority of lease renewal options is at the Company’s sole discretion. Some lease agreements have variable payments, the majority of which are real estate agreements in which future increases in rent are based on an index. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company
accounts for lease and non-lease components as a single lease component for all leases other than leases of durable tooling. The Company has elected to exclude leases with an initial term of 12 months or less from the consolidated balance sheets and recognizes related lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the reasonably expected holding period at the commencement date of the leases. Few of the Company’s lease contracts provide a readily determinable implicit rate. As such, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Accounting for leases requires judgment, including determining whether a contract contains a lease, the incremental borrowing rates to utilize for leases without a stated implicit rate, the reasonably certain holding period for a leased asset, and the allocation of consideration to lease and non-lease components. The allocation of the lease and non-lease components for durable tooling is based on the Company’s best estimate of standalone price.
Weighted average information about the Company’s lease portfolio as of July 2, 2022 was as follows:
| | | | | |
| Weighted-average remaining lease term | 7.0 years |
| Weighted-average IBR | 5.62 | % |
Operating lease costs were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Operating lease costs | | | | | | | |
| Fixed lease costs | $ | 24,970 | | | $ | 27,258 | | | $ | 49,171 | | | $ | 53,225 | |
| Short-term lease costs | 6,836 | | | 2,599 | | | 15,071 | | | 4,942 | |
| Variable lease costs | 29,333 | | | 25,463 | | | 53,204 | | | 47,846 | |
| | | | | | | |
| | | | |
Cash and non-cash activities were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows for operating leases | $ | 19,250 | | | $ | 22,721 | | | $ | 41,490 | | | $ | 49,740 | |
| | | | | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 4,104 | | | $ | 11,811 | | | $ | 10,521 | | | $ | 17,515 | |
Future minimum lease payments under non-cancelable leases as of July 2, 2022 are as follows (in thousands): | | | | | |
| Operating Leases |
| 2022 (excluding the six months ended July 2, 2022) | $ | 32,189 | |
| 2023 | 68,898 | |
| 2024 | 56,776 | |
| 2025 | 47,581 | |
| 2026 | 38,088 | |
| Thereafter | 111,462 | |
| Total future minimum lease payments | 354,994 | |
| Less: interest | 63,672 | |
| Present value of future minimum lease payments | $ | 291,322 | |
| |
| As of July 2, 2022 | |
| Current portion of lease liabilities | $ | 57,524 | |
| Long-term portion of lease liabilities | 233,798 | |
| Total | $ | 291,322 | |
NOTE 11 — SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan, as amended (the “2003 Incentive Plan”), was an equity-based compensation plan that allowed us to grant a variety of types of awards, including stock options, restricted stock awards, stock appreciation rights, cash awards, phantom stock awards, restricted stock unit awards (“RSUs”) and long-term incentive awards with performance conditions (“performance share units” or “PSUs”). Awards were generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). In connection with the Merger (as defined herein) with Ply Gem Parent, LLC (“Ply Gem”), on November 16, 2018, awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, RSUs, and PSUs. A portion of the Founders Awards was not granted under the 2003 Incentive Plan but was instead granted pursuant to a separate equity-based compensation plan, the Long-Term Incentive Plan. These Founders Awards were subject to award agreements with the same terms and provisions as awards of the same type granted under the 2003 Incentive Plan.
As of July 2, 2022, and for all periods presented, the Founders Awards and our share-based awards granted under the 2003 Incentive Plan consisted of RSUs, PSUs and stock options, none of which could be settled through cash payments. Both our stock options and restricted stock awards were subject only to vesting requirements based on continued employment through the end of a specified time period and typically vest in annual increments over three to five years or earlier upon death, disability or a change in control. As a general rule, stock option awards expired on the earlier of (i) 10 years from the date of grant, (ii) 60 days after termination of employment or service for a reason other than death, disability or retirement, or (iii) 180 days after death, disability or retirement. Awards were non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Committee may approve.
Our time-based restricted stock awards were typically subject to graded vesting over a service period, which was three to five years. Our performance-based and market-based restricted stock awards were typically subject to cliff vesting at the end of the service period, which was typically three years. Our share-based compensation arrangements were equity classified and we recognized 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 was recognized based upon management’s assessment of the probability that
such performance conditions would be achieved. Certain of our awards provided for accelerated vesting upon a change of control or upon termination without cause or for good reason.
Vesting of the PSUs granted under the 2003 Incentive Plan during the six months ended July 2, 2022 and July 3, 2021 were contingent upon achievement of a cumulative three-year EBITDA growth target with an additional modifier based on total stockholders return. The grant-date fair value of the PSUs granted during the six months ended July 3, 2021 was determined by Monte Carlo simulation.
Stock option awards
During the six months ended July 2, 2022, there were 0.1 million options exercised with an intrinsic value of $1.7 million and cash received from the options exercised was $1.4 million. During the six months ended July 3, 2021, there were 0.1 million options exercised with an intrinsic value of $0.7 million and cash received from the options exercised was $1.5 million.
Restricted stock units
Annual awards to our key employees generally have a three-year performance period. The fair value of RSUs awarded is based on the Company’s stock price as of the date of grant. During the six months ended July 2, 2022, we granted RSUs to certain key employees with a fair value of $1.7 million representing 0.1 million shares. During the six months ended July 3, 2021, we granted RSUs to key employees with a fair value of $11.6 million, representing 0.8 million shares.
Share-based compensation expense
During the three and six months ended July 2, 2022, we recorded share-based compensation expense for all awards of $4.7 million and $16.2 million, respectively. During the three and six months ended July 3, 2021, we recorded share-based compensation expense for all awards of $5.3 million and $8.6 million, respectively.
Impact of CD&R Merger
As a result of the CD&R Merger, each outstanding and vested stock option was cancelled and converted into the right to receive an amount in cash equal to the product of (x) the excess, if any, of $24.65 per share (the “CD&R Merger Consideration”) over the exercise price per share of such stock option and (y) the number of shares of Company common stock subject to such stock option. Each outstanding and unvested stock option was cancelled and converted into a contingent contractual right to receive a payment in cash from the Company equal to the product of (x) the excess, if any, of the CD&R Merger Consideration over the exercise price per share of such stock option and (y) the number of shares of Company common stock subject to such stock option, and such resulting cash-based awards are subject to the same terms and conditions as are applicable to the corresponding stock option (including time-based vesting conditions but excluding provisions related to exercise).
As a result of the CD&R Merger, each outstanding RSU was cancelled and converted into the contractual right to receive a cash payment from the Company equal to the product of (x) the number of shares of Company common stock subject to such RSU and (y) the CD&R Merger Consideration, and such resulting cash-based awards are subject to the same terms and conditions as are applicable to the corresponding RSU (including time-based vesting conditions).
As a result of the CD&R Merger, each outstanding PSU (i) granted during the 2020 calendar year (each, a “2020 Company PSU Award”) or (ii) granted during the 2021 calendar year to the Company’s Chief Executive Officer or the Chief Executive Officer’s direct reports (each, a “2021 Company Executive PSU Award”), was cancelled and converted into a contingent contractual right to receive a cash payment from the Company equal to the product of (x) the number of PSUs earned under the terms of the applicable award agreement, but with the applicable total shareholder return metric determined using a per share price equal to the CD&R Merger Consideration and the EBITDA-based metric determined based on actual performance as of the end of the performance period applicable to such PSU and (y) the CD&R Merger Consideration, with the resulting cash-based awards subject to the same terms and conditions as are applicable to the corresponding 2020 Company PSU Award or 2021 Company Executive PSU Award (including time-based vesting conditions and EBITDA-based vesting conditions, but excluding any vesting conditions based on total shareholder return). In addition, as a result of the CD&R Merger, each outstanding PSU granted during the 2021 calendar year that was not a 2021 Company Executive PSU Award was cancelled and converted into a contingent contractual right to receive a cash payment from the Company equal to the product of (x) the number of PSUs earned under the terms of the applicable award agreement, but with the applicable total shareholder return determined using a per share price equal to the CD&R Merger Consideration and the EBITDA-based metric in the applicable award agreement deemed achieved at target performance and determined without proration for any portion of the performance period that has not yet been completed, and (y) the CD&R Merger Consideration.
NOTE 12 — EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per common share is as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Numerator for Basic and Diluted Earnings Per Common Share | | | | | | | |
| Net income applicable to common shares | $ | 376,927 | | | $ | 8,804 | | | $ | 478,804 | | | $ | 7,179 | |
| Denominator for Basic and Diluted Earnings Per Common Share | | | | | | | |
| Weighted average basic number of common shares outstanding | 127,449 | | | 125,863 | | | 127,288 | | | 125,683 | |
| Common stock equivalents: | | | | | | | |
| Employee stock options | 1,597 | | | 978 | | | 1,576 | | | 786 | |
| | | | | | | |
| Weighted average diluted number of common shares outstanding | 129,046 | | | 126,841 | | | 128,864 | | | 126,469 | |
| | | | | | | |
| Basic income per common share | $ | 2.96 | | | $ | 0.07 | | | $ | 3.76 | | | $ | 0.06 | |
| Diluted income per common share | $ | 2.92 | | | $ | 0.07 | | | $ | 3.72 | | | $ | 0.06 | |
| | | | | | | |
Incentive Plan securities excluded from dilution(1) | — | | | 130 | | | 34 | | | 216 | |
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units from the numerator and excludes the dilutive impact of those shares from the denominator. Awards subject to the achievement of performance conditions or market conditions for which such conditions had been met at the end of any of the fiscal periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
NOTE 13 — WARRANTY
The Company offers a number of warranties associated with the products it sells. The specific terms and conditions of these warranties vary depending on the product sold. The Company’s warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized.
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the six months ended July 2, 2022 and July 3, 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | Six Months Ended | |
| | | July 2, 2022 | | July 3, 2021 | |
| Beginning balance | | $ | 218,356 | | | $ | 216,230 | | |
| Acquisitions | | 189 | | | 162 | | |
| Divestiture | | (4,345) | | | — | | |
| Held for sale adjustment | | — | | | (2,256) | | |
| Warranties sold | | 937 | | | 1,158 | | |
| Revenue recognized | | (1,228) | | | (1,391) | | |
| Expense | | 23,499 | | | 15,674 | | |
| Settlements | | (18,462) | | | (15,137) | | |
| Ending balance | | 218,946 | | | 214,440 | | |
| Less: current portion | | 26,586 | | | 26,702 | | |
| Total warranty, less current portion | | $ | 192,360 | | | $ | 187,738 | | |
The current portion of the warranty liabilities is recorded within other accrued expenses and the long-term portion of the warranty liabilities is recorded within other long-term liabilities in the Company’s consolidated balance sheets.
NOTE 14 — DEFINED BENEFIT PLANS
RCC Pension Plan — With the acquisition of Robertson-Ceco II Corporation (“RCC”) on April 7, 2006, the Company assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds and fixed income securities.
Coil Coatings Benefit Plans — On January 16, 2015, as part of an acquired business, the Company assumed noncontributory defined benefit plans that covered certain hourly employees (the “Coil Coatings Benefit Plans”) and a postretirement medical and life insurance plan that covered certain of its employees and their spouses (the “OPEB Plan”). On June 28, 2022, the Company completed the sale of the coil coatings business as described in Note 4 — Divestitures, which included the transfer of the Coil Coatings Benefit Plans and the OPEB Plan to the purchaser of the coil coatings business.
Ply Gem Pension Plans — As a result of the merger with Ply Gem Parent, LLC on November 16, 2018, the Company assumed the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc Retirement Plan (the “MW Plan”). The Ply Gem Plan was frozen during 1998, and no further increases in benefits for participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for salaried participants during 2004 and non-salaried participants during 2005. No additional participants may enter the plan, but increases in benefits for participants as a result of increase in service years or compensation will occur. Plan assets of the Ply Gem Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds and fixed income securities.
We refer to the RCC Pension Plan, the Coil Coatings Benefit Plans, the Ply Gem Plan and the MW Plan collectively as the “Defined Benefit Plans” in this Note.
The following tables set forth the components of the net periodic benefit cost (income), before tax for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans |
| | Three Months Ended | | Six Months Ended |
| July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Service cost | $ | 11 | | | $ | 13 | | | $ | 22 | | | $ | 27 | |
| Interest cost | 669 | | | 636 | | | 1,338 | | | 1,271 | |
| Expected return on assets | (1,158) | | | (1,359) | | | (2,316) | | | (2,719) | |
| Amortization of prior service cost | — | | | 16 | | | — | | | 32 | |
| Amortization of net actuarial loss | 50 | | | 104 | | | 100 | | | 208 | |
| Net periodic benefit income | $ | (428) | | | $ | (590) | | | $ | (856) | | | $ | (1,181) | |
| | | | | | | |
| OPEB Plan |
| | Three Months Ended | | Six Months Ended |
| July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Service cost | $ | 4 | | | $ | 5 | | | $ | 8 | | | $ | 9 | |
| Interest cost | 45 | | | 45 | | | 89 | | | 89 | |
| | | | | | | |
| | | | | | | |
| Amortization of net actuarial loss | 13 | | | 17 | | | 27 | | | 35 | |
| Net periodic benefit cost | $ | 62 | | | $ | 67 | | | $ | 124 | | | $ | 133 | |
The Company is not required to make contributions to the Defined Benefit Plans in fiscal 2022.
NOTE 15 — LONG-TERM DEBT
Debt was comprised of the following (in thousands):
| | | | | | | | | | | |
| July 2,
2022 | | December 31,
2021 |
| | | |
| Term loan facility due April 2028 | $ | 2,567,500 | | | $ | 2,580,500 | |
| | | |
6.125% senior notes due January 2029 | 489,030 | | | 500,000 | |
Less: unamortized discounts and unamortized deferred financing costs(1) | (40,438) | | | (43,657) | |
| Total long-term debt, net of unamortized discounts and unamortized deferred financing costs | 3,016,092 | | | 3,036,843 | |
| Less: current portion of long-term debt | 26,000 | | | 26,000 | |
| Total long-term debt, less current portion | $ | 2,990,092 | | | $ | 3,010,843 | |
(1)Includes the unamortized discounts and unamortized deferred financing costs associated with the term loan facility and the 6.125% senior notes due January 2029. The unamortized deferred financing costs associated with the asset-based and revolving credit facilities of $1.2 million and $1.3 million as of July 2, 2022 and December 31, 2021, respectively, are classified in other assets on the consolidated balance sheets.
Term Loan Facility due April 2028 and Cash Flow Revolver
On April 12, 2018, Ply Gem Midco entered into a Cash Flow Agreement (the "Current Cash Flow Credit Agreement"), which provides for (i) a term loan facility (the “Existing Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million, issued with a discount of 0.5%, and (ii) a cash flow-based revolving credit facility (the “Existing Cash Flow Revolver” and together with the Existing Term Loan Facility, the “Existing Cash Flow Facilities”) of up to $115.0 million.
On November 16, 2018, the Company entered into an incremental term loan facility in connection with the Merger, which increased the aggregate principal amount of the Existing Term Loan Facility by $805.0 million. The proceeds of this incremental term loan facility were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement and (c) repay $325.0 million of borrowings outstanding under the ABL Facility. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Existing Cash Flow Facilities, and the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Existing Cash Flow Facilities.
On April 15, 2021, the Company entered into a Second Amendment to the Current Cash Flow Credit Agreement (the “Second Amendment"), among the Company, the several banks and other financial institutions party thereto (the "Cash Flow Lenders") and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), which amended the Current Cash Flow Credit Agreement to, among other things:
•Terminate $92.0 million of commitments by Cash Flow Lenders under the Company’s cash flow-based revolving credit facility of up to $115.0 million, maturing on April 12, 2023 (the “Existing Cash Flow Revolver”); and
•Replace such commitments with $92.0 million of extended cash flow-based revolving commitments, maturing on April 12, 2026 (the “Extended Cash Flow Revolver” and together with the Existing Cash Flow Revolver, the “Current Cash Flow Revolver”).
On April 15, 2021, the Company entered into (i) a Third Amendment to Current Cash Flow Credit Agreement (the “Third Amendment”), among the Company, the subsidiary guarantors parties thereto, the Cash Flow Lenders party thereto and the Cash Flow Agent and (ii) an Increase Supplement (the “Increase Supplement”), between the Company and JPMorgan Chase Bank, N.A., as the increasing lender. The Third Amendment amended the Current Cash Flow Credit Agreement to, among other things, refinance the Existing Term Loan Facility in an original aggregate principal amount of $1,755.0 million with Tranche B Term Loans in an aggregate principal amount of $2,491.6 million, maturing on April 12, 2028. The Increase Supplement supplemented the Current Cash Flow Credit Agreement to, among other things, increase the aggregate principal amount of the Tranche B Term Loan Facility by $108.4 million (the “Incremental Tranche B Term Loans”), for a total principal amount of $2,600.0 million (the “Current Term Loan Facility” and together with the Current Cash Flow Revolver, the “Current Cash Flow Facilities”). Proceeds of the Incremental Tranche B Term Loans were used, together with cash on hand, (i) for the redemption of all of the 8.00% Senior Notes (as defined below) (the “Senior Notes Redemption”) and (ii) to pay any fees and expenses incurred in connection with the extension and refinancing of the Company’s senior credit facilities and the Senior Notes Redemption.
In connection with the Third Amendment and the Increase Supplement to the Current Cash Flow Credit Agreement, the Company incurred $24.8 million in financing costs of which $13.2 million was deferred and are being amortized using the effective interest method.
The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity. The Current Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.50%) plus an applicable margin of 3.25% per annum or (ii) an alternate base rate plus an applicable margin of 2.25% per annum. At July 2, 2022, the interest rates on the Current Term Loan Facility were as follows:
| | | | | |
| July 2, 2022 |
| Interest rate | 4.57 | % |
| Effective interest rate | 4.02 | % |
The Company entered into certain interest rate swap agreements in 2019 and 2021 to effectively convert a portion of its variable rate debt to fixed. See Note 16 — Derivatives.
Loans outstanding under the Current Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.00%) plus an applicable margin ranging from 2.50% to 3.00% per annum depending on the Company’s secured leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on the Company’s secured leverage ratio. There are no amortization payments under the Current Cash Flow Revolver. Additionally, unused commitments under the Current Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio.
Both the Current Term Loan Facility and Current Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
Subject to certain exceptions, the Current Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Current Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. No payments were required in 2021 under the fiscal year 2020 excess cash flow calculation.
The obligations under the Current Cash Flow Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor (other than ABL Priority Collateral (as defined below)), including the capital stock of each direct material wholly-owned U.S. restricted subsidiary owned by the Company and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Company or any subsidiary guarantor, subject to certain exceptions (the “Cash Flow Priority Collateral”), which security interest will be senior to the security interest in the foregoing assets securing the Current ABL Facility; and
•a perfected security interest in the ABL Priority Collateral, which security interest will be junior to the security interest in the ABL Priority Collateral securing the Current ABL Facility.
The Current Cash Flow Revolver includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
On July 25, 2022, in connection with the consummation of the CD&R Merger, Parent entered into a joinder agreement with respect to the Existing Cash Flow Facilities, and Parent became Holdings (as defined in the Current Cash Flow Credit Agreement) under the Existing Cash Flow Facilities.
ABL Facility due July 2027
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), which provides for an asset-based revolving credit facility (the “Existing ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). The Company and, at their option, certain of their subsidiaries are the borrowers under the Existing ABL Facility.
On October 15, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $36.0 million, which upsized the Existing ABL Facility to $396.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million.
On November 16, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $215.0 million in connection with the Merger, which upsized the Existing ABL Facility to $611.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $313.5 million to $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Existing ABL Facility, and the Company became the Parent Borrower (as defined in the Current ABL Credit Agreement) under the Existing ABL Facility.
On April 15, 2021, the Company entered into Amendment No. 6 to the Current ABL Credit Agreement, by and among the Company, the subsidiary borrowers party thereto, the several banks and financial institutions party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent, which amended the Current ABL Credit Agreement in order to, among other things:
•Terminate the existing revolving commitments of each of the Extending ABL Credit Lenders (as defined in therein), originally maturing on April 12, 2023 (the “Existing Amendment No. 6 ABL Commitments”); and
•Replace the Existing ABL Commitments with an extended revolving commitment of $611.0 million, maturing on April 12, 2026 (the “Amendment No. 6 ABL Facility”).
On July 25, 2022, the Company entered into Amendment No. 7 to the Current ABL Credit Agreement, by and among the Company, the subsidiary borrowers party thereto, the several banks and financial institutions party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent, which amended the Current ABL Credit Agreement in order to, among other things:
•Terminate the existing revolving commitments of each of the Extending ABL Credit Lenders (as defined in therein), originally maturing on April 12, 2026 (the “Existing ABL Commitments”);
•Replace the Existing ABL Commitments with an extended revolving commitment of $611.0 million, maturing on July 25, 2027 (the “Current ABL Facility”);
•Upsize the Current ABL Facility to $850.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $483.7 million to $672.9 million and (y) the ABL Canadian Facility being increased from $127.3 million to $177.1 million; and
•Add an incremental first-in, last-out tranche asset-based revolving credit facility of $95.0 million (the “FILO Facility”).
Borrowing availability under the Current ABL Facility and the FILO Facility (collectively, the “ABL Facilities”) is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, 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 July 2, 2022, the Company had the following in relation to the Current ABL Facility (in thousands):
| | | | | |
| July 2, 2022 |
| Excess availability | $ | 565,411 | |
| Revolving loans outstanding | — | |
| Letters of credit outstanding | 40,146 | |
Loans outstanding under the Current ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term Secured Overnight Financing Rate (“SOFR”) rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the 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 Current ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
Loans outstanding under the FILO Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 2.25% to 2.75% per annum depending on the average daily excess availability under the FILO Facility or (ii) an alternate base rate plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the FILO Facility. Additionally, unused commitments under the FILO Facility are subject to a 0.25% per annum fee.
The obligations under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by the Company and the U.S. subsidiary guarantors and the proceeds of any of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral, and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the foregoing assets securing the Current Cash Flow Facilities; and
•a perfected security interest in the Cash Flow Priority Collateral, which security interest will be junior to the security interest in the Cash Flow Collateral securing the Current Cash Flow Facilities.
Additionally, the obligations of the Canadian borrowers under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions, and are secured by substantially all assets of the Canadian borrowers and the Canadian subsidiary guarantors, subject to certain exceptions.
The Current ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the Current ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days.
On July 25, 2022, in connection with the consummation of the CD&R Merger, Parent entered into a joinder agreement with respect to the ABL Facilities, and Parent became Holdings (as defined in the Current ABL Credit Agreement) under the ABL Facilities.
Term Loan Facility due August 2028
On July 25, 2022, in connection with the CD&R Merger, the Company entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) which provides for a term loan facility (the “New Term Loan Facility”) in an original aggregate principal amount of $300.0 million (the “New Term Loans”), issued with a discount of 9.5%. Proceeds from the New Term Loan Facility, together with other sources, were used to fund the consummation of the CD&R Merger. The Term Loan Credit Agreement will mature on August 1, 2028 and will bear interest at a floating rate per annum of, at the Company’s option, term SOFR plus 5.625% or a base rate plus 4.625%. The term SOFR rate is subject to an interest rate floor of 0.50% and the base rate is subject to an interest rate floor of 0.00%. Borrowings under the Term Loan Credit Agreement will amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount; provided that if the New Term Loans outstanding as of July 25, 2022 will not be discharged as of July 23, 2027, the last business day of each fiscal quarter ending on or after July 25, 2027 and prior to April 15, 2028 shall not be an amortization payment date.
The Term Loan Credit Agreement is guaranteed 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 ABL Facilities on a joint and several basis with the Company or a subsidiary guarantor), and are secured by a perfected security interest in the Cash Flow Priority Collateral, which security interest will be senior to the security interest in the Cash Flow Priority Collateral securing the ABL Facilities and equal to the security interest in the Cash Flow Priority Collateral securing the Current Cash Flow Facilities; 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 ABL Facilities and equal to the security interest in the ABL Priority Collateral securing the Current Cash Flow Facilities.
The New Term Loan Facility may be prepaid at the Company’s option at any time, subject to minimum principal amount requirements, without premium or penalty, except as set forth below:
•prior to August 1, 2024, prepayments of the New Term Loan Facility will be subject to the applicable make-whole premium;
•prior to August 1, 2024, up to 40.0% of the original aggregate principal amount of the New Term Loan Facility may be prepaid with proceeds of certain equity offerings, at a prepayment premium equal to 108.750% of the principal amount thereof;
•on or after August 1, 2024 and prior to August 1, 2025, prepayments of the New Term Loan Facility will be subject to a prepayment premium equal to 106.563% of the principal amount thereof;
•on or after August 1, 2025 and prior to August 1, 2026, prepayments of the New Term Loan Facility will be subject to a prepayment premium equal to 103.281% of the principal amount thereof; and
•on or after August 1, 2026, prepayments of the New Term Loan Facility will be at a price equal to 100.000% of the principal amount thereof.
8.750% Senior Secured Notes due January 2028
On July 25, 2022, in connection with the CD&R Merger, the Company issued $710.0 million in aggregate principal amount of 8.750% Senior Secured Notes due August 2028 (the “8.750% Senior Secured Notes”). Proceeds from the 8.750% Senior Secured Notes, together with other sources, were used to fund the consummation of the CD&R Merger. The 8.750% Senior Secured Notes bear interest at 8.750% per annum and will mature on August 1, 2028. Interest is payable semi-annually in arrears on January 15 and July 15 of each year and on August 1, 2028; provided, that if the New Term Loans outstanding as of July 25, 2022 will not be discharged as of July 15, 2027, in lieu of the interest payment date that would otherwise be January 15, 2028, interest will instead be payable in cash on April 15, 2028. The first interest date will be January 15, 2023.
The 8.750% Senior Secured Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 8.750% Senior Secured Notes are secured senior indebtedness and are effectively senior to all of the Company’s indebtedness under the Current ABL Facility, to the extent of the value of the Cash
Flow Priority Collateral securing such indebtedness, effectively subordinated to all of the Company’s indebtedness under the Current ABL Facility, to the extent of the value of the ABL Priority Collateral securing such indebtedness, equal with the Company’s indebtedness secured by liens on the collateral that are pari passu to the liens on the collateral securing the 8.750% Senior Secured Notes (including the Current Cash Flow Facilities and the New Term Loan Facility), and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 8.750% Senior Secured Notes in whole or in part at any time as set forth below:
•prior to August 1, 2024, 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 August 1, 2024, up to 40% of the aggregate principal amount with the proceeds of certain equity offerings at a redemption price of 108.750% plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after August 1, 2024 and prior to August 1, 2025, at a price equal to 106.563% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after August 1, 2025 and prior to August 1, 2026, at a price equal to 103.281% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after August 1, 2026, at a price equal to 100.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date.
6.125% Senior Notes due January 2029
On September 24, 2020, the Company issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029 (the “6.125% Senior Notes”). Proceeds from the 6.125% Senior Notes were used to repay outstanding amounts under the Company’s Current ABL Facility and Current Cash Flow Revolver. The 6.125% Senior Notes bear interest at 6.125% per annum and will mature on January 15, 2029. Interest is payable semi-annually in arrears on January 15 and July 15 commencing on January 15, 2021. The effective interest rate for the 6.125% Senior Notes was 6.33% as of July 2, 2022, after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
The 6.125% Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 6.125% Senior Notes are unsecured senior indebtedness and are effectively subordinated to all of the Company’s existing and future senior secured indebtedness, including indebtedness under the Current Term Loan Facility, Current Cash Flow Revolver, ABL Facilities and New Term Loan Facility, and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 6.125% Senior Notes in whole or in part at any time as set forth below:
•prior to September 15, 2023, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date, plus the applicable make-whole premium;
•prior to September 15, 2023, up to 40% of the aggregate principal amount with the proceeds of certain equity offerings at a redemption price of 106.125% plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after September 15, 2023 and prior to September 15, 2024, at a price equal to 103.063% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after September 15, 2024 and prior to September 15, 2025, at a price equal to 101.531% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after September 15, 2025, at a price equal to 100.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date.
During the second quarter of 2022, the Company entered into a 10b5-1 trading plan to repurchase an aggregate principal amount of up to $100 million of its 6.125% Senior Notes. As of July 2, 2022, the Company repurchased an aggregate principal amount of $11.0 million of the 6.125% Senior Notes for $7.3 million in cash. The net carrying value of the extinguished debt, including unamortized debt discount and deferred financing costs, was $10.9 million, resulting in a $3.6 million gain on extinguishment of debt, which is included as a separate item in the consolidated statements of operations.
Subsequent to July 2, 2022, the Company completed the 10b5-1 trading plan by repurchasing an aggregate principal amount of $89.0 million for $63.3 million in cash. The Company anticipates recognizing a gain of approximately $24.0 million in the third quarter of fiscal 2022 after the write-off of associated unamortized debt discount and deferred financing costs.
Redemption of 8.00% Senior Notes
On April 15, 2021, the Company redeemed the outstanding $645.0 million aggregate principal amount of the 8.00% Senior Notes due April 2026 (the “8.00% Senior Notes”) for $670.8 million using cash on hand and proceeds from the Incremental Tranche B Term Loans. The redemption resulted in a pre-tax loss on extinguishment of debt of $41.9 million during the year ended December 31, 2021, comprising a make-whole premium of $25.8 million and a write-off of $16.1 million in unamortized deferred financing costs.
Debt Covenants
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. As of July 2, 2022, the Company was in compliance with all covenants that were in effect on such date.
NOTE 16 — DERIVATIVES
We utilize derivative instruments, including interest rate swap agreements and foreign currency hedging contracts, to manage our exposure to interest rate risk and currency fluctuations. We only hold such instruments for economic hedging purposes, not for speculative or trading purposes. Our derivative instruments are transacted only with highly rated institutions, which reduces our exposure to credit risk in the event of nonperformance.
Interest Rate Swaps
We are exposed to interest rate risk associated with fluctuations in interest rates on our floating-rate Current Term Loan Facility. The objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we have entered into interest rate swap agreements as part of our interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
On a monthly basis, we net settle with our swap counterparties for the difference between the fixed rate specified in each swap agreement and the variable rate as applied to the notional amount of the swap.
In May 2019, the Company entered into four-year interest rate swaps to mitigate variability in forecasted interest payments on $1,500 million of the Company’s Current Term Loan Facility. The interest rate swaps effectively converted a portion of the floating rate interest payment into a fixed rate interest payment. Three interest rate swaps each covered a notional amount of $500 million. The Company designated the interest rate swaps as qualifying hedging instruments and accounted for these derivatives as cash flow hedges.
As discussed in Note 15 — Long-Term Debt, the Company refinanced its Term Loan Facility. Contemporaneously with the refinancing on April 15, 2021, we completed a series of transactions to modify our interest rate swap positions as follows: (i) we dedesignated all existing interest rate swaps as cash flow hedges; (ii) we terminated two existing interest rate swaps with a notional value of $500 million each; (iii) we entered into two receive-fixed interest rate swaps with a notional amount of $250 million each, which are designed to offset the terms of an existing, active interest rate swap with a notional amount of $500 million; and (iv) we entered into two pay-fixed interest rate swaps with a notional amount of $750 million each, effectively blending the liability position of our existing interest rate swap agreements into the new swaps and extending the term of our hedged position to April 2026.
The amount remaining in accumulated other comprehensive loss for the dedesignated and terminated swaps as of July 2, 2022 was $30.1 million and is being amortized as an increase to interest expense over the effective period of the original swap agreements.
The new receive-fixed interest rate swaps remain undesignated to economically offset the dedesignated existing, active swap. The new receive-fixed swaps and the dedesignated existing, active swap mature on July 12, 2023. Cash settlements related to the receive-fixed interest rate swaps are classified as operating activities in the consolidated statements of cash flows.
The new pay-fixed interest rate swaps also qualify as hybrid instruments in accordance with ASC 815, Derivatives and Hedging, consisting of a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The financing component is accounted for at amortized cost over the life of the swap while the embedded at-market derivative is accounted for at fair value. The new swaps are indexed to one-month LIBOR and are net settled on a monthly basis with the counterparty for the difference between the fixed rate of 2.0369% and 2.0340%, respectively, and the variable rate based upon one-month LIBOR (subject to a floor of 0.5%) as applied to the notional amount of the swaps. In connection with the transactions discussed above, no cash was exchanged between the Company and the counterparty. The liability of the terminated interest rate swaps as well as the inception value of the receive-fixed interest rate swap was blended into the new
pay-fixed interest rate swap. The cash flows related to the portion treated as a financing component are classified as financing activities while the cash flows related to the portion treated as an at-market derivative are classified as operating activities in the consolidated statements of cash flows.
The key terms of interest rate swaps are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | July 2, 2022 | | December 31, 2021 | | |
| Effective Date | | Fixed Rate Paid (Received) | | Notional Amount | | Status | | Notional Amount | | Status | | Maturity Date |
| Entered into May 2019: | | | | | | | | | | | | |
| July 12, 2019 | | 2.1570 | % | | $ | — | | | Terminated | | $ | — | | | Terminated | | July 12, 2023 |
| July 12, 2019 | | 2.1560 | % | | — | | | Terminated | | — | | | Terminated | | July 12, 2023 |
| July 12, 2019 | | 2.1680 | % | | 500,000 | | | Active | | 500,000 | | | Active | | July 12, 2023 |
| | | | | | | | | | | | |
| Entered into April 2021: | | | | | | | | | | | | |
| April 15, 2021 | | 2.0369 | % | | 750,000 | | | Active | | 750,000 | | | Active | | April 15, 2026 |
| April 15, 2021 | | 2.0340 | % | | 750,000 | | | Active | | 750,000 | | | Active | | April 15, 2026 |
| April 15, 2021 | | (2.1680) | % | | (250,000) | | | Active | | (250,000) | | | Active | | July 12, 2023 |
| April 15, 2021 | | (2.1680) | % | | (250,000) | | | Active | | (250,000) | | | Active | | July 12, 2023 |
| | | | $ | 1,500,000 | | | | | $ | 1,500,000 | | | | | |
The embedded at-market derivative portion of our interest rate swap agreements is recognized at fair value on the consolidated balance sheets. It is valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.
Foreign Currency Forward Contracts
The Company enters into forward contracts to hedge a portion of its non-functional currency inventory purchases. These forward contracts are established to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar. The forward contracts are highly correlated to the changes in the U.S. dollar relative to the Canadian dollar. All of the Company’s foreign currency forward contracts are initially designated as qualifying hedging instruments and accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. Unrealized gains and losses on these contracts are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income (loss) to cost of goods sold. The gains and losses on the derivative contracts that are reclassified from accumulated other comprehensive income (loss) to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. The Company may dedesignate cash flow hedges in advance of the occurrence of the forecasted transactions.
During the six months ended July 2, 2022 and July 3, 2021, the Company realized a gain of $0.5 million and a loss of $0.5 million, respectively, within cost of goods sold in the consolidated statements of operations based on the foreign currency forward contracts described above. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings. As of July 2, 2022 and December 31, 2021, the Company had a hedge asset of $1.1 million and $0.7 million respectively, and a gain of $1.1 million and $0.8 million in accumulated other comprehensive income (loss), respectively, on the consolidated balance sheets.
Fair Values of Derivatives on the Consolidated Balance Sheets
The fair values of our derivatives and their presentation on the consolidated balance sheets as of July 2, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | July 2, 2022 | | December 31, 2021 |
| | | | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives not designated as hedging instruments | | Financial statement line item | | | | | | | | |
| Interest rate swaps | | Other assets(1) | | $ | 4,466 | | | $ | — | | | $ | 11,543 | | | $ | — | |
| | Other long-term liabilities(2) | | — | | | 4,466 | | | — | | | 11,543 | |
| | | | $ | 4,466 | | | $ | 4,466 | | | $ | 11,543 | | | $ | 11,543 | |
| | | | | | | | | | |
| Derivatives designated as hedging instruments | | Financial statement line item | | | | | | | | |
| Interest rate swaps | | Other assets(3) | | $ | 94,234 | | | $ | — | | | $ | — | | | $ | — | |
| | Other accrued expenses(3) | | — | | | 13,127 | | | — | | | 13,127 | |
| | Other long-term liabilities(3) | | — | | | 36,786 | | | — | | | 28,279 | |
| Foreign currency forward contracts | | Prepaid expenses and other | | 1,132 | | | — | | | 728 | | | — | |
| | | | $ | 95,366 | | | $ | 49,913 | | | $ | 728 | | | $ | 41,406 | |
(1)The balances relate to receive-fixed interest rate swaps for which the fair value option has been elected.
(2)The balances relate to a pay-fixed May 2019 active interest rate swap which has been dedesignated as a cash flow hedge.
(3)The balances relate to the pay-fixed interest rate swaps, including the financing component.
Effect of Derivatives on the Consolidated Statements of Operations
The portion of gains or losses on the derivative instruments previously included in accumulated other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs or becomes probable of not occurring. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives not designated as hedging instruments section below. The effect of our derivatives and their presentation in the consolidated statements of operations for the six months ended July 2, 2022 and July 3, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Six Months Ended |
| | | | July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Derivatives not designated as hedging instruments | | Financial statement line item | | | | | | | | |
| Interest rate swaps | | Interest expense(1) | | $ | 7,288 | | | $ | 6,669 | | | $ | 14,576 | | | $ | 6,669 | |
| Foreign currency forward contracts | | Cost of sales | | (546) | | | 448 | | | (511) | | | 527 | |
| | | | $ | 6,742 | | | $ | 7,117 | | | $ | 14,065 | | | $ | 7,196 | |
| Derivatives designated as hedging instruments | | | | | | | | | | |
| Interest rate swaps | | Interest expense | | 1,427 | | | 3,061 | | | 3,967 | | | 10,882 | |
| | | | $ | 1,427 | | | $ | 3,061 | | | $ | 3,967 | | | $ | 10,882 | |
(1)The balance relates to the reclassification from accumulated other comprehensive income (loss) to interest expense due to dedesignation from hedge accounting of all May 2019 interest rate swaps.
NOTE 17 — CD&R INVESTOR GROUP
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of the Company, which was converted into shares of our common stock on May 14, 2013.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018.
On July 17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ply Gem, and for certain limited purposes as set forth in the Merger Agreement, Clayton, Dubilier & Rice, LLC, pursuant to which, at the closing of the merger, Ply Gem would be merged with and into the Company, with the Company continuing its existence as a corporation organized under the laws of the State of Delaware (the “Merger”). The Merger was consummated on November 16, 2018 pursuant to the Merger Agreement.
Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between the Company and each of the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of the Company’s Common Stock held by the Investors following the consummation of the Merger.
On August 25, 2020, the Company filed a shelf registration statement on Form S-3, declared effective by the SEC on September 2, 2020, registering the resale of shares of the Company’s Common Stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company’s Common Stock held by the CD&R Fund VIII Investor Group and the Golden Gate Investor Group.
Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement. Pursuant to the terms of the New Registration Rights Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Registration Rights Agreement, dated as of October 20, 2009, by and among the Company and the CD&R Fund VIII Investor Group.
As of July 2, 2022 and December 31, 2021, the CD&R Investor Group owned 48.6% and 48.8%, respectively, of the outstanding shares of the Company’s Common Stock.
On March 5, 2022, the Company entered into an Agreement and Plan of Merger (the “CD&R Merger Agreement”), by and among Camelot Return Intermediate Holdings, LLC (“Parent”), Camelot Return Merger Sub, Inc. (“Merger Sub”). Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice (“CD&R”). Upon the terms and subject to the conditions of the CD&R Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “CD&R Merger”). As a result of the CD&R Merger, the Company will cease to be publicly-traded, and investment funds managed by CD&R will become the indirect owner of all of the Company’s outstanding shares of common stock that it does not already own. With the completion of the CD&R Merger on July 25, 2022, shares of Company common stock were removed from trading on the NYSE and the Company became a privately held company. In connection with the CD&R Merger, the New Stockholders Agreement and the New Registration Rights Agreements were terminated in accordance with their respective terms.
NOTE 18 — STOCK REPURCHASE PROGRAM
On March 7, 2018, the Company announced that its Board of Directors authorized a new stock repurchase program for the repurchase of up to $50.0 million of the Company’s outstanding Common Stock. Under the repurchase program, the Company is authorized to repurchase shares at times and in amounts that it deems appropriate in accordance with all applicable securities laws and regulations. There is no time limit on the duration of the program and shares repurchased pursuant to the repurchase program are usually retired.
During the six months ended July 2, 2022 and July 3, 2021, there were no stock repurchases under the stock repurchase program. As of July 2, 2022, $49.1 million remained available for stock repurchases under the stock repurchase program. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to
results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
During the six months ended July 2, 2022 and July 3, 2021, the Company withheld 0.2 million and 0.1 million shares, respectively, of stock to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
During the six months ended July 2, 2022, the Company cancelled 0.2 million shares that had been previously withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards. The cancellations resulted in a $4.6 million decrease in both treasury stock and additional paid in capital during the six months ended July 2, 2022.
NOTE 19 — FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of July 2, 2022 and December 31, 2021 because of their relatively short maturities. The carrying amounts of the indebtedness under the Current ABL Facility and Current Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. At July 2, 2022, there were no borrowings outstanding under the Current ABL Facility and no outstanding indebtedness under the Current Cash Flow Revolver. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective period ends were (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | July 2, 2022 | | December 31, 2021 |
| Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| Term Loan Facility | $ | 2,567,500 | | | $ | 2,118,188 | | | $ | 2,580,500 | | | $ | 2,570,823 | |
6.125% Senior Notes | 489,030 | | | 312,979 | | | 500,000 | | | 531,900 | |
The fair value of the term loan facility was based on recent trading activities of comparable market instruments, which are level 2 inputs, and the fair value of the 6.125% senior notes was based on quoted prices in active markets for the identical liabilities, which are level 1 inputs.
Fair Value Measurements
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used as of July 2, 2022 and December 31, 2021.
Money market: Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds: Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
Deferred compensation plan liability: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
Interest rate swaps: Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market-based LIBOR yield curves. These interest rate swaps are classified within Level 2 of the fair value hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Foreign currency forward contracts: The fair value of the foreign currency forward contracts are classified within Level 2 of the fair value hierarchy because they are estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of July 2, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| July 2, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Short-term investments in deferred compensation plan(1): | | | | | | | |
| Money market | $ | 179 | | | $ | — | | | $ | — | | | $ | 179 | |
| | | | | | | |
| Mutual funds – Blend | 1,668 | | | — | | | — | | | 1,668 | |
| Mutual funds – Foreign blend | 312 | | | — | | | — | | | 312 | |
| Mutual funds – Fixed income | — | | | 95 | | | — | | | 95 | |
Total short-term investments in deferred compensation plan(2) | 2,159 | | | 95 | | | — | | | 2,254 | |
| Foreign currency forward contracts | — | | | 1,132 | | | — | | | 1,132 | |
Interest rate swap assets(3) | — | | | 98,700 | | | — | | | 98,700 | |
| Total assets | $ | 2,159 | | | $ | 99,927 | | | $ | — | | | $ | 102,086 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Deferred compensation plan liability(2) | $ | — | | | $ | 2,254 | | | $ | — | | | $ | 2,254 | |
| | | | | | | |
Interest rate swap liabilities(4) | — | | | 54,379 | | | — | | | 54,379 | |
| Total liabilities | $ | — | | | $ | 56,633 | | | $ | — | | | $ | 56,633 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Short-term investments in deferred compensation plan(1): | | | | | | | |
| Money market | $ | 24 | | | $ | — | | | $ | — | | | $ | 24 | |
| Mutual funds – Growth | 557 | | | — | | | — | | | 557 | |
| Mutual funds – Blend | 1,560 | | | — | | | — | | | 1,560 | |
| Mutual funds – Foreign blend | 467 | | | — | | | — | | | 467 | |
| Mutual funds – Fixed income | — | | | 151 | | | — | | | 151 | |
Total short-term investments in deferred compensation plan(2) | 2,608 | | | 151 | | | — | | | 2,759 | |
| Foreign currency forward contracts | — | | | 728 | | | — | | | 728 | |
Interest rate swap assets(3) | — | | | 11,543 | | | — | | | 11,543 | |
| Total assets | $ | 2,608 | | | $ | 12,422 | | | $ | — | | | $ | 15,030 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Deferred compensation plan liability(2) | $ | — | | | $ | 2,759 | | | $ | — | | | $ | 2,759 | |
Interest rate swap liabilities(4) | — | | | 52,949 | | | — | | | 52,949 | |
| Total liabilities | $ | — | | | $ | 55,708 | | | $ | — | | | $ | 55,708 | |
(1)Unrealized holding gains (losses) for the six months ended July 2, 2022 and July 3, 2021 were $(1.0) million and $0.2 million, respectively. These unrealized holding gains (losses) were substantially offset by changes in the deferred compensation plan liability.
(2)The Company records the short-term investments in deferred compensation plan within investments in debt and equity securities, at market, and the deferred compensation plan liability within accrued compensation and benefits on the consolidated balance sheets.
(3)The balance as of July 2, 2022 includes $94.2 million and $4.5 million related to the pay-fixed interest rate swaps and the receive-fixed interest rate swaps for which the fair value option has been elected, respectively. The balance as of December 31, 2021 is related to the receive-fixed interest rate swaps for which the fair value option has been elected.
(4)The balances as of July 2, 2022 and December 31, 2021 include $49.9 million and $41.4 million, respectively, related to the pay-fixed interest rate swaps, and $4.5 million and $11.5 million, respectively, related to the pay-fixed May 2019 active interest rate swap which has been dedesignated as a cash flow hedge.
NOTE 20 — INCOME TAXES
Under FASB ASC 740-270, Income Taxes - Interim Reporting, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date ordinary pre-tax book income (loss). In addition, the Company excludes jurisdictions with a projected loss for the year or the year-to-date ordinary loss where the Company cannot recognize a tax benefit from its estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax book income (loss), the Company includes certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense in future periods in accordance with ASC 740-270.
For the six months ended July 2, 2022, the Company’s estimated annual effective income tax rate of ordinary forecasted pre-tax book income was approximately 26.2%, which varied from the statutory rate primarily due to impact of global intangible low-tax income (“GILTI”), state income tax expense, valuation allowances, foreign income taxes, and executive compensation. For the six months ended July 2, 2022, the effective tax rate was 25.7%, which varied from the annual effective tax rate due to discrete items recorded during the period, including legal settlement income received, interest recorded on unrecognized tax benefits, adjustments to state income tax rates, and stock compensation.
Valuation allowance
As of July 2, 2022, the Company remained in a valuation allowance position, in the amount of $14.3 million, against its deferred tax assets for certain state jurisdictions of certain entities as it is currently deemed “more likely than not” that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these state jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowances as necessary.
Unrecognized tax benefits
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences as well as interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities. During the six months ended July 2, 2022, the tax reserves increased by approximately $0.6 million. The increase is primarily due to additional interest expense related to previously recorded unrecognized tax benefits.
The liability for unrecognized tax benefits as of July 2, 2022 was approximately $18.0 million and is recorded in other long-term liabilities in the consolidated balance sheet.
CARES Act
Under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that was signed into law on March 27, 2020, the Company elected to defer employer social security payments of approximately $19.9 million as of December 31, 2020. In December 2021, the Company paid approximately $10 million in deferred employer social security payments and has approximately $10 million recorded in current liabilities on the consolidated balance sheet as of July 2, 2022 that will be paid by December 31, 2022.
NOTE 21 — SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and is evaluated on a regular basis by the chief operating decision maker to make decisions regarding the allocation of resources to the segment and assess the performance of the segment. The Company has three reportable segments: Windows, Siding and Commercial.
These operating segments follow the same accounting policies used for our consolidated financial statements. We evaluate a segment’s performance on a U.S. GAAP basis based primarily upon operating income before corporate expenses.
Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition-related costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, loss on extinguishment of debt, and other income (expense).
The following table represents summary financial data attributable to the segments for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Net sales: | | | | | | | |
| Windows | $ | 777,470 | | | $ | 579,744 | | | $ | 1,479,580 | | | $ | 1,107,007 | |
| Siding | 421,106 | | | 362,187 | | | 754,096 | | | 678,578 | |
| Commercial | 605,225 | | | 458,190 | | | 1,136,963 | | | 881,568 | |
| Total net sales | $ | 1,803,801 | | | $ | 1,400,121 | | | $ | 3,370,639 | | | $ | 2,667,153 | |
| Operating income: | | | | | | | |
| Windows | $ | 66,959 | | | $ | 38,783 | | | $ | 113,204 | | | $ | 68,145 | |
| Siding | 50,191 | | | 53,383 | | | 77,614 | | | 80,911 | |
| Commercial | 493,042 | | | 53,330 | | | 573,985 | | | 94,915 | |
| Corporate | (55,306) | | | (48,686) | | | (30,601) | | | (91,953) | |
| Total operating income | 554,886 | | | 96,810 | | | 734,202 | | | 152,018 | |
| Unallocated other expense, net | (42,330) | | | (88,947) | | | (84,997) | | | (145,018) | |
| Income before taxes | $ | 512,556 | | | $ | 7,863 | | | $ | 649,205 | | | $ | 7,000 | |
| | | | | | | |
| | | | | July 2,
2022 | | December 31,
2021 |
| Total assets: | | | | | | | |
| Windows | | | | | $ | 2,259,167 | | | $ | 2,223,098 | |
| Siding | | | | | 2,106,670 | | | 2,060,275 | |
| Commercial | | | | | 738,267 | | | 1,073,264 | |
| Corporate | | | | | 1,334,351 | | | 470,823 | |
| Total assets | | | | | $ | 6,438,455 | | | $ | 5,827,460 | |
NOTE 22 — CONTINGENCIES
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. The Company regularly reviews the status of ongoing proceedings and other contingent matters. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of July 2, 2022.
Environmental
The Company’s operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of its employees and the end-users of its products; regulate the materials used in its products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could result in substantial fines or penalties, civil sanctions, injunctive relief, consent orders, or requirements to install pollution controls or other abatement equipment.
The Company could be held liable for costs to investigate, remediate or otherwise address contamination at any real property it has ever owned, operated or used as a disposal site, or at other sites where the Company or its predecessors may have released hazardous materials. The Company could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
MW Manufacturers, Inc. (“MW”), a subsidiary of Ply Gem Industries, Inc., entered into a September 2011 Administrative Order on Consent with the U.S. Environmental Protection Agency (“EPA”) under the Corrective Action Program to address known releases of hazardous substances at MW’s Rocky Mount, Virginia property. A Phase I RCRA Facility Investigation (“RFI”) was submitted to the Virginia Department of Environmental Quality (“VDEQ”) in December 2015, and a Phase II RFI and the Human Health Risk Assessment and Baseline Ecological Risk Assessment were submitted in October 2018. A Limited Corrective Measures Study based on the investigations was submitted to the VDEQ for review and approval in September 2019. Upon completion of a 30-day public comment period, the VDEQ issued its Final Decision and Response to Comments approving a final remedy in May 2021. The final remedy consists of continuing groundwater monitoring until the VDEQ’s corrective actions have been met; and implementing and complying with land use restrictions and institutional controls imposed by an environmental covenant. The Company has recorded a liability of $4.5 million for this MW site, of which $1.0 million is in other current liabilities and $3.5 million is in other long-term liabilities on the Company’s consolidated balance sheet as of July 2, 2022.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska, referred to as the PCE/TCE Northeast Contamination Site (“PCE/TCE Site”). Kroy Building Products, Inc. (“KBP”), a subsidiary of Ply Gem Industries, Inc., has been identified as a potentially responsible party at the site and has liability for investigation and remediation costs associated with the contamination. In May 2019, KBP and an unrelated respondent entered into an Administrative Settlement Agreement and Order on Consent with the EPA to conduct a Remedial Investigation/Feasibility Study (“RI/FS”) of the PCE/TCE Site. A final RI/FS Work Plan was approved by the EPA in December 2019. Two phases of RI field sampling were completed through May 2021 and EPA-approved groundwater monitoring wells installation is planned for Q3 2022. The Company has recorded a liability of $4.4 million within other current liabilities on its consolidated balance sheet as of July 2, 2022. If necessary, the Company will adjust its remediation liability if the RI/FS scope materially changes or the EPA imposes additional investigative requirements. The Company may be able to recover a portion of costs incurred in connection with the PCE/TCE Site from other potentially responsible parties, though there is no assurance we would receive any funds.
Based on current information, the Company is not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on its results of operations, cash flows or financial position except as otherwise disclosed in the Company’s consolidated financial statements. However, there can be no guarantee that previously known or newly discovered matters will not result in material costs or liabilities.
Litigation
The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019. The Company has a $1.6 million liability related to the settlement in other current liabilities on the Company’s consolidated balance sheet as of July 2, 2022. The liability will be paid in January 2023.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action Complaint in the Delaware Court of Chancery against Clayton Dubilier & Rice, LLC (“CD&R”), Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), and certain directors of the Company. Voigt purported to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholders of the Company, and derivatively on behalf of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserted claims for breach of fiduciary duty and unjust enrichment against CD&R Fund VIII and CD&R, and for breach of fiduciary duty against twelve director defendants in connection with the Merger. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to four of the director defendants. Voigt sought damages in an amount to be determined at trial. On August 25, 2021, the parties to the case filed a Stipulation of Compromise and Settlement (“Stipulation”) setting forth their agreement to settle the litigation. The Stipulation provides for CD&R, CD&R Fund VIII, and the eight director defendants to cause their respective insurers to pay a total of $100 million into an escrow account that will be used to pay escrow expenses, satisfy any fee and incentive amounts awarded by the court in favor of plaintiff and plaintiff’s counsel, and distribute the remaining funds to the Company. The Stipulation further provided that plaintiff’s counsel would apply for an award of attorneys’ fees and litigation expenses in an amount of up to 23.5% of the $100 million payment by the insurers, and that any incentive award for the named plaintiff will be paid solely from the amount of plaintiff attorneys’ fees awarded. This Stipulation required court approval. On January 19, 2022, the Court held a hearing, verbally approved the Stipulation, and approved the plaintiff’s counsel’s application for a fee award of 23.5% of the $100 million settlement payment and the incentive award. On January 20, 2022, the Court entered an Order and Final Judgment approving the Stipulation. During the quarter ended April 2, 2022, the matter was resolved as the Company received $76.5 million in cash proceeds from the Stipulation, which was recorded in gain on legal settlements in the consolidated statement of operations.
Three complaints were filed by purported former stockholders of the Company relating to the CD&R Merger. The actions are captioned Stein v. Cornerstone Building Brands, Inc., et al., Case No. 1:22-cv-02981 (Apr. 11, 2022), filed in the United States District Court for the Southern District of New York, Hopkins v. Cornerstone Building Brands, Inc., et al., Case No. 1:22-cv-02258 (Apr. 20, 2022), filed in the United States District Court for the Eastern District of New York, and Whitfield v. Cornerstone Building Brands, Inc., et al., Case No. 2:22-cv-01547 (Apr. 20, 2022), filed in the United States District Court for the Eastern District of Pennsylvania. The complaints named the Company and the members of the Company’s board of directors as defendants and alleged that the preliminary proxy statement filed with the SEC on April 7, 2022 contained alleged material misstatements and omissions in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 of the Exchange Act. On July 7, 2022, plaintiffs in each litigation voluntarily dismissed their complaints.
Additional lawsuits may be filed against the Company, current or former members of the Company’s board of directors or the Company’s officers in connection with the CD&R Merger, which could result in substantial costs to the Company, including any costs associated with indemnification.
Other contingencies
The Company’s imports of fabricated structural steel (“FSS”) from its Mexican affiliate, Building Systems de Mexico S.A. de C.V. (“BSM”) were subject to antidumping (“AD”) and countervailing duty (“CVD”) tariff proceedings before the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“USITC”). The proceedings were initiated in February 2019 by the American Institute of Steel Construction (“AISC”) against FSS being imported into the USA from Mexico, Canada, and China. In 2019, the DOC issued preliminary tariff rates and in 2020 finalized CVD and AD tariff rates of 0% and 8.47%, respectively, for the Company’s imports of FSS from BSM. However, in February 2020, in a 3 to 2 vote, the USITC concluded there was no injury or threat of injury to the domestic FSS industry. In March 2020, the USITC opinion was published in the Federal Register, ceasing the Company’s requirement to pay the AD and CVD tariffs. The Company received full reimbursement for the $4.1 million in tariffs previously deposited with United States Customs and Border Protection and recorded a reduction in costs of sales during the fiscal year ended December 31, 2020. This matter was appealed by the AISC and, on September 22, 2021, the U.S. Court of International Trade (“CIT”) issued an opinion upholding the USITC’s determination that there was no injury or threat of injury to the domestic FSS industry caused by the cumulated imports of FSS from Mexico, Canada, and China. The AISC has appealed the CIT decision to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). The Company will continue to vigorously advocate its position, that its import of FSS from BSM should not be subject to any CVD or AD tariffs, in all tribunals including the CAFC as well as the tribunal established pursuant to the North American Free Trade Agreement (“NAFTA”). The Company’s position is in agreement with, and bolstered by, the USITC’s determination that FSS imports do not cause material injury or threaten material injury to the U.S. industry and the CIT’s sustaining of the USITC’s final negative injury determination. We have evaluated this matter in accordance with ASC 450, Contingencies, and concluded that no liability to the Company is probable and estimable as of July 2, 2022.
NOTE 23 — SUBSEQUENT EVENTS
On July 25, 2022, the Company, Camelot Return Intermediate Holdings, LLC (“Parent”) and Camelot Return Merger Sub, Inc. (“Merger Sub”) completed the transactions contemplated by that certain Agreement and Plan of Merger, dated as of March 5, 2022 (the “Merger Agreement”), by and among the Company, Parent and Merger Sub. Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice, LLC (“CD&R”). Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “CD&R Merger”), with the Company surviving the Merger as a subsidiary of Parent (the “Surviving Corporation”). Prior to the completion of the CD&R Merger, CD&R and its affiliates collectively owned approximately 49% of the issued and outstanding shares of Company common stock, par value $0.01 per share (“Company common stock”). As a result of the CD&R Merger, investment funds managed by CD&R became the indirect owners of all of the issued and outstanding shares of Company common stock that CD&R did not already own. With the completion of the CD&R Merger, shares of Company common stock were removed from trading on the NYSE and we became a privately held company.
As discussed in Note 15 — Long-Term Debt, on July 25, 2022, in connection with the CD&R Merger, the Company (i) amended the Current ABL Credit Agreement to, among other things, upsize the facility to $850.0 million and add the FILO Facility of $95.0 million, (ii) entered into the New Term Loan Facility in an aggregate principal amount of $300.0 million, and (iii) and issued $710.0 million in aggregate principal amount of 8.750% Senior Secured Notes due August 2028. Proceeds from the New Term Loan Facility and the Senior Secured Notes, together with other sources, were used to fund the consummation of the CD&R Merger.
CORNERSTONE BUILDING BRANDS, INC.