NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data, unless otherwise noted)
Note 1 — Basis of Presentation
Description of Business
Cornerstone Building Brands, Inc. (“Cornerstone Building Brands” or, collectively with its subsidiaries, the “Company”) is a holding company incorporated in Delaware. The Company is the largest exterior building products manufacturer by sales in North America and serves residential and commercial customers across new construction and the repair and remodel end markets. The Company is organized in three reportable segments, which we have renamed as follows: Aperture Solutions (formerly “Windows”), Surface Solutions (formerly “Siding”) and Shelter Solutions (formerly “Commercial”).
Organization and Ownership Structure
On July 25, 2022 and pursuant to an Agreement and Plan of Merger dated March 5, 2022 (the “Merger Agreement”) by and among the Company, Camelot Return Intermediate Holdings, LLC (“Camelot Parent”), and Camelot Return Merger Sub, Inc. (“Merger Sub”), investments funds managed by Clayton, Dubilier and Rice, LLC (“CD&R”) became the indirect owners of all the issued and outstanding shares of Cornerstone Building Brands. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “Merger”), with the Company surviving the Merger as a subsidiary of Camelot Parent (the “Surviving Corporation”). At the effective time of the Merger (the “Effective Time”), the Company became a privately held company and its common shares are no longer traded on the New York Stock Exchange (“NYSE”). Following the Merger, the Stockholders Agreement, dated as of November 16, 2018, by and among the Company and certain of its stockholders, including investment funds managed by CD&R, terminated.
At the Effective Time, in accordance with the terms and conditions set forth in the Merger Agreement, each share of Company common stock outstanding immediately prior to the Effective Time of the Merger (other than (i) shares of Company common stock that were cancelled or converted into shares of common stock of the Surviving Corporation in accordance with the Merger Agreement and (ii) shares of Company common stock held by stockholders of the Company (other than CD&R, certain investment funds managed by CD&R and other affiliates of CD&R that held shares of Company common stock) who did not vote in favor of the Merger Agreement or the Merger and who have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware), was converted into the right to receive cash in an amount equal to $24.65 in cash per share, without interest and subject to any required withholding taxes.
On July 25, 2022, the Company amended its Certificate of Incorporation to authorize 1,000 shares of common stock, par value of $0.01. Each share of common stock will have one vote and all shares of common stock vote together as a single class.
Basis of Presentation
The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying Consolidated Financial Statements include the accounts and operations of the Company and its majority-owned subsidiaries and all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. All intercompany accounts and transactions have been eliminated in consolidation. Through application of pushdown accounting, the Company’s Consolidated Financial Statements are presented as Predecessor for periods prior to the Merger and Successor for subsequent periods. The Company has reclassified certain prior year amounts to conform to the current year’s presentation. All references herein for the years “2021” and “2020” represent the year ended December 31, 2021 and year ended December 31, 2020.
During the fourth quarter of 2022, the Company identified an error in its Consolidated Statement of Cash Flows for the period from January 1, 2022 through July 24, 2022 related to the classification of certain outstanding checks that were originally classified as accounts payable instead of a reduction to cash and cash equivalents. This error was deemed immaterial to the Company’s Consolidated Financial Statements. The impacts of correcting the Company’s Consolidated Statement of Cash Flow are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | January 1, 2022 through July 24, 2022 |
| Consolidated Statement of Cash Flow | | As Reported | | Adjustment | | Revised |
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | | |
| Accounts payable | | $ | 64,044 | | | $ | (19,598) | | | $ | 44,446 | |
| Net cash provided by operating activities | | 350,665 | | | (19,598) | | | 331,067 | |
| Net increase in cash, cash equivalents and restricted cash | | 712,930 | | | (19,598) | | | 693,332 | |
| Cash, cash equivalents and restricted cash at end of period | | 1,109,588 | | | (19,598) | | | 1,089,990 | |
Note 2 — Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. These estimates include, but are not limited to: establishing the allowance for expected credit losses; allowance for obsolete inventory; the impairment of goodwill and intangible assets; establishing useful lives for and evaluating the recovery of long-lived assets; recognizing the fair value of assets acquired and liabilities assumed in business combinations; accounting for rebates and product warranties; the valuation and expensing for share-based compensation; certain assumptions made in accounting for pension benefits; accounting for contingencies and uncertainties and accounting for income taxes. Actual results may differ from the estimates used in preparing the Consolidated Financial Statements.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents consists of instruments with an original maturity of three months or less. As of December 31, 2022, the Company’s cash and cash equivalents were only invested in cash.
The following table sets forth 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:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| | December 31,
2022 | | | December 31,
2021 |
| Cash and cash equivalents | $ | 553,551 | | | | $ | 394,447 | |
Other current assets - Restricted cash(1) | 463 | | | | 2,211 | |
| Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 554,014 | | | | $ | 396,658 | |
(1)Restricted cash primarily relates to indemnification agreements and is included in other current assets in the Consolidated Balance Sheets.
Accounts Receivable, Net
The Company reports accounts receivable net of an allowance for expected credit losses. The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to the Company by its customers. Such allowances are included in selling, general and administrative expenses in the Company’s Consolidated Statements of (Loss) Income. In establishing the allowance, the Company considers changes in the financial position of a customer, age of the accounts receivable balances, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with its customers. 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 or any legal action taken by the Company has concluded.
The following table sets forth the changes in the allowance for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
Beginning balance(1) | $ | — | | | | $ | 11,299 | | | $ | 13,313 | | | $ | 9,962 | |
| Cumulative effect of accounting change | — | | | | — | | | — | | | 678 | |
| Provision for expected credit losses | 2,053 | | | | 3,811 | | | 3,604 | | | 5,390 | |
| Amounts charged against allowance for credit losses, net of recoveries | — | | | | 307 | | | (1,729) | | | (3,579) | |
| Allowance for credit losses of acquired company at date of acquisition | — | | | | 442 | | | 269 | | | 862 | |
| Divestitures | — | | | | (80) | | | (4,158) | | | — | |
| Ending balance | $ | 2,053 | | | | $ | 15,779 | | | $ | 11,299 | | | $ | 13,313 | |
(1) In connection with the Merger, the beginning balance for the Successor period reflects acquisition-related adjustments of $15.8 million.
Inventories
Inventories are stated at the lower of cost or net realizable value less allowance for obsolete inventory using the first-in, first-out method. The Company reduces its inventory value for estimated obsolete and slow-moving inventory when evidence exists that the net realizable value of inventory is lower than its cost. The Company’s estimate is based upon multiple factors including, but not limited to: (i) historical write-offs and usage, (ii) sales of products at discounted or negative margins, (iii) discontinued products or designs, (iv) specific inventory quantities that are more than estimated future demand and (v) other market conditions. Cost of sales includes the cost of inventory sold during the period, including costs for manufacturing, inbound freight, receiving, inspection, warehousing. Vendor rebates are treated as a reduction to cost of sales in the Company’s Consolidated Statements of (Loss) Income.
Property, Plant and Equipment, Net
Property, plant and equipment is carried at cost. Depreciation is provided on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in operating income. Betterments and renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed as incurred. Assets held for use to be disposed of at a future date are depreciated over the remaining useful life. Assets to be sold are written down to fair value less costs to sell at the time the assets are being actively marketed for sale. Depreciation and amortization are recognized in cost of sales or selling, general and administrative expenses based on the nature and use of the underlying assets.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment, including, but not limited to, property, plant and equipment and finite-lived intangible assets, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or the assets are being held for sale. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value and any resulting impairment loss is reflected within other operating costs on the Consolidated Statements of (Loss) Income. The Company recorded impairments relating to its long-lived assets of $0.0 million for the period from July 25, 2022 through December 31, 2022, $0.4 million for the period from January 1, 2022 through July 24, 2022, $22.2 million for 2021 and $4.9 million for 2020.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. The Company evaluates goodwill for impairment at least annually and completes its annual review in the fourth quarter. When evaluating goodwill for impairment, the Company estimates the fair value of its reporting units. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then the excess is charged to
earnings as an impairment loss. Significant judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests. The determination of fair value incorporates significant unobservable inputs. The Company records goodwill adjustments for changes to the purchase price allocation prior to the end of the measurement period, which is not to exceed one year from the acquisition date. The Company recognized impairments relating to goodwill of $0.0 million from July 25, 2022 through December 31, 2022, January 1, 2022 through July 24, 2022 and 2021 and $503.2 million of impairment for 2020.
Product Warranties
The Company offers a number of warranties associated with the products it sells. 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. The Company accrues for the estimated cost of product warranty at the time of sale based on historical experience, expectations regarding future costs to be incurred and information provided by third party actuarial estimates. Warranty costs are included within cost of goods sold.
Leases
The Company has leases for certain manufacturing, warehouse and distribution locations, offices, vehicles and equipment. 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. The Company’s 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 (Loss) Income 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 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.
Long-term Debt Discounts, Issuance Costs and Fair Value Adjustments
Unamortized discounts, debt issuance costs and fair value adjustments incurred relating to long-term debt are amortized over the term of the related financing using the effective interest method.
Revenue Recognition
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, the Company is 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 the Company’s products. Revenue is generally recognized when the product has shipped from the Company’s facility and control has transferred to the customer. 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.
The Company’s revenues are adjusted for variable consideration, which includes customer volume rebates, prompt payment discounts, customer returns and other incentive programs. The Company measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, and current and forecasted information. 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, mainly 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 billed to customers are treated as fulfillment costs. Shipping and handling activities performed before a customer obtains control of the product are not treated as a separate performance obligation and are included in revenue at the same point in time the related product revenue is recognized, while shipping and handling costs are expenses as incurred and recorded within in cost of sales in the Company’s Consolidated Statements of (Loss) Income.
In accordance with certain contractual arrangements, the Company receives payment from its customers in advance related to performance obligations that are to be satisfied in the future and recognizes such payments as deferred revenue, mainly related to the Company’s weathertightness warranties.
A portion of the Company’s revenue, exclusively within the Shelter Solutions reportable 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.
For the period from July 25, 2022 through December 31, 2022 and for the period from January 1, 2022 through July 24, 2022, one customer accounted for 13.1% and 11.8% of the Company’s net sales. The sales attributed to this customer are included in all three of the Company’s reportable segments.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $11.3 million for the period from July 25, 2022 through December 31, 2022, $11.1 million for the period from January 1, 2022 through July 24, 2022, $16.9 million for 2021 and $15.1 million for 2020. These costs are included in selling, general and administrative expenses on the Consolidated Statements of (Loss) Income.
Share-Based Compensation
Share-based compensation expense, measured as the fair value of an award on the date of grant, is recorded over the requisite service or performance period. For awards with performance conditions, the amount of share-based compensation expense recognized is based upon the probable outcome of the performance conditions, as determined by the Company. The Company accounts for forfeitures of outstanding but unvested awards in the period they occur.
Income Taxes
Deferred income tax assets and liabilities are measured based on differences between the financial statement basis and income tax basis of assets and liabilities using estimated income tax rates expected to be in effect for the year in which the differences are expected to reverse. Changes in deferred income tax assets and liabilities attributable to changes in enacted income tax rates are charged or credited to income tax expense. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount that is more-likely-than-not to be realized.
The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. The Company recognizes tax benefits from uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on technical merits of the positions. The tax benefits recognized from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement.
Fair Value Measurements
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value as of December 31, 2022 and 2021 given the instruments relatively short maturities. The carrying amounts of the indebtedness under revolving credit facilities approximate fair value as the interest rates are variable and reflective of market rates. Fair values for our other debt instruments are measured using Level 1 and Level 2 inputs. U.S. GAAP requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
Foreign Currency Remeasurement and Translation
The Company’s reporting currency is the United States (“U.S.”) dollar while the functional currency of the Company’s significant non-U.S. subsidiaries is the Canadian Dollar. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in accumulated other comprehensive income (loss) in equity. Gains (losses) arising from transactions denominated in a currency other the functional currency of the entity that is party to the transaction are included in net income (loss) on the Company’s Consolidated Statements of (Loss) Income.
Contingencies
The Company’s contingent liabilities are related primarily to litigation and environmental matters and are based upon assumptions and estimates regarding the probable outcome of the matter. The Company estimates the probability by evaluating historical precedent as well as the specific facts relating to each particular contingency (including the opinion of outside advisors, professionals and experts). The Company estimates loss contingencies and unasserted claims when it believes a loss is probable and the amount of the loss can be reasonably estimated. The ultimate losses incurred upon final resolution of loss contingencies may differ materially from the estimated liability recorded at any particular balance sheet date. Changes in estimates are recorded in the Consolidated Statements of (Loss) Income in the period in which such changes occur.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“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. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, that deferred the sunset date of Topic 848 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company is evaluating the impact of electing to apply the amendments.
Note 3 — Mergers, Acquisitions and Divestitures
CD&R Merger Transaction
On July 25, 2022, Merger Sub merged with and into the Company, with the Company surviving the merger as a subsidiary of Camelot Parent. CD&R previously held 61.9 million shares of the Company immediately prior to the Merger. As a result of the Merger, 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.
The Merger was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market value at the date of the Merger.
The Merger was funded in part with proceeds from the following issuances:
•$300.0 million aggregate principal amount term loan facility, due August 2028;
•$710.0 million of 8.750% Senior Secured Notes due August 2028;
•$564.4 million of cash from the Company;
•$464.4 million aggregate principal amount of 2.99% senior payment-in-kind notes due 2029 that were issued and are held by Camelot Return Parent, LLC (“Camelot Return Parent”), an indirect parent of Company; and
•$195.0 million from preferred shares of Camelot Return Parent.
Neither the Company nor any of its subsidiaries is a guarantor of or is obligated to make any payments related to the 2.99% senior payment-in-kind notes due 2029 held by Camelot Return Parent.
The calculation of the total consideration paid follows:
| | | | | |
| Consideration |
| Common shares purchased | 65,613,349 | |
| Common share closing price | $ | 24.65 | |
| Merger consideration, common shares purchased | $ | 1,617,369 | |
Effective settlement of pre-existing relationships(1) | 128,721 | |
| Total Merger consideration | 1,746,090 | |
Fair value of common shares previously held by CD&R and other adjustments(2) | 1,526,591 | |
| Total equity value | $ | 3,272,681 | |
(1) Consists mainly of employee share-based compensation awards that were outstanding at that time the Merger was consummated.
(2) Consists of 61.9 million common shares, with shares rolled over or acquired by Camelot Parent.
The following table summarizes the fair value of net assets acquired:
| | | | | |
| Fair Value |
| Merger consideration | $ | 1,746,090 | |
| Fair value of common shares previously held by CD&R and other adjustments | 1,526,591 | |
| Total equity value | $ | 3,272,681 | |
| |
| Cash and cash equivalent | $ | 1,087,586 | |
| Accounts receivable | 794,341 | |
| Inventories | 768,827 | |
| Property, plant and equipment | 581,617 | |
| Lease right-of-use assets | 252,262 | |
| Goodwill | 1,693,594 | |
| Intangible assets | 2,610,685 | |
| Other assets | 120,543 | |
| Total assets acquired | 7,909,455 | |
| Accounts payable | 329,105 | |
| Accrued liabilities | 623,647 | |
| Long-term debt | 2,467,210 | |
| Lease liabilities | 252,262 | |
| Deferred income tax liabilities | 679,014 | |
| Other liabilities | 285,536 | |
| Total liabilities assumed | 4,636,774 | |
| Net assets acquired | $ | 3,272,681 | |
The above purchase price allocation is based upon provisional information and is subject to revision during the measurement period (up to one year from the date of the Merger) as additional information concerning valuations is obtained. During the measurement period, as the Company obtains new information regarding facts and circumstances that existed as of the date of the Merger that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise the provisional purchase price allocation and may include, but not limited to, adjustments pertaining to intangible assets acquired, property, plant and equipment acquired and tax liabilities assumed. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been made as of the date of the Merger. Residual amounts will be allocated to goodwill.
As part of pushdown accounting, we recorded the provisional goodwill and it has been allocated to reporting units expected to benefit from the business combination. The goodwill is mainly attributable to cost savings in manufacturing productivity; freight and logistics; procurement; and other operating costs, as well as operational improvements in recent acquisitions to be achieved subsequent to the Merger. The goodwill recorded is not deductible for income tax purposes.
The Company identified intangible assets for customer lists and relationships and trademarks, trade names and other. Intangible assets are amortized on a straight-line basis over their expected useful lives. The provisional fair value and weighted average estimated useful life of identifiable intangible assets consists of the following:
| | | | | | | | | | | |
| Fair Value | | Weighted Average Useful Life (years) |
| Customer relationships | $ | 2,088,548 | | | 13 |
| Trade names and other | 522,137 | | | 13 |
| Total | $ | 2,610,685 | | | |
The Company incurred transaction costs of $29.4 million associated with the Merger, of which $0.7 million was recognized in the period from July 25, 2022 through December 31, 2022 and $28.7 million was recognized in the period from January 1, 2022 through July 24, 2022. These costs are included in selling, general and administrative expenses on the Consolidated Statements of (Loss) Income.
Unaudited Pro Forma Financial Information
Had the Merger occurred at the beginning of 2020, unaudited pro forma revenues and net income for the period from January 1, 2022 through July 24, 2022, 2021 and 2020 would not have been materially different than the amounts reported as the pro forma adjustments would primarily reflect the amortization of intangibles and depreciation of property, plant and equipment that received a step up in basis and the cost to finance the transaction, net of the related tax effects. The unaudited supplemental pro forma financial information would not give effect to the potential impact of current financial conditions, operating efficiencies or cost savings that may result from the Merger or any integration costs. Unaudited pro forma balances would not necessarily be indicative of operating results had the Merger occurred on January 1, 2020 or of future results.
Acquisitions
Union Corrugating Company Holdings, Inc.
On December 3, 2021, the Company acquired 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 Company’s Consolidated Balance Sheet. The Company reports UCC results within the Shelter Solutions reportable segment.
The following table summarizes the final fair value of net assets acquired:
| | | | | |
| Fair Value |
| Cash | $ | 19,594 | |
| Accounts receivable | 20,515 | |
| Inventories | 66,420 | |
| Property, plant and equipment | 24,184 | |
| Lease right of use assets | 37,964 | |
| Trade name and customer relationship intangibles | 97,560 | |
| Goodwill | 63,933 | |
| Other assets | 1,466 | |
| Total assets acquired | 331,636 | |
| Accounts payable and other liabilities assumed | 57,163 | |
| Lease liabilities | 37,964 | |
| Deferred income taxes | 22,310 | |
| Total liabilities assumed | 117,437 | |
| Net assets acquired | $ | 214,199 | |
The $63.9 million of goodwill was allocated to the Shelter Solutions reportable segment. Goodwill from this acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
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 U.S., expanding our manufacturing capabilities and creating new opportunities for us in the Western U.S. This acquisition was funded through cash available on the Company’s Consolidated Balance Sheet. The Company reports Cascade Windows’ results within the Aperture Solutions reportable segment.
The following table summarizes the final fair value of net assets acquired:
| | | | | |
| Fair Value |
| Cash | $ | 2,838 | |
| Accounts receivable | 16,956 | |
| Inventories | 15,392 | |
| Property, plant and equipment | 18,300 | |
| Lease right of use assets | 21,849 | |
| Trade name and customer relationship intangibles | 137,660 | |
| Goodwill | 110,417 | |
| Other assets | 2,556 | |
| Total assets acquired | 325,968 | |
| Accounts payable and other liabilities assumed | 34,861 | |
| Lease liabilities | 20,173 | |
| Deferred income taxes | 33,221 | |
| Total liabilities assumed | 88,255 | |
| Net assets acquired | $ | 237,713 | |
The $110.4 million of goodwill was allocated to the Aperture Solutions reportable segment and is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
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 U.S. This acquisition was funded through borrowings under the Company’s existing credit facilities. Prime Windows’ results are reported within the Aperture Solutions reportable segment.
Kleary
On March 2, 2020, the Company acquired 100% of the issued and outstanding shares of the common stock of Kleary Masonry, Inc. (“Kleary”) for total consideration of $40.0 million, exclusive of the $2.0 million working capital adjustment that was finalized during the three months ended July 4, 2020. The transaction was financed with cash on hand and through borrowings under the Company’s asset-based revolving credit facility. Kleary’s results are reported within the Surface Solutions reportable segment.
Unaudited Pro Forma Financial Information
The following table provides unaudited supplemental pro forma results for the Company had the acquisitions occurred on January 1, 2020:
| | | | | | | | | | | |
| Predecessor |
| Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Net sales | $ | 5,977,230 | | | $ | 5,056,390 | |
| Net income (loss) applicable to common shares | 663,273 | | | (480,289) | |
| Net income (loss) per common share: | | | |
| Basic | $ | 5.26 | | | $ | (3.83) | |
| Diluted | $ | 5.23 | | | $ | (3.83) | |
The unaudited supplemental pro forma financial information was prepared based on the historical information of the Company, UCC, Cascade Windows, Prime Windows and Kleary. The unaudited supplemental pro forma financial
information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the acquisitions occurred on January 1, 2020 or of future results.
Divestitures
Coil Coatings
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 period from January 1, 2022 through July 24, 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 (Loss) Income. The Company incurred $9.6 million of divestiture-related costs for the period from January 1, 2022 through July 24, 2022, which are recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of (Loss) Income. 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 Shelter Solutions reportable segment.
IMP and DBCI Businesses
On August 9, 2021, the Company completed the sale of its IMP business for cash proceeds of $1.0 billion. On August 18, 2021, the Company completed the sale of its DBCI business for cash proceeds of $168.9 million. The IMP and DBCI businesses were within the Company’s Shelter Solutions reportable segment. For the year ended December 31, 2021, the Company recognized a pre-tax gain of $679.8 million for the IMP divestiture and $151.5 million for the DBCI divestiture, which are included in gain on divestitures in the Consolidated Statements of (Loss) Income. As part of the consideration received for the sale of the IMP business, we entered into a short-term agreement with the purchaser to supply steel for the IMP business. We recognized $15.5 million in net sales under the supply agreement, which ended in December 2021. For the year ended December 31, 2021, the Company incurred $21.3 million of divestiture-related costs, which are recorded in strategic development and acquisition related costs in the Company’s Consolidated Statements of (Loss) Income. During the period from January 1, 2022 through July 24, 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 (Loss) Income. The divested businesses did not represent strategic shifts that have a major effect on our operations and financial results, so they were not presented as discontinued operations.
Note 4 — Inventories
The following table sets forth the components of inventories:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31,
2022 | | | December 31,
2021 |
| Raw materials | $ | 312,380 | | | | $ | 485,642 | |
| Work in process | 67,424 | | | | 65,070 | |
| Finished goods | 172,024 | | | | 198,020 | |
| Total inventories | $ | 551,828 | | | | $ | 748,732 | |
The following table sets forth the changes to the allowance for obsolete inventory:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
Beginning balance(1) | $ | — | | | | $ | 21,281 | | | $ | 22,172 | | | $ | 18,712 | |
| Provisions | 3,805 | | | | 7,197 | | | 5,155 | | | 8,015 | |
| Dispositions | (1,578) | | | | (2,335) | | | (6,029) | | | (4,555) | |
| Allowance of acquired company at date of acquisition | — | | | | 3,817 | | | 705 | | | — | |
| Divestitures | — | | | | (400) | | | (722) | | | — | |
| Ending balance | $ | 2,227 | | | | $ | 29,560 | | | $ | 21,281 | | | $ | 22,172 | |
(1) In connection with the Merger, the beginning balance for the Successor period reflects acquisition-related adjustments of $29.6 million.
Note 5 — Property, Plant and Equipment, Net
The following sets forth the components of property, plant and equipment, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Useful Lives
(Years) | | Successor | | | Predecessor |
| | December 31,
2022 | | | December 31,
2021 |
| Land | | | | | $ | 16,970 | | | | $ | 24,812 | |
| Buildings and improvements | 15 | – | 39 | | 111,296 | | | | 253,637 | |
| Machinery and equipment | 3 | – | 15 | | 526,764 | | | | 990,338 | |
| | | | | 655,030 | | | | 1,268,787 | |
| Less: accumulated depreciation and amortization | | | | | (36,966) | | | | (656,492) | |
| Total property, plant and equipment, net | | | | | $ | 618,064 | | | | $ | 612,295 | |
Depreciation and amortization expense related to property, plant and equipment was $44.7 million for the period from July 25, 2022 through December 31, 2022, $56.7 million for the period from January 1, 2022 through July 24, 2022, $103.0 million for 2021 and $103.5 million for 2020.
Note 6 — Goodwill and Intangible Assets
Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Aperture Solutions | | Surface Solutions | | Shelter Solutions | | Total |
| Balance, December 31, 2020 (Predecessor) | $ | 397,024 | | | $ | 654,821 | | | $ | 142,884 | | | $ | 1,194,729 | |
| Acquisitions | 143,964 | | | 122 | | | 140,342 | | | 284,428 | |
| Divestiture | — | | | — | | | (121,464) | | | (121,464) | |
| Currency translation | 208 | | | 155 | | | — | | | 363 | |
| Balance, December 31, 2021 (Predecessor) | $ | 541,196 | | | $ | 655,098 | | | $ | 161,762 | | | $ | 1,358,056 | |
| Currency translation | (750) | | | (561) | | | — | | | (1,311) | |
Measurement period adjustments(1) | (366) | | | (10) | | | (97,474) | | | (97,850) | |
| Balance, July 24, 2022 (Predecessor) | $ | 540,080 | | | $ | 654,527 | | | $ | 64,288 | | | $ | 1,258,895 | |
| | | | | | | |
| Balance, July 25, 2022 (Successor) | $ | 612,368 | | | $ | 763,324 | | | $ | 284,796 | | | $ | 1,660,488 | |
Measurement period adjustments(2) | 14,527 | | | 29,288 | | | (10,709) | | | 33,106 | |
| Currency translation | (2,886) | | | (2,160) | | | — | | | (5,046) | |
| Balance, December 31, 2022 (Successor) | $ | 624,009 | | | $ | 790,452 | | | $ | 274,087 | | | $ | 1,688,548 | |
(1)Primarily reflects the fair value of acquired intangibles totaling $97.6 million in connection with the acquisition of UCC, which is reported in the Shelter Solutions reportable segment.
(2)Measurement period adjustments have been recorded as the Company has obtained additional information since the preliminary purchase price allocation of the assets and liabilities acquired in connection with the Merger. The measurement period adjustments did not have a significant impact on the Company’s results of operations.
Intangible Assets, Net
The following table sets forth the major components of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | | Cost | | Accumulated Amortization | | Net Carrying Value |
As of December 31, 2022 (Successor)(1) | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | |
| Trademarks, trade names and other | | 13 | | | 13 | | $ | 522,137 | | | $ | (18,332) | | | $ | 503,805 | |
| Customer lists and relationships | | 13 | | | 13 | | 2,088,548 | | | (73,330) | | | 2,015,218 | |
| Total intangible assets | | | | | | | $ | 2,610,685 | | | $ | (91,662) | | | $ | 2,519,023 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of December 31, 2021 (Predecessor) | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | |
| Trademarks, trade names and 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 | | | | | | | $ | 2,087,238 | | | $ | (562,603) | | | $ | 1,524,635 | |
(1)In connection with the Merger, the Company recorded a provisional intangible asset fair value. The fair value is based on preliminary information and subject to revision during the measurement period.
Intangible assets are amortized on a straight-line basis or a basis consistent with the expected future cash flows over their expected useful lives. Amortization expense related to intangible assets was $85.4 million for the period from July 25, 2022 through December 31, 2022, $109.5 million for the period from January 1, 2022 through July 24, 2022, $189.5 million for 2021, and $181.0 million for 2020.
The expected amortization expense over the next five years and thereafter for acquired intangible assets recorded as of December 31, 2022 is as follows:
| | | | | |
| 2023 | $ | 200,822 | |
| 2024 | 200,822 | |
| 2025 | 200,822 | |
| 2026 | 200,822 | |
| 2027 | 200,822 | |
| Thereafter | 1,514,913 | |
| $ | 2,519,023 | |
Note 7 — Other Current Liabilities
The following table sets forth the components of other current liabilities: | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31,
2022 | | | December 31,
2021 |
| Accrued insurance | $ | 23,609 | | | | $ | 20,473 | |
| Accrued freight | 11,130 | | | | 12,604 | |
| Accrued facilities | 4,687 | | | | 1,901 | |
| Professional services | 10,380 | | | | 11,993 | |
| Interest rate swaps | 7,000 | | | | 13,127 | |
| Accrued interest | 48,595 | | | | 19,775 | |
| Other accrued expenses | 44,195 | | | | 64,864 | |
| Total other current liabilities | $ | 149,596 | | | | $ | 144,737 | |
Note 8 — Product Warranties
The following table sets forth the changes in the carrying amount of product warranties liability: | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 |
Balance, beginning of period(1) | $ | 203,011 | | | | $ | 218,356 | | | $ | 216,230 | |
| Acquisitions | — | | | | 189 | | | 10,518 | |
| Divestitures | — | | | | (4,345) | | | (2,245) | |
| Warranties sold | 879 | | | | 1,052 | | | 1,986 | |
| Revenue recognized | (1,135) | | | | (1,383) | | | (2,650) | |
| Expense | 17,019 | | | | 26,910 | | | 26,129 | |
| Settlements | (17,311) | | | | (21,311) | | | (31,612) | |
| Balance, end of period | $ | 202,463 | | | | $ | 219,468 | | | $ | 218,356 | |
| Reflected as: | | | | | | |
| Current liabilities – Rebates, warranties and other customer-related liabilities | $ | 25,304 | | | | $ | 26,888 | | | $ | 30,181 | |
| Noncurrent liabilities – Other long-term liabilities | 177,159 | | | | 192,580 | | | 188,175 | |
| Total product warranty liability | $ | 202,463 | | | | $ | 219,468 | | | $ | 218,356 | |
(1) In connection with the Merger, the beginning balance for the Successor period reflects acquisition-related adjustments of $16.5 million.
Note 9 — Leases
The following sets forth weighted average information about the Company’s lease portfolio as of December 31, 2022:
| | | | | |
| Weighted-average remaining lease term | 7.2 years |
Weighted-average incremental borrowing rate | 10.49 | % |
The following table sets forth components of operating lease costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Operating lease costs | | | | | | | | |
| Fixed lease costs | $ | 35,419 | | | | $ | 54,910 | | | $ | 107,938 | | | $ | 113,760 | |
| Short-term lease costs | 19,221 | | | | 17,051 | | | 8,350 | | | 8,478 | |
| Variable lease costs | 49,251 | | | | 54,316 | | | 94,296 | | | 62,317 | |
The following table sets forth cash and non-cash lease activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows for operating leases | $ | 34,104 | | | | $ | 42,069 | | | $ | 91,024 | | | $ | 99,076 | |
Right-of-use assets obtained in exchange for new operating lease liabilities(1) | $ | 277,724 | | | | $ | 10,601 | | | $ | 88,826 | | | $ | 19,785 | |
(1) For the period July 25, 2022 through December 31, 2022, all leases that existing prior to the Merger were treated as new operating leases.
For the period from July 25, 2022 through December 31, 2022, the Company renewed certain existing facility and transportation leases which resulted in the net remeasurement of the existing lease right-of-use assets in the amount of $110.2 million.
The following table sets forth future minimum lease payments under non-cancelable leases as of December 31, 2022:
| | | | | |
| Operating Leases |
| 2023 | $ | 94,475 | |
| 2024 | 89,095 | |
| 2025 | 78,674 | |
| 2026 | 72,396 | |
| 2027 | 36,246 | |
| Thereafter | 164,825 | |
| Total future minimum lease payments | 535,711 | |
| Less: interest | 171,473 | |
| Present value of future minimum lease payments | $ | 364,238 | |
Note 10 — Long-Term Debt
The following table sets forth the components of long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | December 31, 2022 | | | December 31, 2021 |
| Effective Interest Rate | | Principal Outstanding | | Unamortized Fair Value Adjustment(1) | | Unamortized Discount and Issuance Costs | | Carrying Amount | | | Principal Outstanding | | Unamortized Discount and Issuance Costs | | Carrying Amount |
| Term loan facility, due April 2028 | 8.57 | % | | $ | 2,554,500 | | | $ | (348,769) | | | $ | — | | | $ | 2,205,731 | | | | $ | 2,580,500 | | | $ | (37,811) | | | $ | 2,542,689 | |
| Term loan facility, due August 2028 | 9.69 | % | | 300,000 | | | — | | | (21,538) | | | 278,462 | | | | — | | | — | | | — | |
6.125% senior notes due January 2029 | 13.73 | % | | 365,541 | | | (111,524) | | | — | | | 254,017 | | | | 500,000 | | | (5,846) | | | 494,154 | |
8.750% Senior Secured Notes, due August 2028 | 10.61 | % | | 710,000 | | | — | | | (52,622) | | | 657,378 | | | | — | | | — | | | — | |
| Total long-term debt | | | $ | 3,930,041 | | | $ | (460,293) | | | $ | (74,160) | | | $ | 3,395,588 | | | | $ | 3,080,500 | | | $ | (43,657) | | | $ | 3,036,843 | |
| Reflected as: | | | | | | | | | | | | | | | | |
| Current liabilities - Current portion of long-term debt | | | | $ | 29,000 | | | | | | | | $ | 26,000 | |
| Non-current liabilities - Long-term debt | | | | 3,366,588 | | | | | | | | 3,010,843 | |
| Total long-term debt | | | | | | | | | $ | 3,395,588 | | | | | | | | $ | 3,036,843 | |
| Fair value - Senior notes - Level 1 | | | | | | | | | $ | 907,993 | | | | | | | | $ | 531,900 | |
| Fair value - Term loans - Level 2 | | | | | | | | | 2,580,000 | | | | | | | | 2,570,823 | |
| Total fair value | | | | | | | | | $ | 3,487,993 | | | | | | | | $ | 3,102,723 | |
(1)On July 25, 2022, as a result of the pushdown accounting related to the Merger, the carrying values of the term loan facility due April 2028 and the 6.125% senior notes were adjusted to fair value.
The following table sets forth the scheduled maturity of our debt:
| | | | | |
| 2023 | $ | 29,000 | |
| 2024 | 29,000 | |
| 2025 | 29,000 | |
| 2026 | 29,000 | |
| 2027 | 29,000 | |
| Thereafter | 3,785,041 | |
| $ | 3,930,041 | |
Revolving Credit Facilities
The following table sets forth the Company’s availability under its credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2022 | | | December 31, 2021 |
| Available | | Borrowings | | Letters of Credit and Priority Payables | | | Available | | Borrowings | | Letters of Credit and Priority Payables |
| Asset-based lending facility | $ | 850,000 | | | $ | — | | | $ | 48,000 | | | | $ | 611,000 | | | $ | — | | | $ | 45,000 | |
Cash flow revolver(1) | 115,000 | | | — | | | — | | | | 115,000 | | | — | | | — | |
| First-in-last-out tranche asset-based lending facility | 95,000 | | | — | | | — | | | | — | | | — | | | — | |
| Total | $ | 1,060,000 | | | $ | — | | | $ | 48,000 | | | | $ | 726,000 | | | $ | — | | | $ | 45,000 | |
(1) Cash flow revolver commitments of $23.0 million mature in April 2023 and $92.0 million mature in April 2026.
Merger Transaction
In July 2022, in connection with the Merger, the Company:
•Incurred a new $300.0 million aggregate principal amount Side Car Term Loan Facility (as defined below).
•Issued $710.0 million 8.750% Senior Secured Notes (as defined below) due August 2028.
•Increased the ABL Facility (as defined below) available under the ABL Credit Agreement (as defined below) from $611.0 million to $850.0 million and amended the ABL Credit Agreement to, among other things, extend the maturity of the ABL Facility to July 2027.
•Added the ABL FILO Facility (as defined below) of $95.0 million under the ABL Credit Agreement. The ABL FILO Facility terminates in July 2027.
The proceeds totaling $1.0 billion, together with other sources, were used to purchase all remaining issued and outstanding shares of Cornerstone Building Brands and related fees to consummate the Merger.
Term Loan Facility due April 2028 and Cash Flow Revolver
In April 2018, Ply Gem Midco entered into a Cash Flow Agreement (as amended from time to time, the “Cash Flow Credit Agreement”), which provides for (i) a term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $2,600.0 million, issued with a discount of 0.5% and (ii) a cash flow-based revolving credit facility (the “Cash Flow Revolver”) of up to $115.0 million. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Borrower (as defined in the Cash Flow Credit Agreement) under the Term Loan Facility and Cash Flow Revolver (together the “Cash Flow Facilities”).
The Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity. The Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) 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.
Loans outstanding under the Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) 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 Cash Flow Revolver. Additionally, unused commitments under the Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio.
Subject to certain exceptions, the Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. No payments were required in 2022 under the year 2021 excess cash flow calculation.
Both the Term Loan Facility and Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
ABL Facility due July 2027
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (as amended from time to time, the “ABL Credit Agreement”), which provides for (a) an asset-based revolving credit facility of up to $850.0 million (amended from time to time the “ABL Facility”), a portion of which is (i) available to U.S. borrowers and (ii) available to U.S. and Canadian borrowers. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the ABL Facility, and (b) a first-in-last-out tranche asset-based revolving credit facility of up to $95.0 million (the “ABL FILO Facility”) available to U.S. borrowers.
Borrowing availability under the ABL Facility and the ABL FILO Facility (collectively, the “ABL Facilities”) is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.
Loans outstanding under the ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
Loans outstanding under the ABL FILO Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 2.25% to 2.75% per annum depending on the average daily excess availability under the ABL FILO Facility or (ii) an alternate base rate plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL FILO Facility. Additionally, unused commitments under the ABL FILO Facility are subject to a 0.25% per annum fee.
Side Car Term Loan Facility due August 2028
On July 25, 2022, the Company entered into a Term Loan Credit Agreement (as amended from time to time, the “Side Car Term Loan Credit Agreement”) which provides for a term loan facility (the “Side Car Term Loan Facility”) in an original aggregate principal amount of $300.0 million. The Side Car Term Loan Credit Agreement will mature on August 1, 2028.
Loans outstanding under the Side Car Term Loan Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate plus 5.625% (subject to a SOFR floor of 0.50%) or (ii) an alternate base rate plus 4.625%. Borrowings under the Side Term Loan Credit Agreement amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount.
The Side Car Term Loan Facility may be prepaid at the Company’s option at any time, subject to certain prepayment premiums if prepaid prior to August 1, 2026.
6.125% Senior Notes due January 2029
On September 24, 2020, the Company issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029 (the “6.125% Senior Notes”). The 6.125% Senior Notes bear interest at 6.125% per annum and will mature on January 15, 2029. Interest is payable semi-annually in arrears on January 15 and July 15 commencing on January 15, 2021.
The 6.125% Senior Notes are unsecured senior indebtedness and are effectively subordinated to all of the Company’s existing and future senior secured indebtedness, including indebtedness under the Term Loan Facility, the Cash Flow Revolver, the Side Car Term Loan Facility, the 8.750% Senior Secured Notes and the ABL Facilities, and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 6.125% Senior Secured Notes in whole or in part at any time subject to certain prepayment premiums if the 6.125% Senior Secured Notes were to be redeemed prior to September 15, 2023.
8.750% Senior Secured Notes due August 2028
On July 25, 2022, the Company issued $710.0 million in aggregate principal amount of 8.750% Senior Secured Notes due August 2028 (the “8.750% Senior Secured Notes”). The 8.750% Senior Secured Notes bear interest at 8.750% per annum and will mature on August 1, 2028. Interest is payable semi-annually in arrears on January 15 and July 15 of each year. The first interest date will be January 15, 2023.
The 8.750% Senior notes are secured senior indebtedness and rank equal in right of payment with all existing and future senior indebtedness, and are senior in right of payment to all existing and future subordinated indebtedness of the Company, including the 6.125% Senior Notes.
The Company may redeem the 8.750% Senior Secured Notes in whole or in part at any time subject to certain prepayment premiums if the 8.750% Senior Secured Notes were to be redeemed prior to August 1, 2026.
Repurchase of 6.125% Senior Notes
Under a 10b5-1 plan approved by the Board of Directors, the Company repurchased an aggregate principal amount of $100.0 million for $70.6 million in cash during the period from January 1, 2022 through July 24, 2022 and an aggregate principal amount of $34.5 million for $23.2 million in cash during the period from July 25, 2022 through December 31, 2022. The gains, which included the write-off of associated unamortized debt discount and deferred financing costs, totaled
$28.4 million in the period from January 1, 2022 through July 24, 2022 and $0.5 million in the period from July 25, 2022 through December 31, 2022, were recognized as gain on extinguishment of debt in the Consolidated Statements of (Loss) Income.
Redemption of 8.00% Senior Notes
In April 2021, the Company redeemed the outstanding $645.0 million aggregate principal amount of the 8.00% Senior Notes due April 2026 for $670.8 million. The redemption resulted in a pre-tax loss on extinguishment of debt in the Consolidated Statements of (Loss) Income of $41.9 million, comprising a make-whole premium of $25.8 million and a write-off of $16.1 million of unamortized deferred financing costs.
Other Information
The obligations under the Company’s debt agreements are generally guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions. In addition, the obligations of the Canadian borrowers under the ABL Facility are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions. In addition, the obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are guaranteed by Camelot Parent, which guarantee is non-recourse and limited to the equity interests of the Company. The obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are also secured by a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor and in the capital stock of the Company, subject to certain exceptions and subject to priority of security interests provided therein.
Covenant Compliance
The ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days. The Cash Flow Credit Agreement includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. The Company is in compliance with all of its covenants as of December 31, 2022.
Interest Rate Swaps
The Company uses certain interest rate swaps to manage a portion of the interest rate risk on its term loans. The following table sets forth the terms of the Company’s interest rate swap agreements:
| | | | | | | | | | | |
| May 2019 Swap(1) | | April 2021 Swaps |
| Notional amount | $ | 500,000 | | | $ | 1,000,000 | |
| Forecasted term loan interest payments being hedged | 1-month LIBOR | | 1-month LIBOR |
| LIBOR floor (per annum - matches floor in hedged item) | 0.00 | % | | 0.50 | % |
Fixed rate paid on $500,000 and $1,500,000 notional amounts | 2.1680 | % | | 2.0340 | % |
Fixed rate received on $(500,000) notional amount | n/a | | (2.1680) | % |
| Origination date | July 12, 2019 | | April 15, 2021 |
| Maturity - Fixed rate paid | July 12, 2023 | | April 15, 2026 |
| Maturity - Fixed rate received | n/a | | July 12, 2023 |
| Fair value at December 31, 2022 - Other current assets | $ | 7,000 | | | $ | — | |
| Fair value at December 31, 2022 - Other assets, net | $ | — | | | $ | 95,361 | |
| Fair value at December 31, 2022 - Other current liabilities | $ | — | | | $ | 7,000 | |
| Fair value at December 31, 2021 - Other assets, net | $ | 11,543 | | | $ | — | |
| Fair value at December 31, 2021 - Other current liabilities | $ | — | | | $ | 13,127 | |
| Fair value at December 31, 2021 - Other long-term liabilities | $ | 11,543 | | | $ | 28,279 | |
Level in fair value hierarchy(2) | Level 2 | | Level 2 |
(1)The May 2019 swap was de-designated from cash flow hedge accounting in April 2021.
(2)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.
Note 11 — Employee Benefit Plans
Defined Benefit Plans
The Company has certain defined benefit plans which are frozen with no further increases in benefits for participants may occur as a result of increases in service years or compensation. In connection with the sale of the coil coatings business on June 28, 2022, the Company transferred two defined benefit plans and an other post-employment benefit plan to the purchaser resulting in no further benefit obligation at the time of sale.
The following table sets forth the weighted average actuarial assumptions used to determine benefit obligations: | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31,
2022 | | | December 31,
2021 |
| Discount rate | 5.45 | % | | | 2.85 | % |
The following table sets forth the weighted average actuarial assumptions used to determine net periodic benefit cost (income): | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 |
| Discount rate | 4.40 | % | | | 2.85 | % | | 2.50 | % |
| Expected return on plan assets | 5.16 | % | | | 4.85 | % | | 5.95 | % |
The basis used to determine the expected long-term rate of return on assets assumptions for the defined benefit plans was recent market performance and historical returns. The investment policy is to maximize the expected return for an acceptable level of risk. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels.
As of December 31, 2022, all of our defined pension plans have projected benefit obligations in excess of the fair value of plan assets. The following table sets forth the changes in the projected benefit obligation, plan assets and funded status, and the amounts recognized on the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | | Year Ended
December 31,
2021 |
| Change in benefit obligation: | | | | | | | |
| Beginning of period | $ | 70,676 | | | | $ | 97,134 | | | | $ | 104,934 | |
| Service cost | — | | | | 23 | | | | 54 | |
| Interest cost | 1,254 | | | | 1,529 | | | | 2,542 | |
| Benefits paid | (2,607) | | | | (3,339) | | | | (6,641) | |
| Actuarial gains | (5,859) | | | | (13,523) | | | | (3,755) | |
| Divestitures | — | | | | (11,148) | | | | — | |
| End of period | $ | 63,464 | | | | $ | 70,676 | | | | $ | 97,134 | |
| Accumulated benefit obligation at end of period | $ | 63,464 | | | | $ | 70,676 | | | | $ | 97,134 | |
| | | | | | | |
| Change in plan assets: | | | | | | | |
| Beginning of period | $ | 63,627 | | | | $ | 98,954 | | | | $ | 94,215 | |
| Actual return on plan assets | (4,284) | | | | (16,524) | | | | 8,162 | |
| Company contributions | — | | | | — | | | | 3,218 | |
| Benefits paid | (2,606) | | | | (3,339) | | | | (6,641) | |
| Divestitures | — | | | | (15,464) | | | | — | |
| End of period | $ | 56,737 | | | | $ | 63,627 | | | | $ | 98,954 | |
| | | | | | | |
| Funded status at end of period | $ | (6,727) | | | | $ | (7,049) | | | | $ | 1,820 | |
| | | | | | | |
| | | | Successor | | | Predecessor |
| | | | December 31,
2022 | | | December 31,
2021 |
| Amounts recognized on the Consolidated Balance Sheets | | | | | | | |
| Noncurrent assets | | | | $ | — | | | | $ | 5,098 | |
| Noncurrent liabilities | | | | (6,727) | | | | (3,278) | |
| | | | $ | (6,727) | | | | $ | 1,820 | |
The following table sets forth the weighted average asset allocations by asset category for the defined benefit plans:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Investment type | December 31,
2022 | | | December 31,
2021 |
| Equity securities | 38 | % | | | 31 | % |
| Debt securities | 60 | % | | | 67 | % |
| Real estate | 2 | % | | | 2 | % |
| Total | 100 | % | | | 100 | % |
The principal investment objectives are to ensure the availability of funds to pay pension and postretirement benefits as they become due under a broad range of future economic scenarios, to maximize long-term investment return with an acceptable level of risk based on our pension and postretirement obligations, and to be sufficiently diversified across and within the capital markets to mitigate the risk of adverse or unexpected results from one security class having an unduly detrimental impact on the entire portfolio. Each asset class has broadly diversified characteristics. Decisions regarding investment policy are made with an understanding of the effect of asset allocation on funded status, future contributions and projected expenses.
The fair values of the assets of the defined benefit plans at December 31, 2022 and 2021, by asset category and by levels of fair value were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2022 | | | December 31, 2021 |
| Level 1 | | Level 2 | | Total | | | Level 1 | | Level 2 | | Total |
| Cash and cash equivalents | $ | 27 | | | $ | — | | | $ | 27 | | | | $ | 20 | | | $ | — | | | $ | 20 | |
| Mutual funds: | | | | | | | | | | | | |
| Growth funds | 4,271 | | | — | | | 4,271 | | | | 6,649 | | | — | | | 6,649 | |
| Real estate funds | 1,395 | | | — | | | 1,395 | | | | 2,072 | | | — | | | 2,072 | |
| Equity income funds | 4,217 | | | — | | | 4,217 | | | | 6,197 | | | — | | | 6,197 | |
| Index funds | 9,036 | | | — | | | 9,036 | | | | 12,642 | | | — | | | 12,642 | |
| International equity funds | 3,795 | | | — | | | 3,795 | | | | 4,883 | | | — | | | 4,883 | |
| Fixed income funds | 6,680 | | | 27,316 | | | 33,996 | | | | 12,982 | | | 53,509 | | | 66,491 | |
| Total | $ | 29,421 | | | $ | 27,316 | | | $ | 56,737 | | | | $ | 45,445 | | | $ | 53,509 | | | $ | 98,954 | |
The following tables set forth the components of the net periodic benefit income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | | | |
| | Successor | | | Predecessor |
| | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Service cost | | $ | — | | | | $ | 23 | | | $ | 54 | | | $ | 46 | |
| Interest cost | | 1,254 | | | | 1,529 | | | 2,542 | | | 3,231 | |
| Expected return on assets | | (1,316) | | | | (2,650) | | | (5,439) | | | (4,958) | |
| Amortization of prior service cost | | — | | | | — | | | 65 | | | 62 | |
| Amortization of loss | | — | | | | 117 | | | 416 | | | 433 | |
| Net periodic benefit income | | $ | (62) | | | | $ | (981) | | | $ | (2,362) | | | $ | (1,186) | |
The following table sets forth the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit income:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31,
2022 | | | December 31,
2021 |
| Unrecognized actuarial (gain) loss | $ | 278 | | | | $ | 4,946 | |
The following tables set forth the changes in plan assets and benefit obligation recognized in other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | | | |
| | Successor | | | Predecessor |
| | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Net actuarial (gain) loss | | $ | (278) | | | | $ | 9,966 | | | $ | (6,479) | | | $ | 1,777 | |
| Amortization of net actuarial gain (loss) | | — | | | | 117 | | | (416) | | | (433) | |
| Amortization of prior service cost | | — | | | | — | | | (65) | | | (63) | |
| Total recognized in other comprehensive (loss) income | | $ | (278) | | | | $ | 10,083 | | | $ | (6,960) | | | $ | 1,281 | |
We expect the following benefit payments to be made:
| | | | | |
| Years ending | Defined
Benefit Plans |
| 2023 | $ | 5,611 | |
| 2024 | 5,536 | |
| 2025 | 5,468 | |
| 2026 | 5,408 | |
| 2027 | 5,339 | |
| 2028 - 2032 | 24,721 | |
Defined Contribution Plan
The Company has a 401(k) profit sharing plan that allows participation by all eligible employees. The Company’s contributions vary, but are based primarily on each participant’s level of contributions, which cannot exceed the maximum allowable for income tax purposes. The Company’s contribution expense for matching contributions to the plan was $6.6 million for the period from July 25, 2022 through December 31, 2022, $10.2 million for the period from January 1, 2022 through July 24, 2022, $16.3 million for 2021, and $16.2 million for 2020.
Deferred Compensation Plan
The Company has a deferred compensation plan that allows its officers and key employees to defer a minimum and a maximum deferral percentage of the employee’s base salary and bonus until a specified date in the future, including at or after retirement. As of December 31, 2022 and 2021, the liability balance of the deferred compensation plan was $1.7 million and $2.8 million and was included in employee-related liabilities on the Company’s Consolidated Balance Sheets. The investments in the rabbi trust were $1.7 million and $2.8 million as of December 31, 2022 and 2021.
Note 12 — Share-based Compensation
Merger Transaction
Prior to July 24, 2022, under its long-term stock incentive plan, the Company had several share-based compensation award types, including stock options, restricted stock units and performance share unit awards (collectively, the “Pre-Merger Awards”). In connection with the Merger, outstanding vested stock option awards were canceled and converted to the right to receive a fixed amount of cash equal to the intrinsic value of the awards and were paid in August 2022. Performance share unit awards (“PSUs”) granted to certain key employees in March 2021 were paid in cash in September 2022 with the applicable total stockholder return metric determined using a per share price equal to the Merger consideration and the EBITDA-based metric determined based on target performance.
Resulting from the Merger, unvested awards were cancelled and converted into a contingent contractual right to receive a payment in cash equal to the Merger consideration per award, subject to the same time-based vesting conditions as the original awards, which is typically three to five years. In the case of the PSUs that were granted in March 2020 to executives and certain key employees and in March 2021 to executives, the contingent contractual right to receive a cash payment from the Company will equal the product of the number of performance share units earned under the terms of the applicable award agreement, but with the applicable total stockholder return metric determined using a per share price equal to the Merger consideration and the EBITDA-based metric determined based on actual performance as of the end of the tree-year performance period applicable to such performance share unit. The Pre-Merger Awards are be accounted for under ASC Topic 710.
As of December 31, 2022, the Company has liabilities of $92.9 million and $16.0 million classified within employee-related liabilities and other long-term liabilities on its Consolidated Balance Sheet related to the Pre-Merger Awards that will be settled in cash. For the period July 25, 2022 through December 31, 2022, the Company paid out $41.6 million of cash to settle Pre-Merger Awards.
Incentive Units
Beginning in the fourth quarter of 2022, pursuant to an incentive unit grant agreement, certain participants were granted 0.8 million incentive units in Camelot Return Ultimate, L.P. (the “Partnership”) with no forfeitures occurring in 2022. The Incentive Units provide the holder with the opportunity to receive, upon certain vesting events and subject to Partnership repurchase rights and conditions, a return based upon the appreciation of the Partnership’s equity value from the date of grant.
The Company will recognize compensation cost for the awards on a straight-line basis over a five-year vesting period based on the fair value of the award at the date of grant, which was calculated using a Black-Scholes pricing formula, including the significant assumptions below:
| | | | | |
| Successor |
| July 25, 2022
through
December 31, 2022 |
| Underlying price | $ | 100.00 | |
| Volatility rate | 45.5 | % |
| Expected term (in years) | 6.1 |
| Risk-free interest rate | 4.2 | % |
Upon a sale of the Partnership, vesting of incentive units will accelerate, subject to the participant’s continued employment through the consummation of such sale unless there is non-cash consideration and the incentive units are replaced with awards that have substantially equivalent or better rights.
Compensation Expense
For the period from July 25, 2022 through December 31, 2022, the amount of expense recognized from the Pre-Merger Awards and the Incentive units was $21.9 million and $2.3 million. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $4.4 million for the period from January 1, 2022 through July 24, 2022, $7.5 million in 2021 and $4.4 million and 2020. As of December 31, 2022, the Company estimates that unrecognized expense is expected to be recognized over a weighted-average period of 3.4 years totaling $57.4 million, of which $18.0 million relates to Pre-Merger Awards and $39.4 million relates to incentive units.
Note 13 — Income Taxes
The following table sets forth the components of the provision for income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Current: | | | | | | | | |
| Federal | $ | 14,096 | | | | $ | 148,371 | | | $ | 219,379 | | | $ | (1,343) | |
| State | 3,307 | | | | 38,814 | | | 64,509 | | | 7,316 | |
| Foreign | 4,480 | | | | 5,315 | | | 11,590 | | | 3,909 | |
| Total current | 21,883 | | | | 192,500 | | | 295,478 | | | 9,882 | |
| Deferred: | | | | | | | | |
| Federal | (31,529) | | | | (23,867) | | | (43,980) | | | 82 | |
| State | (5,632) | | | | (4,637) | | | (18,363) | | | 1,462 | |
| Foreign | 205 | | | | 1,818 | | | 2,833 | | | (5,863) | |
| Total deferred | (36,956) | | | | (26,686) | | | (59,510) | | | (4,319) | |
| Total income taxes | $ | (15,073) | | | | $ | 165,814 | | | $ | 235,968 | | | $ | 5,563 | |
The following table sets forth a reconciliation of income tax computed at the U.S. federal statutory tax rate to the effective income tax rate:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Federal income tax statutory rate | 21.0 | % | | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal income tax | 3.9 | % | | | 4.0 | % | | 3.8 | % | | (1.6) | % |
| Non-deductible expenses | (4.6) | % | | | 0.7 | % | | 0.4 | % | | (0.9) | % |
| Foreign tax and other credits | 8.9 | % | | | (0.2) | % | | (1.6) | % | | 0.7 | % |
| Global intangible low-taxed income | (8.7) | % | | | — | % | | 0.9 | % | | (0.9) | % |
| Goodwill impairment | — | % | | | — | % | | — | % | | (19.9) | % |
| Other | (1.3) | % | | | — | % | | 1.7 | % | | 0.4 | % |
| Effective tax rate | 19.2 | % | | | 25.5 | % | | 26.2 | % | | (1.2) | % |
The net deferred income tax liability consists of the following:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31,
2022 | | | December 31,
2021 |
| Deferred tax assets: | | | | |
| Inventory obsolescence | $ | 9,678 | | | | $ | 4,363 | |
| Allowance for credit losses | 3,341 | | | | 2,511 | |
| Accrued and deferred compensation | 20,942 | | | | 13,136 | |
| Accrued insurance liability | 9,268 | | | | 7,895 | |
| Net operating loss and tax credit carryover | 27,211 | | | | 41,732 | |
| Defined benefit plans | 2,221 | | | | 1,148 | |
| Leases | 84,144 | | | | 72,812 | |
| Warranty liabilities | 42,843 | | | | 44,925 | |
| Debt | — | | | | 5,713 | |
| Other | 55,493 | | | | 46,922 | |
| Total deferred income tax assets | 255,141 | | | | 241,157 | |
| Valuation allowance | (3,158) | | | | (15,634) | |
| Net deferred income tax assets | 251,983 | | | | 225,523 | |
| | | | |
| Deferred income tax liabilities: | | | | |
| Intangible assets | (573,826) | | | | (310,598) | |
| Property-related items | (90,042) | | | | (78,132) | |
| Stock basis | (12,680) | | | | (12,733) | |
| Leases | (84,203) | | | | (72,098) | |
| Debt | (103,671) | | | | — | |
| Other | (38,612) | | | | (2,296) | |
| Total deferred income tax liabilities | (903,034) | | | | (475,857) | |
| Total deferred income tax liability, net | $ | (651,051) | | | | $ | (250,334) | |
The Company carries out its business operations mainly through legal entities in the U.S., Canada and Mexico where we are subject to U.S., state and foreign tax laws. We are subject to income tax audits in multiple jurisdictions.
As of December 31, 2022, the $27.2 million net operating loss carryforward included $15.4 million for U.S federal losses, $11.2 million for U.S. state losses, and $0.6 million for foreign losses. Federal and foreign net operating losses will begin to expire in 2029, if unused, and state operating losses began to expire in 2022, if unused. There are limitations on the utilization of certain net operating losses.
Valuation allowance
The following table sets forth the changes in the valuation allowance on deferred taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
Beginning balance(1) | $ | 3,006 | | | | $ | 15,634 | | | $ | 11,996 | | | $ | 10,347 | |
| Additions (reductions) | 152 | | | | (3,004) | | | 3,638 | | | 1,649 | |
| Ending balance | $ | 3,158 | | | | $ | 12,630 | | | $ | 15,634 | | | $ | 11,996 | |
(1) In connection with the Merger, the beginning balance for the Successor period reflects acquisition-related adjustments of $9.6 million.
Uncertain tax positions
The following table sets forth the changes in unrecognized tax benefits (excluding interest and penalties):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Beginning balance | $ | 14,928 | | | | $ | 14,845 | | | $ | 9,403 | | | $ | 10,107 | |
| Additions based on tax positions related to current year | 232 | | | | — | | | 6,037 | | | 194 | |
| Additions (reductions) for tax positions of prior years | 5 | | | | 83 | | | 15 | | | (39) | |
| Reductions resulting from expiration of statute of limitations | (409) | | | | — | | | (610) | | | (859) | |
| Ending balance | $ | 14,756 | | | | $ | 14,928 | | | $ | 14,845 | | | $ | 9,403 | |
Despite the Company’s expectation that its tax return positions are consistent with applicable tax laws, the Company understands that certain positions could be challenged by taxing authorities. The Company’s tax liability reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These allowances have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest and penalties applicable to both permanent and temporary differences. The tax allowances 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.
As of December 31, 2022, the reserve was $18.0 million, which includes interest and penalties of $3.3 million and is recorded in other long-term liabilities in the accompanying Consolidated Balance Sheets. Of this amount, $14.7 million, if recognized would have an impact on the Company's effective tax rate. Interest and penalties were $0.2 million for the period from July 25, 2022 through December 31, 2022, $0.6 million for the period from January 1, 2022 through July 24, 2022, $0.2 million for 2021 and $0.3 million for 2020.The Company has elected to treat interest and penalties on unrecognized tax benefits as income tax expense in its Consolidated Statement of (Loss) Income.
The Company anticipates that approximately $2.6 million of unrecognized tax benefits will be reversed during the next twelve months due to lapsing statute of limitations.
Note 14 — Fair Value of Financial Instruments and Fair Value Measurements
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of December 31, 2022 and 2021 because of the relatively short maturities of these instruments.
The Company’s has short-term investments in a deferred compensation plan, in which the investment funds are comprised primarily of debt and equity securities, the value of which is recorded at market price. As of December 31, 2022, the fair value of the short-term investments was $1.7 million, of which $1.6 million and $0.1 million were based on Level 1 and Level 2 inputs and is included in other current assets in the Consolidated Balance Sheets. The offsetting deferred compensation liability is included within employee-related liabilities in the Consolidated Balance Sheets.
The carrying amounts of the indebtedness under the ABL Facility, ABL FILO Facility, and Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. The fair values of the term loan facilities were based on recent trading activities of comparable market instruments, which are Level 2 inputs and the fair values of the senior notes were based on quoted prices in active markets for the identical liabilities, which are Level 1 inputs. Interest rate swaps are classified within Level 2 of the fair value hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Note 15 — Accumulated Other Comprehensive (Loss) Income
The following tables set forth the change in accumulated other comprehensive (loss) income attributable to the Company by each component of accumulated other comprehensive (loss) income, net of applicable income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Unrealized (Loss) Gain on Derivative Instruments | | Unrecognized (Loss) Gain on Retirement Benefits | | Changes in Retirement Related Benefit Plans from Divestitures | | Total Accumulated Other Comprehensive (Loss) Income |
| Balance, December 31, 2020 (Predecessor) | $ | 16,147 | | | $ | (58,625) | | | $ | (9,039) | | | $ | — | | | $ | (51,517) | |
| Other comprehensive income | 6,594 | | | 35,218 | | | 4,093 | | | — | | | 45,905 | |
| Balance, December 31, 2021 (Predecessor) | $ | 22,741 | | | $ | (23,407) | | | $ | (4,946) | | | $ | — | | | $ | (5,612) | |
| | | | | | | | | |
| Foreign Currency Translation Adjustment | | Unrealized (Loss) Gain on Derivative Instruments | | Unrecognized (Loss) Gain on Retirement Benefits | | Changes in Retirement Related Benefit Plans from Divestitures | | Total Accumulated Other Comprehensive (Loss) Income |
| Balance, December 31, 2021 (Predecessor) | $ | 22,741 | | | $ | (23,407) | | | $ | (4,946) | | | $ | — | | | $ | (5,612) | |
| Other comprehensive (loss) income | (1,367) | | | 78,720 | | | — | | | (1,122) | | | 76,231 | |
| Balance, July 24, 2022 (Predecessor) | $ | 21,374 | | | $ | 55,313 | | | $ | (4,946) | | | $ | (1,122) | | | $ | 70,619 | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, July 25, 2022 (Successor) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Other comprehensive (loss) income | (6,789) | | | 40,962 | | | 336 | | | — | | | 34,509 | |
| Balance, December 31, 2022 (Successor) | $ | (6,789) | | | $ | 40,962 | | | $ | 336 | | | $ | — | | | $ | 34,509 | |
Note 16 — Reportable Segment and Geographical Information
The Company is organized in three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions, which operate principally in the U.S. with limited operations in Canada.
•The Aperture Solutions reportable segment offers a broad line of windows and doors at multiple price-points for residential new construction and repair and remodel end markets in the U.S. and Canada. Its main products include vinyl, aluminum, wood-composite and aluminum clad-wood windows and patio doors, as well as steel, wood-composite, and fiberglass entry doors.
•The Surface Solutions reportable segment offers a broad suite of surface solutions products and accessories at multiple price-points for the residential new construction and repair and remodel end markets as well as stone installation services. Its main products include vinyl siding and accessories, cellular polyvinyl chloride trim, vinyl fencing and railing, stone veneer and gutter protection products.
•The Shelter Solutions reportable segment designs, engineers, manufactures and distributes extensive lines of metal products for the low-rise commercial construction market under multiple brand names and through a nationwide network of manufacturing plants and distribution centers. The Company defines low-rise commercial construction as building applications of up to five stories.
Management monitors the operations results of its reportable segments separately for purposes of making decisions about resources and evaluating performance. Management evaluates performance on the basis of segment earnings before interest, income taxes, depreciation and amortization (“Adjusted reportable segment EBITDA”).
Corporate operating expenses are not allocated to reportable segments. Corporate and Other consists specifically of corporate operating expenses that are generally not allocated to reportable segments, related-party management fees, and other items that are not assigned or allocated to reportable segments. Any intercompany revenues or expenses are eliminated in consolidation.
The following table sets forth financial data by reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | | Year Ended
December 31,
2020 |
| Net sales: | | | | | | | | | |
| Aperture Solutions | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,322,277 | | | | $ | 1,889,625 | |
| Surface Solutions | 592,449 | | | | 839,130 | | | 1,364,080 | | | | 1,141,946 | |
| Shelter Solutions | 905,288 | | | | 1,253,335 | | | 1,896,780 | | | | 1,585,798 | |
| Total net sales | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | | | | $ | 4,617,369 | |
| Adjusted reportable segment EBITDA: | | | | | | | | | |
| Aperture Solutions | $ | 149,433 | | | | $ | 202,682 | | | $ | 239,491 | | | | $ | 233,716 | |
| Surface Solutions | 57,331 | | | | 143,880 | | | 265,671 | | | | 241,182 | |
| Shelter Solutions | 177,537 | | | | 209,156 | | | 323,533 | | | | 234,560 | |
| Total reportable adjusted segment EBITDA | 384,301 | | | | 555,718 | | | 828,695 | | | | 709,458 | |
| Corporate and Other | (172,331) | | | | 331,996 | | | 601,451 | | | | (691,362) | |
| Depreciation and amortization | (130,153) | | | | (166,177) | | | (292,901) | | | | (284,602) | |
| Interest expense | (157,191) | | | | (101,078) | | | (191,301) | | | | (213,610) | |
| Foreign exchange (loss) gain | (4,809) | | | | 686 | | | (3,749) | | | | 1,068 | |
| Gain (loss) on extinguishment of debt | 474 | | | | 28,354 | | | (42,234) | | | | — | |
| Other income, net | 1,140 | | | | 101 | | | 1,866 | | | | 1,833 | |
| Loss (income) before income taxes | $ | (78,569) | | | | $ | 649,600 | | | $ | 901,827 | | | | $ | (477,215) | |
| | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | |
| Aperture Solutions | $ | 64,348 | | | | $ | 79,816 | | | $ | 134,626 | | | | $ | 121,519 | |
| Surface Solutions | 52,621 | | | | 65,225 | | | 116,660 | | | | 113,737 | |
| Shelter Solutions | 10,291 | | | | 18,016 | | | 36,282 | | | | 45,213 | |
| Corporate | 2,893 | | | | 3,120 | | | 5,333 | | | | 4,133 | |
| Total depreciation and amortization expense | $ | 130,153 | | | | $ | 166,177 | | | $ | 292,901 | | | | $ | 284,602 | |
| Capital expenditures: | | | | | | | | | |
| Aperture Solutions | $ | 43,741 | | | | $ | 22,935 | | | $ | 49,001 | | | | $ | 22,197 | |
| Surface Solutions | 13,470 | | | | 17,304 | | | 33,198 | | | | 28,558 | |
| Shelter Solutions | 28,909 | | | | 16,153 | | | 16,934 | | | | 26,833 | |
| Corporate | 11,888 | | | | 8,456 | | | 15,582 | | | | 4,263 | |
| Total capital expenditures | $ | 98,008 | | | | $ | 64,848 | | | $ | 114,715 | | | | $ | 81,851 | |
| | | | | | | | | |
| | | | | | Successor | | | Predecessor |
| | | | | | December 31,
2022 | | | December 31,
2021 |
| Property, plant and equipment, net: | | | | | | | | | |
| Aperture Solutions | | | | | | $ | 273,709 | | | | $ | 251,627 | |
| Surface Solutions | | | | | | 167,096 | | | | 155,346 | |
| Shelter Solutions | | | | | | 139,382 | | | | 174,440 | |
| Corporate | | | | | | 37,877 | | | | 30,882 | |
| Total property, plant and equipment, net | | | | | | $ | 618,064 | | | | $ | 612,295 | |
| Total assets: | | | | | | | | | |
| Aperture Solutions | | | | | | $ | 2,153,378 | | | | $ | 2,223,098 | |
| Surface Solutions | | | | | | 2,099,244 | | | | 2,060,275 | |
| Shelter Solutions | | | | | | 973,718 | | | | 1,073,264 | |
| Corporate | | | | | | 1,967,310 | | | | 470,823 | |
| Total assets | | | | | | $ | 7,193,650 | | | | $ | 5,827,460 | |
The following table sets forth net sales disaggregated by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Aperture Solutions: | | | | | | | | |
| Vinyl windows | $ | 1,178,609 | | | | $ | 1,542,525 | | | $ | 2,190,887 | | | $ | 1,763,565 | |
| Aluminum windows | 37,653 | | | | 55,078 | | | 85,735 | | | 74,672 | |
| Other | 30,149 | | | | 46,016 | | | 45,655 | | | 51,388 | |
| Total | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,322,277 | | | $ | 1,889,625 | |
| | | | | | | | |
| Surface Solutions: | | | | | | | | |
Vinyl siding(1) | $ | 283,298 | | | | $ | 415,534 | | | $ | 667,284 | | | $ | 523,724 | |
| Metal | 136,851 | | | | 185,097 | | | 293,427 | | | 255,267 | |
| Injection molded | 25,153 | | | | 41,841 | | | 75,361 | | | 66,672 | |
| Stone | 42,706 | | | | 51,904 | | | 87,948 | | | 86,457 | |
| Stone veneer installation and other | 104,441 | | | | 144,754 | | | 240,060 | | | 209,826 | |
| Total | $ | 592,449 | | | | $ | 839,130 | | | $ | 1,364,080 | | | $ | 1,141,946 | |
| | | | | | | | |
| Shelter Solutions: | | | | | | | | |
Metal building products(2) | $ | 905,288 | | | | $ | 1,140,259 | | | $ | 1,473,662 | | | $ | 1,107,733 | |
Insulated metal panels(3) | — | | | | — | | | 208,220 | | | 348,640 | |
Metal coil coating(4) | — | | | | 113,076 | | | 214,898 | | | 129,425 | |
| Total | $ | 905,288 | | | | $ | 1,253,335 | | | $ | 1,896,780 | | | $ | 1,585,798 | |
| | | | | | | | |
| Total net sales | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | | | $ | 4,617,369 | |
(1)Includes the results of Prime Windows as of April 2021 and Cascade Windows as of August 2021.
(2)Includes the results of UCC as of December 2021. Excludes the results of the divested roll-up sheet doors business from August 2021.
(3)Excludes the results of the divested insulated metal panels business from August 2021.
(4)Excludes the results of the divested coil coatings business from June 2022.
The following tables set forth financial data attributable to various geographic regions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | | |
| Successor | | | Predecessor |
| July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | | Year Ended
December 31,
2020 |
| Total sales: | | | | | | | | | |
| U.S. | $ | 2,537,101 | | | | $ | 3,466,127 | | | $ | 5,132,085 | | | | $ | 4,304,559 | |
| Canada | 199,466 | | | | 261,796 | | | 422,867 | | | | 305,780 | |
| All other | 7,581 | | | | 8,161 | | | 28,185 | | | | 7,030 | |
| Total net sales | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | | | | $ | 4,617,369 | |
| | | | | | | | | |
| | | | | | Successor | | | Predecessor |
| | | | | | December 31,
2022 | | | December 31,
2021 |
| Long-lived assets: | | | | | | | | | |
| U.S. | | | | | | $ | 891,122 | | | | $ | 842,158 | |
| Canada | | | | | | 81,516 | | | | 81,281 | |
| All other | | | | | | 10,978 | | | | 11,464 | |
| Total long-lived assets | | | | | | $ | 983,616 | | | | $ | 934,903 | |
Sales are determined based on customers’ requested shipment location. Long-lived assets presented above include property, plant and equipment, net and lease right-of-use assets.
Note 17 — Commitments and Contingencies
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company may become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Environmental
The Company’s operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of 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 impact the Company's current and future operations.
The Company believes it is in material compliance with all applicable laws and regulations and has recorded a liability of $8.8 million at December 31, 2022 and $8.8 million at December 31, 2021.
Litigation
The Company is a party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company is also included in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines or penalties and other costs in substantial amounts and are described below.
Stockholder Litigation
In November 2018, Gary D. Voigt, an individual common stockholder of Cornerstone Building Brands, file a putative class-action complaint against CD&R, Clayton, Dubilier & Rice Fund VIII, L.P. (together, the “CD&R Defendants”), and certain directors of Cornerstone Building Brands (collectively, the “Defendants”) in the Delaware Court of Chancery. 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. The complaint, as amended, asserted claims for breach of fiduciary duty and unjust enrichment against the CD&R Defendants, and for breach of fiduciary duty against twelve director defendants in connection with the Ply Gem merger. The plaintiff sought damages in an amount to be determined at trial.
In August 2021, the parties filed a Stipulation of Compromise and Settlement (“Stipulation”) with the Court setting forth their agreement to settle the litigation. Under the Stipulation, as approved by the Court in January 2022, the defendants’ insurers paid $100.0 million and $23.5 million of this amount was paid to plaintiff’s counsel. The Company received cash settlement proceeds of $76.5 million in March 2022 and recognized a gain on legal settlements in the Consolidated Statements of (Loss) Income.
In January 2023, purported former stockholders filed two separate complaints challenging the fairness of the CD&R Merger. The complaints are captioned Firefighters’ Pension System of the City of Kansas City, Missouri Trust and Gary D. Voigt v. Affeldt et al., C.A. No. 2023-0091-JTL (Del. Ch.) and Whitebark Value Partners LP and Robert Garfield v. Clayton Dubilier & Rice, LLC et al., C.A. No. 2023-0092-JTL (Del. Ch.). In both complaints, the plaintiffs allege that CD&R and its affiliates controlled the Company prior to the transaction and that certain directors and officers of the Company, as well as CD&R and its affiliates, breached their fiduciary duties and engaged in conduct resulting in a sale of the Cornerstone Building Brands public stockholders’ shares to CD&R at an unfair price. The plaintiffs seek unspecified monetary damages, attorneys’ fees, expenses, and costs. The Company does not believe these claims have merit and intend to vigorously defend against them. The Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. The Company does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on its financial condition, although the outcome could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.
Note 18 — Earnings Per Common Share
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted income per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted income per common share is as follows:
| | | | | | | | | | | | | | | | | |
| Predecessor |
| January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
Numerator for Basic and Diluted Earnings Per Common Share: | | | | | |
| Net income (loss) applicable to common shares | $ | 480,211 | | | $ | 658,044 | | | $ | (482,778) | |
Denominator for Basic and Diluted Earnings Per Common Share: | | | | | |
| Weighted average basic number of common shares outstanding | 127,316 | | | 126,058 | | | 125,562 | |
| Common stock equivalents: | | | | | |
| Employee stock options | 1,578 | | | 737 | | | — | |
| Weighted average diluted number of common shares outstanding | 128,894 | | | 126,795 | | | 125,562 | |
| | | | | |
| Basic earnings (loss) per common share | $ | 3.77 | | | $ | 5.22 | | | $ | (3.84) | |
| Diluted earnings (loss) per common share | $ | 3.73 | | | $ | 5.19 | | | $ | (3.84) | |
| | | | | |
Incentive Plan securities excluded from dilution(1) | 30 | | 275 | | 2,559 |
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
The Company calculates earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units related to our Incentive Plan from the numerator and excludes the dilutive impact of those shares from the denominator. Awards subject to the achievement of performance conditions or market conditions for which such conditions had been met at the end of any of the periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
Earnings per common share is not presented for the Successor period as the Company’s common stock is no longer publicly traded either on a stock exchange or in the over-the-counter market.
Note 19 — Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information and non-cash investing and financing activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | |
| | Successor | | | Predecessor |
| | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24,
2022 | | Year Ended
December 31,
2021 | | Year Ended
December 31,
2020 |
| Supplemental cash flow information: | | | | | | | | |
| Interest paid, net of amounts capitalized | $ | 73,726 | | | | $ | 103,074 | | | $ | 178,330 | | | $ | 196,770 | |
| Income taxes paid (refunded) | $ | 187,777 | | | | $ | 56,243 | | | $ | 267,399 | | | $ | (3,316) | |
| | | | | | | | |
| Supplemental non-cash investing and financing activities — | | | | | | | | |
| Pushdown fair value adjustments | $ | 1,522,432 | | | | $ | — | | | $ | — | | | $ | — | |