UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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| (Mark One) |
☒ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212023
or | | | | | |
☐o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-14315
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Cornerstone Building Brands, Inc.
(Exact name of registrant as specified in its charter)
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| | | | | |
| Delaware | 76-0127701 |
(State or other jurisdiction of
incorporation or organization)
| (I.R.S. Employer
Identification No.)
|
| | | | | | | | | | | | | | |
| 5020 Weston Parkway | Suite 400 | Cary | NC | 27513 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (866) 419-0042
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Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value | | CNR | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesAct. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YesAct. Yes oý No ýo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesdays. Yes ýo No oý
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes. Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ýo | Accelerated filer | ☐o |
| Non-accelerated filer | ¨ý (Do not check if a smaller reporting company)
| Smaller reporting company | ☐o |
| | Emerging growth company | ☐o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ý
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ☐¨ No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on July 3, 2021 was $966,794,672, which aggregate market value was calculated using the closing sales price reported by the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number ofThere are no longer publicly traded shares of common stock of the registrant outstanding on February 22, 2022 was 127,001,002.Cornerstone Building Brands, Inc.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual Report is incorporated by reference from the registrant’s definitive proxy statement for its 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of December 31, 2021.
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This Annual Report includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will,” “target” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. These risks, uncertainties, and other factors include, but are not limited to:
•the outcome of negotiations with and any definitive agreement entered into with respect to the recent offer received from Clayton, Dubilier & Rice, LLC (“CD&R”) to purchase all of the shares of the Company’s common stock that CD&R does not already own and whether any transaction will be consummated in connection therewith;
•industry cyclicality;
•seasonality of the business and adverse weather conditions;
•challenging economicChallenging macroeconomic conditions affecting the residential, non-residentialcommercial and repair and remodeling construction industry and markets;markets, including increasing interest rates, and demand in new construction and repair and remodeling;
•commodityCommodity price volatility and/or limited availability of raw materials, including steel, polyvinyl chloride (“PVC”) resin, glass, aluminum, and steelglass due to supply chain disruptions;
•Increases in the macroeconomic inflationary environment and our ability to react accordingly;
•Our ability to identify and develop relationships with a sufficient number of qualified suppliers to mitigate risk in the event a significant supplier experiences a significant production or supply chain interruption;
•Seasonality of the business and adverse weather conditions;
•The increasing difficulty of consumers and builders in obtaining credit or financing;
•Our ability to successfully implement operational efficiency initiatives, including to increase automation and mitigate increases in the macroeconomic inflationary environment;our manufacturing costs ;
•Our ability to successfully achieve price increases to offset cost increases;
•abilityAbility to successfully implement operational efficiency initiatives, including automation;compete effectively against competitors;
•Our ability to successfully integrate our acquired businesses;businesses and to realize anticipated benefits;
•Our ability to attractemploy, train and retain employees, including through various initiatives and actions;
•volatility in the United States (“U.S.”) and international economies and in the credit markets;
•the severity, duration and spread of the COVID-19 pandemic, as well as actions that may be taken by the Company or governmental authorities to contain the COVID-19 pandemic or to treat its impact;
•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•our ability to retain and replace keyqualified personnel;
•enforcement and obsolescence of our intellectual property rights;
•costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
•competitive activity and pricing pressure in our industry;
•our ability to make strategic acquisitions accretive to earnings and dispositions at favorable prices and terms;
•our ability to fund acquisitions using available liquidity;
•our ability to carry out our restructuring plans and to fully realize the expected cost savings;
•global climate change, including legal, regulatory or market responses thereto;
•breaches of our information system security measures;
•damage to our computer infrastructure and software systems;
•necessary maintenance or replacements to our enterprise resource planning technologies;
•potential personal injury, property damage or product liability claims or other types of litigation;
•compliance with certain laws related to our international business operations;
•increasesIncreases in labor costs, labor market pressures, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
•significantIncreases in energy costs;
•Increases in freight and transportation costs;
•Volatility in the United States (“U.S.”) and international economies and in the credit markets;
•An impairment of our goodwill or intangible assets;
•Our ability to successfully develop new products or improve existing products;
•Enforcement and obsolescence of our intellectual property rights;
•Costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
•Our ability to make strategic acquisitions accretive to earnings and dispositions at favorable prices and terms;
•Our ability to fund operations, provide increased working capital necessary to support our strategy and acquisitions using available liquidity;
•Global climate change, and compliance with new or changed laws or regulations relating to environmental, social and governance (“ESG”);
•Breaches of our information system security measures;
•Damage to our computer infrastructure and software systems, as well as issues relating to the incorporation of artificial intelligence solutions into our systems;
•Necessary maintenance or replacements to our enterprise resource planning technologies;
•Potential personal injury, property damage or product liability claims or other types of litigation, including stockholder litigation related to the Merger (as defined herein);
•Compliance with certain laws related to our international business operations;
•Significant changes in factors and assumptions used to measure certain of our defined benefit plan obligations and the effect of actual investment returns on pension assets;
•ability to compete effectively against competitors with substitutable products;
•additionalAdditional costs from new regulations which relate to the utilization or manufacturing of our products or services, including changes in building codes and standards;
•our ability to realize the anticipated benefits of acquisitionsIncreases in tariffs or import and dispositions and to use the proceeds from dispositions;trade restrictions;
•volatilityOur controlling stockholder’s interests differing from the interests of the Company’s stock price;holders of our indebtedness;
•substantial governance and other rights held by the Investors;
•the effect on our common stock price caused by transactions engaged in by the Investors, our directors or executives;
•ourOur substantial indebtedness and our ability to incur substantially more indebtedness;
•limitationsLimitations that our debt agreements place on our ability to engage in certain business and financial transactions;
•ourOur ability to obtain financing on acceptable terms;
•downgradesExchange rate fluctuations;
•Downgrades of our credit ratings;
•theThe effect of increased interest rates on our ability to service our debt; and
•otherOther risks detailed under the caption “Risk Factors” in Part I, Item 1A of this report.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption “Risk Factors” in Item 1A of this report. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations unless the securities laws require us to do so.
PART I
Item 1. Business.
Recent Developments
On February 13, 2022, funds affiliated with Clayton Dubilier & Rice, LLC (“CD&R”) submitted a non-binding proposal to acquire all of the Company’s outstanding shares of common stock that CD&R does not already own for a purchase price of $24.65 in cash per share (the “CD&R Offer”).
The CD&R Offer stated that any transaction would be subject to (i) approval by a special committee (“Special Committee”) of our independent directors; and (ii) a vote in favor of the transaction by a majority of the voting power represented by the shares of our common stock owned by stockholders not affiliated with CD&R.
The board of directors of theOur Company (the “Board”) previously formed a Special Committee to evaluate and consider any potential or actual proposal from CD&R and any other alternative proposals or other strategic alternatives that may be available to the Company.
The CD&R Offer provides that CD&R reserves the right to withdraw or modify the CD&R Offer at any time and no legally binding obligation with respect to any transaction will exist unless and until mutually acceptable definitive documentation is executed and delivered by us and CD&R. There can be no assurance that the transaction proposed by CD&R or any related transaction will be completed or as to the terms of any such potential transaction, including with respect to pricing or timing.
Overview
Cornerstone Building Brands, Inc. (together(“Cornerstone Building Brands”, together with its subsidiaries, unless the context requires otherwise, the “Company,” “Cornerstone,” “we,” “us” or “our”) becameis a newly formedholding company on November 16, 2018 as the result of a merger (the “Merger”) between NCI Building Systems, Inc. (“NCI”) and Ply Gem Parent, LLC (“Ply Gem”) wherein Ply Gem was merged into NCI, incorporated in the State of Delaware, and 58,709,067 shares of NCI common stock, par value of $0.01 per share, were issued to the holders of all the equity interests in Ply Gem. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Merger with Ply Gem.”
Delaware. We are the largesta leading manufacturer of exterior building products in North America. The Company servesAmerica by sales and serve residential and commercial customers across both the new construction and repair &and remodel markets.
Our operations are organized as three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions. We believe our business model emphasizes a commitment to our customers and operational excellence, supported by strong sourcing, vertical integration and engineering & design capabilities across an extensive national manufacturing footprint, and leveraging robust distribution channel access. Substantially all of the Company’s operations and customers are in North America.have:
We believe we have one•One of the broadest product offerings with the most well-regarded brand portfolio and value-added services in our industry. We have established aOur total addressable market is diverse and expands across multiple geographies, end markets, channels and customers providing us with significant benefits.
•A leading market position in the majority of our product categories within thevarious North American exterior building products market,markets we serve, including, among others, vinyl windows, vinyl siding, stone veneer installation,installations, metal accessories, metal roofing/roofing and wall systems and a top-three position in engineered metal building systems. Our expansive product offering and brand portfolio enable us to better serve our customers across the multiple end markets in which we operate, and we have worked to position ourselves as a one-stop-shop solution for exterior building products.
We have an•An extensive coast-to-coast network of manufacturing, distribution and branch office facilities throughout North America. We operate 107 manufacturing facilities across the U.S. and Canada, supported by a network of 52 distribution and branch office facilities. Our manufacturing processes are
•A vertically integrated whichmanufacturing process that enables us to deliver better service and positions us to be a cost-advantaged manufacturer.
Our Business Strategy and Operating Model
Building our leading business and brand positions in attractive growth and return categories. We have leading brands that we believe provides costhave sustainable competitive advantages in the North America markets we serve. Our brands and competitive advantages. core value proposition are meaningful to our customers and the consumers they serve in their respective categories.
Build on Cornerstone Building Brands customer-centric culture and sales excellence.We continually investhave a long track record of developing and maintaining deep and lasting channel partnerships. Our customers look to us not only for our product quality, performance, and breath of our product offering, but for our service and responsiveness. We have the opportunity to grow organically and to lead in price by continuing to build on our customer-centric culture and amplifying differentiation through top-tier service and quality, as well as new product development. Using a highly collaborative selling approach, we intend to grow in attractive, highly fragmented market sectors that demand superior service and value the reliability and energy efficiency offered by our products.
Revitalizing our operating model. Our business segments are organized based on distinct product categories and the segment management is responsible for the business segment’s strategy and bottom line performance. While our business units operate with a certain degree of independence, they are built on a consistent and unifying framework of operating principles that we believe is critical to our strategic growth and margin improvement across our entire business. The framework builds on executing on operational, sales and growth excellence strategies.
We are focused on simplifying our business through rationalizing our brands and systems, as well as our manufacturing and distribution operations to drive efficiencies, enhance safety and improve our cost structure, including the introduction of various automation technologies.
warehouse footprint. We are mindful of the harmful effects of global climate changedelivering on making our processes more efficient and the contributionscost effective by making investments in automation; driving procurement savings; improving labor planning and productivity; as well as other improvements that leverage our scale to climate change from manufacturing operations and the end-use of building construction products. We have made and continue to make progress onstrengthen our work related to environmental, social and governance (“ESG”) matters.business.
We believe our vertically integrated, cost-advantaged manufacturing platform, along withframework allows each of our national scale, expansive product offerings, leading brands, multi-channel distribution network servicing long-tenured customersbusinesses to take advantage of available opportunities for revenue growth, pricing excellence and dedicatedmargin improvement, no matter the market environment. We believe this work will allow us achieve organic growth above market and to earn superior returns.
Driving value through talent. The Company has built a diverse and talented leadership team that is well positioned to execute on our transformation to a more aligned operating model. We believe that investing in our employees create significant competitive advantages relativeis a critical component of our business strategy. We endeavor to other exterior building products manufacturers.do this through talent acquisition, development, succession planning and fostering a diverse and inclusive workforce.
Our principal offices are located at 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513, and our telephone number is (866) 419-0042.
Enhancing returns and deploying our cash flow to high return opportunities. We file annual, quarterly and current reportscontinue to believe that investing in profitable, organic growth initiatives is our most attractive opportunity. We are intently focused on adhering to a disciplined capital allocation framework, which includes: (i) investing in our core business through capital expenditures and other informationorganic growth initiatives, and (ii) pursuing strategic acquisitions to broaden our portfolio and capabilities across the residential and commercial markets, with a focus on adjacent exterior building products and related services. As part of this framework, we may also restructure, reposition or divest non-core product lines or assets.
We focus our core business investments on high-return initiatives in large markets to build scale and drive efficiency and investments in growing markets that leverage our operational and distribution channel capabilities.
Acquisitions and divestitures. We regularly evaluate growth opportunities both through acquisitions and divestitures.
We have a history of making strategic acquisitions that meet strict criteria. We frequently engage in negotiations with potential sellers regarding the Securitiespossible purchase of businesses or assets that are strategic and Exchange Commission (the “SEC”).complementary to our existing operations. Such negotiations may include participation in public auctions involving a number of potential buyers or situations where we are the only party or one of a very limited number of potential buyers.
We also evaluate possible dispositions of assets or businesses when such investments are no longer core to our operations and do not fit into our long-term strategy.
Reportable Segments
We have three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions. Our annual reportsreportable segments compete based on Form 10-K, quarterly reports on Form 10-Qaesthetics, quality, price, service, product performance, breadth of product offerings and current reports on Form 8-K, alongresponsiveness to distributor, retailer and installer needs, as well as end-user customer preference. Our markets are very competitive. For the year ended December 31, 2023, our top 10 customers accounted for 39% of net sales, with any amendments to those reports, are available free one customer accounting for 13% of charge at our corporate website at http://www.cornerstonebuildingbrands.com as soon as practicable after such material is electronically filed with, or furnishednet sales. See Note 16 — Reportable Segment and Geographical Information in the Notes to the SEC. In addition, our website includes other items related to corporate governance matters, including our corporate governance guidelines, charters of various committees of our board of directors (the “Board of Directors”) and our code of conduct (the “Code of Conduct”) applicable to our employees, officers and directors. You may obtain copies of these documents, free of charge, from our corporate website. However, theConsolidated Financial Statements for information on our website is not incorporated by reference into this Form 10-K.reportable segments.
Aperture Solutions
Operating Segments
We design, engineer, manufacture, install residential products and market external building products through three operating segments: Windows, Siding, and Commercial. Our segments are exposed to the construction industry, whose net sales have historically fluctuated based on seasonality, with increases in the second and third fiscal quarters when construction activity is the most robust, which generally results in higher sales and profits in these periods. Working capital requirements have historically been greatest during the first half of our fiscal year mainly due to the timing of the buildup of inventory to support the heavier construction season. Fiscal years 2021 and 2020 had different working capital requirements as a result of the COVID-19 pandemic and its variants (collectively, the “COVID-19 pandemic”).
Windows Segment
In our WindowsAperture Solutions reportable segment we offeroffers a broad line of windows and doors at multiple price tiers for the residential new construction and residential repair and remodel end markets primarilyend-markets in the United StatesU.S. and Canada. Our principal products mainly include vinyl, aluminum wood and aluminum clad-wood windows and patio doors, as well as steel, wood and fiberglass entry doors. We frequently introduce new products to ourOur product portfolio, enabling further penetration of new distribution channelscategories and customers. We intend to complement this organic growth with continued strategic acquisitions in this segment, and we intend to drive margin improvement through focused price discipline and improved product mix, as well as continuous improvement and increased automation in our manufacturing operations.
The breadth of our product offering and our multiple price-point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing), end user markets (residential new construction and residential repair and remodel) and customer types (entry level, move-up and high-end). Our collection of leadingkey brands in thisthe Aperture Solutions reportable segment includes: Ply Gem, Simonton, Atrium, American Craftsman, Silver Line, Cascade Windows, Prime Windows, Great Lakes Window, and North Star.includes the following:
| | | | | | | | |
| Product Categories | | Brands |
| Windows | | Ply Gem®, Simonton®, Atrium®, American Craftsman®, Silver Line®, Cascade® Windows, Prime Windows, Great Lakes Windows®, North Star® and Bertha® |
| Doors | | Ply Gem®, Simonton®, Atrium®, American Craftsman®, Silver Line®, North Star® and Bertha® |
We sell our windows and doors through multiple distribution channels. Our residential new construction product lines are sold across a diversified customer base, which includes independent building products dealers, regional/dealers; regional and national lumberyardslumberyards; homebuilders and homebuilders.contractors and retail home centers. Our residential repair and remodel window products are primarily sold through one-step distributors; retail home centers; and independent home improvement dealers one-step distributors and retail home centers. Dealers typically market directly to homeowners or contractors in connection with remodeling requirements, while distributors focus primarily on selling to builders, contractors and local independent retailers. We have long-tenured customer relationships across the channels we serve in this segment, and we have beenare a key supplier to a majority of the nation’s largest homebuilders, which we have served through our distribution channels and through direct relationships for over 10 years.
In Canada, sales for residential new construction are predominantly made on a direct basis to homebuilders and contractors, while residential repair and remodel construction products are primarily sold not only through high-end independent dealers and regional lumberyards, but also directly to contractors and consumers through our supply-and-install services. We distribute Ply Gem Canada products through our distribution centers across Western Canada. In Ontario, we manufacture and distribute North Star branded windows and doors primarily for the premium-priced tier of the residential repair and remodel market.
InThe North American window and patio door market remains highly fragmented. The Aperture Solutions reportable segment’s main competitors include national brands such as Jeld-Wen, Pella, MI and Andersen, and regional brands such as PGT, United and Provia. Competitors in Canada include Jeld-Wen, All Weather Windows, Durabuilt and numerous regional brands. We generally compete on aesthetics, quality, price, service, product performance, breadth of product offerings and responsiveness to distributors, retailers and installers needs. We believe all of our Sidingproducts are competitively priced and that we are one of the few manufacturers to serve all end markets and price points on a national basis.
Surface Solutions
Our Surface Solutions reportable segment we offeroffers a broad suite of exterior cladding, fencingsurface solution products and stone products, other accessories products at multiple price tiers for the residential new construction and residential repair and remodel end markets andas well as stone installation that is sold directly to buildersservices. Our product categories and general contractors. Our principal products include vinyl siding and skirting, composite siding, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, fabricated aluminum gutter protection, PVC trim and moldings, window and door trim, injection molded designer accents such as shakes, shingles, shutters and vents, vinyl fencing and railing, and stone veneer.
We intend to drive organic growth in this segment through focused product innovation in siding and new product development in attractive adjacent product lines. We have successfully expanded our siding product offering to include innovative alternatives to our existing portfolio, including a luxury vinyl siding alternative and stone veneer. In stone veneer,
we have increased market share through our differentiated business model and national footprint with a strong network of architects, general contractors and builders.
We believe we are currently the largest manufacturer of vinyl siding in North America. We believe we are the second largest provider of stone veneer in North America, and the only turnkey installation provider of stone solutions on a national basis. Our collection of leadingkey brands in thisthe Surface Solution reportable segment includes the following:
| | | | | | | | |
| Product Categories | | | | | | | | | | | | | | | | | | | | | | | | | | Brands |
Siding & Accessoriesand accessories | | Ply Gem®, Mastic®, Mitten®, Variform®, MAC Métal Architectural® |
Cellular PVC Trimtrim | | Vinyl Fencing and Railing | | Stone Veneer | | Gutter ProtectionPly Gem® |
Ply GemVinyl fencing and railing | | Ply Gem | | Ply Gem | | Ply Gem | | Leaf ReliefGem® |
MasticStone veneer | | | | | | Ply Gem®, Environmental Stoneworks | | Snap TightStoneworks®, ClipStone®, Canyon Stone® |
Georgia-Pacific (licensed)Gutter & Gutter protection | | | | | | ClipStone | | Ply Gem®, Leaf Smart |
Mitten | | | | | | Canyon Stone | | Relief®, Leaf LogicRelief Snap Tight, Leaf Smart®, Leaf Logic® |
Variform | | | | | | | | |
We sell our siding, fencing and stoneSurface Solutions products mainly through multiple distribution channels, including wholesale and specialty distributors,distributors; retail home centers,centers; manufactured housing producers, homebuildersproducers; homebuilders; and contractors. In the specialty channel, weWe have an extensive network of independent dealers and distributors serving contractors and homebuilders nationwide. We believe we are well-positioned in thisthe specialty distributor channel with over 11,000 distribution locations and partnerships with many of the largest and most successful distributors in the industry.industry. In Canada, our complete offering of vinyl siding, accessories, trim, and moldings and attached stone veneers, along with in-house manufactured and third-party sourced complementary products are distributed nationwide, primarilymainly through our distribution centers and to retail home centers, lumberyards and contractors.
Commercial SegmentOur main vinyl siding competitors include CertainTeed, Alside, Westlake Royal Building Products and smaller regional competitors. Our aluminum accessories competitors include Rollex, Euramax, Gentek and other smaller regional competitors. Our vinyl fencing and railing competitors mainly include Barrette, U.S. Fence, Homeland Vinyl Products, Westech, Bufftech, and Azek. Our cellular PVC trim and moulding competitors mainly include Azek, Inteplast, KOMA, Versatex, Kleer, CertainTeed and Westlake Royal Building Products. Our stone veneer competitors mainly include Cultured Stone and Eldorado Stone, Coronado Stone Products and smaller regional competitors.
In our CommercialShelter Solutions
Our Shelter Solutions reportable segment we design, engineer, manufacturedesigns, engineers, manufactures and distributedistributes an extensive linesline of metalbuilding products for the low-rise non-residentialcommercial construction market under multiple brand names and through a nationwide network of manufacturing plants and distribution centers. Low-rise non-residential,
We believe we maintain leading positions across all of our key product categories in this reportable segment and we believe that our brands, many of which we generally define as building applications of up to five stories, typically lags housing cycleshave been in use for several decades, are well-recognized by 18 to 24 months.
our customers and industry associations. Our principal products in this reportable segment include:
Metal Building Systems – Metal building systems consist of engineered structural members and panels that are fabricated and roll-formed in a factory. These systems are custom designed and engineered to meet project requirements and then shipped to a construction site complete and ready for assembly with no additional field welding required. Engineered building systems manufacturers design an integrated system that meets applicable building code and designated end use requirements. These systems consist of primary structural framing, secondary structural members (purlins and girts) and metal roof and wall systems or conventional wall materials manufactured by others, such as masonry and concrete tilt-up panels.
Our metal building systems are sold predominately under the Metallic Building Company®, Ceco Building Systems, Star Building Systems®, Heritage Building Systems®, and Robertson Building Systems® brands.
Metal Roofing and Wall Systems – These products are used in new construction and in repair and retrofit applications for industrial, commercial, institutional, agricultural, rural and residential uses. Metal components are used in a wide variety of construction applications, including purlins and girts, roofing, standing seam roofing, walls, doors, trim and other parts of traditional buildings, as well as in architectural applications and engineered building systems.
Our residential metal roofing and wall systems are sold predominantly under key brands including Union Corrugating Company®, Reed’s Metals® and Metal Depots® brands. Our commercial metal components are sold predominately under key brands including MBCI® and ABC American Building Components® brands.
Our Retail Direct business is comprised of the largest coil coaters in the country,Heritage Building Systems®, Reed’s Metals® and Metal Coaters specializes in the toll processingDepots® brands. This business sells simple metal buildings including pole barns, cold formed buildings and low-complexity pre-engineered metal buildings, metal roofing and some third party produced products to retail customers through a network of customer-owned light gauge metal to deliver coil coating solutions throughout the United States. Metal Prep is one of the largest providers of pre-painted hot rolled steel in the United States and provides heavy gauge coil coating solutions to the construction industry.branch locations.
We believe weOur products offer a number of advantages over traditional construction alternatives, including shorter construction time, more efficient use of materials, lower construction costs, greater ease of expansion and lower maintenance costs. Our Commercial segment also provides metal coil coating services for low-rise non-residential construction applications, servicing both internal and external customers. We sell our products for both new construction and repair and remodel applications across a broad range of markets and customer solutions, including distribution &and warehouse facilities,facilities; manufacturing &and industrial facilities,facilities; as well as automotive, aviation, agricultural, healthcare, educational and retail facilities, among others.
We believe there is a meaningful opportunity to drive growth in this segment through select strategic acquisitions. We intend to drive margin improvement through focused price discipline and improved product mix, as well as continuous improvement initiatives and increased automation in our manufacturing operations.
We believe we maintain leading positions across all of our key product categories in this segment and we believe that our brands, many of which have been in use for several decades, are well-recognized by our customers and industry associations. Our collection of leading brands in this segment includes the following:
| | | | | | | | | | | | | | | | | | | | |
Metal Building Systems | | Components | | Metal Roofing | | Coil Coatings |
Metallic Building Systems | | MBCI | | Union Corrugating Company | | Metal Coaters |
Ceco Building Systems | | American Building Components | | Reed’s Metals | | Metal Prep |
Star Building Systems | | Metal Depots | | | | |
Heritage Building Systems | | | | | | |
Robertson Building Systems | | | | | | |
Sources and Availability of Raw Materials
The raw materials used in each of our segments are primarily commodities. Specifically, we use PVC resin, glass and aluminum in our residential products and steel in our non-residential products. The availability, quality, and costs of many of these commodities have fluctuated, and may continue to fluctuate, over time and are primarily sourced in North America. Generally, we have been able to pass price increases onto our customers. The results of operations can be impacted by a delay between the time of a raw material cost increase and our price capture.
Raw materials are generally available from numerous sources, and the number of suppliers is adequate to support production. The Company is not dependent on any single source of supply except for aluminum, which is sourced from a single supplier.
Competition
We are the largest manufacturer of exterior building products in North America and have established a leading market position for many of our core product categories including: vinyl windows; vinyl siding; metal accessories; metal roofing and wall systems; stone veneer, as the only turnkey installation provider of stone solutions on a national basis; and a leading position in engineered metal building systems.
We compete with a number of other domestic manufacturers. Our vinyl siding competitors include CertainTeed, Alside, Westlake Royal Building Products and smaller regional competitors. Our aluminum accessories competitors include Rollex, Euramax, Gentek and other smaller regional competitors. Our vinyl fencing and railing competitors including U.S. Fence, Homeland, Westech, Bufftech, and Azek. Our cellular PVC trim and moulding competitors include Azek, Inteplast, Kommerling (KOMA), Wolfpac (Versatex), Tapco (Kleer), CertainTeed and Westlake Royal Building Products. Our stone veneer competitors include Boral (Cultured Stone and Eldorado Stone), Coronado Stone and smaller regional competitors.
The window and patio door sector remains fragmented, comprised primarily of local and regional manufacturers with limited product offerings. The sector’s competitors in the United States include national brands, such as Jeld-Wen, Pella, MI Home Products and Andersen, and other regional brands, including Weathershield and others. Competitors in Canada include Jeld-Wen, All Weather, Durabuilt, Vinylbilt and numerous regional brands. We generally compete on service, product performance, product offering, sales and support. We believe all of our products are competitively priced and that we are one of the few manufacturers to serve all end markets and price points on a national basis.
We compete with a number of other manufacturers of metal components metal coil coaters, and engineered building systems for the building industry, includingwhich mainly include Nucor, Bluescope, Mueller, Kingspan,BlueScope, McElroy, Metal Sales and Central States. Many of these competitors operate on a regional basis. We have two primary nationwide competitors in the engineered building systems market and three primary nationwide competitors in the metal components market. However, theThe metal components market is more fragmented than the engineered building systems market.
Other Information
Manufacturing and Distribution
We believe the diversity of our revenue base across geographies, end markets, channels, customers, products, and raw materials provides usemploy a multichannel distribution strategy with significant benefits. We operate a broad165 manufacturing and distribution platform of 159warehouse facilities across North America, enablingAmerica. Our broad distribution network enables us to serve customers across all 50 U.S. states, and all 10 Canadian provinces thereby limiting our dependence on any one specific geographic region. Thisand other select international jurisdictions. Our integrated North American footprint also enables deeper relationships with large homebuilders and retail customers due toenhances our ability to serve them on a nationwide basis. We are also diversifiedand develop deeper customer relationships across both our residential new construction, residential repair and remodel and low-rise non-residential constructioncommercial end markets. We employ a multichannel distribution strategy with a broad product portfolio serving thousands of customers
across North America, including over 5,000 distribution partners, which serves to insulate our business model from any negative trends in any one particular channel, customer or product. The breadth of diversification across our business, from what we sell, to where we sell and to whom we sell, enables significant resiliency in our business model by insulating us from any negative trends or fluctuations in any single market segment, distribution channel, customer segment or product category.
Seasonality
Our sales volume is generally higher during our second and third quarters, which is historically the peak season for new construction and repair and remodeling in North America. Seasonal variations in our operational results may be impacted by inclement weather and other conditions. Working capital requirements have generally been greatest during the first half of our fiscal year due to the timing of the buildup of inventory to support the heavier construction season.
Raw Materials
We mainly use PVC resin, aluminum and glass in our residential products and steel in our commercial products. The availability, quality and costs of many of these commodities have fluctuated, and will continue to fluctuate over time. Raw materials are mainly sourced from North America, generally available from numerous sources and the number of suppliers is adequate to support production. We have typically been able to pass commodity price increases to our customers.
Intellectual Property
We possess a wide array of intellectual property rights across our segments, including patents, pending patent applications, trademarks, tradenames, licenses, proprietary technologyProduct innovation and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe our segments are dependent on any one of our trademarks, we believe that our trademarksbranding are important to the development and conductsuccess of our business as well asbusiness. In addition to the marketingbrand protection offered by our trademarks, patent protection helps distinguish our unique product features in the market by preventing copying and making it more difficult for competitors to benefit unfairly from our design innovation. We hold U.S. and foreign patents covering various features used in products sold within all of our products.
We licensereportable segments. Although each of our reportable segments relies on a number of trademarks, patents and patent groups that, in the Georgia-Pacificaggregate, provide important protections to the Company, no single trademark, for our Georgia-Pacific private label vinyl siding products sold through BlueLinx.patent or patent group is material to any of the Company’s reportable segments. We vigorously protect all of our intellectual property rights.
Backlog
Our Windows and Siding segments had a backlog of approximately $539.4 million and $172.8 million, respectively, at December 31, 2021. We expect to fill 100% of this backlog during 2022. Within our Commercial segment, the total backlog of orders for our products, primarily engineered building systems, was $666.9 million at December 31, 2021. We anticipate that approximately 24% of the backlog within the Commercial segment will extend beyond one year. Job orders included in backlog are generally cancelable by customers at any time for any reason; however, cancellation charges may be assessed. Occasionally, orders in the backlog are not completed and shipped for reasons that include changes in customer requirements and the inability of customers to obtain necessary financing or zoning variances.
Business Strategy
We are relentlessly committed to our customers and to creating great and sustainable building solutions that enable communities to grow and thrive. By focusing on operational excellence every day, we create a platform for future growth and invest in market-leading residential and commercial building brands. We play an essential role in our communities where people live, work and play to enable those communities to grow and thrive.
We have developed and continue to implement a well-defined business strategy focused on several primary elements:
Profitable Growth.The Company intends to expand into new and existing markets by leveraging its customer relationships and full portfolio of leading products. We believe that our customers look to the Company for quality products, dependable service and the national footprint required for large homebuilders and retail customers. We participate in the large exterior building products market and have established leading market positions in many of our core product categories. Given our broad market participation, our growth strategy is differentiated by being focused and targeted on market segments exhibiting favorable characteristics, industry positioning and growth outlook.
We believe we have a meaningful opportunity for organic growth through product line extension and new product development with innovation being a key pillar of our organic growth strategy. We also believe we have an opportunity to drive cross-selling of our products to deepen penetration, drive growth and maximize profitability across customer channels.
Using a highly collaborative selling approach, the Company intends to grow in attractive market sectors, emphasizing those spaces that are highly fragmented, demand high service and value the reliability and efficiency offered by the Company’s products.
In addition to driving organic growth, we believe that we have a meaningful opportunity to grow through acquisitions, in a manner that is both prudent and profitable.
Operational Excellence. Cornerstone Building Brands operates with a relentless drive for exceptional results and a passion for superior execution. The Cornerstone Production System (CPS) drives how we improve execution effectiveness and efficiency to deliver margin expansion across our business. Additionally, the Company embraces a continuous improvement culture that is charged with increasing efficiency, optimizing costs, eliminating waste, encouraging organizational agility and building greater brand equity to fuel growth and establish Cornerstone Building Brands as a “supplier of choice” for our customers. This requires the Company’s ongoing commitment to attract, retain and develop the best talent, a paramount focus on the safety of our employees, and a commitment to diversity, equity, and inclusion. This is particularly evident during periods of high risk, such as the COVID-19 pandemic, where we continue to drive our culture of safety and employee care through rapid and effective implementation of safety guidelines throughout our business. This also includes making investments in automation while maximizing quality within our manufacturing facilities, transforming the
way work gets done, and deploying capital in ways we believe will drive the greatest returns for our stockholders over the long-term.
The relentless focus on superior execution and our culture of continuous improvement create and protect our position as a cost-advantaged manufacturer with a highly variable and flexible cost structure and continue to favorably impact our financial results.
Disciplined Capital Allocation.The Company is intently focused on providing the highest returns for stockholders through its capital allocation framework, which includes: (1) investing in the Company’s core business through capital expenditures and other organic growth initiatives; (2) pursuing strategic acquisitions to broaden its portfolio and capabilities across the residential and commercial markets, with a focus on adjacent exterior building products and related services; and (3) targeting long-term net debt leverage of 2.0x to 2.5x. As part of this framework, the Company may also restructure, reposition or divest non-core product lines or assets.
We balance the investment in our core business by focusing on high-return initiatives supporting leading positions in large markets where we can build scale and drive efficiency as well as investments in growing markets that leverage operational and distribution channel capabilities. Our acquisition criteria are focused on opportunities that are highly strategic, synergistic and accretive, and we focus on well positioned businesses with strong financial returns. Overall, our capital allocation framework is balanced between a focus on debt repayment and opportunistic investment in high return initiatives.
Restructuring
We continue to execute on our plans to improve cost efficiency through the optimization of our combined manufacturing plant footprint and the elimination of certain fixed and indirect selling, general, and administrative (“SG&A”) costs. During the fiscal year ended December 31, 2021, we incurred restructuring charges of $26.2 million. See Note 6 — Restructuring in the notes to the consolidated financial statements for additional information.
Acquisitions & Divestitures
We have a history of making strategic acquisitions within our industry, and we regularly evaluate growth opportunities both through acquisitions and divestitures. We believe that there are opportunities for growth through acquisitions in the Windows, Siding and Commercial segments, and our goal is to supplement organic growth with opportunistic strategic acquisitions that meet our strict criteria.
Consistent with our growth strategy, we frequently engage in discussions with potential sellers regarding the possible purchase of businesses, assets, and operations that are strategic and complementary to our existing operations. Such acquisition efforts may involve participation by us in processes that have been made public, involve a number of potential buyers and are commonly referred to as “auction” processes, as well as situations in which we believe we are the only party or one of the very limited number of potential buyers in negotiations with the potential seller. These acquisition efforts often involve assets that, if acquired, would have a material effect on our financial condition and results of operations.
We also evaluate from time to time possible dispositions of assets or businesses when such assets or businesses are no longer core to our operations and do not fit into our long-term strategy.
Sustainability
Cornerstone Building Brands is uniquely positioned to make positive impacts on the communities we serve as we continue our journey to become North America’s premier manufacturer of exterior building solutions. To do so, we consider how we can increase manufacturing efficiencies, reduce environmental impacts, take care of our people, and uphold professional integrity and ethics in everything we do.
We recognize our responsibility as a provider of building solutions to communities across North America to incorporate sustainability into our products and business operations. Our business was formed by brands that have been making sustainability-focused decisions for several years, and now we are building on that foundation to challenge ourselves to do more. In 2021, we honored this commitment by establishing Board of Director oversight for ESG initiatives, hiring dedicated ESG leaders, creating an ESG Council, and completing an ESG materiality assessment. As we continue to develop an integrated strategy of financial growth and corporate responsibility for the future, we acknowledge that there is still much work to do as we take the next steps on our sustainability journey.
We believe that we can use our footprint for good and act as stewards of the environment. By addressing energy usage and operational environmental impacts, we seek to have a positive impact for both our stakeholders and the planet. We are committed to the well-being of our employees and the communities and customers we serve. We believe that our sustainable business practices provide positive social benefits to our people. Our highest priority is always the safety of our employees. We feel a responsibility not only to uphold product integrity and safety, but also to leverage innovation and stewardship to
make products that meet the needs of our customers and promote sustainability. We are committed to conducting business at the highest levels of ethics every day.
Environmental, Health, and Safety Matters
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of our employees and the end-users of our products; regulate the materials used in our products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could result in substantial fines or penalties, injunctive relief, consent orders, requirements to install pollution controls or other abatement equipment, or civil sanctions.
We could be held liable for costs to investigate, remediate, or otherwise address contamination at any real property we have ever owned, operated or used as a disposal site, or at other sites where we or predecessors may have released hazardous materials. We could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
Changes in or new interpretations of existing laws, regulations or enforcement policies, the discovery of previously unknown contamination or other environmental liabilities or obligations with respect to our products or business activities, or the imposition of new regulatory requirements for our facilities may lead to additional costs that could have an adverse effect on our business, financial condition or results of operations.
We do not believe that compliance with environmental, health and safety laws, including existing requirements to investigate and remediate contamination, will have a material adverse effect on our business, financial position, or manufacturing processes.
The following are representative environmental, health and safety requirements relating to our operations:
Air Emissions. Our operations are subject to the federal Clean Air Act and comparable state and foreign laws. These laws govern emissions of air pollutants from industrial stationary sources, such as our manufacturing facilities, and impose various permitting, air pollution control, emissions monitoring, recordkeeping and reporting requirements. Such laws may require us to obtain pre-approval for constructing or modifying our facilities in ways that have the potential to produce new or increased air emissions; obtain and comply with operating permits that limit air emissions or certain operating parameters, or employ best available control technologies to reduce or minimize emissions from our facilities. We may be required to purchase air pollution control equipment to comply with air emissions laws.
Greenhouse Gases. Efforts to mitigate the effects of global climate change has led to federal, state, and foreign legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions. While GHG regulations do not currently affect our facilities as they are insignificant sources, more stringent federal, regional, state, and foreign laws and regulations relating to global climate change and GHG emissions may be adopted. These laws and regulations could impact our facilities, raw material suppliers, the transportation and distribution of our products, and our customers’ businesses, which could reduce demand for our products or cause us to incur additional capital, operating or other costs. Until the timing, scope and extent of any future legislation or regulation becomes known, we cannot predict its effect on our business. In addition, global climate change may increase the frequency or intensity of extreme weather events, such as storms, floods, extreme temperatures and other events that could affect our facilities, raw material suppliers, the transportation and distribution of our products, and demand for our products.
Hazardous and Solid Industrial Waste. Our operations generate industrial solid wastes, including some hazardous wastes that are subject to the federal Resource Conservation and Recovery Act (“RCRA”) and comparable state and foreign laws. RCRA imposes requirements for the handling, storage, treatment, and disposal of hazardous waste. Industrial wastes we generate in our manufacturing processes, such as used chemicals, may be regulated as hazardous waste, although RCRA has provisions to exempt some of our wastes from classification as hazardous waste. However, our non-hazardous or exempted industrial wastes are still regulated under state law or the less stringent industrial solid waste requirements of RCRA.
RCRA Corrective Action Program. Certain facilities may be subject to the Corrective Action Program under the Solid Waste Disposal Act, as amended by RCRA, and the Hazardous and Solid Waste Amendments (“Corrective Action Program”). The Corrective Action Program is designed to ensure that certain facilities subject to RCRA have investigated and remediated releases of hazardous substances at their property.
MW Manufacturers Inc. (“MW”), a subsidiary of Ply Gem Industries, Inc., entered into a September 2011 Administrative Order on Consent with the U.S. Environmental Protection Agency (“EPA”) under the Corrective Action Program to address known releases of hazardous substances at MW’s Rocky Mount, Virginia property. A Phase I RCRA
Facility Investigation (“RFI”) was submitted to the Virginia Department of Environmental Quality (“VDEQ”) in December 2015, and a Phase II RFI and the Human Health Risk Assessment and Baseline Ecological Risk Assessment were submitted in October 2018. A Limited Corrective Measures Study based on the investigations was submitted to the VDEQ for review and approval in September 2019. Upon completion of a 30-day public comment period, the VDEQ issued its Final Decision and Response to Comments approving a final remedy in May 2021. The final remedy consists of continuing groundwater monitoring until the VDEQ’s corrective actions have been met; and implementing and complying with land use restrictions and institutional controls imposed by an environmental covenant. We have recorded a liability of $4.5 million for this MW site, of which $1.0 million is in other current liabilities and $3.5 million is in other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2021.
CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”, commonly known as Superfund), and comparable state and foreign laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for releases of hazardous substances into the environment. These include the current and past owners or operators of sites where hazardous substances were released, and companies that disposed or arranged for disposal of hazardous substances at off-site locations such as landfills. CERCLA authorizes the EPA and, in certain cases, third parties to take actions in response to threats to the public health and welfare or the environment and to seek to recover remediation costs from the responsible parties.
We currently own or lease, and historically owned or leased, numerous properties that have extensive histories of industrial operations. Hazardous substances may have been released on, under or from these properties, or on, under or from other locations where hazardous wastes have been disposed. Some of these properties have been owned or operated by third parties who may have released hazardous substances for which we could have liability. We could be required to investigate or remediate contaminated property, perform remedial closure activities, or assess and remediate volatile chemical vapors migrating from soil or groundwater into overlying buildings. Our liability for investigating and remediating contamination could be joint and several and could include damages for impacts to natural resources.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska, referred to as the PCE/TCE Northeast Contamination Site (“PCE/TCE Site”). Kroy Building Products, Inc. (“KBP”), a subsidiary of Ply Gem Industries, Inc., has been identified as a potentially responsible party at the site and has liability for investigation and remediation costs associated with the contamination. In May 2019, KBP and an unrelated respondent entered into an Administrative Settlement Agreement and Order on Consent with the EPA to conduct a Remedial Investigation/Feasibility Study (“RI/FS”) of the PCE/TCE Site. A final RI/FS Work Plan was approved by EPA in December 2019. Two phases of RI field sampling have been completed through May 2021 and a Monitoring Well Plan was approved by EPA in November 2021. We have recorded a liability of $4.4 million within other current liabilities on our consolidated balance sheet as of December 31, 2021. If necessary, we will adjust our remediation liability if the RI/FS scope materially changes or the EPA imposes additional investigative requirements. We may be able to recover a portion of costs incurred in connection with the PCE/TCE Site from other potentially responsible parties, though there is no assurance we would receive any funds.
Wastewater Discharges. Our operations are subject to the federal Water Pollution Control Act, also known as the Clean Water Act (“CWA”) and comparable state and foreign laws. These laws impose requirements and strict controls regarding the discharge of pollutants from industrial activity into waters of the United States. Such laws may require that we comply with stormwater runoff and wastewater discharge standards or obtain permits limiting our discharges of pollutants. Failure to comply with CWA requirements could subject us to monetary penalties, injunctions, restrictions on operations, and administrative or civil enforcement actions. We may be required to incur certain capital expenditures for wastewater discharge or stormwater runoff treatment technology to comply with wastewater permits and water quality standards.
Employee Health and Safety. We are subject to the Occupational Safety and Health Act (“OSHA”) and comparable state and foreign laws that regulate the protection of the health and safety of our workers. Among other things, we are required to maintain and make available to our employees, state and local government authorities, and others information about hazardous materials used or produced by our operations.
Zoning and Building Code Requirements
The engineered building systems and components we manufacture must meet zoning, building code and uplift requirements adopted by local governmental agencies. We believe that our products are in substantial compliance with applicable zoning, code and uplift requirements. Compliance does not have a material adverse effect on our business.
Research and Development Costs
Total expenditures for research and development were $13.4 million, $13.7 million and $14.2 million for fiscal years 2021, 2020 and 2019, respectively. We incur research and development costs to develop new products, improve existing products and improve safety factors of our products.
Human Capital Resources
As ofAt December 31, 2021,2023, we employed approximately 21,700 persons worldwide. Approximately 2,564more than 17,600 full-time and part-time employees (excluding contract workers), with 81% of our workforce composed of hourly production, manufacturing, shipping and customer service employees. Approximately 1,900 of employees worldwide are represented by various unionswork under collective bargaining agreements. Our current agreements which either are under negotiations or will expire in fiscal years 2022, 20232024, 2025 and 2024.2027.
At Cornerstone Building Brands, corporateCorporate stewardship is a responsibility that is deeply embedded in our long brand history. We believe our employees drive our business and our ability to effectively serve our customers and sustain our competitive position. We endeavor to create an environment that keeps our employees safe, treats them with dignity and respect and fosters a culture of performance. We do this through the programs summarized below, the objective and related risk of each is overseen by our Board of Directors or its committees.
Leadership, Talent Acquisition and Talent Management
Our talent strategyteam members are critical to our mission and success, and, as such, our goal is rootedto be an employer of choice in our Success Model,the communities in which we operate. Essential to this is built uponcreating a workplace that promotes our core values and shared mindsets and behaviors. These elements include our commitment to customer centricity, interconnectedness, and continuous improvement. We take great care in hiring, developing and retaining our team members to maximize their individual potential and our cumulative success.
To succeed in an ever-changing and competitive labor market, we have identified priorities we believe are critical to our success in attracting, motivating, developing, and retaining employees. These include among other things: (i) providing competitive compensation and benefit programs, (ii) emphasizing performance management and career development, (iii) promoting health and safety, and (iv) championing a diverse and inclusive work environment. Further information is available in our Environmental Social and Governance (“ESG”) report available on our website.
Compensation and Benefit Programs
We are committed to providing our employees with a competitive compensation package that rewards performance and achievement of safety, integrity, innovationdesired business results. Our compensation package consists of three primary benefits: pay (base pay and teamwork.
incentive programs), health and welfare benefits, and retirement contributions. Our talent philosophy dictatesprograms target the way we managemarket for competitiveness. We provide benefit programs with the goal of improving physical, mental, and financial wellness of our talent processesemployees throughout the lifetime. Some examples of this include base and variable pay, medical, dental, vision, life and accidental death and dismemberment insurance, paid time off and retirement savings plans. We analyze our compensation and benefit programs annually to ensure transparent, fair, inclusive,we remain competitive and differentiated treatment for all employeesmake changes as necessary.
Performance Management and candidates. We measure performance based upon both results achieved and the way in which results are achieved. Our Success Model reinforces the culture that we want to have at Cornerstone Building Brands. It highlights four key leadership elements and associated behaviors our employees must demonstrate to help us effectively lead at every level. The four elements are: Lead Inclusively, Drive Change, Win as One, and Make an Impact. Success Model behaviors, along with goal achievement, comprise a performance rating that is used in our pay for performance and talent review processes.
We measure performance based upon the results achieved and the way results are achieved. The Success Model is the reference point reinforcing the culture that we want to have at Cornerstone Building Brands. This performance rating is used in our pay for performance and talent review process. Our talent philosophy dictates the way we manage our talent processes to ensure transparent, fair, inclusive, and differentiated treatment for all employees and candidates.Career Development
Our leaders receive training on our three pillars of performance management, succession and talent planning, and learning and talent development. This creates the foundation for our leaders to support their teams to connect their work to our purpose, mission, values, and strategies of the Company, motivating and giving them a higher sense of purpose.
Our talent strategy is focused on having the right people with the right skills in the right places androles supporting a consistent and compelling employee experience. This ensures that we are able to exceed our customers’ expectations and allow our people to develop and increase their career opportunities. Our talent management process:
•Clearly defines roles and goals;
•Establishes clear-cut performance and behavior expectations;
•Focuses work in alignment with business strategy and company goals; and
•Creates consistent, structured processes to enable development and career growth, — including extensive curriculum and training programs.
We manage and measure our employee engagement with a view to gaining insight into our employees’ experiences, levels of workplace satisfaction, and feelings of engagement within the Company. We measure employee engagement and manager effectiveness at least annually through our global engagement survey and strive to increase our engagement scores year-over-year. To assist in this formal effort, managers are given direct access to their engagement results, share these results with their teams, and create measurable action plans. The connection with our Success Model creates an environment that makes us a talent magnet. Coresenior leadership team demonstrates their commitment to our talent management strategyengagement through transparent communications in town halls and leadership team meetings. Engagement is embracing all candidates, no matter their background, race, age or sexual orientation and identity, and delivering a transparent, fair and engaging experience acrossalso managed at the organization. We recruit, hire and train candidates using a process that is free from biases for or against any individual or group of candidates. Using technology and grass roots recruiting, we specifically target sources where candidates congregate, and we go to market with an employer brand that highlights the value we place on people and opinions from all walks of life.
Competitive Pay and Benefits
To attract and retain the best employees, we focus on providing competitive pay and benefits. Our programs target the market for competitiveness. We provide benefit programs with the goal of improving physical, mental and financial wellness of our employees throughout their lifetime. Some examples include base and variable pay, medical, dental, vision, life and accidental death and dismemberment insurance, paid time off, and retirement savings plans.
When designing our base pay compensation ranges, we perform market analyses to ensure ranges are current and our employees are advancing their earning potential. We also perform frequent compensation studies to assess market movement and competitive changes in local marketplaces. We continually review wages in all countries we operate to ensure we are fair, equitable, competitive and can attract and retain the best talent.
We also provide diverse benefit programs that are aligned with our values and focused on supporting employees and their families based on their unique needs. For example, our Employee Assistance Foundation assists employees in need of emergency financial support and is offered to all employees. We also offer a broad range of benefits to support ourlevel.
employees wanting to expand their families through adoption benefits, infertility treatment benefits, and paid time off to bond with their new families.
Employee Safety and Wellness
Cornerstone Building Brands is committed to safety as our highest priority. Safety is one of the Company’s core valuesvalues. We are committed to (i) providing training for our employees to perform their job tasks safely, (ii) developing and nothing is more important to us than providingmaintaining safety programs and initiatives with the purpose of eliminating all injuries, safety incidents and job-related illnesses and (iii) addressing all safety risks in a safe work environment.thorough and timely manner. We publicly disclose operational health and safety statistics on our rate of recordable injuries and our rate of lost workdays due to injury involving full-time and part-time employees, temporary employees and contractors.
Our response to the COVID-19 pandemic illustrated ouremployee safety and wellness programs are designed around global policies and standards and a commitment to safety. To supportcomplying with applicable laws within our manufacturing, service and install, and headquarter operations. We proactively implement management systems and procedures consistent with industry best practices to prevent employee health and safety risks and to create a strong safety culture and improve performance. We are committed to continuous improvement and continue to measure, refine, and improve on our performance. We educate and train our employees customersto help ensure compliance with our policies, standards, and communities, we took extraordinary measuresmanagement systems. We also have policies and investedprocedures in practicesplace to protectencourage employees to stop work to address at-risk conditions without threat of retaliation. Our management and reduce the riskBoard of spreading the virus. Our actions included additional cleaningDirectors regularly review our health and safety results and progress at Board of our facilities, staggering crews, incorporating visual cuesDirectors meetings to reinforce social distancing, providing face coverings and gloves, as well as implementing daily health validation at our manufacturing and office facilities.promote continuous improvement.
Diversity, Equity and Inclusion
Our Company’s Purpose is to positively contribute to the communities where we live, work, and play. ItThe success of our Company begins with our employees, a team comprised of many backgrounds, with each member adding a unique and valued contribution to the success of our organization. We value teamwork and work together to create a truly inclusive environment where each team member feels respected, valued and has access to opportunities and resources that enable them to be successful everyday. Our Diversity, Equity, and Inclusion (“DE&I”) promise supports our purpose, mission and core values to haveensure a work environment that is inclusive and equitable for all employees. This creates an environment of mutual respect where our diversity reflects the communities we serve.
Our Diversity, Equity & Inclusion Council (the “Council”) began with 12 key leaders who were selected based on capability, sphereAs part of influence, interests and their passion for creating an inclusive culture. In 2021,DE&I efforts, we added the chairs of eachsponsor Employee Resource Group to the Council, bringing our total Council to 20 members. The Council has a charter and an ongoing prioritized action plan to accelerate the adoption of DE&I in our processes to positively impact our culture. The Council’s responsibilities include defining metrics, setting targets, benchmarking, providing education and training, seeking employee feedback, and building engagement as well as evaluating the Company’s current initiatives with a DE&I context.
Groups. The Employee Resource Groups (“ERGs”) have expanded the network of advocates includinginclude members and allies of Women!, Unity, Pride,Women, Black, Hispanic, LGBTQ and Patriots. Each groupMilitary employees that are focused on activating and educating employees and accelerating our inclusive culture. The Company also has a core active group who meet monthlyDiversity Council which is responsible for setting priorities and the ERGs meet together once per quarter.initiatives that support an inclusive work environment.
Our success depends on valuing all individuals and leveraging our diverse talent. For more information
Environmental Matters
Sustainability
We are well positioned to make positive impacts on the topics abovecommunities we serve as we continue our journey to become North America’s premier manufacturer of exterior building solutions.
We recognize our responsibility as a provider of building solutions to communities across North America to incorporate sustainability into our products and our management ofbusiness operations. Our business is committed to prioritizing sustainability in decision making.
In 2023, we continued our human capital resources, please visitsustainability journey by establishing baselines for key sustainability metrics, implementing a SaaS application to operationalize our website at https://investors.cornerstonebuildingbrands.com.
Item 1A. Risk Factors.
Risks Related to the CD&R Offer
The transaction proposed by CD&R may not occur, may increase the volatility of the market price ofsustainability data and engaging our common stock and will result in certain costs and expenses.
On February 13, 2022, we received the CD&R Offer, a non-binding letter from CD&R proposing a transaction pursuant to which CD&R would purchase all outstanding shares of our common stock not owned by CD&R for a purchase price of $24.65 in cash per share.
The CD&R Offer provides that no legally binding obligationsupply chain with respect to any transaction will exist unlesssustainability specific initiatives. We also continued to focus on a climate-positive future through energy and until mutually acceptable definitive documentation is executedwater conservation, landfill diversion and delivered with respect thereto. There can be no assurance thatresponsible sourcing while acting as stewards of the transaction proposed by CD&R or any related transaction will be completed, or asenvironment. By addressing energy usage and operational environmental impacts, we seek to have a positive impact for both our stakeholders and the planet. We are committed to the termswell-being of our employees, our fence line communities and the customers we serve. We believe that our sustainable business practices provide positive societal benefits for our people and our communities.
As we continue to develop an integrated strategy of financial growth and corporate responsibility for the future, we acknowledge that there is still much work to do as we take the next steps on our sustainability journey. Our highest priority is always the safety of our employees. We are committed to conducting business at the highest levels of ethics every day.
Environment, Health and Safety Matters
Our operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of our employees and the end-users of our products; regulate the materials used in our products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any such potential transaction.conditions contained in environmental permits could result in substantial fines or penalties, injunctive relief, consent orders, requirements to install pollution controls or other abatement equipment, or civil sanctions.
The market price of our common stockWe could be held liable for costs to investigate, remediate, or otherwise address contamination at any real property we have ever owned, operated or used as a disposal site, or at other sites where we or predecessors may reflect various assumptions ashave released hazardous materials. We could incur fines, penalties or sanctions or be subject to whether the proposed transaction with CD&R will occur. Variations in the market price of our common stock may occurthird-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of changing assumptions regardingviolations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
Changes in or new interpretations of existing laws, regulations or enforcement policies, the proposed transaction, independentdiscovery of changes inpreviously unknown contamination or other environmental liabilities or obligations with respect to our products or business activities, or the imposition of new regulatory requirements for our facilities may lead to additional costs that could have an adverse effect on our business, financial condition or prospects or changes in general market or economic conditions. As a result, a definitive agreement regarding a transaction, or a failure to reach a definitive agreement regarding a transaction, could result in a significant change in the market priceresults of our common stock.operations.
We expectdo not believe that compliance with environmental, health and safety laws, including existing requirements to incur costs in connection with the consideration of the CD&R Offer, including costs ofinvestigate and remediate contamination, will have a material adverse effect on our business, financial position, or manufacturing processes.
The following are representative environmental, health and legal advisorssafety requirements relating to our operations:
Air Emissions. Our operations are subject to the Special Committee. Mergersfederal Clean Air Act and comparable state and foreign laws. These laws govern emissions of air pollutants from industrial stationary sources, such as our manufacturing facilities, and impose various permitting, air pollution control, emissions monitoring, recordkeeping and reporting requirements. Such laws may require us to obtain pre-approval for constructing or modifying our facilities in ways that have the one proposed in the CD&R Offer often attract litigationpotential to produce new or increased air emissions; obtain and the Companycomply with operating permits that limit air emissions or certain operating parameters, or employ best available control technologies to reduce or minimize emissions from our facilities. We may be required to expend additional resources defending such litigation. It is difficultpurchase air pollution control equipment to estimatecomply with air emissions laws.
Greenhouse Gases. Efforts to mitigate the aggregate amounteffects of such costs, althoughglobal climate change has led to federal, state and foreign legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions. While GHG regulations generally do not affect our facilities as they are insignificant sources, more stringent federal, regional, state, and foreign laws and regulations relating to global climate change and GHG emissions may be adopted similar to those established in California in 2023. These laws and regulations could be substantial. In addition, uncertainly associated withimpact our facilities, raw material suppliers, the potential transaction could adversely affect the Company's ability to attract, retaintransportation and motivate key employees,distribution of our products, and our customers’ businesses, which could have a negativereduce demand for our products or cause us to incur additional capital, operating or other costs. Until the timing, scope and extent of any additional future legislation or regulation becomes known, we cannot predict its effect on our business. In addition, global climate change may increase the frequency or intensity of extreme weather events, such as storms, floods, extreme temperatures and other events that could affect our facilities, our supply chain, raw material suppliers, the transportation and distribution of our products, and demand for our products.
Hazardous and Solid Industrial Waste. Our operations generate industrial solid wastes, including some hazardous wastes that are subject to the federal Resource Conservation and Recovery Act (“RCRA”) and comparable state and foreign laws. RCRA imposes requirements for the handling, storage, treatment, and disposal of hazardous waste. Industrial wastes that we generate in our manufacturing processes, such as used chemicals, may be regulated as hazardous waste, although RCRA has provisions to exempt some of our wastes from this category. However, our non-hazardous and exempted industrial wastes are still regulated under state law or the less stringent industrial solid waste requirements of RCRA.
RCRA Corrective Action Program. Certain facilities may be subject to the Corrective Action Program under the Solid Waste Disposal Act, as amended by RCRA, and the Hazardous and Solid Waste Amendments (“Corrective Action Program”). The Corrective Action Program is designed to ensure that certain facilities subject to RCRA have investigated and remediated releases of hazardous substances at their property.
CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”, commonly known as Superfund), and comparable state and foreign laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for releases of hazardous substances into the environment. These include the current and past owners or operators of sites where hazardous substances were released, and companies that disposed or arranged for disposal of hazardous substances at off-site locations such as landfills. CERCLA authorizes the EPA and, in certain cases, third parties to take actions in response to threats to the public health and welfare or the environment and to seek to recover remediation costs from the responsible parties.
We currently own or lease, and historically owned or leased, numerous properties that have extensive histories of industrial operations. Hazardous substances may have been released on, under or from these properties, or on, under or from other locations where hazardous wastes have been disposed. Some of these properties have been owned or operated by third parties who may have released hazardous substances for which we could have liability. We could be required to investigate or remediate contaminated property, perform remedial closure activities, or assess and remediate volatile chemical vapors migrating from soil or groundwater into overlying buildings. Our liability for investigating and remediating contamination could be joint and several and could include damages for impacts to natural resources.
Wastewater Discharges. Our operations are subject to the federal Water Pollution Control Act, also known as the Clean Water Act (“CWA”) and comparable state and foreign laws. These laws impose requirements and strict controls regarding the discharge of pollutants from industrial activity into waters of the U.S. Such laws may require that we comply with stormwater runoff and wastewater discharge standards or obtain permits limiting our discharges of pollutants. Failure to comply with CWA requirements could subject us to monetary penalties, injunctions, restrictions on operations, and business plans.administrative or civil enforcement actions. We may be required to incur certain capital expenditures for wastewater discharge or stormwater runoff treatment technology to comply with wastewater permits and water quality standards.
Employee Health and Safety. We are subject to the Occupational Safety and Health Act (“OSHA”) and comparable state and foreign laws that regulate the protection of the health and safety of our workers. Among other things, we are required to maintain and make available to our employees, state and local government authorities, and others information about hazardous materials used or produced by our operations.
Available Information
The Company’s website address is www.cornerstonebuildingbrands.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available free of charge on the Company’s website as soon as reasonably practicable after the reports are filed or furnished electronically with the SEC. Reports filed with the SEC are also made available on its website at www.sec.gov.
Item 1A. Risk Factors.
Risks Related to Our Industry and Economic and Market Conditions
Our industry is cyclical and highly sensitive to macroeconomic conditions. Negative economic events including, but not limited to, recessions,actual or perceived economic downturns, lower business and consumer confidence, high interest rates, inflation, and lower new construction home starts and repair and remodeling activity may materially and adversely affect the outlook for our business, liquidityfinancial condition and results of operations.
The construction industry is highly sensitive to global, national and regional macroeconomic conditions. The risks associated with our business may become more acute in periods of a slowing economy or economic downturns, which may reduce business and consumer confidence and result in decreased demand for our products. Furthermore, rising or continued high interest rates in response to concerns about inflation may further increase economic uncertainty and heighten these risks. As a result, instability and weakness of the U.S. and global economies, including due to disruptions to financial markets, inflation, actual or perceived economic downturns, rising unemployment, geopolitical events and the negative effects on consumers’ spending, may materially adversely affect our business, financial condition and results of operations.
Our residential business depends heavily on the new home construction and repair and remodel markets. Our commercial business depends heavily on the levels of commercial construction activity. Current market estimates continue to show recovery across the nonresidential construction markets from the dip in fiscal 2020, returning above fiscal 2019 levels. According to Dodge Data & Analytics, Inc. (“Dodge”), low-rise nonresidential construction starts as measured in square feetforecast continued and comprising buildings of up to five stories, were up in fiscal 2021 by as much as 15% as compared to our fiscal 2020. However, there can be no assurance that a recovery will be sustained as this market is impacted by the greater-than-normal economic volatility, rising inflation rates and continued supply chain disruptions.
In addition to commercial and residential market indicators, we also depend to a significant extent upon thehigher levels of home repair and remodeling and new construction spending for our residential businesses, which have declined significantlyvolatility in the past and may decline2024, in the future. Accordingpart due to the U.S. Census Bureau, housing levels in fiscal 2021 increased over 12% as compared to our fiscal 2020 while remodeling activity increased 9%, according to the Leading Indicator of Remodeling Activity published by the Joint Center of Housing Studies. While each of these markets has performed well, greater-than-normal volatilitygreater and faster-than-normal changes in factors such as interest rates, inflation, business and consumer confidence, unemployment, and the availability of business and consumer creditcredit. Declines in the residential and commercial construction activity markets could negativelylead to decreased sales of our products, which would have an adverse impact on our business.business, financial condition and results of operations.
Our performance isfinancial results are also dependent upon consumers having theimpacted by our consumers’ ability to finance home repair and remodeling projects and/or the purchase of new homes. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures, which in turn could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures.expenditures or home purchases. Declining home values, increased home foreclosures and tightening of credit standards by lending institutions have in the past and may in the future negatively impact the home repair and remodeling and the new construction sectors, which could adversely affect our business, financial condition and operating results.results of operations.
Historically, any uncertainty about current economic conditions has had a negative effect on our business, and will continue to pose a risk to our business as our customers may postpone spending in response to tighter credit, higher interest rates, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products. Other factors that could influence demand include fuel and other energy costs, conditions in the nonresidentialcommercial real
estate markets, labor and healthcare costs, access to credit, tariffs, and other macroeconomic factors.
From time to time, our industry has also been adversely affected in various parts of the country by declines in nonresidentialcommercial construction starts, including but not limited to, high vacancy rates, changes in tax laws affecting the real estate industry, high interest rates and the unavailability of financing. Sales of our products may be adversely affected by continued weakness in demand for our products within particular customer groups, or a continued decline in the general construction industry or particular geographic regions. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
We cannot predict the timing or severity of any future economic or industry downturns or adverse weather conditions. A prolonged economic downturn or negative weather patterns, particularly in states where many of our sales are made, would have a material adverse effect on our results of operations and financial condition.
Uncertainty and volatility in the financial markets and worldwide economic conditions may adversely affect our operating results.
The markets in which we compete are sensitive to general business and economic conditions in the United States and worldwide, including availability of credit, interest rates, fluctuations in capital, credit and mortgage markets and business and consumer confidence. Adverse developments in global financial markets and general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including our ability and the ability of our customers and suppliers to access capital.
The COVID-19 pandemic has had, and may continue to have, an adverse effect on our business.
Our business and operations have been adversely affected by the COVID-19 pandemic and may continue to be adversely affected by any recurrence or worsening of the pandemic, particularly if located in regions where we derive a significant amount of our sales or profit or where our manufacturing facilities, suppliers or customers are located. Since 2020, we have experienced volatility in the markets in which we participate due to the COVID-19 pandemic.
In response to the pandemic, we have implemented and may need to further implement a range of actions aimed at reducing costs and preserving liquidity. While our manufacturing facilities are fully operational, closures of facilities may be needed in the future, which could disrupt our operations and negatively impact our business, financial condition and results of operation.
The COVID-19 pandemic could also cause disruptions in our supply chain. The inability of our suppliers to meet our supply needs in a timely manner or our quality standards could cause delays to delivery date requirements of our customers. Such failures could result in the cancellation of orders, customers’ refusal to accept deliveries, a reduction in purchase prices, and ultimately, termination of customer relationships, any of which could have a negative impact on our business, financial condition, results of operations and liquidity. In that case, we may be required to seek alternative sources of materials or products. Although we believe that we can manage our exposure to these risks, we cannot be certain that we will be able to identify such alternative materials or sources without delay or without greater cost to us. Our inability to identify and secure alternative sources of supply in this situation could negatively impact our ability to satisfy customer orders.
We could also be adversely affected by the COVID-19 pandemic if government authorities impose further mandatory closures or restrictions on our operations, seek voluntary closures, or if suppliers issue mass recalls of products. The perceived risk of infection or health risk may also adversely affect our business and operating results.
We cannot predict the duration or scope of the COVID-19 pandemic, the effectiveness of vaccines for COVID-19 or the future impact of the pandemic on our business, financial condition and results of operations. Any significant downturn in new home construction as a result of the economic impact of the COVID-19 pandemic could negatively impact our business, financial condition and results of operations.
To the extent the COVID-19 pandemic adversely affects our business, financial conditions and results of operations, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our substantial level of indebtedness, our future capital needs, our need to generate sufficient cash to service our indebtedness and our ability to obtain financing on acceptable terms or at all. Further, an outbreak of any other health epidemic or pandemic may expose our business and operations to similar risks as set forth above.
Risks Related to Our Business
Inability to optimize operational efficiency could adversely affect our business, results of operation and financial condition.
Our ability to sell quality products at profitable margins depends in large part on our ability to efficiently operate our facilities. We are implementing initiatives to optimize our operational efficiencies and reduce costs while ensuring superior quality. If we are unsuccessful in implementing these initiatives, or are otherwise unable to operate our manufacturing facilities efficiently, produce high quality products and provide value to our customers, our business, financial condition and results of operations could be materially and adversely affected.
Failure to attract and retain employees could adversely affect our business, results of operation and financial condition.
Our ability to attract and retain or replace employees is challenging due to a shortage of both hourly and technically skilled workers for our manufacturing facilities. We face intense competition for talent to operate our manufacturing facilities, including from current and potential competitors in our industry. As a large-scale manufacturer, our workforce is
distributed across North America, where candidates are in high demand which changes based upon many factors in local markets, and we may incur significant costs to attract and retain them.employees, particularly in smaller, local markets. If we do not attract and retain the services of individuals to operate our manufacturing facilities, we may experience delays in producing our products, which may reduceresult in a reduction in net sales and an adverse effect on our net revenues and adversely affect ourbusiness, results of operations and financial condition.
Increases in labor costs, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.
Our ability to attract and retain qualified manufacturing team members to operate our manufacturing plants efficiently is critical to our financial performance. Our financial performance is affected by the availability of qualified personnel and the cost of labor. As of December 31, 2021, approximately 12%2023, 11% of our employees were represented by labor unions, the collective bargaining agreements with whom either are under negotiations or will expire in fiscal years 2022, 2023year 2024, 2025 and 2024.2027. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs. Any labor shortage will create operating inefficiencies that could adversely impact our financial performance.
An inability
The industries in which we operate are highly competitive.
Competition in the construction markets of the building industry is intense. Competition is based primarily on aesthetics, quality, price, service, product performance, breadth of product offerings and responsiveness to successfully develop newdistributor, retailer and installer needs, as well as end-user customer preference. In addition, we also compete with alternative building products materials and alternative methods of building construction that do not utilize our products that which may be viewed as more traditional, more aesthetically pleasing or improve existinghaving other advantages.
In our Aperture Solutions and Surface Solutions reportable segments, we compete with other national and regional manufacturers of exterior building products. Some of these companies are larger and have greater financial resources than we do. Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do. Additionally, our products couldface competition from alternative materials, such as wood; composites and fiberglass in windows; metal; fiber cement; and masonry and composites in siding. In our Shelter Solutions reportable segment, we compete with a number of other manufacturers of metal components and engineered building systems ranging from small local firms to large national firms. In addition, we and other manufacturers of metal components and engineered building systems compete with alternative methods of building construction.
Further, vertical consolidation by our competitors may negatively impact our ability to attract new customers and/compete. For example, in the past several of our competitors in the Shelter Solutions reportable segment have been acquired by steel producers. Competitors owned by steel producers may have a competitive advantage on raw materials that we do not enjoy. Steel producers may prioritize deliveries of raw materials to such competitors or retain existing customers, including our significant customers.
Our success depends on meeting consumer needs and anticipating changes in consumer preferencesprovide them with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in salesmore favorable pricing, both of existing products. While we devote significant focus to the development of new products, we may not be successful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products more rapidly or effectively, which could adverselyenable them to offer products to customers at lower prices or accelerated delivery schedules.
In all our reportable segments, failure to provide our customers with quality, service, on-time delivery and project completion, and other value additions would negatively affect our sales. Furthermore, market demand may declineability to compete in our industry. The resulting increased competition from other exterior building products manufacturers, as a result of consumer preferences trending awaywell as the competition from alternative building materials and alternative construction methods, could cause us to lose our categories or trending down within our brands or product categories,customers and lead to net sales decreases, which could adverselywould impact our results of operations, cash flows and financial condition.operations.
Our Windows and Siding segments depend on a core group of significant customers for a substantial portion of net sales and we expect this to continue for the foreseeable future. The loss of, or a significant adverse change in our relationships with our largest customers, or loss of market position of any major customer, whether because of an inability to successfully develop new products or improve existing products, or otherwise, could cause a material decrease in net sales. The loss of, or a reduction in orders, from any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or performance or related matters, or an inability to collect accounts receivable from any major customer could adversely impact our net income and cash flow. In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.
Manufacturing or assembly realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, due to the costs of implementation.
We continually review our manufacturing and assembly operations and sourcing capabilities. Effects of periodic manufacturing realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize. Such programs may include the consolidation and integration of facilities, functions, systems and procedures. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.
Our business may be adversely affected by weather conditions and other external factors beyond our control.
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing reduced profit margins when such conditions exist. For example, unseasonably cold weather or extraordinary amounts of rainfall may decrease construction activity.
Further, other external factors beyond our control could cause disruptions at any of our facilities, including maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any equipment or other operational problems; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, hurricanes, earthquakes or other catastrophic disasters; pandemics, including the COVID-19 pandemic; or an act
of terrorism. Any prolonged disruption in operations at any of our facilities could cause a significant loss in production. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to customers during the time that it takes for us to reopen or replace a damaged facility, which could cause our customers to purchase from our competitors either temporarily or permanently. If any of these events were to occur, it could adversely affect our business, financial condition, cash flows and results of operations.
Price volatility and supply constraints for raw materials could prevent us from meeting delivery schedules to our customers or reduce our profit margins.
Our business is heavily dependent on the price and supply of raw materials including steel, PVC resin, aluminum and glass. Raw material prices have been volatile in recent years and may remain volatile in the future. Raw material prices are influenced by numerous factors beyond our control, including general domestic and international economic conditions domestically and internationally,conditions; currency fluctuations, the availability of raw materials, competition,fluctuations; supply constraints; competition; labor costs,costs; freight and transportation costs,costs; production costs,costs; and tariffs, import duties and other trade restrictions. For example, in 2018, the Trump administration implemented new tariffs on imports of steel and aluminum into the United States.U.S. In response to these tariffs, the European Union, Canada, Mexico and China announced tariffs on U.S. goods and services. Although some of these tariffs have been rescinded, suspended, or suspended,modified, these tariffs, along with any additionalfuture tariffs or trade restrictions, could result in reduced overall economic activity and increased costs in operating our business.
A sudden increase in demand for steel, PVC resin, aluminum or glass could affect our ability to purchase such raw materials and result in rapidly increasing prices. We have historically been able to substantially pass on significant cost increases in raw materials through price increases to our customers; however, we may not be able to do so in the future. Further, if the available supply of any of the raw materials we use declines, we could experience a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our business, results of operations and financial condition. We can give no assurance that steel, PVC resin, aluminum or glass will remain available, that prices will not continue to be volatile or that we will be able to purchase these raw materials on favorable or commercially reasonable terms.
Further, we use energy in the manufacturing and transportation of our products. In particular, our manufacturing plants use considerable amounts of electricity and natural gas. Consequently, our operating costs typically increase if energy costs rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. To the extent we are not able to recover these cost increases through price increases or otherwise, our profitability and cash flow will be adversely impacted. WeFrom time to time, we may partially hedge our exposure to higher prices through fixed forward positions. However, such fixed forward positions or other hedging instruments may not fully mitigate our risk from operating cost increases.
We rely on third-party suppliers for materials in addition to steel, PVC resin, aluminum and glass, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our business and results of operations could be adversely affected.
In addition to steel, PVC resin, aluminum and glass, our operations require other raw materials from third-party suppliers. We generally have multiple sources of supply for our raw materials; however, in some cases, materials are provided by a single supplier. The loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of a key supplier, could adversely impact our business, financial condition and results of operations. In addition, supply interruptions could arise from shortages of raw materials, commodity cost volatility, pandemics, labor disputes or weather conditions affecting products or shipments or other factors beyond our control. For example, U.S. and global markets are experiencing volatility and disruption related to the escalation of geopolitical tensions and the military conflict currently ongoing in Ukraine and the Middle East. While we do not have any customer or direct supplier relationships with any entities in Russia, Ukraine, or the Middle East, these conflicts could lead to market or operational disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Short- and long-term disruptions in our supply chain would result in a need to maintain higher inventory levels as we replace similar product, a higher cost of product and ultimately a decrease in our revenuesnet sales and profitability. To the extent our suppliers experience disruptions, there is a risk for delivery delays, production delays, production issues or delivery of non-conforming products by our suppliers. Even where these risks do not materialize, we may incur costs as we prepare contingency plans to address such risks. In addition, disruptions in transportation lines could delay our receipt of raw materials. If our supply of raw materials is disrupted or our delivery times are extended, our business, results of operations and financial condition could be materially adversely affected. Furthermore, some
An inability to successfully develop new products or improve existing products could negatively impact our ability to attract new customers or retain existing customers, including our significant customers.
Our success depends on meeting consumer needs and anticipating changes in consumer preferences with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to meet customer needs, and to offset obsolescence and decreases in sales of our third-party suppliersexisting products. While we devote significant focus to the development of new products, we may not be ablesuccessful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products more rapidly or respond to handle commodity cost volatilitychanging consumer preferences more effectively, which could adversely affect our net sales. Furthermore, market demand may decline as a result of consumer preferences trending away from our categories or changing volumes while still performing uptrending down within our brands or product categories, which could adversely impact our business, results of operations and financial condition.
Our Aperture Solutions and Surface Solutions reportable segments depend on a core group of significant customers for a substantial portion of net sales and we expect this to continue for the foreseeable future. For the year ended December 31, 2023, the top 10 customers accounted for 58% of net sales in Aperture Solutions and 59% of net sales in Surface Solutions. The loss of, or a significant adverse change in our specifications.relationships with our largest customers, or loss of market position of any major customer, whether because of an inability to successfully develop new products or improve existing products, or otherwise, could cause a material decrease in net sales. The loss of, or a reduction in orders, from any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or performance or related matters, or an inability to collect accounts receivable from any major customer could adversely impact our net sales and profitability. In addition, net sales from customers that have accounted for significant net sales in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.
Our business may be adversely affected by weather conditions and other external factors beyond our control.
Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are supplied or installed, causing reduced profit margins when such conditions exist. For example, unseasonably cold weather or extraordinary amounts of rainfall in the markets we serve may decrease construction activity.
Further, other external factors beyond our control could cause disruptions at any of our facilities, including maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any equipment or other operational problems; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, hurricanes, earthquakes or other catastrophic disasters; pandemics; or an act of terrorism. Any prolonged disruption in operations at any of our facilities could cause a significant loss in production. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to customers during the time that it takes for us to reopen or replace a damaged facility. This could cause our customers to purchase from our competitors and stop purchasing from us either temporarily or permanently, particularly where we are currently a customer’s single source of supply. If any of these events were to occur, it could adversely affect our business, financial condition and results of operations.
If we are unable to enforce our intellectual property rights, or if such intellectual property rights become obsolete, our competitive position could be adversely affected.
As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands. We also have issued patents and rely on trade secret and copyright protection for certain of our technologies. These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our intellectual property rights, which may harmadversely affect our operating results.financial condition. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights in which case we would have to defend
these rights. There is also a risk that third parties, including our current competitors,or will claim that our products infringe on their intellectual property rights. These third parties may bring infringement claims against usrights, in which case we would have to defend these rights or our customers,ourselves, which may harm our operating results.be costly or unsuccessful.
We also rely on third party license agreements for certain trademarks and technologies we employ. There is a risk that third parties may modify or terminate such licenses, which may harm our operating results. While these license agreements generally provide that the licensors will indemnify us, subject to certain limitations, for certain infringement liabilities, our ability to seek indemnification from the respective licensors is limited by various factors, including the financial condition of the licensor as well as by the terms and limits of such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from licensors, and any related infringement liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.
There can be no assurance that the efforts we have taken to protect our proprietarybusiness with respect to intellectual property rights will be sufficient or effective, that any pending or future patent and trademark applications will lead to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated, misappropriated or infringed by others.effective. If we are unable to protect and maintain our intellectual property rights, or if there are any successful challenges to our intellectual property challengesrights or infringement proceedings against us, our business, financial condition and revenueresults of operations could be materially and adversely affected.
We could incur significant costs as a result of compliance with, violations of or liabilities under applicable environmental, health and safety laws.
Our operations include 93 manufacturing facilities and 72 distribution and warehouse facilities spread across North America (see “Item 2. Properties” for additional information). As a result, our operations are subject to various federal, state, local and foreign environmental, health and safety (“EHS”) laws. Among other things, these laws (i) regulate the emission or discharge of materialspollutants into the environment, (ii) govern the use, storage, treatment, disposal and management of hazardous substances and wastes, (iii) protectgovern the health and safety of our employees, the end-users of our products, and the general public, (iv) regulate the materialschemicals used in our products, and (v) impose liability for the costs of investigating and remediatingpresent and past releases of hazardous substances and other related damages. Violations of these laws or of any conditions contained in environmental permits could result in substantial fines or penalties, injunctive relief, requirements to install pollution or other controls or other equipment, civil and criminal sanctions, permit revocations, and facility shutdowns. We could be held liable for the costs to investigate, remediate or otherwise address contamination at any real property we have historically owned, operated, or contracted for waste disposal, site or at sites which we or predecessors released hazardous materials. We also could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise because of violations of or liabilities under EHS laws or in connection with releases of hazardous materials. In addition, changes in or new interpretations of existing EHS laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future, in each case with respect to our operations, products or business activities, may lead to additional costs that could have a material adverse effect on our business, financial condition or results of operations. We cannot predict whether such liabilities or obligations will arise in the future or the scope thereof.
Changes in building codes and standards could increase the cost of our products, lower the demand for our products, or otherwise adversely affect our business.
Our products and markets are subject to extensive and complex local, state, federal, and foreign statutes, ordinances, rules, and regulations. These mandates, including but not limited to building design safety and construction standards and zoning requirements, affect the cost, selection, and quality requirements of the products we sell, including building structures and envelopes, including roofs, windows and siding.
These statutes, ordinances, rules, and regulations often provide broad discretion to governmental authorities as to the types and quality specifications ofrequired for products we sell that are used in new residential and non-residentialcommercial construction and home renovations and improvement projects. Compliance withIn addition, we cannot predict whether and how any of these standards may change in the future. Ongoing compliance with current standards and with any future changes in such statutes, ordinances, rules, and regulationsthereto may increase the costs of manufacturing our products or may reduce the demand for certain of ourimpacted products in affected geographical areas or product markets. All or any of these changesmarkets, which could have a material adverse effect on our business, financial condition, and results of operations.
The industries in which we operate are highly competitive.
We compete with all other alternative methods of building construction, which may be viewed as more traditional, more aesthetically pleasing or having other advantages over our products. In addition, competition in the construction markets of the building industry is intense. It is based primarily on quality; service; on-time delivery and project completion; ability to provide added value in the design and engineering of buildings; price; and personal relationships with customers.
In our Windows and Siding segments, we compete with other national and regional manufacturers of exterior building products. Some of these companies are larger and have greater financial resources than we do. Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do. Competitors could take a greater share of sales and cause us to lose business from our customers. Additionally, our products face competition from alternative materials, such as wood, composites and fiberglass in windows, and wood, metal, fiber cement, masonry and composites in siding. An increase in competition from other exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to net sales decreases.
In our Commercial segment, we compete with a number of other manufacturers of metal components and engineered building systems and providers of coil coating services ranging from small local firms to large national firms. In addition, we and other manufacturers of metal components and engineered building systems compete with alternative methods of building construction. If these alternative building methods compete successfully against us, such competition could adversely affect us. In addition, several of our competitors have been acquired by steel producers. Competitors owned by steel producers may have a competitive advantage on raw materials that we do not enjoy. Steel producers may prioritize deliveries of raw materials to such competitors or provide them with more favorable pricing, both of which could enable them to offer products to customers at lower prices or accelerated delivery schedules.
We face risks related to acquisitions and dispositions that could adversely affect our results of operations.
We have a history of expansion through acquisitions, and, from time to time, we evaluate acquisitions and dispositions of assets and businesses. We believe that if our industry continues to consolidate, our future success may depend, in part, on our ability to successfully complete acquisitions. Acquisitions and dispositions involve a number of risks, including:
•theThe risk of incorrect assumptions or estimates regarding the future results of an acquired business or expected cost reductions or other synergies expected to be realized as a result of acquiring the business;
•theThe risk of disposing of an asset or business at a price or on terms that are less favorable than we had anticipated;
•difficultyDifficulty in finding sellers or buyers;
•diversionDiversion of management’s attention from existing operations;
•unexpectedUnexpected losses of key employees, customers and suppliers of an acquired business;
•integratingIntegrating the financial, technological and management standards, processes, procedures and controls of an acquired business with those of our existing operations;
•increasingIncreasing the scope, geographic diversity and complexity of our operations; and
•potentialPotential litigation or other claims arising from an acquisition or disposition.
We can provide no assurance that we will be successful in identifying or completing any future acquisitions or dispositions or that any businesses or assets that we are able to acquire will be successfully integrated into our existing business. The incurrence of additional debt, contingent liabilities and expenses in connection with any future acquisitions could have a material adverse effect on our business, financial condition and results of operations. Further, we cannot predict the effect, if any, that any announcement or consummation of an acquisition or disposition would have on the trading price of our common stock.
In addition, we may be subject to claims arising from the operations of businesses from periods prior to the dates we acquired them. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce any indemnification rights we may have against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, or if we do not have any right to indemnification, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.
Restructuring
We risk liabilities and losses due to personal injury, property damage or product liability claims, which may not be covered by insurance.
Our workers are subject to hazards associated with work in manufacturing environments. Operating hazards can cause personal injury and loss of life, as well as damage to or destruction of property. We are subject to either deductible or self-insured retention amounts, per claim or occurrence, under our Property/Casualty insurance programs, as well as an individual stop-loss limit per claim under our group medical insurance plan that we believe are consistent with industry practice. The transfer of risk through insurance cannot guarantee that coverage will be available for every loss or liability that we may incur in our operations.
Exposures that could create insured (or uninsured) liabilities are difficult to assess and quantify due to unknown factors, including but not limited to injury frequency and severity, natural disasters, terrorism threats, third-party liability, and claims that are incurred but not reported. Although we engage third-party actuarial professionals to assist us in determining our probable future loss exposure, it is possible that claims or costs could exceed our estimates or our insurance limits, or could be uninsurable. In such instances we might be required to use working capital to satisfy these losses rather than to maintain or expand our operations, may harmwhich could materially and adversely affect our profitability,business, financial condition and results of operations. Our ability
Further, we face the risk of product liability exposure, including regulatory penalties and class action and warranty claims, in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products prove to fully achieve the estimated cost savings is uncertain.
We have developed plans to improve cost efficiency and optimize our combined manufacturing plant footprint considering our recent acquisitions and restructuring efforts. Future chargesbe defective, among other things, we may be responsible for damages related to the plans may harm our profitability in the periods incurred. Additionally, if we were to incur unexpected charges related to the plans, our financial conditionany defective products and results of operations may suffer.
Implementation of these plans carries significant risks, including:
•actual or perceived disruption of service or reduction in service levels to our customers;
•failure to preserve supplier relationships and distribution, sales and other important relationships and to resolve conflicts that may arise;
•potential adverse effects on our internal control environment and an inability to preserve adequate internal controls;
•diversion of management attention from ongoing business activities and other strategic objectives; and
•failure to maintain employee morale and retain key employees.
Because of these and other factors, we cannot predict whether we will fully realize the cost savings from these plans. If we do not fully realize the expected cost savings from these plans, our business and results of operations may be negatively affected. Also, if we were to experience any adverse changes to our business, additional restructuring activities may be required into cease production, recall or redesign such products. Because of the future.
We may be significantly affected by global climate change or by legal, regulatory or market responses to global climate change.
Efforts to mitigate the effects of global climate change have led to, and may lead to future, federal, state and foreign legislative and regulatory efforts to limit greenhouse gas (“GHG”) emissions. While GHG regulations do not materially affect our facilities as they are insignificant sources, more stringent federal, regional, state and foreign laws and regulations relating to global climate change and GHG emissions, if adopted, could impact our facilities, raw material suppliers, the transportation and distributionlong useful life of our products, and our customers’ businesses,it is possible that latent defects might not appear for several years. Any insurance we maintain may not continue to be available on acceptable terms or such coverage may not be adequate for liabilities actually incurred. Further, any claim or product discontinuance, recall or redesign could result in adverse publicity against us, which could reduce demand for our productscause sales to decline, or cause us to incur additional capital, operating or otherincrease warranty costs. Until the timing, scope and extent of any future legislation or regulation becomes known, we cannot predict its effect on our business. Further, global climate change may increase the frequency or intensity of extreme weather events, such as storms, floods, extreme temperatures, and other events that could affect our facilities and demand for our products.
Evolving expectations around corporate responsibility practices, specifically related to environmental, social and governance (“ESG”) matters, may expose us to reputational and other risks.
Investors, stockholders, customers, suppliers and other third parties are increasingly focusing on ESG and corporate social responsibility endeavors and reporting. Certain institutional investors, investment funds, other influential investors, customers, suppliers and other third parties are also increasingly focused on ESG practices. Companies that do not adapt to or comply with the evolving investor or stakeholder expectations and standards, or which are perceived to have not responded appropriately, may suffer from reputational damage and result in the business, financial condition and/or stock price of a company being materially and adversely affected. Further, this increased focus on ESG issues may result in new regulations and/or third-party requirements that could adversely impact our business, or certain shareholders reducing or eliminating their holdings of our stock. Additionally, an allegation or perception that we have not taken sufficient action in these areas could negatively harm our reputation.
Breaches of our information system security measures could disrupt our internal operations.
We are dependent upon information technology for the distribution of information internally and also to our customers and suppliers. This information technology is subject to theft, damage or interruption from a variety of sources, including but not limited to malicious computer viruses, security breaches and defects in design. Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers’ business and personally identifiable information. We also hold the sensitive personal data of our current and former employees, as well as proprietary information of our business, including strategic plans and intellectual property. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers and employees, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information.
We have in the past experienced, and may in the future face, hackers, cybercriminals or others gaining unauthorized access to, or otherwise misusing, our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. For example, in August 2020, we detected a ransomware attack impacting certain of our operational and information technology systems. Promptly upon our detection of the attack, we launched an investigation, notified law enforcement and engaged the services of specialized legal counsel and other incident response professionals. While we were able to recover our critical operational data and business systems, there is no guarantee that we will have similar success with an attack in the future should one occur. Any such future attack could lead to the public disclosure of customer or employee data, our trade secrets or other intellectual property, personal information of our employees, or material financial and other information related to our business. The release of any of this information could have a material adverse effect on our business, reputation, and financial condition and results of operations.condition.
The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs is critical to our business. To the extent that any disruptions or security breaches result in a loss or damage to our data, it could cause harm to our reputation or brand. This couldcould: (i) lead some customers to stop purchasing our products and reduce or delay future purchases of our products or lead to the use of competing products; (ii) lead to private causes of action that could result in a judgment, settlement or other liability; (iii) lead to state or federal enforcement actions, which could result in fines, penalties and/or other liabilities and which may cause us to incur legal fees and costs; and/or (iv) result in additional costs associated with responding to a cyberattack. Increased regulation regarding cyber securitycybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cyber security audits.cybersecurity audits and insurance. Any of these actions could materially adversely impact our business, financial condition and results of operations.
We have invested in industry appropriate protections and monitoring practices of our data and information technology to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats. There can be no assurance, however, that our efforts will prevent breakdowns or breaches to our or our third party providers’ databases or systems that could adversely affect our business.business and financial condition.
Damage to our computer infrastructure and software systems and issues relating to the incorporation of artificial intelligence (“AI”) solutions into our systems, could harm our business.
The unavailability of any of our primary information management systems for any significant period of time could have an adverse effect on our operations. In particular, our ability to deliver products to our customers when needed, collect our receivables and manage inventory levels successfully largely depend on the efficient operation of our computer hardware and software systems. Through information management systems, we provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data, and monitor operating results.results of operations. Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could lead to business interruptions that could harm our reputation, increase our operating costs, and decrease our profitability. In addition, these systems are vulnerable to, among other things, damage or interruption from power loss, computer system and network failures, loss of telecommunications services, operator negligence, physical and electronic loss of data, or security breaches and computer viruses.
We have contracted with third-party service providers that provide us with redundant data center services in the event that our major information management systems are damaged. The backup data centers and other protective measures we take coulddamaged, but they may prove to be inadequate. Our inability to restore data completely and accurately could lead to inaccurate and/or untimely filings of our periodic reports with the SEC,financial reporting, tax filings with the Internal Revenue Service (“IRS”) or other required filings, all of which could have a significant negative impact on our corporate reputationbusiness, and could negatively impact our stock price or result in fines or penalties.
In addition, we may incorporate traditional and generative AI solutions into our information systems, products, offerings, services and features, and these solutions may become important in our operations over time. The ever-increasing use and evolution of technology, including cloud-based computing and AI, creates opportunities for the potential loss or misuse of personal data that forms part of any data set and was collected, used, stored, or transferred to run our business, and unintentional dissemination or intentional destruction of confidential information stored in our or our third party providers’ systems, portable media or storage devices, which may result in significantly increased business and security costs, a damaged reputation, administrative penalties, or costs related to defending legal claims. If the content, analyses, or recommendations that AI programs assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, financial condition, and results of operations and our reputation may be adversely affected. AI programs may be costly and require significant expertise to develop, may be difficult to set up and manage, and require periodic upgrades. There is also a risk that we may not have access to the technology and qualified AI personnel resources to adequately incorporate ongoing advancements into our AI initiatives, including access to the licensing of key intellectual property from third parties. Our competitors or other third parties may incorporate AI into their products more quickly or more successfully than us, which could impactimpair our ability to compete effectively and adversely affect our results of operations. Our competition may have access to greater financial results.and technological resources, giving them a competitive advantage in recruiting, motivating, and retaining sought-after AI professionals. AI also presents emerging ethical issues and if our use of AI becomes controversial, we may experience brand or reputational harm, competitive harm, or legal liability. The rapid evolution of AI, including potential government regulation of AI, will require significant resources to develop, test and maintain our platform, offerings, services, and features to help us implement AI ethically in order to minimize unintended, harmful impact.
Our enterprise resource planning technologies will require maintenance or replacement in order to allow us to continue to operate and manage critical aspects of our business.
We rely heavily on enterprise resource planning technologies (“ERP Systems”) from third parties in order to operate and manage critical internal functions of our business, including accounting, order management, procurement, and transactional entry and approval. Certain of our ERP Systems are no longer supported by their vendor, are reaching the end of their useful life or are in need of significant updates to adequately perform the functions we require. We have limited access to support for older software versions and may be unable to repair the hardware required to run certain ERP Systems on a timely basis due to the unavailability of replacement parts. In addition, we face operational vulnerabilities due to limited access to software patches and software updates on any software that is no longer supported by their vendor. We are planninghave started implementing a multi-year plan to upgrade and rationalize the hardware and software upgrades toplatforms used in our ERP Systems and are in discussions with third-party vendors regarding system updates.Systems.
If our ERP Systems become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms or if we are unable to successfully implement our upgrade and rationalization plan, our operational efficiency could be harmed and we may face increased replacement costs. We may also face extended recovery time in the event of a system failure due to lack of resources to troubleshoot and resolve such issues. Our ability to manage our operations could be interrupted and our order management processes and customer support functions could be impaired
until equivalent services are identified, obtained and implemented on commercially reasonable terms, all of which could adversely affect our business, results of operations and financial condition.
We risk liabilitiesmay be significantly affected by new or stricter regulatory standards on sustainability matters, and losses due to personal injury, property damage or product liability claims, which may not be covered by insurance.global climate change.
Our workers are subject to the usual hazards associated with work in manufacturing environments. Operating hazards can cause personal injury and loss of life, as well as damage to or destruction of business personal property, and possible environmental impairment. We are subject to either deductible or self-insured retention (SIR) amounts, per claim or occurrence, under our Property/Casualty insurance programs, as well as an individual stop-loss limit per claim under our group medical insurance plan. We maintain insurance coverage to transfer risk, with aggregate and per-occurrence limits and
deductible As governmental and societal attention is increasingly paid to sustainability matters, we expect that regulatory standards on topics such as climate change, GHG emissions, water usage, waste management, human capital, and risk oversight will continue to evolve. Implementation of new and/or retention levels thatstricter regulatory standards could expand the nature, scope, and complexity of what we believe are consistentrequired to comply with, industry practice. The transfer of risk through insurance cannot guarantee that coverage will be available for every loss or liability that we may incur in our operations.
Exposures that could create insured (or uninsured) liabilities are difficult tocontrol, assess, and quantify due to unknown factors, including but not limited to injury frequencyreport. Such changes could increase the cost of our compliance and severity, natural disasters, terrorism threats, third-party liability, and claims that are incurred but not reported (“IBNR”). Although we engage third-party actuarial professionals to assist us in determining our probable future loss exposure, it is possible that claims or costs could exceed our estimates or our insurance limits, or could be uninsurable. In such instances we might be required to use working capital to satisfy these losses rather than to maintain or expand our operations,internal risk management programs, which could materiallyhave a material adverse effect on our business, results of operations, and adverselyfinancial condition.
For example, the State of California established climate legislation in 2023 that will require certain U.S. companies with business activities in California to provide disclosures related to their GHG emissions, climate-related financial risks and any voluntary carbon offsets or climate related claims. It is expected that the SEC will issue a similar type of climate disclosure rule in 2024. While GHG regulations generally do not materially affect our operating resultsfacilities as they are insignificant sources, the new California legislation is likely to increase the resources we will need to allocate for compliance. In addition, any other more stringent federal, regional, state and foreign laws and regulations relating to global climate change and GHG emissions, if adopted, could impact our financial condition.
Further, we face an inherent business risk of exposure to product liability claims, including class action claimsmanufacturing operations, raw material suppliers, the transportation and warranties, in the event that the use of anydistribution of our products, results in personal injuryand our customers’ businesses.
Further, global climate change may increase the frequency or property damage. In the eventintensity of extreme weather-related events, such as storms, floods, wildfires, extreme temperatures, and other events that any ofcould affect our facilities, suppliers, and demand for our products, are defective or prove to be defective, among other things, we may be responsible for damages related to any defective products and may be required to cease production, recall or redesign such products. Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any insurance we maintain may not continue to be available on acceptable terms or such coverage may not be adequate for liabilities actually incurred. Further, any claim or product discontinuance, recall or redesign could result in adverse publicity against us, which could cause sales to decline, or increase warranty costs.have a material adverse effect on our business, results of operations, and financial condition.
We face risks related to our international operations.
In addition to the United States,U.S., we operate our business in certain foreign jurisdictions, principally in Canada and Mexico, and make sales in certain other jurisdictions. jurisdictions, which poses certain risks to our business, including foreign exchange rate and international legal compliance risks.
Our operations in Canada generated approximately 7.6%7.7% of our revenuesnet sales in 2021.2023. As such, our net sales, earnings and cash flow are exposed to risk from changes in foreign exchange rates, which can be difficult to mitigate. Depending on the direction of changes relative to the U.S. dollar, Canadian dollar values can increase or decrease the reported values of our net assets and results of operations. We hedge this foreign currency exposure by evaluating the usage of certain derivative instruments which hedge certain, but not all, underlying economic exposures.
Our international operations require us to comply with certain U.S. and international laws, such as import/export laws and regulations, anti-boycott laws, anti-dumping laws, economic sanctions, laws and regulations, the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws. We operate in parts of the world, including Canada and Mexico, that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.has proved challenging historically. We cannot provide absolute assurance that our internal controls and procedures will always prevent reckless or criminal acts by our employees or agents, or that the operations of acquired businesses will have been conducted in accordance with our policies and applicable regulations. If we are found to be liable for violations of these laws (either due to our own acts, out of inadvertence or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, including limitations on our ability to conduct our business, which could have a material and adverse effect on our results of operations,business, financial condition and cash flows.results of operations.
Significant changes in factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our operating results of operations and cash flows.
The recognition of costs and liabilities associated with our pension plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates. These assumptions are generally updated annually.
In recent years, the declining
Changes in interest rates, and changes to mortality assumptions have negatively impacted the funded status of our pension plans. In addition, volatileand asset performance has also negatively impactedmay affect the funded status of our pension plans. Funding requirements for our pension plans may become more significant. If our cash flows and capital resources are insufficient to fund our pension plan obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.
Any impairment of our goodwill and/or intangible assets could negatively impact our results of operations and financial condition.
We evaluate assets on our balance sheet,Consolidated Balance Sheets, including goodwill and intangible assets, annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, market capitalization, and external market conditions that would require an
impairment test. We may experience unforeseen events in the future, including related to or as a result of the COVID-19 pandemic, that could adversely affect the value of our goodwill or intangible assets and trigger an interim impairment evaluation. There can be no assurance that valuation multiples will not decline, discount rates will not increase, or the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. Future determinations of significant impairments of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of intangible assets could have a negative impact on the Company’s business, results of operations and financial condition.
Risks Related to Our Common Stock and Significant Stockholders
Our stock price has been and may continue to be volatile.
The trading price of our Common Stock has fluctuated in the past and is subject to significant fluctuations in response to the following factors, some of which are beyond our control:
•variations in quarterly operating results;
•deviations in our earnings from publicly disclosed forward-looking guidance;
•variability in our revenues;
•changes in earnings estimates by analysts;
•our announcements of significant contracts, acquisitions, strategic partnerships or joint ventures;
•uncertainty about current global economic conditions;
•sales of our Common Stock by our significant stockholders;
•fluctuations in stock market price and volume; and
•other general economic conditions.
During 2021, our stock price on the NYSE ranged from a high of $19.50 per share to a low of $9.47 per share. In recent years, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar to ours. Some of these fluctuations have been unrelated to the operating performance of the affected companies. These market fluctuations may decrease the market price of our common stock in the future.
The CD&R Investors own a significant amount of our Common Stock and have substantial governance and other rights pursuant to the New Stockholders Agreement.
The CD&R Investor Group collectively owned approximately 48.8% of our outstanding Common Stock as of December 31, 2021. As a significant stockholder, the CD&R Investors could significantly influence the outcome of matters requiring a stockholder vote, including the election of directors, the adoption of any amendment to our certificate of incorporation or bylaws and the approval of mergers and other significant corporate transactions. Their influence over us may have the effect of delaying or preventing a change of control or may adversely affect the voting and other rights of other stockholders.
Further, the CD&R Investor Group has substantial governance and other rights pursuant to the New Stockholders Agreement, including the ability, for so long as it beneficially owns at least 7.5% of our outstanding shares of Common Stock, to nominate for election, fill vacancies and appoint replacements for a number of Board members in proportion to the CD&R Investor Group’s percentage beneficial ownership of our outstanding Common Stock, but never to exceed one less than the number of independent, non-CD&R-affiliated directors serving on the Board.
Transactions engaged in by the CD&R Investors, the Golden Gate Investors or our directors or executives involving our Common Stock may have an adverse effect on the price of our Common Stock.
We are party to the New Registration Rights Agreement, which grants the Investors customary demand and piggyback registration rights. In connection with the registration rights granted under the New Registration Rights Agreement, we filed three shelf registration statements on Form S-3, declared effective by the SEC on April 8, 2016, February 28, 2019 and September 2, 2020, registering the resale of shares of our Common Stock held by the CD&R Fund VIII Investor Group, the Golden Gate Investors and CD&R Pisces, respectively.
As of December 31, 2021, the CD&R Fund VIII Investor Group, CD&R Pisces and the Golden Gate Investor Group owned approximately 18.0%, 30.9% and 5.9%, respectively, of our issued and outstanding Common Stock. Future sales of our shares by these stockholders could have the effect of lowering our stock price. The perceived risk associated with the possible purchase or sale of a large number of shares by these stockholders could cause volatility in our stock price or result in the sale by some of our stockholders of our common stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers could cause other institutions or individuals to engage in short sales of our Common Stock, which may further cause the price of our stock to decline.
From time to time our directors, executive officers, or any of the Investors may sell shares of our Common Stock on the open market or otherwise, for a variety of reasons, which may be related or unrelated to the performance of our business. These sales will be publicly disclosed in filings made with the SEC. Our stockholders may perceive these sales as a reflection on management’s view of the business which may result in a drop in the price of our stock or cause some stockholders to sell their shares of our common stock.
Risks Related to Our Indebtednessour Sole Stockholder
The interests of our controlling stockholder may differ from the interests of holders of our indebtedness.
Following the Merger (as defined herein), investment funds managed by Clayton, Dubliner and Rice, LLC (“CD&R”) own all of the Company’s outstanding capital stock and have the ability to appoint the members of our Board of Directors. As a result, CD&R has significant influence over our business. The interests of CD&R may differ from those of holders of our outstanding indebtedness in material respects. For example, CD&R may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their overall equity investment, even though such transactions might involve risks to holders of our outstanding indebtedness. CD&R is in the business of making investments in companies, and may from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are our suppliers or customers. The companies in which CD&R invests may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Additionally, CD&R may determine that the disposition of some or all of their interests in the Company would be beneficial to them at a time when such disposition could be detrimental to the holders of our outstanding indebtedness.
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health, reduce our profitability, limit our ability to obtain financing in the future and pursue certain business opportunities and make payments on our indebtedness.
As of December 31, 2021,2023, we had total indebtedness of approximately $3.1outstanding principal on long-term debt totaling $3.9 billion.
The amount of our debt or other similar obligations could have important consequences for us, including, but not limited to:
•aA substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes;
•ourOur ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and our ability to satisfy our obligations with respect to our outstanding indebtedness may be impaired in the future;
•weWe are exposed to the risk of increased interest rates because a portion of our borrowings is at variable rates of interest;
•weWe may be at a competitive disadvantage compared to our competitors with less debt or with comparable debt at more favorable interest rates and who, as a result, may be better positioned to withstand economic downturns;
•ourOur ability to refinance indebtedness may be limited or the associated costs may increase;
•our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing may be limited in the future;
•itIt may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of such indebtedness;
•weWe may be more vulnerable to general adverse economic and industry conditions; and
•ourOur flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be limited, or we may be prevented from making capital investments that are necessary or important to our operations, growth strategy or efforts to improve operating margins of our business units.
If we cannot service our debt, we will be forced to take actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We can give no assurance that we can do any of these things on satisfactory terms or at all.
Further, the terms of the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement, the Side Car Term Loan Credit Agreement (each as defined in Note 10 — Long-Term Debt), the 2028 Indenture (as defined below) and the 20202029 Indenture (as defined below) provide us and our subsidiaries with the flexibility to incur a substantial amount of additional secured or unsecured indebtedness in the future if we or our subsidiaries are in compliance with certain incurrence ratios set forth therein. Any such incurrence of additional indebtedness may increase the risks created by our current substantial indebtedness. As of December 31, 2021,2023, we were able to borrow up to approximately $565.6to(i) $850.0 million under the Current ABL Facility. All of these borrowingsFacility (as defined in Note 10 — Long-Term Debt), (ii) $95.0 million under the CurrentABL FILO Facility (as defined in Note 10 — Long-Term Debt) and (iii) $92.0 million under the Cash Flow Revolver (as defined in Note 10 — Long-Term Debt). Borrowings under the ABL Facility, the ABL FILO Facility and the Cash Flow Revolver would be secured.
The 2020 Indenture, the Current Cash Flow Credit Agreement, and the Current ABL Credit Agreement, the Side Car Term Loan Credit Agreement, and the indenture governing the terms of our 8.750% Senior Secured Notes (the “2028 Indenture”) and the indenture governing the terms of our 6.125% Senior Notes (the “2029 Indenture”) contain restrictions and limitations that could significantly impact our ability and the ability of most of our subsidiaries to engage in certain business and financial transactions.
The 2020 Indenture, the Current Cash Flow Credit Agreement, and the Current ABL Credit Agreement, (each as defined in Item 7, “Management’s Discussionthe Side Car Term Loan Credit Agreement, the 2028 Indenture and Analysis of Financial Condition and Results of Operations”)the 2029 Indenture contain restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
•incurIncur additional indebtedness or issue certain preferred shares;
•payPay dividends, redeem stock or make other distributions in respect of capital stock;
•repurchase,Repurchase, prepay or redeem the 6.125% Senior Notes (as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) andour subordinated indebtedness;
•makeMake investments;
•incurIncur additional liens;
•transferTransfer or sell assets;
•createCreate restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers;
•makeMake negative pledges;
•consolidate,Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•enterEnter into certain transactions with our affiliates; and
•designateDesignate subsidiaries as unrestricted subsidiaries.
In addition, the Current Cash Flow Revolver (as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) requires us to maintain a maximum total secured leverage ratio under certain circumstances, and the Current ABL Facility (as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) requiresrequire us to maintain a minimum consolidated fixed charge coverage ratio under certain circumstances. The Current ABL Credit Agreement also contains other covenants customary for asset-based facilities of this nature. Our ability to borrow additional amounts under the Current Cash Flow Revolver and the Current ABL Facility depends upon satisfaction of these covenants. Events beyond our control can affect our ability to meetfulfill these covenants.
We are required to make mandatory pre-payments under the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement upon the occurrence of certain events, including the sale of assets and the issuance of debt, in each case subject to certain limitations and conditions set forth in the Current Cash Flow Credit Agreement and the Current ABL Credit Agreement.
In addition, under certain circumstances and subject to the limitations set forth in the Current Cash Flow Credit Agreement and the Current Term Loan Facility (as defined in Item 7.7, “Management’s Discussion and Analysis of Financial Condition and ResultResults of Operations”) may require us to make prepayments of the term loans to the extent we generate excess positive cash flow each year.
Any future financing arrangements entered into by us may also contain similar covenants and restrictions. As a result of these covenants and restrictions, we may be limited in our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise restricted in our activities. These covenants and restrictions could also adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.
Our failure to comply with obligations under the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement, the Side Car Term Loan Credit Agreement, the 2028 Indenture or the 20202029 Indenture as well as others contained in any future debt instruments from time to time, may result in an event of default under the Current Cash Flow Credit Agreement, the Current ABL Credit Agreement, the Side Car Term Loan Credit Agreement, the 2028 Indenture or the 20202029 Indenture, as applicable. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our business, results of operations, financial condition and cash flowsresults of operations could be adversely affected.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability, decrease our liquidity and impact our solvency.
Our indebtedness under the Cash Flow Facilities, the ABL Facilities and the Side Car Term Loan Facility (each as defined in Note 10 — Long-Term Debt) bears interest at variable rates, and our future indebtedness may bear interest at variable rates. As a result, increases in interest rates could increase the cost of servicing such debt and materially reduce our profitability and cash flows. For example, the Board of Governors of the U.S. Federal Reserve System increased interest rates multiple times in 2023 in response to concerns about inflation, and it may raise interest rates again in the future. As of December 31, 2023, assuming all Cash Flow Revolver and ABL Facilities revolving loans were fully drawn and SOFR exceeded 0.00%, each one percent change in interest rates would result in an approximately $10.4 million change in annual interest expense on the Cash Flow Revolver and the ABL Facilities (excluding the impact of any Company hedging arrangements). The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.
In addition, an increase in interest rates would generally lead to a decline in residential and commercial new construction starts and residential repair and remodeling activity, which could adversely affect our business, financial condition and results of operations. See Risk Factor “Our industry is highly sensitive to macroeconomic conditions. Negative economic events including, but not limited to, actual or perceived economic downturns, lower business and consumer confidence, high interest rates, inflation, and lower new construction starts and repair and remodeling activity may materially and adversely affect the outlook for our business, financial condition and results of operations.”
The Cash Flow Facilities, the ABL Facilities and the Side Car Term Loan Facility bear a variable rate of interest that is based on the Secured Overnight Financing Rate (“SOFR”) which may have consequences for us that cannot be reasonably predicted and may adversely affect our liquidity and financial condition.
Borrowings under the Cash Flow Facilities, the ABL Facilities and the Side Car Term Loan Facility bear interest at a rate per annum of either, at our election, (i) term SOFR plus a margin or (ii) an alternative base rate plus a margin. Although SOFR has been endorsed by the Alternative Reference Rates Committee as its preferred replacement for the London Interbank Offered Rate (“LIBOR”), it remains uncertain whether or when SOFR or other alternative reference rates will be widely accepted by lenders as the replacement for LIBOR. This may, in turn, impact the liquidity of the SOFR loan market, and SOFR itself. Since the initial publication of SOFR, daily changes in the rate have, on occasion, been more volatile than daily changes in comparable benchmark or market rates, and SOFR over time may bear little or no relation to the historical actual or historical indicative data. SOFR is observed and backward-looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members.
It is possible that the volatility of and uncertainty around SOFR as a LIBOR replacement rate and the applicable credit adjustment would result in higher borrowing costs for us, and would adversely affect our liquidity, financial condition, and earnings.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms or at all.
Although we believe that our current cash position and the additional committed funding available under the Current ABL FacilityFacilities and the Current Cash Flow Revolver is sufficient for our current operations, any reductions in our available borrowing capacity, or our inability to renew or replace our debt facilities, when required or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. Our ability to secure additional financing or financing on favorable terms and to satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit generally, economic and market conditions and financial, business and other factors, many of which are beyond our control.
If financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution.
Our credit ratings are important to our cost of capital. The major debt rating agencies routinely evaluate our debt based on a number of factors, which include financial strength and business risk as well as transparency with rating agencies and timeliness of financial reporting. A downgrade in our debt rating could result in increased interest and other expenses on our existing variable interest rate debt, and could result in increased interest and other financing expenses on future borrowings. Downgrades in our debt rating could also restrict our access to capital markets and affect the value and marketability of our outstanding notes.
Our ability to access future financing also may be dependent on regulatory restrictions applicable to banks and other institutions subject to U.S. federal banking regulations, even if the market would otherwise be willing to provide such financing.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability, decrease our liquidity and impact our solvency.
To the extent LIBOR exceeds 0.00%, our indebtedness under the Current Cash Flow Facilities (as defined in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and the Current ABL Facility will bear interest at variable rates, and our future indebtedness may bear interest at variable rates. As a result, increases in interest rates could increase the cost of servicing such debt and materially reduce our profitability and cash flows. As of December 31, 2021, assuming all Cash Flow Revolving Credit Facility and Current ABL Facility revolving loans were fully drawn and LIBOR exceeded 0.00%, each one percent change in interest rates would result in approximately a $33.3 million change in annual interest expense on the Current Term Loan Facility and the Current ABL Facility (excluding the impact of any Company hedging arrangements). The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.
The phase-out of LIBOR could increase our interest expense and have a material adverse effect on us.
Borrowings under our Current Cash Flow Facilities and the Current ABL Facility use LIBOR as a benchmark for establishing the applicable interest rate. The Financial Conduct Authority of the United Kingdom ceased the publication of the 1-week and 2-month LIBOR offered rates on December 31, 2021. However, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Although our borrowing arrangements provide for alternative base rates, those alternative base rates historically would often have led to increased interest rates, in some cases significantly higher, than those we paid based on LIBOR, and may similarly be higher in the future. Therefore, if LIBOR ceases to exist, the interest rates on our Current Term Loan Facility and Current ABL Facility will likely change. The consequences of the phase out of LIBOR cannot be entirely predicted at this time. Any alternative rate for calculating interest with respect to our outstanding indebtedness may not be as favorable or perform in the same manner as LIBOR and could lead to an increase in our interest expense or could impact our ability to refinance some or all of our existing indebtedness. In addition, the transition process may involve, among other things, increased volatility or illiquidity in financial markets, which could also have an adverse effect on us whether or not any replacement rate applicable to our borrowings is affected. Any such effects of the transition away from LIBOR, as well as other unforeseen impacts, may result in increased interest expense and other expenses, difficulties, complications or delays in connection with future financing efforts or otherwise have a material adverse impact on our financial condition.
Item 1B. Unresolved Staff Comments.
There are no unresolved staff comments outstanding with the SEC at this time.
Item 2. 1C. Cybersecurity
Risk Management and Strategy
Risk Assessments
Properties.
The Company recognizes the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data. The Company has integrated cybersecurity risk management into our broader enterprise risk management framework to promote a company-wide culture of cybersecurity risk awareness and management. This integration aims to ensure that cybersecurity considerations are an integral part of our decision-making processes at every level.
We maintain an enterprise risk management program (“ERM”) designed to assess, identify, manage and mitigate material risks, including cybersecurity risk. ERM is a Company-wide initiative that involves both the Board of Directors and the Company’s management. The program is designed to (i) identify and assess risks most critical to the Company’s success including through detailed analysis of the likelihood of occurrence and potential impact of each risk, (ii) assign individual executives the responsibility of managing those risks, and (iii) align those management assignments with appropriate board-level oversight.
Our corporate headquartersGeneral Counsel and Assistant General Counsel – Compliance drive the program. The executive leadership team, including our Chief Executive Officer, and the Company’s management team, comprised of department leaders and subject matter experts, are responsible for identifying, assessing managing and mitigating risks. With respect to cybersecurity risk, our legal and compliance team works closely with our IT leaders to evaluate and address cybersecurity risks in alignment with our business objectives and operational needs.
External experts supplement our internal expertise as necessary. Risks identified as significant risks are communicated to the Board of Directors, who ultimately oversees the program both directly and indirectly through Board Committees, such as the Audit Committee.
Risk management, including risks related to cybersecurity is also incorporated into the review and approval process for our project management organization (“PMO”).
Our cybersecurity risk management program includes enterprise-wise monitoring of cyber activity to identify and analyze potential events that may have an adverse effect or impact on the Company’s assets, systems, resources or reputation. This monitoring is designed to identify both external activity and routine internal activity for behavior that may be unusual or potentially malicious. Depending upon the nature and severity of the risk, cybersecurity monitoring and identification can result in automated processes to immediately block and remove undesired risks, cybersecurity team review and action, or both. The Cybersecurity Incident Response Plan provides a framework for addressing a cyber-crisis, cyber-incident and/or data breach, which could include activating crisis, or business continuity recovery plans, as appropriate. These plans are regularly reviewed and updated by our Chief Information Officer and communicated to appropriate stakeholders.
Third-Party Engagement
Recognizing the complexity and evolving nature of cybersecurity threats, the Company engages with a range of external experts, including cybersecurity assessors, consultants, and auditors in evaluating and testing our risk management systems. These partnerships enable us to leverage specialized knowledge and insights, with the aim of modeling our cybersecurity strategies and processes after industry best practices. Our collaboration with these third parties includes managed services, team augmentation, independent audits, vulnerability management, threat and attack and consultation on security risks enhancements. Some engagements involve point in time activities with end products or reporting while others involve ongoing monitoring and management of risk across the Company.
Third-Party Risk Management
Because we are aware of the risks associated with third-party service providers, such as suppliers, software and cloud-based service providers, and cybersecurity partners, the Company implements processes to oversee and manage these risks. We assess the risks from cybersecurity threats that impact select suppliers and third-party service providers with whom we share personal identifying and confidential information. We require third parties to maintain security controls to protect our confidential information and data and notify us of breaches that may impact our data. Third parties that interact with our information or have access to our systems may have additional security requirements depending on the levels of risk. When new third-party risks are identified, we require those impacted to implement appropriate remediations or controls. Identified risks are documented and tracked along with general ongoing monitoring of third parties external risk posture. This approach is designed to mitigate risks related to data breaches or other security incidents originating from third party service providers.
Learning from Threats/Incidents
During the last year we have not identified cybersecurity threats or challenges that have materially impaired our operations or financial condition. Our monthly baselines for cybersecurity are closely tracked and show a continual improvement and reduction of risk over the last three years. Similarly, incident investigations over the same period have reduced in severity and frequency. These internal metrics are consistent with our third-party risk scorecard subscriptions which similarly show a year-over-year improvement in our risk posture over the last three years. See Risk Factor, “Damage to our computer infrastructure and software systems and issues relating to the incorporation of artificial intelligence (“AI”) solutions into our systems, could harm our business.”
Board Oversight
The Board of Directors has established robust oversight mechanisms designed to ensure effective governance in managing risks associated with cybersecurity threats due to the significance of these threats to our operational integrity. The Board of Directors have delegated to the Audit Committee oversight over cybersecurity risk.
Governance – Conveying Risks to the Board of Directors
The Chief Information Officer (“CIO”) and Chief Financial Officer (“CFO”) play a pivotal role in informing the Audit Committee on cybersecurity risks. They provide comprehensive briefings to the Audit Committee on a quarterly basis at the Audit Committee meetings. These briefings encompass a broad range of topics, including:
•Current cybersecurity landscape and emerging threats
•Status of ongoing cybersecurity initiatives and strategies
•Incident reports and learnings from cybersecurity events; and
•Compliance with regulatory requirements and industry standards.
In addition to our scheduled meetings, the Audit Committee, CIO and CFO maintain an ongoing dialogue regarding emerging or potential cybersecurity risks to ensure that the Board Director’s oversight is proactive and responsive. The Audit Committee actively participates in strategic decisions related to cybersecurity, offering guidance for major initiatives. Furthermore, significant cybersecurity matters, and strategic risk management decisions are escalated to the Audit Committee or Board of Directors through the Board-approved escalation protocol.
Governance and Management
Primary responsibility for assessing, monitoring and managing our cybersecurity risks rests with the Director Cyber Security under the oversight of the Chief Information Officer. With over 20 years in the field of IT and cybersecurity, the Director, Cybersecurity has significant professional experience including senior technical leadership roles along with consulting and management roles at public and private companies in the manufacturing , chemical and oil and gas sectors. His in-depth knowledge and experience are instrumental in developing and executing our cybersecurity strategies. He holds a masters in science degree from the University of Texas at Austin and professional certifications that include a CISSP and an active U.S. Government security clearance. Our Director Cyber Security oversees our cybersecurity governance programs and leads a team responsible for cybersecurity risk assessment, continuous monitoring for internal and external threats and vulnerabilities, remediation of known risks, and employee cybersecurity training.
Management Oversight
The Director Cyber Security and Chief Information Officer are regularly informed about the latest developments in cybersecurity, including potential threats and innovative risk management techniques. Keeping senior management abreast of the cybersecurity posture and potential risks facing the Company is viewed as crucial for the effective prevention, detection, mitigation, and remediation of cybersecurity incidents. The Director Cyber Security leads a team of Cybersecurity Engineers and manages vendor relationships and is responsible for implementation and oversight of processes for monitoring enterprise information systems. These processes include the deployment of advanced cybersecurity platforms which continually assess, remediate and provide regular measures and regular system audits so that identified threats and potential vulnerabilities can be addressed. In the event of a cybersecurity incident, the Director Cyber Security is equipped with our Cybersecurity Incident Response Plan. This plan includes an escalation protocol to ensure Company leaders and the Board of Directors are aware of and can oversee response plans, immediate actions to mitigate the impact and long-term strategies for remediation and prevention of future incidents. Processes also include escalating potentially material incidents directly to the General Counsel to ensure incidents are reported as required by applicable law and regulation. Both the Board of Directors and the Company’s IT Steering committee, which is comprised of senior executives are kept updated on any material incidents, Cybersecurity initiatives and strategic roadmap.
Item 2. Properties.
Our principal executive office is located in Cary, North Carolina. We own and lease properties primarily in the United States, Canada, and Mexico. The following table listsprovides additional information by reportable segment and geography with respect to our principal manufacturing and warehousing facilitiesproperties as of December 31, 2021:2023:
| | | | | | | | |
Facility | | Product type/Usage |
Commercial Segment: | | |
Florence, Alabama(1)
| | Metal building products |
Atwater, California | | Metal building products |
Lithia Springs, Georgia | | Metal building products |
Marietta, Georgia | | Metal coil coating |
Monticello, Iowa | | Metal building products |
Mount Pleasant, Iowa | | Metal building products |
Brookhaven, Mississippi(1)
| | Metal building products |
Hernando, Mississippi | | Metal building products |
Jackson, Mississippi | | Metal coil coating |
Cambridge, Ohio | | Metal coil coating |
Middletown, Ohio | | Metal coil coating |
Elizabethton, Tennessee | | Metal building products |
Lexington, Tennessee | | Metal building products |
Houston, Texas(2)
| | Metal building products |
Monterrey, Mexico | | Metal building products |
Siding Segment: | | |
Kearney, Missouri(1)
| | Vinyl siding and other (trim) |
Kansas City, Missouri(1)
| | Warehousing |
Sidney, Ohio | | Metal |
Gaffney, South Carolina | | Injection molded |
Gaffney, South Carolina(1)
| | Warehousing |
Jasper, Tennessee | | Vinyl siding |
Harrisonburg, Virginia(1)
| | Warehousing |
Stuarts Draft, Virginia | | Vinyl siding |
Martinsburg, West Virginia(1)
| | Vinyl siding |
Martinsburg, West Virginia(1)
| | Warehousing |
Brantford, Ontario, Canada(1)
| | Warehousing |
Paris, Ontario, Canada | | Vinyl siding |
Windows Segment: | | |
Phoenix, Arizona(1)
| | Vinyl and aluminum windows |
Sacramento, California(1)
| | Vinyl windows |
Vacaville, California(1)
| | Vinyl windows |
Denver, Colorado(1)
| | Vinyl windows and doors and warehousing |
Lithia Springs, Georgia(1)
| | Vinyl windows and warehousing |
Peachtree City, Georgia(1)
| | Vinyl windows |
Lansing, Illinois(1)
| | Vinyl windows |
Paris, Illinois | | Vinyl windows |
Paris, Illinois(1)
| | Warehousing |
North Brunswick, New Jersey(1)
| | Vinyl windows |
Welcome, North Carolina(1)
| | Vinyl windows |
Marion, Ohio(1)
| | Vinyl windows |
Walbridge, Ohio(1)
| | Vinyl windows and warehousing |
Bryan, Texas | | Vinyl and aluminum windows |
Dallas, Texas(1)
| | Vinyl and aluminum windows |
Salt Lake City, Utah(1)
| | Vinyl windows |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufacturing Facilities | | Distribution and Warehouse Facilities |
| Owned | | Leased | | Total | | Owned | | Leased | | Total |
| Aperture Solutions | 8 | | | 26 | | | 34 | | | — | | | 19 | | | 19 | |
| Surface Solutions | 9 | | | 16 | | | 25 | | | 1 | | | 37 | | | 38 | |
| Shelter Solutions | 17 | | | 17 | | | 34 | | | 5 | | | 10 | | | 15 | |
| Total | 34 | | | 59 | | | 93 | | | 6 | | | 66 | | | 72 | |
| U.S. | 30 | | | 56 | | | 86 | | | 6 | | | 45 | | | 51 | |
| Canada | 3 | | | 3 | | | 6 | | | — | | | 21 | | | 21 | |
| Mexico | 1 | | | — | | | 1 | | | — | | | — | | | — | |
| Total | 34 | | | 59 | | | 93 | | | 6 | | | 66 | | | 72 | |
| | | | | | | | |
Rocky Mount, Virginia(1)(2)
| | Vinyl and aluminum windows and other (doors) and warehousing |
Auburn, Washington(1)
| | Vinyl windows |
Spokane Valley, Washington(1)
| | Vinyl windows |
Ellenboro, West Virginia | | Vinyl windows |
Pennsboro, West Virginia | | Vinyl windows |
St. Marys, West Virginia | | Vinyl windows and other (trim) |
Vienna, West Virginia(1)
| | Warehousing |
Calgary, Alberta, Canada(1)
| | Vinyl and aluminum windows and other (doors) and warehousing |
St. Thomas, Ontario, Canada | | Vinyl windows |
(1) Location is leased as of December 31, 2021 | | |
(2) Location has multiple principal facilities | | |
Item 3. Legal Proceedings.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium WindowsJanuary 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 Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019. The Company has a $3.9 million liability related to the settlement in other current liabilities on the Company’s consolidated balance sheet as of December 31, 2021.
On November 14, 2018, an individual stockholder, Gary D. Voigt filed a putative class action Complaint in the Delaware Court of Chancery againstv. Affeldt et al., C.A. No. 2023-0091-JTL (Del. Ch.) and Whitebark Value Partners LP and Robert Garfield v. Clayton Dubilier & Rice, LLC (“CD&R”)et al., Clayton, Dubilier & Rice Fund VIII, L.P. (“C.A. No. 2023-0092-JTL (Del. Ch.). In both complaints, the plaintiffs allege that CD&R Fund VIII”), and its affiliates controlled the Company prior to the transaction and that certain directors of the Company. Voigt purported to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholdersand officers of the Company, as well as CD&R and derivatively on behalfits affiliates, breached their fiduciary duties and engaged in conduct resulting in a sale of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserted claims for breach of fiduciary duty and unjust enrichment againstCornerstone Building Brands public stockholders’ shares to CD&R Fund VIIIat an unfair price. The plaintiffs seek unspecified monetary damages, attorneys’ fees, expenses, and CD&R,costs. The court consolidated the two cases, and on May 3, 2023, selected Whitebark Value Partners LP as lead plaintiff. On July 14, 2023, the defendants moved to dismiss the operative complaint. The motion to dismiss was denied on January 10, 2024. The Company intends to vigorously defend against these claims. 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.
In June 2023, a purported former stockholder filed a class action complaint in the United States District Court for breachthe District of fiduciary duty against twelve director defendantsDelaware alleging that the Company’s disclosures issued in connection with the Merger. DefendantsCD&R Merger were materially misleading in violation of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934. The complaint is captioned Water Island Merger Arbitrage Institutional Commingled Master Fund, L.P. v. Cornerstone Building Brands et al., Case No. 1:23-cv-00701 (D. Del.). The complaint alleges that the Company’s directors and officers issued misleading disclosures, which caused stockholders to approve the CD&R Merger at an unfair price. The plaintiff seeks unspecified monetary damages, interest, attorneys’ fees, expenses, and costs. On December 8, 2023, the defendants moved to dismiss the Amended Complaintoperative complaint, and, on February 10, 2020,in the court denied the motions except asalternative, to four of the director defendants. Voigt sought damages in an amount to be determined at trial. On August 25, 2021, the parties to the case filed a Stipulation of Compromise and Settlement (“Stipulation”) setting forth their agreement to settlestay the litigation. The Stipulation provides for CD&R, CD&R Fund VIII, andCompany intends to vigorously defend against these claims. The Company cannot predict with any degree of certainty the eight director defendants to cause their respective insurers to pay a totaloutcome of $100 million intothis matter or determine the extent of any potential liabilities. The Company also cannot provide an escrow account that will be used to pay escrow expenses, satisfy any fee and incentive amounts awarded by the court in favor of plaintiff and plaintiff’s counsel, and distribute the remaining funds to the Company. The Stipulation further provided that plaintiff’s counsel would apply for an award of attorneys’ fees and litigation expenses in an amount of up to 23.5%estimate of the $100 million payment by the insurers, and that an incentive award for the named plaintiff will be paid solely from the amountpossible loss or range of plaintiff attorneys’ fees awarded. This Stipulation required court approval. On January 19, 2022, the Court held a hearing, verbally approved the Stipulation, and approved the plaintiff’s counsel’s application for a fee award of 23.5% of the $100 million settlement payment and the incentive award. On January 20, 2022, the Court entered an Order and Final Judgment approving the Stipulation. The Stipulation represents a gain contingency in accordance with ASC 450, Contingencies, that has not been recorded as the matter was not resolved as of December 31, 2021. The proceeds from the Stipulation will be recorded when received.loss.
As a manufacturer of products primarily for use in nonresidentialresidential and residentialcommercial building construction, we are inherently exposed to various typesa variety of contingentlitigation and other proceedings incidental to its business, including lawsuits involving claims both assertedfor damages arising out of its products, employment matters, commercial disputes, product liability and unasserted, in the ordinary course of business. As a result, from time to time, we and/personal injury as well as regulatory investigations or our subsidiaries become involved in various legal proceedings or other contingent matters arising from claims, or potential claims.enforcement. We insure against these risks to the extent deemed prudent by our management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable, and recurring in nature, such as claims for general liability.nature. The Company regularly reviews the status of on-going proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. ManagementBased on current information, experience, and applicable law management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
COMMON STOCKMarket Information
Our Common StockAs of July 25, 2022, the Company’s common stock is listedno longer publicly traded either on a stock exchange or in the NYSE under the symbol “CNR.” over-the-counter market.
Holders
As of February 22, 2022,23, 2024, there were 15,821 holders of record and an estimated 35 beneficial owners of our Common Stock.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table shows our purchases of our Common Stock during the fourth quarter of fiscal 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1) | | Average
Price Paid
per Share | | Total Number of
Shares Purchased
as Part of Publicly Announced
Programs | | Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Programs(2) |
| October 03, 2021 to October 30, 2021 | | — | | | $ | — | | | — | | | $ | 49,145 | |
| October 31, 2021 to November 27, 2021 | | 400,656 | | | $ | 16.61 | | | — | | | $ | 49,145 | |
| November 28, 2021 to December 31, 2021 | | 11,157 | | | $ | 15.16 | | | — | | | $ | 49,145 | |
| Total | | 411,813 | | | $ | 16.57 | | | — | | | |
(1)The total number of shares purchased includes shares of restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of restricted stock. The required withholding is calculated using the closing sales price on the previous business day prior to the vesting date as reported by the NYSE.
(2)On March 7, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to an aggregate of $50.0 millionwas one holder of the Company’s Common Stock. Under this repurchase program, the Company is authorized to repurchase shares, if at all, at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of this program. As of December 31, 2021, approximately $49.1 million remained available for stock repurchases under the program.
STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the cumulative stockholder return on our Common Stock from October 30, 2016 to the end of the fiscal year ended December 31, 2021 with the cumulative total return on the (i) S&P SmallCap 600 Index and (ii) S&P Smallcap Building Products peer group. The comparison assumes $100 was invested on October 30, 2016 in our Common Stock and in each of the foregoing indices and assumes reinvestment of dividends.
In accordance with the rules and regulations of the SEC, the above stock performance chart shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.common stock.
Item 6. Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RECENT DEVELOPMENTS
On February 13, 2022, funds affiliated with Clayton Dubilier & Rice, LLC (“CD&R”) submitted a non-binding proposal to acquire all of the Company’s outstanding shares of common stock that CD&R does not already own for a purchase price of $24.65 in cash per share (the “CD&R Offer”).
The CD&R Offer stated that any transaction would be subject to (i) approval by a special committee (“Special Committee”) of our independent directors; and (ii) a vote in favor of the transaction by a majority of the voting power represented by the shares of our common stock owned by stockholders not affiliated with CD&R.
The board of directors of the Company (the “Board”) previously formed a Special Committee to evaluate and consider any potential or actual proposal from CD&R [and any other alternative proposals or other strategic alternatives that may be available to the Company].
The CD&R Offer provides that CD&R reserves the right to withdraw or modify the CD&R Offer at any time and no legally binding obligation with respect to any transaction will exist unless and until mutually acceptable definitive documentation is executed and delivered by us and CD&R. There can be no assurance that the transaction proposed by CD&R or any related transaction will be completed or as to the terms of any such potential transaction, including with respect to pricing or timing.
BUSINESS OVERVIEWOur Business
Cornerstone Building Brands Inc. is the largest manufacturer ofa holding company incorporated in Delaware. The Company is a leading exterior building products manufacturer, by sales, in North America. The Company serves residential and commercial customers across new construction and the repair &and remodel end markets. Our mission is to be relentlessly committed to our customers and to create great exterior building solutions that enable communities to grow and thrive. All references herein for the years “2023,” “2022,” and “2021” represent the years ended December 31, 2023, December 31, 2022 and December 31, 2021.
We have developedThe Company is organized in three reportable segments, which are as follows: Aperture Solutions, Surface Solutions and continue to implement a well-defined business strategy focused on (i) driving profitable growth in new and existing markets; (ii) leveraging operational excellence across our businesses; and (iii) implementing a capital allocation framework balanced between a focus on opportunistic investment in high return initiatives and continued debt repayment.
We believe that by focusing on operational excellence every day, creating a platform for future growth and investing in market-leading residential and commercial building brands, we will deliver unparalleled financial results. We design, engineer, manufacture, install and market external building products through our three operating segments: Windows, Siding, and Commercial.
Our manufacturing processes are vertically integrated, which we believe provides cost and competitive advantages. As the leading manufacturer of vinyl windows, vinyl siding, metal roofing and wall systems and metal accessories, Cornerstone Building Brands combines a diverse portfolio of products with an expansive national footprint that includes over 21,700 employees at manufacturing, distribution and office locations primarily in North America.
At Cornerstone Building Brands, corporate stewardship is a responsibility that is deeply embedded in our 75-year history. Our business practices have given us the staying power to make a real difference in countless cities and neighborhoods.
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of material costs relative to other building materials, the level of residential and nonresidential construction activity, repair and remodel demand and the availability and cost of financing for construction projects. Our sales normally are lowerShelter Solutions. There was no change in the firstcomposition of our reportable segments:
•Through our Aperture Solutions reportable segment, we offer a broad line of windows and fourth fiscal quarters of each year compared to the second and third fiscal quarters because of unfavorable weather conditionsdoors at multiple price-points for construction and typical business planning cycles affecting construction.
Markets We Serve
Our products are available across several large and attractive end markets, including residential new construction, residential repair and remodel and low-rise non-residential construction. We believe that there are favorable underlying fundamental factors that will drive long-term growth across the end markets in which we operate. We also believe the recent COVID-19 pandemic, while still causing economic uncertainty worldwide, has driven strong demand for residential repair and remodel activity, residential new construction and selectrepair and remodel end markets in the United States (“U.S.”) and Canada. Our 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.
•Our Surface Solutions reportable segment offers a broad suite of exterior surface solutions products and accessories at multiple price-points for the residential new construction and repair and remodel end markets. Our main products include vinyl siding and accessories, cellular PVC trim, vinyl fencing and railing, stone veneer and gutter protection products, as well as stone installation services.
•In our Shelter Solutions reportable segment, we design, engineer, manufacture and distribute an 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. We define low-rise commercial construction as building applications of up to five stories.
Costs related to other business activities, primarily our corporate headquarters functions, are disclosed separately from the three reportable segments as “Corporate and Other.” See Note 16 — Reportable Segment and Geographical Information, in our Consolidated Financial Statements located in Part II, Item 8 of this Form 10-K for additional information.
Merger Transaction
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”), investment 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 low-rise non-residential construction market, such as distribution, warehouse, healthcareMerger (the “Effective Time”), we became a privately held company and educational facilities in suburban regions; however,our common shares are no longer traded on the COVID-19 pandemic has also caused challenges in other areas of non-residential construction, most notably in retail and commercial office facilities in densely populated urban centers, where we have minimal, if any, participation. We believe our business is well-New York Stock Exchange.
positioned to benefit from broader societalAt the Effective Time, in accordance with the terms and population trends favoring suburban regions, as employment and living preferences shift towards such regions.
Cornerstone Building Brands is deeply committedconditions set forth in the Merger Agreement, each share of Company common stock outstanding immediately prior to the communities where our customers and employees live, work and play. We recognize that our customers are increasingly environmentally conscious in their purchasing behavior, and we believe our sustainable solutions favorably address these evolving consumer preferences. For example, certain products in our portfolio are high in recycled end content, virtually 100% recyclable at the end of their useful life and often manufactured to meet or exceed specified sustainability targets, such as ENERGY STAR and LEED certifications. We recognize that efficient use of recycled materials helps to conserve natural resources and reduces environmental impact, and we are committed to driving these sustainable practices throughout our business.
COVID-19 Update
We experienced a significant decrease in customer demand across all our markets during the second quarter of 2020 due to the COVID-19 pandemic mostly due to delays in construction activity driven by temporary closures of non-life sustaining businesses. The continuing impactEffective Time of the pandemic on our future consolidated resultsMerger (other than (i) shares of operations is uncertain. During 2020,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 quickly implemented a range(other than CD&R, certain investment funds managed by CD&R and other affiliates of actions aimed at reducing costs and preserving liquidity. These actions included the closureCD&R that held shares of our Ambridge, Pennsylvania Commercial facility and Corona, California Windows facility, permanent workforce reductions, employee furloughs, a hiring freeze, a deferral of annual wage raises, and reducing discretionary and non-essential expenses, such as consulting expenses. Additionally, we reduced capital expenditures to focus on key strategic initiatives, such as automation, product innovation, and critical maintenance items. We believe our business model, our existing balances of domestic cash and cash equivalents, currently anticipated operating cash flows, and overall liquidity will be sufficient to meet our cash needs arisingCompany common stock) who did not vote in the ordinary course of business for the next twelve months and positions us to manage our business through this crisis as it continues to unfold. We will continue to evaluate the nature and extentfavor of the COVID-19 pandemic’s impact on our financial condition, resultsMerger Agreement or the Merger and who have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of operationsthe 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 cash flows.subject to any required withholding taxes.
Significant Business Developments
OurIn addition to the Merger, our significant business development activities in 2021 include the: (i)2022 included the divestiture of our coil coating business in June 2022. Further, we continued to pursue tuck-in acquisitions in 2023. In August 2023, we completed the acquisition of Prime Windows LLC (April 2021)M.A.C. Métal Architectural Inc. (“MAC Metal”), (ii) divestituresa manufacturer of high-end steel siding and roofing products, and in December 2023, we completed the acquisition of the Eastern Architectural Systems (“EAS”) business, which manufactures of custom-made aluminum and vinyl impact windows and doors.
Financial Measures
Predecessor and Successor Periods
The Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides an overview of our IMPfinancial condition as of December 31, 2023 and DBCI businesses (August 2021), (iii) acquisitionDecember 31, 2022 and the results of Cascade Windows, Inc. (August 2021),operations for the period July 25, 2022 through December 31, 2022 (“Successor”) and (iv) acquisitionfor periods prior to July 25, 2022 (“Predecessor”). Our Consolidated Statements of Union Corrugating Company Holding, Inc. (December 2021). In(Loss) Income as reported in our Consolidated Financial Statements for these periods are prepared in accordance with U.S. GAAP. Although U.S. GAAP requires that we report on our results for the period from July 25, 2022 through December 31, 2022 separately from the period from January 1, 2022 through July 24, 2022, management views the Company’s operating results for the twelve months ended December 31, 2022 by combining the results of the applicable Predecessor and Successor periods because such presentation provides the most meaningful comparison of our results to prior periods.
To enhance the analysis of our operating results for the periods presented, we have included a discussion of selected financial and operating data of the Predecessor and Successor on a combined basis. The presentation consists of the mathematical addition in April 2021, we amended our cash flow creditof selected financial and ABL credit agreements. See Note 4 — Acquisitions, Note 5 — Divestituresoperating data of the Successor for the period from July 25, 2022 through December 31, 2022 with the comparable financial and Note 13 — Long Term Debt,operating data of the Predecessor for the period from January 1, 2022 through July 24, 2022. There are no other adjustments made in the notescombined presentation. The mathematical combination of selected financial and operating data is included below under the heading “Combined” and this data is a non-GAAP presentation. Management believes that this selected financial and operating data provides investors with useful information upon which to assess our operating performance.
Seasonality
Our sales volume is generally higher during our second and third quarters, which is historically the consolidated financial statementspeak season for more information on our divestitures, acquisitions, and debt.
Residential (Windows and Siding)
Our residential building products are typically installed on a new construction home 90and repair and remodeling in North America. Seasonal variations in our operational results may be impacted by inclement weather and other conditions. Working capital requirements have generally been greatest during the first half of our fiscal year due to 120 days after the start of the home, therefore, there is a lag between the timing of the single-family housing start datebuildup of inventory to support the heavier construction season.
Impact of Acquisitions and Divestitures
In our MD&A, the time in which our products are installed on a home. From an industry perspective, we evaluateimpact of acquisitions and divestitures, when presented, is quantified as the new construction environment by reviewing the U.S. Census Bureau single family housing start statistics to assess the performanceportion of the new construction market for a normal period. We evaluated U.S. Census Bureau single family housing starts forpreceding twelve months post- or pre-transaction where no comparable period is available. Specifically, in our Shelter Solutions reportable segment, we completed the year endedsale of our coil coatings business in June 2022. In our Surface Solutions reportable segment, we completed the acquisition of MAC Metal in August 2023. In our Aperture Solutions reportable segment, we completed the acquisition of EAS in December 31, 2021 as compared to December 31, 2020 to assess the demand impacts for our products, noting that single-family housing starts increased over 12% on a seasonally adjusted annual rate (SAAR) basis due to overall economic conditions specifically for new construction. For Canada, we evaluate the Canada Mortgage and Housing Corporate statistics, which showed housing starts increased by 25% for the year ended December 31, 2021 compared to 2020.2023.
The graph below shows the seasonally adjusted annual single family residential new construction starts as of each year end since 1982 as compiled and reported by U.S. Census Bureau:
In addition to new construction, we also evaluate the repair and remodel market to assess residential market conditions by evaluating the Leading Indicator of Remodeling Activity (“LIRA”). For the year ended December 31, 2021, LIRA reflected that the trailing 12 months of remodeling activity increased 9% from 2020. While LIRA is a remodeling economic indicator as it tracks all remodeling activity including kitchen, bathroom and low ticket remodeling, it is not a specific metric for our residential businesses measuring solely windows and siding remodeling growth. Therefore, we utilize this index as a trend indicator for our repair and remodeling business.
Finally, we assess our performance relative to our competitors and the overall siding industry by evaluating the marketing indicators produced by the Vinyl Siding Institute (“VSI”), a third party which summarizes vinyl siding unit sales for the industry. For the year ended December 31, 2021, the VSI reported that siding units increased 9% for the industry. Overall, our Siding segment, including stone veneer, is weighted to the repair and remodel market with approximately 53% of our net sales being attributed to repair and remodeling with the remaining 47% attributed to the new construction market. Historically, we evaluate our net sales performance within the Windows segment by evaluating our net sales for the new construction market and the repair and remodel market. Overall, our Windows segment is relatively balanced with approximately 51% of our net sales attributed to new construction with the remaining 49% attributed to the repair and remodel market.
Commercial
Our sales and earnings are subject to both seasonal and cyclical trends and are influenced by general economic conditions, interest rates, the price of steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales in the Commercial segment normally are lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction.
The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. Following a significant downturn in 2008 and 2009, the current recovery of low-rise construction has been uneven and slow. The COVID-19 pandemic interrupted some signs of steady growth in recent years. We believe that the nonresidential construction industry will return to mid-cycle levels of activity over the next several years.
The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1982 as compiled and reported by Dodge Data & Analytics, Inc. (“Dodge”):
Current market estimates continue to show recovery across the nonresidential construction markets from the 2020 dip, returning above 2019 levels. According to Dodge Data & Analytics, Inc. (“Dodge”), low-rise nonresidential construction starts as measured in square feet and comprising buildings of up to five stories, were up in fiscal 2021 by approximately 19% as compared to our fiscal 2020.
The leading indicators that we follow and that typically have the most meaningful correlation to nonresidential low-rise construction starts are the American Institute of Architects’ (“AIA”) Architecture Mixed Use Index, Dodge Residential single family starts and the Conference Board Leading Economic Index (“LEI”). Historically, there has been a very high correlation to the Dodge low-rise nonresidential starts when the three leading indicators are combined and then seasonally adjusted.
RESULTS OF OPERATIONSResults of Operations
This section of the Form 10-K generally discussesincludes a comparison of fiscal 2023 to fiscal 2022. A similar discussion and analysis that compares fiscal 2022 to fiscal 2021 and fiscal 2020 items and year-over-year comparisons of these periods. Discussions of fiscal 2019 items and year-over-year comparisons between fiscal 2020 and fiscal 2019 that are not included in this Form 10-K canmay be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2022.
The following table represents key results of operations on a consolidated basis for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| (Amounts in thousands) | | | | | | | | December 31,
2021 | | December 31,
2020 | | $ change | % change |
| Net sales | | | | | | | | $ | 5,583,137 | | | $ | 4,617,369 | | | $ | 965,768 | | 20.9 | % |
| Gross profit | | | | | | | | 1,199,075 | | | 1,050,320 | | | 148,755 | | 14.2 | % |
| % of net sales | | | | | | | | 21.5 | % | | 22.7 | % | | | |
| Selling, general and administrative expenses | | | | | | | | 649,472 | | | 579,200 | | | 70,272 | | 12.1 | % |
| % of net sales | | | | | | | | 11.6 | % | | 12.5 | % | | | |
| Restructuring and impairment charges, net | | | | | | | | 26,247 | | | 34,120 | | | (7,873) | | (23.1) | % |
| Strategic development and acquisition related costs | | | | | | | | 27,875 | | | 19,341 | | | 8,534 | | 44.1 | % |
| Interest expense | | | | | | | | 191,301 | | | 213,610 | | | (22,309) | | (10.4) | % |
| Net income (loss) | | | | | | | | 665,859 | | | (482,778) | | | 1,148,637 | | (237.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined * |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 6,480,232 | |
| Gross profit | 1,204,992 | | | 512,099 | | | | 806,385 | | | 1,318,484 | |
| % of net sales | 22.3 | % | | 18.7 | % | | | 21.6 | % | | 20.3 | % |
| Selling, general and administrative expenses | 954,718 | | | 429,361 | | | | 562,836 | | | 992,197 | |
| % of net sales | 17.7 | % | | 15.6 | % | | | 15.1 | % | | 15.3 | % |
| Loss (gain) on divestitures | 10,080 | | | 921 | | | | (401,413) | | | (400,492) | |
| Gain on legal settlements | — | | | — | | | | (76,575) | | | (76,575) | |
| Income from operations | 240,194 | | | 81,817 | | | | 721,537 | | | 803,354 | |
| % of net sales | 4.4 | % | | 3.0 | % | | | 19.3 | % | | 12.4 | % |
| Interest expense | (380,706) | | | (157,191) | | | | (101,078) | | | (258,269) | |
| Foreign exchange gain (loss) | 6,768 | | | (4,809) | | | | 686 | | | (4,123) | |
| (Loss) gain on extinguishment of debt | (184) | | | 474 | | | | 28,354 | | | 28,828 | |
| Other income, net | 15,013 | | | 1,140 | | | | 101 | | | 1,241 | |
| (Loss) income before income taxes | (118,915) | | | (78,569) | | | | 649,600 | | | 571,031 | |
| Income tax (benefit) expense | (43,390) | | | (15,073) | | | | 165,814 | | | 150,741 | |
| Net (loss) income | $ | (75,525) | | | $ | (63,496) | | | | $ | 483,786 | | | $ | 420,290 | |
| Non-GAAP financial measure – Adjusted EBITDA* | $ | 745,413 | | | $ | 321,089 | | | | $ | 478,297 | | | $ | 799,386 | |
| % of net sales | 13.8 | % | | 11.7 | % | | | 12.8 | % | | 12.3 | % |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
Net sales - Consolidated net sales for the year ended December 31, 2021 increased by approximately 20.9%2023 decreased $1,077.8 million, or 16.6%, as compared to the year ended December 31, 2020. The increase was primarily2022, mainly due to favorable price actions takenlower volume across all reportable segments, partially offset by the strategic acquisition of MAC Metal in all segments to offset commodity inflation, higher volume mainly from increased demand inAugust 2023 and the residential end markets, and an increase from acquisitions ($113.2 million in the Windows segment from Prime and Cascade and $21.9 million in the Commercial segment from UCC).strategic divestiture of our coil coatings business during June 2022.
Gross profit %as a percentage of net sales - The Company’s gross profit percentage was 21.5%22.3% for the year ended December 31, 2021, which was a 120 basis point decrease from2023 compared to 20.3% for the year ended December 31, 2020. The manufacturing inefficiencies and higher costs2022, primarily due to serve our customers that were brought on by supply chain disruptions and labor constraints drove the decrease in gross profit as a percentage of net sales. This reduction was partially offset by positivefavorable product mix, price mix net of inflation.inflation and manufacturing net efficiencies.
Selling, general and administrative expenses increased 12.1% duringdecreased $37.5 million, or 3.8%, for the year ended December 31, 2021,2023. The prior year included Merger related transaction costs and related employee compensation expenses. These costs were partially offset by an increase in depreciation and amortization in 2023 resulting from the update in the fair market value of property, plant and equipment and intangible assets acquired, shortened useful lives and a higher depreciable base as a result of the Merger.
Loss (gain) on divestitures mainly consists of a net gain recognized in connection with the strategic divestiture of our coil coatings business, with the original gain recognized in June 2022 of $394.2 million, offset by $10 million expense during 2023 resulting from a settlement to finalize working capital.
Gain on legal settlements includes a gain recognized in March 2022 of 76.6 million related to a stockholder litigation settlement.
Interest expense increased by $122.4 million, or 47.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2020.2022. The returnfollowing table sets forth the components of near-term costs, such as variable compensation, professional services, and sales commissions drove the higher selling, general, and administrative expenses at December 31, 2021 as compared to December 31, 2020.interest expense:
Restructuring and impairment charges, net decreased $7.9 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to asset impairments | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Interest on outstanding borrowings | $ | 333,950 | | | $ | 123,378 | | | | $ | 76,451 | | | $ | 199,829 | |
| Cash impact of interest rate swaps | (44,957) | | | (5,388) | | | | 4,330 | | | (1,058) | |
Amortization of interest rate swap fair value(1) | 11,980 | | | 4,564 | | | | — | | | 4,564 | |
Amortization of debt discount, debt issuance costs and purchase accounting fair value adjustment(1) | 79,836 | | | 34,433 | | | | 3,696 | | | 38,129 | |
| De-designation of interest rate swaps | — | | | — | | | | 16,256 | | | 16,256 | |
| Other | (103) | | | 204 | | | | 345 | | | 549 | |
| Total interest expense | $ | 380,706 | | | $ | 157,191 | | | | $ | 101,078 | | | $ | 258,269 | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
(1) The fair value adjustments were made in 2021 which were lower in total than the restructuring charges taken in 2020 in response to the COVID-19 pandemic.
Strategic development and acquisition related costs increased $8.5 million, during the year ended December 31, 2021 compared to the year ended December 31, 2020 as our merger-related activities increased as a result of strategic portfolio rationalization actions to accelerate long-term value creation.
Interest expense decreased $22.3 million or 10.4% in 2021, primarily as a result of the redemption of the $645 million 8.00% Senior Notes coupledconnection with the refinancing of the Current Term Loan Facility.Merger transaction in July 2022.
Consolidated provision (benefit) for income taxes was an expense of $236.0 million for the year ended December 31, 2021 compared to an expense of $5.6 million for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 was 26.2% compared to 1.2% for the year ended December 31, 2020. The change in the effective tax rate was primarily driven by the divestitures and improved financial results for the year ended December 31, 2021, and the impact associated with the goodwill impairment recorded during the year ended December 31, 2020.
Net Income (loss) - Net income was $665.9 million or $5.19 per diluted share. Effective execution of our priorities, which included maintaining cost discipline, strengthening price leadership, driving operational excellence and investing in growth opportunities delivered improved profitability in 2021 (excluding the impact of theForeign exchange gain on sales from the divestitures in 2021 and the impact of the goodwill impairment in 2020).
Segment Results of Operations
We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280, Segment Reporting. We have determined that we have three reportable segments, organized and managed principally by the different industry sectors they serve. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, loss on extinguishment of debt and other income (expense).
One of the primary measurements used by management to measure the financial performance of each segment is Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss), adjusted for the following items: income tax (benefit) expense; depreciation and amortization; interest expense, net; restructuring and impairment charges; strategic development and acquisition related costs; gain on divestitures; goodwill impairment; share-based compensation expense; non-cash foreign exchange transaction/translation (income) loss; other non-cash items; and other items.
The presentation of segment results below includes a reconciliation of the changes for each segment reported in accordance with U.S. GAAP to a pro forma basis to allow investors and the Company to meaningfully evaluate the percentage change on a comparable basis from period to period. The pro forma financial information is based on the historical information of Cornerstone Building Brands, which includes historical information of Kleary Masonry, Inc. (“Kleary”), which the Company acquired on March 2, 2020; Prime Windows LLC (“Prime Windows”), which the Company acquired on April 30, 2021; Cascade Windows, Inc. (“Cascade Windows”), which the Company acquired on August 20, 2021; and the insulated metals panels (“IMP”) and the roll-up sheet doors (“DBCI”) businesses, which the Company divested on August 9, 2021 and August 18, 2021, respectively. The 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 Kleary, Prime Windows and Cascade Windows acquisitions; or any integration costs; and from the IMP and DBCI divestitures. Pro forma balances are not necessarily indicative of operating results had the Kleary, Prime Windows and Cascade Windows acquisitions and the IMP and DBCI divestitures occurred on January 1, 2020 or of future results. UCC, which was acquired on December 3, 2021, is only included from the acquisition date as pro forma results would comprise substantially all of the comparative periods and would not be meaningful for comparison.
See Note 22 — Segment Information in the notes to the consolidated financial statements for more information on our segments.
NON-GAAP FINANCIAL MEASURES
Set forth below are certain “non-GAAP financial measures” as defined under the Securities Exchange Act of 1934. Management believes the use of such non-GAAP financial measures assists investors in understanding the ongoing operating performance of the Company by presenting the financial results between periods on a more comparable basis. Such non-GAAP financial measures should not be construed as an alternative to reported results determined in accordance with U.S. GAAP. We have included reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and provided in accordance with U.S. GAAP.
The following tables present a comparison of net sales as reported to pro forma net sales for Cornerstone Building Brands as if the Cascade Windows, Prime Windows and Kleary acquisitions, and IMP and DBCI divestitures had each occurred on January 1, 2020 rather than the respective date referenced above for each transaction. UCC’s results are only included from the acquisition date as discussed above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| Reported | | Acquisitions and Divestitures | | Pro Forma | | Reported | | Acquisitions and Divestitures | | Pro Forma |
| Net Sales | | | | | | | | | | | |
| Windows | $ | 2,322,277 | | | $ | 132,141 | | | $ | 2,454,418 | | | $ | 1,889,625 | | | $ | 206,639 | | | $ | 2,096,264 | |
| Siding | 1,364,080 | | | — | | | 1,364,080 | | | 1,141,946 | | | 8,358 | | | 1,150,304 | |
| Commercial | 1,896,780 | | | (231,347) | | | 1,665,433 | | | 1,585,798 | | | (375,261) | | | 1,210,537 | |
| Total Net Sales | $ | 5,583,137 | | | $ | (99,206) | | | $ | 5,483,931 | | | $ | 4,617,369 | | | $ | (160,264) | | | $ | 4,457,105 | |
| | | | | | | | | | | |
The following tables reconcile Adjusted EBITDA and pro forma Adjusted EBITDA to operating income (loss) for the periods indicated.
| | | | | | | | | | | |
| Consolidated | | | |
| | | |
| Year Ended |
| (Amounts in thousands) | December 31,
2021 | | December 31,
2020 |
| Net sales | $ | 5,583,137 | | | $ | 4,617,369 | |
Impact of acquisitions and divestitures(1) | (99,206) | | | (160,264) | |
| Pro forma net sales | $ | 5,483,931 | | | $ | 4,457,105 | |
| | | |
| Operating income (loss), GAAP | $ | 1,137,245 | | | $ | (266,506) | |
| Restructuring and impairment charges, net | 26,247 | | | 34,277 | |
| Strategic development and acquisition related costs | 27,875 | | | 19,341 | |
| Gain on divestitures | (831,252) | | | — | |
| Goodwill impairment | — | | | 503,171 | |
| Depreciation and amortization | 292,901 | | | 284,602 | |
Other (2) | 42,919 | | | 31,919 | |
| Adjusted EBITDA | 695,935 | | | 606,804 | |
| | | |
Impact of acquisitions and divestitures(1) | (7,953) | | | (52,223) | |
| Pro forma Adjusted EBITDA | $ | 687,982 | | | $ | 554,581 | |
| Adjusted EBITDA as a % of net sales | 12.5 | % | | 13.1 | % |
| Pro forma Adjusted EBITDA as a % of pro forma net sales | 12.5 | % | | 12.4 | % |
(1)Reflects the acquisition from January 1, 2020 of the net sales and Adjusted EBITDA of Kleary through March 1, 2020, Prime Windows through April 29, 2021 and Cascade Windows through August 19, 2021; and reflects the impact from January 1, 2020 of the divestitures of IMP and DBCI through the divestiture dates of August 9, 2021 and August 18, 2021, respectively.
(2)Primarily consists of $29.0 million and $17.1 million of share-based compensation expense for the years ended December 31, 2021 and 2020, respectively; $11.6 million in costs for the year ended December 31, 2021 associated with debt refinancing transactions; and $(0.4) million and $12.5 million of COVID-19 pandemic related costs for years ended December 31, 2021 and 2020, respectively.
Pro forma net sales for the year ended December 31, 2021 increased$1,026.8 million, a 23.0% improvement over pro forma net sales in the same period a year ago. Disciplined price actions in response to rising commodity costs and other inflationary impacts across all segments drove approximately 75% of the increase. Rapid recovery of residential demand drove increased volume within the Windows and Siding segments of approximately $210 million, and non-residential demand drove increased volume in the Commercial segment of approximately $48 million.
Operating income (loss) for the year ended December 31, 2021 increased2023 related to $1,137.2the remeasurement of foreign denominated intercompany loans at current exchange rates that prior to July 25, 2022 was deferred in accumulated other comprehensive (loss) income.
(Loss) gain on extinguishment of debt includes a loss totaling $0.2 million, income as comparedwhich included the write-off of associated unamortized debt discount and deferred financing costs in the amount of $13.1 million, related to an operatingthe repurchase of $46.8 million aggregate principal of its 6.125% senior notes in 2023. The loss of $266.5$28.8 million in the year endedat December 31, 2020 primarily as a result2022 related to the redemption of the gain on the sales$134.5 million aggregate principal of the IMP and DBCI businesses of $831.3 millionits 6.125% senior notes in 2021 and the goodwill impairment of $503.2 million in the comparable period.2022.
Pro forma Adjusted EBITDAIncome tax (benefit) expense for 2021effective tax rate was $688.0 million or 12.5% of pro forma net sales, an improvement of 24.1% or 10 basis points from the same pro forma period a year ago. The improvement was primarily driven by positive price mix net of inflation of $210 million36.5% in 2023 and higher demand of $85 million, mostly from the rapid recovery26.4% in the residential end markets. Partially reducing these favorable impacts were manufacturing inefficiencies2022 and higher costs to serve our customers as a result of the challenges brought on by supply chain disruptions and labor constraints of $93 million. SG&A costs were $69 million higher than the same pro forma period last year primarilyincreased mainly due to the returnMerger transaction and internal restructuring.
Reportable Segment Results of near-term costs, such as variable compensation, professional services, and sales commissions.Operations
The following table sets forth the results of operations for our reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net sales | | | | | | | | |
| Aperture Solutions | $ | 2,476,870 | | | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,890,030 | |
| Surface Solutions | 1,264,173 | | | 592,449 | | | | 839,130 | | | 1,431,579 | |
| Shelter Solutions | 1,661,391 | | | 905,288 | | | | 1,253,335 | | | 2,158,623 | |
| Total net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 6,480,232 | |
| | | | | | | | |
| Adjusted segment EBITDA | | | | | | | | |
| Aperture Solutions | $ | 336,095 | | | $ | 149,433 | | | | $ | 202,682 | | | $ | 352,115 | |
| Surface Solutions | 224,561 | | | 57,331 | | | | 143,880 | | | 201,211 | |
| Shelter Solutions | 322,874 | | | 177,537 | | | | 209,156 | | | 386,693 | |
| Corporate and Other | (230,739) | | | (172,331) | | | | 331,996 | | | 159,665 | |
| Depreciation and amortization | (412,597) | | | (130,153) | | | | (166,177) | | | (296,330) | |
| Income from operations | $ | 240,194 | | | $ | 81,817 | | | | $ | 721,537 | | | $ | 803,354 | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
| | | | | | | | | | | |
| Windows |
| | | |
| Year Ended |
| (Amounts in thousands) | December 31,
2021 | | December 31,
2020 |
| Net sales | $ | 2,322,277 | | | $ | 1,889,625 | |
Impact of acquisitions(1) | 132,141 | | | 206,639 | |
| Pro forma net sales | $ | 2,454,418 | | | $ | 2,096,264 | |
| | | |
| Operating income (loss), GAAP | $ | 100,725 | | | $ | (223,646) | |
| Restructuring and impairment charges, net | 1,252 | | | 7,499 | |
| Strategic development and acquisition related costs | 2,976 | | | 16 | |
| Goodwill impairment | — | | | 320,990 | |
| Depreciation and amortization | 134,626 | | | 121,519 | |
| Other | (88) | | | 7,338 | |
| Adjusted EBITDA | 239,491 | | | 233,716 | |
| | | |
Impact of acquisitions(1) | 15,314 | | | 25,740 | |
| Pro forma Adjusted EBITDA | $ | 254,805 | | | $ | 259,456 | |
| Adjusted EBITDA as a % of net sales | 10.3 | % | | 12.4 | % |
| Pro forma Adjusted EBITDA as a % of pro forma net sales | 10.4 | % | | 12.4 | % |
The following table sets forth the results of operations for the Aperture Solutions reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net sales | $ | 2,476,870 | | | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,890,030 | |
| Adjusted reportable segment EBITDA* | $ | 336,095 | | | $ | 149,433 | | | | $ | 202,682 | | | $ | 352,115 | |
| % of net sales | 13.6 | % | | 12.0 | % | | | 12.3 | % | | 12.2 | % |
| Depreciation and amortization | $ | 179,611 | | | $ | 64,348 | | | | $ | 79,816 | | | $ | 144,164 | |
| * Refer to Non-GAAP Financial Measures for further discussion | | | | | | | |
(1)Reflects the impact of the net sales and Adjusted EBITDA of Prime Windows LLC through April 29, 2021 and Cascade Windows Inc. through August 19, 2021 as if the acquisitions had occurred on January 1, 2020.
Pro forma netNet sales for the year ended December 31, 2021 were 17.1% higher2023 decreased $413.2 million, or 14.3%, compared to the year ended December 31, 2020 due to 9.0% from disciplined2022 mainly driven by lower volumes, partially offset by favorable price actions in response to rising commodity costs and other inflationary impacts coupled with approximately 8.1% increase in sales volume as a result of the rapid recovery within the residential end markets in the U.S. and Canada.product mix.
Operating income (loss)Adjusted reportable segment EBITDA for the year ended December 31, 2021 was $100.72023 decreased $16.0 million of operating income as compared to an operating loss of $223.6 million in the year ended December 31, 2020 primarily2022 mainly due to the goodwill impairment of $321.0 million in the comparable year.
Pro forma Adjusted EBITDA was $254.8 million or 10.4% of pro forma net sales, a 200 basis point decline over the year ended December 31, 2020. Positivelower volume, partially offset by favorable price mix net of inflation, of $22.8 millionproduct mix and higher demand of $46.6 million, mostly from the rapid recovery in the residential end markets, were partially offset by manufacturing inefficiencies and higher costs to serve our customers as a result of the challenges brought on by supply chain disruptions and labor constraints of $61.3net efficiencies.
million. SG&A costs were $12.8 million higher thanThe following table sets forth the same pro forma period last year primarily due toresults of operations for the return of near-term costs, such as variable compensation, professional services, and sales commissions.Surface Solutions reportable segment:
| | | | | | | | | | | |
| Siding | | | |
| | | |
| Year Ended |
| (Amounts in thousands) | December 31,
2021 | | December 31,
2020 |
| Net sales | $ | 1,364,080 | | | $ | 1,141,946 | |
Impact of acquisition(1) | — | | | 8,358 | |
| Pro forma net sales | $ | 1,364,080 | | | $ | 1,150,304 | |
| | | |
| Operating income (loss), GAAP | $ | 137,772 | | | $ | (61,930) | |
| Restructuring and impairment charges, net | 14,226 | | | 2,966 | |
| Strategic development and acquisition related costs | (2,974) | | | 10,158 | |
| Goodwill impairment | — | | | 176,774 | |
| Depreciation and amortization | 116,660 | | | 113,737 | |
| Other | (13) | | | (523) | |
| Adjusted EBITDA | 265,671 | | | 241,182 | |
| | | |
Impact of acquisition(1) | — | | | 1,869 | |
| Pro forma Adjusted EBITDA | $ | 265,671 | | | $ | 243,051 | |
| Adjusted EBITDA as a % of net sales | 19.5 | % | | 21.1 | % |
| Pro forma Adjusted EBITDA as a % of pro forma net sales | 19.5 | % | | 21.1 | % |
(1)Reflects the impact of the net sales and Adjusted EBITDA of Kleary Masonry, Inc. through March 1, 2020 as if the acquisition had occurred on January 1, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net sales | $ | 1,264,173 | | | $ | 592,449 | | | | $ | 839,130 | | | $ | 1,431,579 | |
| Adjusted reportable segment EBITDA* | $ | 224,561 | | | $ | 57,331 | | | | $ | 143,880 | | | $ | 201,211 | |
| % of net sales | 17.8 | % | | 9.7 | % | | | 17.1 | % | | 14.1 | % |
| Depreciation and amortization | $ | 88,597 | | | $ | 52,621 | | | | $ | 65,225 | | | $ | 117,846 | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
Net salesfor the year ended December 31, 2021 were 18.6% higher2023 decreased $167.4 million, or 11.7%, compared to the pro forma net salesyear ended December 31, 2022 mainly driven by lower volumes and changes in price from movement in input costs, partially offset by the acquisition of MAC Metal during August 2023.
Adjusted reportable segment EBITDA for the year ended December 31, 2020. The rapid recovery2023 increased $23.4 million, compared to the year ended December 31, 2022 mainly due the net impact of residential demand contributed 3.4% of the favorable increase, while disciplined price actions to offset inflationary raw material costs resulted in favorable price, mix and movement in input costs and the acquisition of approximately 15.1% versus the pro forma prior year.MAC Metal during August 2023, partially offset by lower volumes.
Shelter Solutions
The following table sets forth the continuing results of operations for the Shelter Solutions reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net sales | $ | 1,661,391 | | | $ | 905,288 | | | | $ | 1,253,335 | | | $ | 2,158,623 | |
| Adjusted reportable segment EBITDA* | $ | 322,874 | | | $ | 177,537 | | | | $ | 209,156 | | | $ | 386,693 | |
| % of net sales | 19.4 | % | | 19.6 | % | | | 16.7 | % | | 17.9 | % |
| Depreciation and amortization | $ | 139,481 | | | $ | 10,291 | | | | $ | 18,016 | | | $ | 28,307 | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
Net salesfor the year ended December 31, 2021 increased to $137.82023 decreased $497.2 million, asor 23.0%, compared to an operating lossthe year ended December 31, 2022 mainly driven by lower volumes and changes in price from movement in input costs.
Adjusted reportable segment EBITDA for the year ended December 31, 2023 decreased $63.8 million, compared to the year ended December 31, 2022 mainly due to lower volume and the impact of $(61.9)the strategic divestitures of our coil coatings business in June 2022, partially offset by the net impact of price, mix and movement in input costs.
Corporate and Other
The following table sets forth Corporate and Other:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Corporate costs | $ | 138,117 | | | $ | 63,212 | | | | $ | 77,421 | | | $ | 140,633 | |
| Strategic development and acquisition related costs | 25,042 | | | 8,116 | | | | 49,560 | | | 57,676 | |
| Asset impairments | — | | | — | | | | 368 | | | 368 | |
| Acquired inventory step-up amortization | — | | | 66,400 | | | | 1,238 | | | 67,638 | |
| Loss (gain) on divestitures | 10,080 | | | 921 | | | | (401,413) | | | (400,492) | |
| Gain on legal settlements | — | | | — | | | | (76,575) | | | (76,575) | |
| Long-term incentive plan compensation | 24,855 | | | 24,248 | | | | 17,099 | | | 41,347 | |
| Facility closure charges and employee separation | 23,068 | | | 8,953 | | | | 92 | | | 9,045 | |
| Other | 9,577 | | | 481 | | | | 214 | | | 695 | |
| Total Corporate and Other | $ | 230,739 | | | $ | 172,331 | | | | $ | (331,996) | | | $ | (159,665) | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
Corporate costs for the year ended December 31, 2023 decreased $2.5 million mainly due to higher variable compensation and personnel costs.
Depreciation and Amortization
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined* | |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 | |
| Depreciation: | | | | | | | | | |
| Cost of sales | $ | 192,130 | | | $ | 38,882 | | | | $ | 6,356 | | | $ | 45,238 | | |
| Selling, general and administrative expenses | 49,160 | | | 5,837 | | | | 50,370 | | | 56,207 | | |
| Total depreciation | 241,290 | | | 44,719 | | | | 56,726 | | | 101,445 | | |
| | | | | | | | | |
| Amortization - Selling, general and administrative expenses | 171,307 | | | 85,434 | | | | 109,451 | | | 194,885 | | |
| Total depreciation and amortization | $ | 412,597 | | | $ | 130,153 | | | | $ | 166,177 | | | $ | 296,330 | | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | | |
Depreciation and amortization increased by $116.3 million for the year ended December 31, 2020 primarily due to a goodwill impairment of $176.8 million in the year ended December 31, 2020. Excluding the 2020 goodwill impairment of $176.8 million and a 2021 asset impairment of $13.9 million related to a discontinued product line, operating income increased 32.1% in 2021 primarily due to disciplined price actions net of inflation of $40.0 million, favorable volume of $12.2 million and lower strategic development costs, offsetting higher costs in manufacturing and SG&A.
Pro Forma Adjusted EBITDA was $265.7 million or 19.5% of pro forma net sales, a 160 basis point decline over the year ended December 31, 2020. As mentioned above, positive price mix net of inflation and higher volume partially offset increased manufacturing costs to serve our customers and inefficiencies from supply chain disruptions of $16.7 million and an increase in SG&A of $12.8 million from return of near-term costs, such as variable compensation and professional service expenses.
| | | | | | | | | | | |
| Commercial | | | |
| | | |
| Year Ended |
| (Amounts in thousands) | December 31,
2021 | | December 31,
2020 |
| Net Sales | $ | 1,896,780 | | | $ | 1,585,798 | |
Impact of divestitures(1) | (231,347) | | | (375,261) | |
| Pro forma net sales | $ | 1,665,433 | | | $ | 1,210,537 | |
| | | |
| Operating income, GAAP | $ | 1,104,335 | | | $ | 159,586 | |
| Restructuring and impairment charges, net | 10,131 | | | 20,270 | |
| Strategic development and acquisition related costs | 3,103 | | | (262) | |
| Gain on divestitures | (831,252) | | | — | |
| Goodwill impairment | — | | | 5,407 | |
| Depreciation and amortization | 36,282 | | | 45,213 | |
| Other | 934 | | | 4,346 | |
| Adjusted EBITDA | 323,533 | | | 234,560 | |
| | | |
Impact of divestitures(1) | (23,267) | | | (79,832) | |
| Pro forma Adjusted EBITDA | $ | 300,266 | | | $ | 154,728 | |
| Adjusted EBITDA as a % of net sales | 17.1 | % | | 14.8 | % |
| Pro forma Adjusted EBITDA as a % of pro forma net sales | 18.0 | % | | 12.8 | % |
(1)Reflects the net adjustments of IMP and DBCI through the divestiture dates of August 9, 2021 and August 18, 2021, respectively, as if the divestitures had occurred on January 1, 2020.
Pro forma net sales for the year ended December 31, 2021 were higher by 37.6% compared to the year ended December 31, 2020 driven approximately by a 33.7% increase from disciplined price actions to mitigate rising steel costs. Additionally, higher volumes of 3.9% from recovering demand in the non-residential end markets also contributed to the increase in net sales. Included in pro forma net sales at December 31, 2021 are $21.9 million of net sales from Union Corrugating Company Holdings, Inc. (“UCC”) from the acquisition date on December 3, 2021. The UCC acquisition furthers our presence in the high-growth residential metal roofing market.
Operating income for the year ended December 31, 2021 increased $944.7 million compared to year ended December 31, 2020 primarily2023, mainly due to the gainrecording of measurement period adjustments on the sales of the IMPestimated fair value elements, as well as shortened useful lives and DBCI businessesa higher depreciable base as a result of strategic portfolio rationalization actionsthe Merger. The measurement period adjustments had been made as of the date of the Merger, including a cumulative catch-up to accelerate long-term value creation. Excludingdepreciation and amortization expense of $65.2 million in cost of sales and $1.3 million in selling, general and administrative expenses recorded during the gain on the sales in 2021 and the goodwill impairment in 2020, operating income of $273.1 million increased 65.5% primarilythree months ended July 1, 2023 resulting from the realizationupdate in the fair market value of price actions takenproperty, plant and equipment and intangible assets.
Non-GAAP Financial Measures
We use several measures derived from consolidated financial information, but not presented in our Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the U.S (“U.S. GAAP”). These measures are considered non-GAAP financial measures. Specifically, in this report, we refer to offset rising steeladjusted EBITDA, which is a non-GAAP financial measure. Our non-GAAP financial measure is not intended to replace the presentation of the comparable measure under U.S. GAAP. However, we believe the presentation of the non-GAAP financial measure, when considered together with the comparable U.S. GAAP financial measure, along with a reconciliation to its respective U.S. GAAP financial measure, assists investors in understanding the factors and trends affecting our underlying business that could not be obtained absent these disclosures. Additionally, we believe that the presentation of our non-GAAP financial measure enables investors to evaluate trends in the business excluding certain items which are not entirely a result of our base operations.
Furthermore, the presentation of this non-GAAP financial measure supplements other metrics we use to internally evaluate our business and facilitates the comparison of past and present operations. The non-GAAP financial measure we use may differ from non-GAAP financial measures used by other companies, and other inflationary impacts. Additionally, higher volume of $26 million from recovering non-residential end markets offset manufacturing inefficiencies from steel constraints and higher SG&A costs. Includedcompanies may not define non-GAAP financial measures we use in operating income at December 31, 2021 is $1.8 million from UCC from the acquisition date.same way.
Pro forma Adjusted EBITDA
was $300.3 million or 18.0% of pro forma net sales, a 520 basis point improvement compared to the year ended December 31, 2020. Included in pro forma EBITDA at December 31, 2021 is $2.2 million from UCC from the acquisition date. As mentioned above, positive price mix net of inflation of approximately $147.6 million and higher volume of $26.3 million offset manufacturing inefficiencies of $14.7 million and higher SG&A costs of $13.6 million.
Unallocated Operating Loss
| | | | | | | | | | | |
| Year Ended |
| (Amounts in thousands) | December 31,
2021 | | December 31,
2020 |
| Statement of operations data: | | | |
| SG&A expenses | $ | (180,817) | | | $ | (131,087) | |
| Strategic development and acquisition related costs | (24,770) | | | (9,429) | |
| Operating loss | $ | (205,587) | | | $ | (140,516) | |
The following table presents the reconciliation of net (loss) income to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Combined * |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net (loss) income | $ | (75,525) | | | $ | (63,496) | | | | $ | 483,786 | | | $ | 420,290 | |
| Interest expense | 380,706 | | | 157,191 | | | | 101,078 | | | 258,269 | |
| Foreign exchange (gain) loss | (6,768) | | | 4,809 | | | | (686) | | | 4,123 | |
| Loss (gain) on extinguishment of debt | 184 | | | (474) | | | | (28,354) | | | (28,828) | |
| Other income, net | (15,013) | | | (1,140) | | | | (101) | | | (1,241) | |
| Income tax (benefit) expense | (43,390) | | | (15,073) | | | | 165,814 | | | 150,741 | |
| Income from operations | 240,194 | | | 81,817 | | | | 721,537 | | | 803,354 | |
| Depreciation and amortization | 412,597 | | | 130,153 | | | | 166,177 | | | 296,330 | |
| Strategic development and acquisition related costs | 25,042 | | | 8,116 | | | | 49,560 | | | 57,676 | |
| Acquired inventory step-up amortization | — | | | 66,400 | | | | 1,238 | | | 67,638 | |
| Loss (gain) on divestitures | 10,080 | | | 921 | | | | (401,413) | | | (400,492) | |
| Gain on legal settlements | — | | | — | | | | (76,575) | | | (76,575) | |
| Long-term incentive plan compensation | 24,855 | | | 24,248 | | | | 17,099 | | | 41,347 | |
| Facility closure charges and employee separation | 23,068 | | | 8,953 | | | | 92 | | | 9,045 | |
| Other | 9,577 | | | 481 | | | | 582 | | | 1,063 | |
Adjusted EBITDA(1) | $ | 745,413 | | | $ | 321,089 | | | | $ | 478,297 | | | $ | 799,386 | |
*Refer to Non-GAAP Financial Measures for further discussion.
Unallocated (Corporate expenses) operating losses(1) include items that are not directly attributed to or allocated to our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the year ended December 31, 2021 increased by $65.1 million or 46.3% comparedabove periods, to the year ended December 31, 2020. The change is primarily due toextent applicable, include the increaseoperations of acquisitions and exclude the operations of divestitures as noted in strategic development expenses as well as debt issuance coststhe “Impact of Acquisitions and the return of near-term expenses such as variable compensation and professional services. Unallocated operating loss includes $29.0 million and $17.1 million of share-based compensation expense for the years ended December 31, 2021 and 2020, respectively.Divestitures” section.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
General
Our main liquidity and capital resource needs are payments to service our debt, ongoing principaloperations and working capital requirements, capital expenditures and the cost of acquisitions. Our primary source of fundsliquidity is cash generated from our continuing operations, supplemented byas well as borrowings againstunder our asset-based lending and revolving credit facility, as necessary.facilities. We typically invest our excess cash in various overnight investmentsbelieve that are issued or guaranteed by the U.S. federal government. Our cash, cash equivalents and restricted cash decreased from $680.5 million as of December 31, 2020 to $396.7 million as of December 31, 2021. The following table summarizes our consolidated cash flows for fiscal 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 |
| Net cash provided by (used in) operating activities | $ | (215,887) | | | $ | 308,417 | |
| Net cash provided by (used in) investing activities | 549,466 | | | (120,123) | |
| Net cash provided by (used in) financing activities | (617,249) | | | 389,655 | |
| Effect of exchange rate changes on cash and cash equivalents | (150) | | | 222 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (283,820) | | | 578,171 | |
| Cash, cash equivalents and restricted cash at beginning of period | 680,478 | | | 102,307 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 396,658 | | | $ | 680,478 | |
Operating Activities
The Company used cash in operating activities during the year ended December 31, 2021 to invest in working capital items to support strong market demand.
The following table shows the impact of working capital items on cash during fiscal 2021 and 2020, respectively (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended | | |
| December 31,
2021 | | December 31,
2020 | | $ Change |
| Net cash (used in) provided by: | | | | | |
| Accounts receivable | $ | (156,066) | | | $ | (61,976) | | | $ | (94,090) | |
| Inventories | (311,242) | | | 7,927 | | | (319,169) | |
| Accounts payable | 72,260 | | | 4,663 | | | 67,597 | |
| Net cash used in working capital items | $ | (395,048) | | | $ | (49,386) | | | $ | (345,662) | |
The use of cash for working capital between periods was driven by investments in net working capital to support the strong demand environment and increased inventory valuations from higher commodity costs and other inflationary aspects. See the Consolidated Statements of Cash Flows in the consolidated financial statements for additional information.
Investing Activities
Cashfunds provided by investing activities was $549.5 million during fiscal 2021 comparedthese sources will be adequate to $120.1 million used during fiscal 2020. During fiscal 2021, we paid approximately $528.3 million (net of cash acquired) toward acquisitions, primarily for the acquisitions of UCC, Cascade Windows and Prime Windows; received proceeds of $1,187.3 million from the divestitures of our insulated metal panels and roll-up sheet doors businesses; received proceeds of $5.1 million from the sale of PP&E, and used $114.7 million for capital expenditures. During fiscal 2020, we paid approximately $41.8 million (net of
cash acquired) for the acquisition of Kleary, used $81.9 million for capital expenditures, and received proceeds of $3.6 million from the sale of PP&E.
Financing Activities
Cash used in financing activities was $617.2 million in fiscal 2021 compared to $389.7 million provided by financing activities in fiscal 2020. During fiscal 2021, we increased our Current Term Loan Facility by $108.4 million, borrowed and then repaid $190.0 million on our Current ABL Facility, paid $670.8 million to redeem the 8.00% Senior Notes, and paid quarterly installments totaling $25.9 million on the Current Term Loan Facility.
During fiscal 2020, we issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029, borrowed $40.0 million on our Existing ABL Facility to finance the acquisition of Kleary, borrowed an additional $305.0 million on our Existing ABL Facility and repaid all outstanding ABL Facility balances at December 31, 2020, and borrowed and repaid $115.0 million on our Existing Cash Flow Revolver balances. Proceeds from the offering of the 6.125% Senior Notes were used to pay down the Existing ABL Facility and Existing Cash Flow Revolver balances. Additionally, during fiscal 2020, we paid quarterly installments totaling $25.6 million on our Term Loan Facility and used $6.4 million to repurchase shares of our outstanding common stock under our stock repurchase programs.
Equity Investment
On August 25, 2020, the Company filed a shelf registration statement on Form S-3, declared effective by the SEC on September 2, 2020, registering the resale of shares of the Company’s common stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company’s common stock held by the CD&R Fund VIII Investor Group and the Golden Gate Investor Group.
At December 31, 2021 and 2020, the CD&R Investor Group owned approximately 48.8% and 49.4%, respectively, of the outstanding shares of our Common Stock.
Debt
Below is a reconciliation of the Company's net debt (in thousands). Management considers net debt to be more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize cash and cash equivalents to reduce debt if needed.
| | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 |
| Asset-based revolving credit facility due April 2026 | $ | — | | | $ | — | |
| Term loan facility due April 2028 | 2,580,500 | | | 2,497,967 | |
| Cash flow revolver due April 2026 | — | | | — | |
| 8.00% senior notes due April 2026 | — | | | 645,000 | |
| 6.125% senior notes due January 2029 | 500,000 | | | 500,000 | |
| Total Debt | 3,080,500 | | | 3,642,967 | |
| Less: cash and cash equivalents | 394,447 | | | 674,255 | |
| Net Debt | $ | 2,686,053 | | | $ | 2,968,712 | |
On April 15, 2021, the Company redeemed its $645 million aggregate principal amount of 8.00% Senior Notes using available cash from the balance sheet and net proceeds from its extended and upsized senior term loan facility. The Company successfully upsized and extended the maturity of its $2,492 million senior term loan facility due 2025 in the form of $2,600 million in Tranche B term loans due April 12, 2028. Additionally, the Company amended and refinanced its senior cash flow based and asset-based revolving credit facilities, extending the maturities to April 12, 2026.
In connection with the new Tranche B term loans, the Company also terminated two interest rate swaps and entered into two new swaps maturing in April 2026 on an aggregate notional value of $1.5 billion. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment.
We may not be successful in refinancing, extending the maturity or otherwise amending the terms of our outstanding indebtedness in the future because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries
could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness.
For additional information, see Note 13 — Long-Term Debt and Note 14 — Derivatives in the notes to the consolidated financial statements.
Additional Liquidity Considerations
We periodically evaluatemeet our liquidity requirements,and capital resource needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and otherfor at least the next 12 months under current operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. The following table summarizes key liquidity measures under the Current ABL Credit Agreement and the Current Cash Flow Credit Agreement in effect as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 |
| Asset-based revolving credit facility due April 2026 | $ | 611,000 | | | $ | 611,000 | |
| Eligible borrowing base | 611,000 | | | 568,000 | |
| Less: Borrowings | — | | | — | |
| Less: LCs outstanding and priority payables | 45,000 | | | 40,000 | |
| Net ABL availability | 566,000 | | | 528,000 | |
| | | |
| Plus: Cash flow revolver due April 2026 | 115,000 | | | 115,000 | |
| Plus: cash and cash equivalents | 394,447 | | | 674,255 | |
| Total Liquidity | $ | 1,075,447 | | | $ | 1,317,255 | |
On April 15, 2021, the Company redeemed its $645 million aggregate principal amount of 8.00% Senior Notes, as noted above, which reduced total liquidity. We expect that cash generated from operations and our availability under the ABL Credit Facility and Current Cash Flow Revolver will be sufficient to provide us the ability to fund our operations and to provide the increased working capital necessary to support our strategy and fund planned capital expenditures for fiscal 2022 and expansion when needed.
Consistent with our growth strategy, we evaluate potential acquisitions that would provide additional synergies in our Windows, Siding and Commercial segments. From time to time, we may enter into letters of intent or agreements to acquire assets or companies in these segments. The consummation of these transactions could require substantial cash payments and/or issuance of additional debt.
On April 30, 2021, the Company acquired Prime Windows. Prime Windows serves residential new construction and repair and remodel markets with energy efficient vinyl window and door products from two manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded through borrowings under the Company’s existing credit facilities.
On August 20, 2021, the Company acquired Cascade Windows. Cascade Windows serves the residential new construction and repair and remodel markets with energy efficient vinyl window and door products from various manufacturing facilities in the United States, expanding our manufacturing capabilities and creating new opportunities for us in the Western United States. This acquisition was funded with cash available on the balance sheet.
On December 3, 2021, the Company acquired Union Corrugating Company Holdings, Inc. (“UCC”). UCC provides metal roofing, roofing components and accessories from locations primarily in the Central and Eastern U.S. regions. This acquisition was funded with cash available on the balance sheet.
We also evaluate possible dispositions of assets or businesses when such assets or businesses are no longer core to our operations and do not fit into our long-term strategy. On August 9, 2021, the Company completed the sale of its insulated metal panels (“IMP”) business to Nucor Insulated Panel Group Inc. and certain of its subsidiaries (collectively, “Nucor”) in a cash transaction for $1 billion. The IMP transaction included products sold under the Metl-Span and CENTRIA brands. On August 18, 2021, the Company completed the sale of its roll-up sheet doors business to Janus International Group, Inc. (“Janus”) in a cash transaction for $169 million. The roll-up sheet doors transaction included products sold under the DBCI brand.
From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase program. On March 7, 2018, we announced that our Board of Directors authorized a new stock repurchase program for the repurchase of up to an aggregate of $50.0 million of our outstanding Common Stock. Under this repurchase program, we are authorized to repurchase shares at times and in amounts that we deem appropriate in accordance with all applicable securities laws and regulations. Shares repurchased are usually retired. There is no time limit on the duration of the program. During fiscal 2021, we did not repurchase shares under the stock repurchase program. As of December 31, 2021, approximately $49.1 million remained available for stock repurchases under the program. In addition to repurchases of shares of our common stock under our stock repurchase program, we also withhold shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of awards of share-based compensation.conditions.
We may from time to time take steps to reduce our debt or otherwise improve our financial position.debt. These actions couldmay include prepayments, open market debt repurchases negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital.debt. The amount of prepayments or the amount of debt, if any, that may be refinanced, repurchased or otherwise retired, if any,refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of thesuch debt, and we would continue to reflect the debt as outstanding onin our consolidated balance sheets.
CONTINGENT LIABILITIES AND COMMITMENTSThe following table sets forth our total net liquidity position as of December 31, 2023:
Our insurance carriers require us | | | | | |
| (Amounts in thousands) | Amount |
| Cash and cash equivalents | $ | 468,877 | |
| Revolving credit facilities: | |
Asset-based lending facility(1) | 850,000 | |
| Cash flow revolving facility | 92,000 | |
First-in-last-out tranche asset-based lending facility(1) | 95,000 | |
| Total revolving credit facilities | 1,037,000 | |
| Less: | |
| Debt issued under the facilities | — | |
Letters of credit outstanding and priority payables(2) | 47,000 | |
| Net credit facility | 990,000 | |
| Net liquidity | $ | 1,458,877 | |
(1) Borrowing availability under the ABL Facilities is determined based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to securecertain other adjustments as set forth in the ABL Credit Agreement. Availability is also reduced by issuance of letters of credit.
(2) As of December 31, 2023, we had standby letters of credit serving as a collateral requirement for our projected exposure to future period claims growth and loss development, including IBNR claims. For all insurance carriers in the total standby lettersamount of $36.4 million.
Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined* |
| (Amounts in thousands) | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2022 |
| Net cash flows from operating activities | $ | 400,184 | | | $ | 177,299 | | | | $ | 331,067 | | | $ | 508,366 | |
| Net cash flows from investing activities | $ | (421,869) | | | $ | (85,638) | | | | $ | 456,357 | | | $ | 370,719 | |
| Net cash flows from financing activities | $ | (62,885) | | | $ | (627,941) | | | | $ | (94,087) | | | $ | (722,028) | |
| * Refer to Non-GAAP Financial Measures for further discussion. | | | | | | | |
Net Cash from Operating Activities
Net cash provided by operating activities consists mainly of: (i) cash collections on credit are approximately $31.9 millionsales to our customers, (ii) purchases of commodity based raw materials, (iii) labor and $27.2 million atother employee-related expenditures, (iv) other non-labor costs, such as, among other items, supplies, insurance, advertising and marketing costs, (v) interest paid on our long-term debt, and (vi) payments for income taxes.
During the year ended December 31, 20212023, the Company generated strong cash flow from operations of $400.2 million, decrease from the $508.4 million provided by operations in the prior year. Lower cash flows from our business operations on lower earnings, increased interest paid on higher long-term debt, payments made to satisfy incentive plan payouts and 2020, respectively.$76.6 million received in 2022 on the shareholder legal settlement, were offset by lower current income taxes.
Net Cash from Investing Activities
Our main uses of cash for investing activities are for payments for property and equipment and acquisitions of businesses.
Net cash used in investing activities was $421.9 million during the year ended December 31, 2023 compared to $370.7 million provided by investing activities during the year ended December 31, 2022. Net cash used in investing activities during the year ended December 31, 2023 is primarily due to $218.5 million paid towards acquisitions, $193.9 million in capital expenditures and a final working capital adjustment from the divestiture of the coil coatings business of $10.1 million. Net cash used in investing activities during the year ended December 31, 2022, is primarily due to the receipt of $500.0 million from the divestiture of the coil coatings business, partially offset by $162.9 million of capital expenditures.
Net Cash from Financing Activities
Our main uses of cash for financing activities include activity to consummate the merger, repurchases and payments on long-term debt, distributions to owners and payments for financing fees. Our main sources of cash from financing activities include the proceeds from issuances of debt and contributions from owners.
Net cash used in financing activities was $62.9 million during the year ended December 31, 2023 compared to $722.0 million used in financing activities during the year ended December 31, 2022. The $659.1 million decrease is mainly driven by significant activity associated with the Merger during the year ended December 31, 2022, which included the purchase of publically held shares totaling $1.6 billion, the issuance of $710.0 million in aggregate principal amount of 8.75% Senior Secured Notes, a $300.0 million Side Car Term Loan Facility, the payment of $84.7 million of financing costs and the receipt of $95.2 million in net contributions.
In January 2024, the Board of Directors paid a dividend on our common stock in the aggregate amount of $231.6 million, which was received by our direct parent, Camelot Parent, and further distributed to Camelot Return Parent, an indirect parent of the Company. Camelot Return Parent used the funds received to redeem all 1,950,000 preferred units of Camelot Return Parent held by CD&R Pisces Holdings, L.P.
CRITICAL ACCOUNTING ESTIMATESContractual and Off Balance Sheet Obligations
We have leases for certain manufacturing, warehouse, distribution locations, offices, vehicles and equipment. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments that are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. As of December 31, 2023, the Company had total future lease payments of $525.1 million, with $96.4 million payable within 12 months. See Note 9 — Leases in the Notes to the Consolidated Financial Statements for additional information. We have certain long-term debt instruments outstanding. As of December 31, 2023, the Company had total future payments of $3.9 billion, with $29.0 million payable within 12 months. See Note 10 — Long-Term Debt in the Notes to the Consolidated Financial Statements for additional information.
Critical Accounting Estimates
Our consolidated financial statementssignificant accounting policies are described in Note 2 to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The Consolidated Financial Statements are prepared in accordanceconformity with accounting principles generally accepted in the United States which requireof America. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities reflected in the financial statements and related disclosure of contingent assetsnet sales and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial condition and results of operations. Our significantexpenses reported for the relevant reporting periods. We believe the policies discussed below are the Company’s critical accounting policies are disclosed in Note 2 toas they include the more significant, subjective and complex judgments and estimates made when preparing our consolidated financial statements. The following discussion of critical accounting policies addresses those policies that are both important to the portrayal of our financial condition and results of operations and require significant judgment and estimates. We baseWhile our estimates are based on our knowledge of current events and judgment on historical experience and on various other factors that are believed to be reasonable underactions we may undertake in the circumstances. Actualfuture, actual results may ultimately differ from these estimates under different assumptions or conditions.and assumptions.
Accounting for acquisitions, intangible assetsAcquisitions and goodwill.Goodwill
Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business. For most assets and liabilities, purchase price allocation is accomplished by recording the asset or liability at its estimated fair value. The most difficult estimations of individual fair values are those involving property, plant and equipment and identifiable intangible assets. We use all available information to make these fair value determinations and, for major business acquisitions, typically engage an outside appraisal firm to assist in the fair value determination of the acquired long-lived assets. We must also refine these estimates over a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
The Company has approximately $1,358.1$1,681.8 million of goodwill as of December 31, 2021,2023, of which approximately $541.2$771.1 million pertains to our WindowsAperture Solutions reportable segment, $655.1$708.4 million pertains to our SidingSurface Solutions reportable segment, and $161.8$202.2 million pertains to our CommercialShelter Solutions reportable segment. We perform an annual impairment assessment of goodwill. Additionally, we assess goodwill for impairment whenever events or changes in circumstances indicate that the fair values may be below the carrying values of the reporting units. Unforeseen events, changes in circumstances and market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affectfourth quarter. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value of our assets and result in a non-cash impairment charge.the reporting unit below the carrying value. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant sustained negative industry or economic trends, suchtrends.
In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the COVID-19 pandemic.
The fair value of our reporting units is based on a blend of estimated discounted cash flows and publicly traded company multiples. A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment. The results from each of these models are then weighted and combined into a single estimate of fair value for our reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisition multiples are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates
of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements. Management does not believe the estimates used in the analysis are reasonably likely to change materially in the future, but we will continue to assess the estimates in the future based on the expectations of the reporting units. Changes in assumptions used in the fair value calculation could result in an estimated reporting unit fair valuecontaining goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, including changes in our management, strategy and primary user base. If we determine that is below the carrying value, which may result in an impairment of goodwill.
We completed our annual goodwill impairment test as of October 3, 2021 for each of our reporting units with goodwill. We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value, or proceeding directly towe then perform a quantitative impairment test. We elected to apply the quantitative assessment for the goodwill impairment test for our reporting units within each of our operating segments as of October 3, 2021.
A summary of the key assumptions utilized in the goodwill impairment analysis at October 3, 2021, as it relatesby comparing the carrying amount to the fair values and the sensitivities for these assumptions follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of October 3, 2021 |
| Windows | | Siding | | Engineered Building Systems | | Metal Components |
| Assumptions: | | | | | | | |
| Income Approach: | | | | | | | |
| Terminal growth rate | 3.5 | % | | 3.0 | % | | 3.0 | % | | 3.0 | % |
| Discount rate | 17.5 | % | | 13.5 | % | | 17.5 | % | | 13.5 | % |
| | | | | | | |
| Market approach: | | | | | | | |
| Control premium | 0.0 | % | | 0.0 | % | | 10.0 | % | | 10.0 | % |
| | | | | | | |
| Sensitivities | | | | | | | |
| (in thousands) | | | | | | | |
| Estimated fair value change in the event of a 1% decrease in the terminal year growth | $ | 58,698 | | | $ | 118,932 | | | $ | 26,843 | | | $ | 28,149 | |
| Estimated fair value change in the event of a 1% decrease in the discount rate | $ | 124,389 | | | $ | 226,792 | | | $ | 50,247 | | | $ | 44,064 | |
| Estimated fair value change in the event of a 1% decrease in the control premium | n/a | | n/a | | $ | 6,627 | | | $ | 4,402 | |
Overall, we utilize the same key assumptions in preparing the prospective financial information utilized in the discounted cash flow test for the reporting units. However, each reporting unit is impacted differently by industry trends, how market factors are influencing the reporting units’ expected performance, competition, and other unique business factors as mentioned above. | | | | | |
(in thousands) | As of October 3, 2021 |
Estimated Windows reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method | $ | 8,920 | |
Estimated Siding reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method | $ | 34,190 | |
Estimated Engineered Building Systems reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method
| $ | 2,480 | |
Estimated Metal Components reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method
| $ | 6,530 | |
The Company’s annual goodwill impairment tests performed as of October 3, 2021 indicated no impairment. The Company’s estimate of the fair value of its Windows, Siding, Engineered Building Systems,the reporting unit. If the carrying amount exceeds the fair value, goodwill will be written down to the fair value and Metal Components reporting units exceeded their carrying values by approximately 19%, 41%, 444%, and 172%, respectively.recorded as impairment expense in the Consolidated Statements of (Loss) Income.
We provide no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase, or (3)completed our annual goodwill impairment test in the earnings, book values or projected earnings and cash flowsfourth quarter of 2023 using the qualitative assessment for each of our reporting units willand concluded that goodwill was not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods andimpaired.
future declines in the residential housing and remodel markets and nonresidential markets as well as economic conditions could result in future goodwill impairments.
Warranty. The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. As of December 31, 2023, the Company’s product warranty liability was $194.2 million. The Company’s warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience.Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the CommercialShelter Solutions reportable segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheetsConsolidated Balance Sheets depending on when the revenues are expected to be recognized.
Income taxes.Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The amount recorded in our consolidated financial statementsConsolidated Financial Statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the potential utilization of operating and capital loss carry-forwards for federal, state, and foreign income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that is more-likely-than-not to be realized upon ultimate settlement. We establish reservesallowances when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, Canadian federal and provincial Mexican federal, and other jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
As of December 31, 2021,2023, the $41.7$15.1 million net operating loss carryforward included $20.8$11.6 million for U.S federal losses, $13.3$2.7 million for U.S. state losses and $7.6$0.8 million for foreign losses. The state net operating loss carryforwards began to expire in 2021,2023, if unused, and the federal and foreign loss carryforwards will begin to expire in fiscal 2029, if unused. There are limitations on the utilization of certain net operating losses.
36
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 — Accounting Pronouncements in the notes to the consolidated financial statements for information on recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Windows and Siding BusinessesCommodity Prices
We are subject to market risk with respect to the pricingThe raw materials used in each of our principalreportable segments are mainly commodities. Specifically, we use PVC resin, glass and aluminum in our residential products and steel in our commercial products. Prices of these commodities can be influenced by numerous factors including, but not limited to, general economic conditions domestically and internationally, the availability of raw materials, which include PVC resin, aluminumcompetition, labor costs, freight and glass.transportation costs, production costs, import duties and other trade restrictions. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly. Raw materials are generally available from numerous sources, and the number of suppliers is adequate to support production.
We manage the exposure to commodity pricing risk by increasing our selling prices for corresponding material cost increases, continuing to diversify our product mix, strategic buying programs and vendor partnering. The average market for our products may or may not accept price for PVC resin was estimated to have increased approximately 55.3% for the fiscal year ended December 31, 2021increases and, as compared to the fiscal year ended December 31, 2020.
Commercial Business
We are subject to market risk exposure related tosuch, there is no assurance that we can maintain margins in an environment of rising commodity prices. See Item 1A- Risk Factors - Price volatility in the price of steel. For the fiscal year ended December 31, 2021, material costs (predominantly steel costs) constituted approximately 67% of our Commercial segment cost of sales. Our business is heavily dependent on the price and supply of steel. Our various products are fabricated from steel produced by mills to forms including bars, plates, structural shapes, sheets, hot-rolled coils and galvanized or Galvalume®-coated coils (Galvalume® is a registered trademark of BIEC International, Inc.). The steel industry is highly cyclical in nature, and steel prices have been volatile in recent years and may remain volatile in the future. Steel prices are influenced by numerous factors beyond our control, including general economic conditions domestically and internationally, the availability ofconstraints for raw materials competition, labor costs, freight and transportation costs, production costs, import duties and other trade restrictions. Based on the cyclical nature of the steel industry, we expect steel prices will continue to be volatile.
With material costs (predominantly steel costs) accounting for approximately 67% of our Commercial segment's cost of sales for fiscal 2021, a one percent change in the cost of steel could have resulted in a pre-tax impact on cost of sales of approximately $9.5 million for our fiscal year ended December 31, 2021. The impactprevent us from meeting delivery schedules to our financial results of operations of such an increase would be significantly dependent on the competitive environment and the costs of other alternative building products, which could impactcustomers or reduce our ability to pass on these higher costs.profit margins.
Impact of Raw Material Prices
In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. Generally, we have been able to pass on price increases to our customers. However, a timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods.
Other Commodity Risks
In addition to market risk exposure related to the volatility in the price of our raw materials, we are subject to market risk exposure related to volatility in the price of natural gas. As a result, we occasionally enter into both index-priced and fixed-price contracts for the purchase of natural gas. We have evaluated these contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the criteria for characterization as a derivative instrument may be exempted from hedge accounting treatment as normal purchases and normal sales and, therefore, these forward contracts are not marked to market. At December 31, 2021, all our contracts for the purchase of natural gas met the scope exemption for normal purchases and normal sales.
Interest Rates
We are subject to market risk exposure related to changes in interest rates on our Current Cash Flow Facilitiesrevolving credit facilities and Current ABL Facility, which provides for borrowingsterm loans facilities. The following table sets forth the annual impact of up to $2,715.0 million on the Current Cash Flow Facilities and up to $611.0 million on the Current ABL Facility. These instruments bear interest at an agreed upon percentage point spread from either LIBOR or an alternative rate. Assuming the Current Cash Flow Revolver is fully drawn, eacha quarter point increase or decrease in interest rates on these facilities assuming the interest rate would change our interest expense by approximately $6.8 million per year for the Current Cash Flow Facilities. Assuming the Current ABL Facility isrevolving credit facilities are fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $1.5 million per year. The fair value of our term loan credit facility at December 31, 2021 and 2020 was approximately $2,570.8 million and $2,485.5 million, respectively, compared to the face value of $2,580.5 million and $2,498.0 million, respectively. drawn:
| | | | | | | | | | | |
| (Amounts in thousands) | December 31, 2023 | | One-quarter Percent Impact on Interest Rates |
| Revolving credit facilities balances assuming they are fully drawn: | | | |
| Asset-based lending facility | $ | 850,000 | | | $ | 2,125 | |
| Cash flow revolving facility | 92,000 | | | 230 | |
| First-in-last-out tranche asset-based lending facility | 95,000 | | | 238 | |
| Term loan facilities outstanding balances: | | | |
| Term loan facility, due April 2028 | 2,528,500 | | | 6,321 | |
| Term loan facility, due August 2028 | 297,000 | | | 743 | |
| Total | $ | 3,862,500 | | | $ | 9,657 | |
In April 2021, we entered into cash flow interest rate swap hedge contracts for a total notional amount of $1.5 billion to mitigate the exposure risk of our floating interest rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate payment. At December 31, 2021, our cash flow hedge contracts had a fair value liability of $41.4 million with $28.3 million recorded as a non-current liability and $13.1 million recorded in accrued expenses on our consolidated balance sheet.
See Note 1310 — Long-Term Debt and Note 14 — Derivatives in the notesNotes to the consolidated financial statementsConsolidated Financial Statements for information on the material terms of our long-term debt and interest rate swaps.
Foreign Currency Exchange Rates
The functional currency for our Canadian operations is the Canadian dollar.dollar (“CAD”). Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar (“USD”) equivalents are reported separately in accumulated other comprehensive (loss) income (loss) in stockholders’ equity.on the Consolidated Statements of Equity. The net foreign currency exchange gains (losses) included in net (loss) income (loss)in the Consolidated Statements of (Loss) Income was a gain of $6.8 million for fiscal 2021, 2020the year ended December 31, 2023, a loss of $4.8 million for the period from July 25, 2022 through December 31, 2022 and 2019 were $(3.1)a gain of $0.7 million $1.1 million and $1.2 million, respectively.for the period from January 1, 2022 through July 24, 2022. Net foreign currency translation adjustment, net of tax, andadjustments included in other comprehensive income (loss) was $6.6 million, $17.3 million and $3.2Consolidated Statements of Comprehensive (Loss) Income were a gain of $2.8 million for fiscal 2021, 2020 and 2019, respectively.
We are exposed to the effectyear ended December 31, 2023, a loss of exchange rate fluctuations on the U.S. dollar value of foreign currency denominated operating revenue and expenses. The functional currency for our Mexico operations is the U.S. dollar. Adjustments resulting from the remeasurement of the local currency financial statements into the U.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income (loss) in the current period. Net foreign currency remeasurement gains (losses) were $(0.6) million, $0.2 million and $0.9$6.8 million for fiscal 2021, 2020the period from July 25, 2022 through December 31, 2022 and 2019.a loss of $1.4 million for the period from January 1, 2022 through July 24, 2022.
We have entered into foreign currency forward contracts with a financial institution to hedge primarily inventory purchases in Canada. At December 31, 2021,2023, we have a total notional amount of approximately $37.8$60.0 million hedged at fixed USD/USD:CAD rates ranging from 1.21201.34 to 1.27261.37 with value dates through September 2022.December 2024. In the future, we may enter into additional foreign currency hedging contracts, to further mitigate the exposure risk of currency fluctuation against the CAD.
Canadian dollar and/or the Mexican Peso. See Note 14 — Derivatives in the notes to the consolidated financial statements for information on our currency hedges.
Labor Force Risk
Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize, and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the residential and nonresidential construction markets continue to recover and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Cornerstone Building Brands, Inc. (the “Company” or “our”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. The design of an internal control system is also based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that an internal control will be effective under all potential future conditions. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to the financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria for internal control over financial reporting described in Internal Control — Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors. Based on this assessment, management has concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
We excluded Union Corrugating Company Holdings, Inc. (“UCC”), Cascade Windows Inc. (“Cascade Windows”), and Prime Windows LLC (“Prime Windows”) from our assessment of internal control over financial reporting as of December 31, 2021 as they were acquired by us during 2021. The total assets and revenues excluded from our assessment of internal control over financial reporting collectively were 10.9% and 2.4%, respectively, as of and for the year ended December 31, 2021.
Grant Thornton LLP, the independent registered public accounting firm that has audited the Company’s consolidated financial statements, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, as stated in their report included elsewhere herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and StockholdersShareholders
Cornerstone Building Brands, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Cornerstone Building Brands, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021,2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), and in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of the Company as of and for the year ended December 31, 2021,2023, and our report dated March 1, 2022February 23, 2024 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Reports on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB.PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Union Corrugating Company Holdings, Inc., Cascade Windows Inc., and Prime Windows LLC, wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 10.9% and 2.4% percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. As indicated in Management’s Report, Union Corrugating Company Holdings, Inc., Cascade Windows Inc., and Prime Windows LLC were acquired during 2021. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Union Corrugating Company Holdings, Inc., Cascade Windows Inc., and Prime Windows LLC.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 1, 2022February 23, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and StockholdersShareholders
Cornerstone Building Brands, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Cornerstone Building Brands, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20212023 and December 31, 2020,2022, the related consolidated statements of operations,(loss) income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the periodyear ended December 31, 2023 (“Successor”), the periods from July 25, 2022 through December 31, 2022 (“Successor”), January 1, 2022 through July 24, 2022 (“Predecessor”), and the year ended December 31, 2021 (“Predecessor”) and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212023 (“Successor”) and December 31, 20202022 (“Successor”), and the results of its operations and its cash flows for each of the three years in the periodyear ended December 31, 2023 (“Successor”), the periods from July 25, 2022 through December 31, 2022 (“Successor”), January 1, 2022 through July 24, 2022 (“Predecessor”), and the year ended December 31, 2021 (“Predecessor”) in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), and in accordance with auditing standards generally accepted in the United States of America, the Company’s internal control over financial reporting as of December 31, 2021,2023, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2022February 23, 2024 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB“PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit mattersmatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Warranty liabilityValuation of acquired customer relationships
As described further in Notes 21 and 123 to the consolidated financial statements, within the Windows and Siding segmenton July 25, 2022 the Company sellsentered into a numbermerger agreement by and among the Company, Camelot Parent and Merger Sub. As a result of productsthis merger, CD&R became indirect owners of all issued and outstanding stock of Cornerstone Building Brands and the Company became a privately held company with warranties that do not have to be separately purchased by the customer. The specific terms and conditions of these warranties vary dependingits shares no longer traded on the product sold. As these products are sold,New York Stock Exchange. This merger transaction was accounted for as a business combination and the Company establishes a warranty liability forvaluation of certain assets such as the cost of estimated warranty claims. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction.customer relationships intangible asset was completed in 2023. We identified the calculationvaluation of these warranty liabilitiesthe customer relationships intangible asset in connection with accounting for the business combination as a critical audit matter.
The principal considerations for our determination that the calculationvaluation of these warranty liabilities arethe customer relationships intangible asset for each reporting unit as of the July 25, 2022 business combination date is a critical audit matter is because ofare the specialized skills necessary to evaluate the Company’s actuarial modelsvaluation and judgments required to assess the underlying assumptions made by the Company. Key assumptions underlying the Company’s actuarial estimates include: paid loss development factors, exposureweighted average cost of capital, discount rates, customer attrition rates, projected revenue growth rates and loss trend factors, selected pure premiums, inflation adjustments and margin adjustments to account for the possibility that actual experience losses can be greater than the expected unpaid liability estimate.
projected EBITDA margins.Our audit procedures related to warranty liabilitiesthe valuation included the following, among others:others.
•We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s relevant controls to determine the fair value of the customer relationship intangible assets for each reporting unit, including the Company’s controls over the warranty liability calculations that ensure management reviewedselection and review of the actuarial analysis, related calculationsappropriateness of the weighted average cost of capital, discount rates, customer attrition rates, projected revenue growth rates and key assumptions.projected EBITDA margins used in determining fair value.
•We utilized our actuarial specialistsan internal valuation specialist to evaluate evaluate:
◦the actuarial methodologymethodologies used and whether they were acceptable for the customer relationship intangible assets and applied correctly by performing independent calculations,
◦the reasonableness of the discount rates by recalculating the weighted average cost of capital,
◦the reasonableness of the customer attrition rates considering the historical information used in testing developing management’s estimate, and
◦the paid loss development factors, exposurequalifications of the third-party valuation firm engaged by the Company based on their credentials and loss trend factors, selected pure premiums, inflation adjustmentsexperience.
•We evaluated the reasonableness of the projected revenue growth rates and margin adjustments.projected EBITDA margins by comparing the projections to historical results and publicly available industry information.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2018.
Raleigh, North Carolina
March 1, 2022February 23, 2024
CORNERSTONE BUILDING BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(LOSS) INCOME
(In thousands, except per share data) | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Sales | $ | 5,583,137 | | | $ | 4,617,369 | | | $ | 4,889,747 | |
| Cost of sales | 4,384,062 | | | 3,567,049 | | | 3,801,328 | |
| Gross profit | 1,199,075 | | | 1,050,320 | | | 1,088,419 | |
| Selling, general and administrative expenses | 649,472 | | | 579,200 | | | 627,861 | |
| Intangible asset amortization | 189,488 | | | 180,994 | | | 177,577 | |
| Restructuring and impairment charges, net | 26,247 | | | 34,120 | | | 18,060 | |
| Strategic development and acquisition related costs | 27,875 | | | 19,341 | | | 50,185 | |
| Gain on divestitures | (831,252) | | | — | | | — | |
| Goodwill impairment | — | | | 503,171 | | | — | |
| Income (loss) from operations | 1,137,245 | | | (266,506) | | | 214,736 | |
| Interest income | 205 | | | 1,364 | | | 674 | |
| Interest expense | (191,301) | | | (213,610) | | | (229,262) | |
| Foreign exchange gain (loss) | (3,749) | | | 1,068 | | | 2,054 | |
| Loss on extinguishment of debt | (42,234) | | | — | | | — | |
| Other income, net | 1,661 | | | 469 | | | 1,183 | |
| Income (loss) before income taxes | 901,827 | | | (477,215) | | | (10,615) | |
| Provision for income taxes | 235,968 | | | 5,563 | | | 4,775 | |
| Net income (loss) | $ | 665,859 | | | $ | (482,778) | | | $ | (15,390) | |
| Net income allocated to participating securities | (7,815) | | | — | | | — | |
| Net income (loss) applicable to common shares | $ | 658,044 | | | $ | (482,778) | | | $ | (15,390) | |
| | | | | |
| Income (loss) per common share: | | | | | |
| Basic | $ | 5.22 | | | $ | (3.84) | | | $ | (0.12) | |
| Diluted | $ | 5.19 | | | $ | (3.84) | | | $ | (0.12) | |
| | | | | |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 126,058 | | | 125,562 | | | 125,576 | |
| Diluted | 126,795 | | | 125,562 | | | 125,576 | |
See accompanying notes to the consolidated financial statements.
CORNERSTONE BUILDING BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Comprehensive income (loss): | | | | | |
| Net income (loss) | $ | 665,859 | | | $ | (482,778) | | | $ | (15,390) | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Foreign exchange translation gains (losses) | 6,594 | | | 17,254 | | | 3,211 | |
| Unrealized gain (loss) on derivative instruments, net of income tax of $(12,063), $10,985, and $7,176, respectively | 14,054 | | | (35,281) | | | (22,812) | |
| Unrecognized actuarial gains (losses) on pension obligation, net of income tax of $(3,195), $231, and $513, respectively | 4,093 | | | (1,092) | | | (1,984) | |
| Amount reclassified from Accumulated other comprehensive income (loss) into earnings | 21,164 | | | — | | | — | |
| Other comprehensive income (loss) | 45,905 | | | (19,119) | | | (21,585) | |
| Comprehensive income (loss) | $ | 711,764 | | | $ | (501,897) | | | $ | (36,975) | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| (In thousands, except share data) |
| December 31,
2021 | | December 31,
2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 394,447 | | | $ | 674,255 | |
| Restricted cash | 2,211 | | | 6,223 | |
| Accounts receivable, net | 685,316 | | | 554,649 | |
| Inventories, net | 748,732 | | | 431,937 | |
| Income taxes receivable | 14,514 | | | 39,379 | |
| Investments in debt and equity securities, at market | 2,759 | | | 2,333 | |
| Prepaid expenses and other | 135,701 | | | 77,751 | |
| Assets held for sale | 3,400 | | | 4,644 | |
| Total current assets | 1,987,080 | | | 1,791,171 | |
| Property, plant and equipment, net | 612,295 | | | 631,821 | |
| Lease right-of-use assets | 322,608 | | | 264,107 | |
| Goodwill | 1,358,056 | | | 1,194,729 | |
| Intangible assets, net | 1,524,635 | | | 1,584,604 | |
| Deferred income taxes | 1,839 | | | 1,867 | |
| Other assets, net | 20,947 | | | 10,191 | |
| Total assets | $ | 5,827,460 | | | $ | 5,478,490 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 26,000 | | | $ | 25,600 | |
| Accounts payable | 311,737 | | | 211,441 | |
| | | |
| Accrued compensation and benefits | 101,164 | | | 81,548 | |
| Accrued interest | 19,775 | | | 25,485 | |
| Accrued income taxes | 3,220 | | | 5,060 | |
| Current portion of lease liabilities | 73,150 | | | 70,125 | |
| Other accrued expenses | 320,389 | | | 247,893 | |
| Total current liabilities | 855,435 | | | 667,152 | |
| Long-term debt | 3,010,843 | | | 3,563,429 | |
| Deferred income taxes | 252,173 | | | 269,792 | |
| Long-term lease liabilities | 251,061 | | | 198,875 | |
| Other long-term liabilities | 281,609 | | | 337,437 | |
| Total long-term liabilities | 3,795,686 | | | 4,369,533 | |
| Stockholders’ equity: | | | |
| Common stock, $0.01 par value, 200,000,000 shares authorized; 126,992,107 and 125,425,931 shares issued at December 31, 2021 and 2020, respectively; and 126,971,036 and 125,400,599 shares outstanding at December 31, 2021 and 2020, respectively | 1,270 | | | 1,255 | |
| Additional paid-in capital | 1,279,931 | | | 1,257,262 | |
| Accumulated deficit | (98,826) | | | (764,685) | |
| Accumulated other comprehensive loss, net | (5,612) | | | (51,517) | |
| Treasury stock, at cost; 21,071 and 25,332 shares at December 31, 2021 and 2020, respectively | (424) | | | (510) | |
| Total stockholders’ equity | 1,176,339 | | | 441,805 | |
| Total liabilities and stockholders’ equity | $ | 5,827,460 | | | $ | 5,478,490 | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| Year Ended |
| (In thousands) | December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 665,859 | | | $ | (482,778) | | | $ | (15,390) | |
| Adjustments to reconcile net income (loss) to net cash from operating activities: | | | | |
| Depreciation and amortization | 292,901 | | | 284,602 | | | 263,764 | |
| Non-cash interest expense | 28,722 | | | 9,589 | | | 8,504 | |
| Share-based compensation expense | 29,003 | | | 17,056 | | | 14,078 | |
| Loss on extinguishment of debt | 42,234 | | | — | | | — | |
| Non-cash fair value premium on purchased inventory | — | | | — | | | 16,249 | |
| Goodwill impairment | — | | | 503,171 | | | — | |
| Asset impairment | 22,210 | | | 4,905 | | | — | |
| Gain on divestitures | (831,252) | | | — | | | — | |
| Loss (gain) on asset sales, net | — | | | (1,252) | | | 321 | |
| Provision for credit losses | 3,604 | | | 5,390 | | | 2,035 | |
| Deferred income taxes | (59,510) | | | (4,319) | | | (6,085) | |
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | |
| Accounts receivable | (156,066) | | | (61,976) | | | (38,242) | |
| Inventories | (311,242) | | | 7,927 | | | 91,822 | |
| Income taxes | 24,865 | | | 14,146 | | | (32,719) | |
| Prepaid expenses and other | (56,768) | | | 3,415 | | | (10,279) | |
| Accounts payable | 72,260 | | | 4,663 | | | (21,141) | |
| Accrued expenses | 36,944 | | | 8,276 | | | (40,403) | |
| Other, net | (19,651) | | | (4,398) | | | (2,906) | |
| Net cash provided by (used in) operating activities | (215,887) | | | 308,417 | | | 229,608 | |
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash acquired | (528,250) | | | (41,841) | | | (179,184) | |
| Capital expenditures | (114,715) | | | (81,851) | | | (121,085) | |
| Proceeds from divestitures, net of cash divested | 1,187,307 | | | — | | | — | |
| Proceeds from sale of property, plant and equipment | 5,124 | | | 3,569 | | | 5,511 | |
| Net cash provided by (used in) investing activities | 549,466 | | | (120,123) | | | (294,758) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from ABL facility | 190,000 | | | 345,000 | | | 290,000 | |
| Payments on ABL facility | (190,000) | | | (415,000) | | | (220,000) | |
| Proceeds from cash flow revolver | — | | | 115,000 | | | — | |
| Payments on cash flow revolver | — | | | (115,000) | | | — | |
| Proceeds from term loan | 108,438 | | | — | | | — | |
| Payments on term loan | (25,905) | | | (25,620) | | | (25,620) | |
| Proceeds from senior notes | — | | | 500,000 | | | — | |
| Payments on senior notes | (670,800) | | | — | | | — | |
| Payments of financing costs | (13,187) | | | (6,731) | | | — | |
| Purchases of treasury stock | — | | | (6,428) | | | — | |
| Payments on tax receivable agreement | — | | | — | | | (24,906) | |
| Payments on derivative financing obligations | (9,377) | | | — | | | — | |
| Other | (6,418) | | | (1,566) | | | (1,934) | |
| Net cash provided by (used in) financing activities | (617,249) | | | 389,655 | | | 17,540 | |
| Effect of exchange rate changes on cash and cash equivalents | (150) | | | 222 | | | 2,310 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (283,820) | | | 578,171 | | | (45,300) | |
| Cash, cash equivalents and restricted cash at beginning of period | 680,478 | | | 102,307 | | | 147,607 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 396,658 | | | $ | 680,478 | | | $ | 102,307 | |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid, net of amounts capitalized | $ | 178,330 | | | $ | 196,770 | | | $ | 240,063 | |
| Taxes paid (refunded), net (excluding tax receivable agreement payments) | $ | 267,399 | | | $ | (3,316) | | | $ | 51,001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | |
| Cost of sales | 4,197,442 | | | 2,232,049 | | | | 2,929,699 | | | 4,384,062 | |
| Gross profit | 1,204,992 | | | 512,099 | | | | 806,385 | | | 1,199,075 | |
| Selling, general and administrative expenses | 954,718 | | | 429,361 | | | | 562,836 | | | 893,082 | |
| Loss (gain) on divestitures | 10,080 | | | 921 | | | | (401,413) | | | (831,252) | |
| Gain on legal settlements | — | | | — | | | | (76,575) | | | — | |
| Income from operations | 240,194 | | | 81,817 | | | | 721,537 | | | 1,137,245 | |
| Interest expense | (380,706) | | | (157,191) | | | | (101,078) | | | (191,301) | |
| Foreign exchange gain (loss) | 6,768 | | | (4,809) | | | | 686 | | | (3,749) | |
| (Loss) gain on extinguishment of debt | (184) | | | 474 | | | | 28,354 | | | (42,234) | |
| Other income, net | 15,013 | | | 1,140 | | | | 101 | | | 1,866 | |
| (Loss) income before income taxes | (118,915) | | | (78,569) | | | | 649,600 | | | 901,827 | |
| Income tax (benefit) expense | (43,390) | | | (15,073) | | | | 165,814 | | | 235,968 | |
| Net (loss) income | (75,525) | | | (63,496) | | | | 483,786 | | | 665,859 | |
| Net loss allocated to participating securities | — | | | — | | | | (3,575) | | | (7,815) | |
| Net (loss) income applicable to common shares | $ | (75,525) | | | $ | (63,496) | | | | $ | 480,211 | | | $ | 658,044 | |
| | | | | | | | |
| Income per common share: | | | | | | | | |
| Basic | | | | | | $ | 3.77 | | | $ | 5.22 | |
| Diluted | | | | | | $ | 3.73 | | | $ | 5.19 | |
| | | | | | | | |
| Weighted average number of common shares outstanding: | | | | | | | | |
| Basic | | | | | | 127,316 | | | 126,058 | |
| Diluted | | | | | | 128,894 | | | 126,795 | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
| (In thousands, except share data) |
| | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings
(Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock | | Stockholders’
Equity |
| Shares | | Amount | | Shares | | Amount | |
| Balance, December 31, 2018 | 125,583,159 | | | $ | 1,256 | | | $ | 1,237,056 | | | $ | (265,839) | | | $ | (10,813) | | | (110,899) | | | $ | (1,678) | | | $ | 959,982 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (256,857) | | | (1,934) | | | (1,934) | |
| Retirement of treasury shares | (306,531) | | | (3) | | | (2,420) | | | — | | | — | | | 306,531 | | | 2,423 | | | — | |
| Issuance of restricted stock | 819,641 | | | 8 | | | (8) | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock for the Ply Gem merger | 13,731 | | | — | | | 167 | | | — | | | — | | | — | | | — | | | 167 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (21,585) | | | — | | | — | | | (21,585) | |
| Deferred compensation obligation | — | | | — | | | (86) | | | — | | | — | | | 5,712 | | | 86 | | | — | |
| Share-based compensation | — | | | — | | | 14,078 | | | — | | | — | | | — | | | — | | | 14,078 | |
| | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (15,390) | | | — | | | — | | | — | | | (15,390) | |
| Balance, December 31, 2019 | 126,110,000 | | | $ | 1,261 | | | $ | 1,248,787 | | | $ | (281,229) | | | $ | (32,398) | | | (55,513) | | | $ | (1,103) | | | $ | 935,318 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (1,298,253) | | | (7,994) | | | (7,994) | |
| Retirement of treasury shares | (1,298,665) | | | (13) | | | (7,982) | | | — | | | — | | | 1,298,665 | | | 7,995 | | | — | |
| Issuance of restricted stock | 614,596 | | | 6 | | | (6) | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (19,119) | | | — | | | — | | | (19,119) | |
| Deferred compensation obligation | — | | | 1 | | | (593) | | | — | | | — | | | 29,769 | | | 592 | | | — | |
| Share-based compensation | — | | | — | | | 17,056 | | | — | | | — | | | — | | | — | | | 17,056 | |
| Cumulative effect of accounting change | — | | | — | | | — | | | (678) | | | — | | | — | | | — | | | (678) | |
| Net loss | — | | | — | | | — | | | (482,778) | | | — | | | — | | | — | | | (482,778) | |
| Balance, December 31, 2020 | 125,425,931 | | | $ | 1,255 | | | $ | 1,257,262 | | | $ | (764,685) | | | $ | (51,517) | | | (25,332) | | | $ | (510) | | | $ | 441,805 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (612,011) | | | (9,685) | | | (9,685) | |
| Retirement of treasury shares | (612,011) | | | (6) | | | (9,679) | | | — | | | — | | | 612,011 | | | 9,685 | | | — | |
| Issuance of restricted stock | 1,861,991 | | | 18 | | | (18) | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock for the Ply Gem merger | 15,220 | | | — | | | 185 | | | — | | | — | | | — | | | — | | | 185 | |
| Stock options exercised | 300,976 | | | 3 | | | 3,264 | | | — | | | — | | | — | | | — | | | 3,267 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | 45,905 | | | — | | | — | | | 45,905 | |
| Deferred compensation obligation | — | | | — | | | (86) | | | — | | | — | | | 4,261 | | | 86 | | | — | |
| Share-based compensation | — | | | — | | | 29,003 | | | — | | | — | | | — | | | — | | | 29,003 | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 665,859 | | | — | | | — | | | — | | | 665,859 | |
| Balance, December 31, 2021 | 126,992,107 | | | $ | 1,270 | | | $ | 1,279,931 | | | $ | (98,826) | | | $ | (5,612) | | | (21,071) | | | $ | (424) | | | $ | 1,176,339 | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Net (loss) income | $ | (75,525) | | | $ | (63,496) | | | | $ | 483,786 | | | $ | 665,859 | |
| Other comprehensive (loss) income, net of tax: | | | | | | | | |
| Foreign exchange translation (loss) gain | (2,764) | | | (6,789) | | | | (1,367) | | | 6,594 | |
| Unrealized (loss) gain on derivative instruments, net of income tax of $4,314, $(14,837), $(16,432), and $(12,063), respectively | (14,362) | | | 40,962 | | | | 62,462 | | | 14,054 | |
| Amount reclassified from Accumulated other comprehensive (loss) income into earnings | — | | | — | | | | 16,258 | | | 21,164 | |
| Unrecognized actuarial gains on pension obligation, net of income tax of $39, $58, $—, and $(3,195), respectively | 484 | | | 336 | | | | — | | | 4,093 | |
| Changes in retirement related benefit plans | — | | | — | | | | (1,122) | | | — | |
| Other comprehensive (loss) income | (16,642) | | | 34,509 | | | | 76,231 | | | 45,905 | |
| Comprehensive (loss) income | $ | (92,167) | | | $ | (28,987) | | | | $ | 560,017 | | | $ | 711,764 | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| (In thousands, except share data) |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 468,877 | | | $ | 553,551 | |
| Accounts receivable, net | 596,621 | | | 665,936 | |
| Inventories | 496,839 | | | 551,828 | |
| Other current assets | 73,987 | | | 125,306 | |
| Total current assets | 1,636,324 | | | 1,896,621 | |
| Property, plant and equipment, net | 889,103 | | | 618,064 | |
| Lease right-of-use assets | 365,292 | | | 365,552 | |
| Goodwill | 1,681,764 | | | 1,688,548 | |
| Intangible assets, net | 2,286,068 | | | 2,519,023 | |
| Other assets, net | 74,790 | | | 105,842 | |
| Total assets | $ | 6,933,341 | | | $ | 7,193,650 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 29,000 | | | $ | 29,000 | |
| Current portion of lease liabilities | 64,711 | | | 61,899 | |
| Accounts payable | 255,227 | | | 288,938 | |
| Accrued income and other taxes | 57,058 | | | 21,867 | |
| Employee-related liabilities | 113,081 | | | 184,187 | |
| Rebates, warranties and other customer-related liabilities | 151,990 | | | 157,752 | |
| Other current liabilities | 129,327 | | | 149,596 | |
| Total current liabilities | 800,394 | | | 893,239 | |
| Long-term debt | 3,382,550 | | | 3,366,588 | |
| Long-term lease liabilities | 287,304 | | | 302,339 | |
| Deferred income tax liabilities | 556,935 | | | 653,745 | |
| Other long-term liabilities | 261,288 | | | 248,794 | |
| Total liabilities | 5,288,471 | | | 5,464,705 | |
| | | |
| Commitments and contingencies (Note 17) | | | |
| | | |
| Equity: | | | |
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at December 31, 2023; 1,000 shares authorized, 1,000 issued and 1,000 shares outstanding at December 31, 2022 | — | | | — | |
| Additional paid-in capital | 1,766,024 | | | 1,757,932 | |
| Accumulated deficit | (139,021) | | | (63,496) | |
| Accumulated other comprehensive income | 17,867 | | | 34,509 | |
| Total equity | 1,644,870 | | | 1,728,945 | |
| Total liabilities and equity | $ | 6,933,341 | | | $ | 7,193,650 | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED STATEMENTS OF EQUITY |
| (In thousands, except share data) |
| | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-In
Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated
Other
Comprehensive
(Loss) Income | | Treasury Stock | | Total Equity |
| Shares | | Amount | | Shares | | Amount | |
| December 31, 2020 (Predecessor) | 125,425,931 | | | $ | 1,255 | | | $ | 1,257,262 | | | $ | (764,685) | | | $ | (51,517) | | | (25,332) | | | $ | (510) | | | $ | 441,805 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (612,011) | | | (9,685) | | | (9,685) | |
| Retirement of treasury shares | (612,011) | | | (6) | | | (9,679) | | | — | | | — | | | 612,011 | | | 9,685 | | | — | |
| Issuance of restricted stock | 1,861,991 | | | 18 | | | (18) | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock for the Ply Gem merger | 15,220 | | | — | | | 185 | | | — | | | — | | | — | | | — | | | 185 | |
| Stock options exercised | 300,976 | | | 3 | | | 3,264 | | | — | | | — | | | — | | | — | | | 3,267 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 45,905 | | | — | | | — | | | 45,905 | |
| Deferred compensation obligation | — | | | — | | | (86) | | | — | | | — | | | 4,261 | | | 86 | | | — | |
| Share-based compensation | — | | | — | | | 29,003 | | | — | | | — | | | — | | | — | | | 29,003 | |
| Net income | — | | | — | | | — | | | 665,859 | | | — | | | — | | | — | | | 665,859 | |
| December 31, 2021 (Predecessor) | 126,992,107 | | | $ | 1,270 | | | $ | 1,279,931 | | | $ | (98,826) | | | $ | (5,612) | | | (21,071) | | | $ | (424) | | | $ | 1,176,339 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (192,773) | | | (4,627) | | | (4,627) | |
| Retirement of treasury shares | (192,773) | | | (2) | | | (4,625) | | | — | | | — | | | 192,773 | | | 4,627 | | | — | |
| Issuance of restricted stock | 611,178 | | | 6 | | | (6) | | | — | | | — | | | — | | | — | | | — | |
| Stock options exercised | 133,529 | | | 1 | | | 1,420 | | | — | | | — | | | — | | | — | | | 1,421 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 76,231 | | | — | | | — | | | 76,231 | |
| Deferred compensation obligation | — | | | — | | | (424) | | | — | | | — | | | 21,071 | | | 424 | | | — | |
| Share-based compensation | — | | | — | | | 17,099 | | | — | | | — | | | — | | | — | | | 17,099 | |
| Net income | — | | | — | | | — | | | 483,786 | | | — | | | — | | | — | | | 483,786 | |
| July 24, 2022 (Predecessor) | 127,544,041 | | | $ | 1,275 | | | $ | 1,293,395 | | | $ | 384,960 | | | $ | 70,619 | | | — | | | $ | — | | | $ | 1,750,249 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Pushdown fair value adjustments | — | | | — | | | 1,978,011 | | | (384,960) | | | (70,619) | | | — | | | — | | | 1,522,432 | |
| Payments to public stockholders | (65,413,135) | | | (654) | | | (1,611,780) | | | — | | | — | | | — | | | — | | | (1,612,434) | |
| Recapitalization of outstanding common shares | (62,129,906) | | | (621) | | | 621 | | | — | | | — | | | — | | | — | | | — | |
| Contributions from parent | — | | | — | | | 95,194 | | | — | | | — | | | — | | | — | | | 95,194 | |
| July 25, 2022 (Successor) | 1,000 | | | $ | — | | | $ | 1,755,441 | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | 1,755,441 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 34,509 | | | — | | | — | | | 34,509 | |
| Share-based compensation | — | | | — | | | 2,323 | | | — | | | — | | | — | | | — | | | 2,323 | |
| Other | — | | | — | | | 168 | | | — | | | — | | | — | | | — | | | 168 | |
| Net loss | — | | | — | | | — | | | (63,496) | | | — | | | — | | | — | | | (63,496) | |
| December 31, 2022 (Successor) | 1,000 | | | $ | — | | | $ | 1,757,932 | | | $ | (63,496) | | | $ | 34,509 | | | — | | | $ | — | | | $ | 1,728,945 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (16,642) | | | — | | | — | | | (16,642) | |
| Share-based compensation | — | | | — | | | 8,262 | | | — | | | — | | | — | | | — | | | 8,262 | |
| Other | — | | | — | | | (170) | | | — | | | — | | | — | | | — | | | (170) | |
| Net loss | — | | | — | | | — | | | (75,525) | | | — | | | — | | | — | | | (75,525) | |
| December 31, 2023 (Successor) | 1,000 | | | $ | — | | | $ | 1,766,024 | | | $ | (139,021) | | | $ | 17,867 | | | — | | | $ | — | | | $ | 1,644,870 | |
See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
|
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Cash flows from operating activities: | | | | | | | | |
| Net (loss) income | $ | (75,525) | | | $ | (63,496) | | | | $ | 483,786 | | | $ | 665,859 | |
| Adjustments to reconcile net (loss) income to net cash from operating activities: | | | | | | | | |
| Depreciation and amortization | 412,597 | | | 130,153 | | | | 166,177 | | | 292,901 | |
| Amortization of debt issuance costs, debt discount and fair values | 91,816 | | | 38,997 | | | | 19,952 | | | 28,722 | |
| Share-based compensation expense | 8,262 | | | 2,323 | | | | 17,099 | | | 29,003 | |
| Non-cash lease expense | 6,346 | | | — | | | | — | | | 3,305 | |
| Loss (gain) on extinguishment of debt | 184 | | | (474) | | | | (28,354) | | | 42,234 | |
| Unrealized (gain) loss on foreign currency exchange rates | (2,200) | | | 6,970 | | | | — | | | — | |
| Asset impairments | — | | | — | | | | 368 | | | 22,210 | |
| Loss (gain) on divestitures | 10,080 | | | 921 | | | | (401,413) | | | (831,252) | |
| Loss (gain) on sale of assets | 328 | | | 398 | | | | (2,670) | | | — | |
| Amortization of inventory and other fair value step-ups | — | | | 66,400 | | | | 1,238 | | | — | |
| Provision for credit losses | 8,195 | | | 2,053 | | | | 3,811 | | | 3,604 | |
| Deferred income taxes | (133,752) | | | (36,956) | | | | (26,686) | | | (59,510) | |
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | | | | |
| Accounts receivable | 73,476 | | | 92,590 | | | | (101,937) | | | (156,066) | |
| Inventories | 70,347 | | | 149,748 | | | | (12,956) | | | (311,242) | |
| Income taxes | 14,781 | | | (44,867) | | | | 14,116 | | | 24,865 | |
| Prepaid expenses and other | 25,849 | | | 26,052 | | | | 31,367 | | | (52,756) | |
| Accounts payable | (40,489) | | | (40,102) | | | | 44,446 | | | 72,260 | |
| Accrued expenses | (64,605) | | | (114,098) | | | | 121,871 | | | 36,944 | |
| Other, net | (5,506) | | | (37,565) | | | | 852 | | | (22,956) | |
| Net cash provided by (used in) operating activities | 400,184 | | | 179,047 | | | | 331,067 | | | (211,875) | |
| Cash flows from investing activities: | | | | | | | | |
| Acquisitions, net of cash acquired | (218,450) | | | — | | | | 4,252 | | | (528,250) | |
| Capital expenditures | (193,935) | | | (98,008) | | | | (64,848) | | | (114,715) | |
| Proceeds from divestitures, net of cash divested | (10,080) | | | — | | | | 510,883 | | | 1,187,307 | |
| Proceeds from sale of property, plant and equipment | 596 | | | 12,370 | | | | 6,070 | | | 5,124 | |
| Net cash (used in) provided by investing activities | (421,869) | | | (85,638) | | | | 456,357 | | | 549,466 | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from credit facilities | — | | | — | | | | — | | | 190,000 | |
| Payments on credit facilities | — | | | — | | | | — | | | (190,000) | |
| Proceeds from term loans | — | | | 300,000 | | | | — | | | 108,438 | |
| Payments on term loans | (29,000) | | | (13,000) | | | | (13,000) | | | (25,905) | |
| Payments to public stockholders | — | | | (1,612,434) | | | | — | | | — | |
| Proceeds from senior notes | — | | | 710,000 | | | | — | | | — | |
| Repurchases of senior notes | (33,885) | | | (23,180) | | | | (70,560) | | | (670,800) | |
| Payments of financing costs | — | | | (84,686) | | | | — | | | (13,187) | |
| Contributions from Parent, net | — | | | 95,194 | | | | — | | | — | |
| Payments on derivative financing obligations | — | | | — | | | | (7,321) | | | (9,377) | |
| Other | — | | | 165 | | | | (3,206) | | | (6,418) | |
| Net cash (used in) provided by financing activities | (62,885) | | | (627,941) | | | | (94,087) | | | (617,249) | |
| Effect of exchange rate changes on cash and cash equivalents | (104) | | | 304 | | | | (5) | | | (150) | |
| Net (decrease) increase in cash and cash equivalents | (84,674) | | | (534,228) | | | | 693,332 | | | (279,808) | |
| Cash and cash equivalents at beginning of period | 553,551 | | | 1,087,779 | | | | 394,447 | | | 674,255 | |
| Cash and cash equivalents at end of period | $ | 468,877 | | | $ | 553,551 | | | | $ | 1,087,779 | | | $ | 394,447 | |
See accompanying notes to the consolidated financial statements.
CORNERSTONE BUILDING BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data, unless otherwise noted)
1. NATURE OF BUSINESS, RECENT DEVELOPMENTS, AND BASIS OF PRESENTATION
NatureDescription of Business
Cornerstone Building Brands, Inc. (together(“Cornerstone Building Brands” or, collectively with its subsidiaries, unless the context requires otherwise, indicated, the “Company,” “Cornerstone,” “we,” “us” or “our”“Company”) is the largest manufacturer of externala holding company incorporated in Delaware. The Company is a leading exterior building products manufacturer by sales in North America. Headquartered in Cary, North Carolina, the CompanyAmerica and serves residential and commercial customers across new construction and the repair and remodel end markets. The Company reports results under 3is organized in three reportable segments: Windows, Siding,Aperture Solutions, Surface Solutions and Commercial.Shelter Solutions.
Recent Developments
Organization and Ownership Structure
On February 13,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”), investment funds affiliated withmanaged by Clayton, Dubilier &and Rice, LLC (“CD&R”) submitted a non-binding proposal to acquirebecame the indirect owners of all of the Company’sissued and outstanding shares of common stock 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 shares were no longer traded on the New York Stock Exchange.
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, doescertain investment funds managed by CD&R and other affiliates of CD&R that held shares of Company common stock) who did not already ownvote in favor of the Merger Agreement or the Merger and who have perfected and not withdrawn a demand for a purchase priceappraisal 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, (the “CD&R Offer”).
The CD&R Offer stated that any transaction would bewithout interest and subject to (i) approval by a special committee (“Special Committee”)any required withholding taxes.
On July 25, 2022, the Company amended its Certificate of our independent directors; and (ii) a vote in favor of the transaction by a majority of the voting power represented by theIncorporation to authorize 1,000 shares of our common stock, owned by stockholders not affiliated with CD&R.
The boardpar value of directors$0.01. Each share of the Company (the “Board”) previously formedcommon stock will have one vote and all shares of common stock vote together as a Special Committee to evaluate and consider any potential or actual proposal from CD&R and any other alternative proposals or other strategic alternatives that may be available to the Company.
The CD&R Offer provides that CD&R reserves the right to withdraw or modify the CD&R Offer at any time and no legally binding obligation with respect to any transaction will exist unless and until mutually acceptable definitive documentation is executed and delivered by us and CD&R. There can be no assurance that the transaction proposed by CD&R or any related transaction will be completed or as to the terms of any such potential transaction, including with respect to pricing or timing.single class.
Basis of Presentation
OurThe accompanying consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries. All intercompany accounts, transactions and profits arising from consolidated entities have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates. The preparation of financial statementsare 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 amounts in prior years’ Consolidated Statement of Cash Flows to conform to the current year’s presentation. All references herein for the years “2023,” “2022,” and “2021” represent the years ended December 31, 2023, December 31, 2022 and December 31, 2021.
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 and cash equivalents at end of period | $ | 1,109,588 | | | (21,809) | | | $ | 1,087,779 | |
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, revenuesnet sales and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statementsConsolidated Financial Statements and accompanying notes. EstimatesThese estimates include, but are used for, but not limited to, provisionsto: establishing the allowance for expected credit losseslosses; allowance for obsolete inventory; the impairment of goodwill and inventory reserves,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; determining the fair value of contingent considerations, accounting for business combinations,rebates and product warranties; the valuation of reporting unitsand expensing for purposes of assessing goodwillshare-based compensation; certain assumptions made in accounting for impairment, valuation of asset groupspension benefits; accounting for impairment testing, accrualscontingencies and uncertainties and accounting for employee benefits, general liability insurance, warranties and certain contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances.income taxes. Actual results couldmay differ from those estimates. Given the uncertain economic climate and additional or unforeseen effects fromestimates used in preparing the COVID-19 pandemic, these estimates have become more challenging, and actual results could differ materially from these estimates.Consolidated Financial Statements.
(b) Cash, Cash Equivalents
Cash and Cash Equivalents. Cashcash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents aremainly consist of highly liquid, debt instrumentsunrestricted savings, checking, money market funds with an original maturitymaturities of less than three months or less and may consistother bank accounts.
The following table sets forth the components of time deposits with a number of commercial banks with high credit ratings, money market instruments, certificates of deposit and commercial paper. The Company’s policy allows it to also invest excess funds in no-load, open-end, management investment trusts (“mutual funds”) that invest exclusively in high quality money market instruments. As of December 31, 2021, the Company’s cash and cash equivalents were only invested in cash.equivalents:
| | | | | | | | | | | |
| Successor |
| | December 31, 2023 | | December 31, 2022 |
| Cash | $ | 228,975 | | | $ | 553,551 | |
| Money market funds (Level 1 securities) | 239,902 | | | — | |
| Total cash and cash equivalents | $ | 468,877 | | | $ | 553,551 | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that total the amounts shown in the consolidated statements of cash flows (in thousands): | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Cash and cash equivalents | $ | 394,447 | | | $ | 674,255 | |
Restricted cash(1) | 2,211 | | | 6,223 | |
| Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | 396,658 | | | $ | 680,478 | |
(1)Restricted cash primarily relates to escrow balances held for an outstanding earn-out agreement as of December 31, 2020 and working capital and other indemnification agreements in both periods presented.
(c) Accounts Receivable, and Related Allowance.Net
The Company reports accounts receivable net of an allowance for expected credit losses. Trade accounts receivable are the result of sales of vinyl windows, aluminum windows, vinyl siding, metal siding, injection molded products, metal building products, metal coating, and other products and services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process and we require payment prior to shipment for certain international shipments.
The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to usthe Company by ourits customers. Such provisionsallowances are included in selling, general and administrative expenses.expenses in the Company’s Consolidated Statements of (Loss) Income. In establishing these reserves,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 ourits customers. Our allowance for credit losses reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Interest on delinquent accounts receivable is included in the trade accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance, all collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
The following table representssets forth the rollforward ofchanges in the allowance for credit losses for the periods indicated (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Ending balance, prior period | $ | 13,313 | | | $ | 9,962 | | | $ | 10,270 | |
Cumulative effect of accounting change(1) | — | | | 678 | | | — | |
| Provision for expected credit losses | 3,604 | | | 5,390 | | | 2,035 | |
| Amounts charged against allowance for credit losses, net of recoveries | (1,729) | | | (3,579) | | | (2,807) | |
| Allowance for credit losses of acquired company at date of acquisition | 269 | | | 862 | | | 464 | |
| Divestitures | (4,158) | | | — | | | — | |
| Ending balance | $ | 11,299 | | | $ | 13,313 | | | $ | 9,962 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
Beginning balance(1) | $ | 2,053 | | | $ | — | | | | $ | 11,299 | | | $ | 13,313 | |
| Provision for expected credit losses | 8,195 | | | 2,053 | | | | 3,811 | | | 3,604 | |
| Amounts charged against allowance for credit losses, net of recoveries | (1,595) | | | — | | | | 307 | | | (1,729) | |
| Allowance for credit losses of acquired company at date of acquisition | 972 | | | — | | | | 442 | | | 269 | |
| Divestitures | — | | | — | | | | (80) | | | (4,158) | |
| Ending balance | $ | 9,625 | | | $ | 2,053 | | | | $ | 15,779 | | | $ | 11,299 | |
(1)Cumulative effectIn connection with the Merger, the beginning balance for Successor period reflects acquisition-related adjustments of accounting change reflects the modified retrospective effect of adopting Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments$15.8 million.
(d) Inventories.
Inventories are stated at the lower of cost or net realizable value less allowance for obsolete inventory obsolescence using the First-In, First-Out Method (“FIFO”).
first-in, first-out method. The componentsCompany 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 follows (in thousands): | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Raw materials | $ | 485,642 | | | $ | 241,353 | |
| Work in process and finished goods | 263,090 | | | 190,584 | |
| $ | 748,732 | | | $ | 431,937 | |
The following table represents the rollforwarda reduction to cost of reserve for obsolete materials and supplies activity for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Beginning balance | $ | 22,172 | | | $ | 18,712 | | | $ | 19,227 | |
| Provisions | 5,155 | | | 8,015 | | | 3,207 | |
| Dispositions | (6,029) | | | (4,555) | | | (4,082) | |
| Reserve of acquired company at date of acquisition | 705 | | | — | | | 360 | |
| Divestitures | (722) | | | — | | | — | |
| Ending balance | $ | 21,281 | | | $ | 22,172 | | | $ | 18,712 | |
The principal raw materials usedsales in the Company’s manufacturing processes include PVC resin, glass, aluminum,Consolidated Statements of (Loss) Income.
Property, Plant and steel that we purchaseEquipment, 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 multiple producers.
(e)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 Sale.
The Company records assets held for sale at the loweruse to be disposed of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relativefuture date are depreciated over the remaining useful life. Assets to its current fair value; and (vi) it is unlikely that the planbe sold are written down to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less costs to sell, the Company considers factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less costs to sell of an asset is less than its current carrying value,at the asset is written down to its estimated fair value less costs to sell. Our assumptions about property sales prices require significant judgment becausetime the current market is highly sensitive to changes in economic conditions. We determined the estimated fair values of real property assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate. The total carrying value of assets held for sale is $3.4 million and
$4.6 million at December 31, 2021 and 2020, respectively. Assets held for sale at December 31, 2021 are being actively marketed for sale or are under contract.
In addition to the divested businesses discussed in Note 5 — Divestitures, during fiscal 2021 and 2020, the Company completed the sale of certain real property and equipment that was previously classified as held for sale, resulting in net cash proceeds of approximately $5.1 million and $2.0 million, respectively, and a net loss that was immaterial for fiscal 2021 and a net gain of $1.4 million for fiscal 2020, which are included in restructuring and impairment charges, net, in the consolidated statement of operations. During fiscal 2020, the Company determined an alternative use for a facility in the Commercial segment that had previously been classified as held for sale and reclassified the net book value of $1.7 million to property, plant and equipment.
(f) Property, Plant and Equipment. Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of their estimated useful lives or the term of the underlying lease.sale. Depreciation and amortization are recognized in cost of sales andor selling, general and administrative expenses based on the nature and use of the underlying assets.
Depreciation expense for fiscal 2021, 2020 and 2019 was $103.0 million, $103.5 million, and $86.2 million, respectively.
Property, plant and equipment consistsImpairment of the following (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Land | $ | 24,812 | | | $ | 26,933 | |
| Buildings and improvements | 253,637 | | | 279,113 | |
| Machinery and equipment | 990,338 | | | 970,083 | |
| 1,268,787 | | | 1,276,129 | |
| Less: accumulated depreciation | (656,492) | | | (644,308) | |
| Total property, plant and equipment, net | $ | 612,295 | | | $ | 631,821 | |
Estimated useful lives for depreciation are:
| | | | | | | | | | | |
| Buildings and improvements | 15 | – | 39 years |
| Machinery and equipment | 3 | – | 15 years |
The Company capitalizes interest on capital invested in projects in accordance with Accounting Standards Codification (“ASC”) 835, Interest. For fiscal 2021, 2020 and 2019, the total amount of interest capitalized was $0.9 million, $1.1 million and $1.2 million, respectively. Upon commencement of operations, capitalized interest, as a component of the total cost of the asset, is amortized over the estimated useful life of the asset.
(g) Internally Developed Software. Internally developed software is stated at cost less accumulated amortization, is included withinevaluates long-lived assets for impairment, including, but not limited to, property, plant and equipment within our consolidated balance sheets, and is depreciated using the straight-line method over its estimated useful life ranging from 3 to 7 years. Softwarefinite-lived intangible assets, are reviewed for impairment when events or circumstances indicate the carrying value may not be recoverable over the remaining lives of the assets. During the software application development stage, capitalized costs include external consulting costs, costs of software licenses and internal payroll and payroll related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred.
(h) Goodwill and Other Intangible Assets. The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value of such carrying valuesassets 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 annuallyany 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 $— million for goodwill as required by ASC 350, Intangibles — 2023, $— 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, and $22.2 million for 2021.
Goodwill
Goodwill and Other. This guidance providesrepresents the option to first assess qualitative factors to determine whether it is more likely than not thatexcess of the purchase price over the fair value of a reporting unit is less thanidentifiable net assets acquired in business combinations. The Company evaluates goodwill for impairment at least annually and completes its carrying value. If, based on aannual review of qualitative factors, it is more likely than not thatin the fourth quarter. When evaluating goodwill for impairment, the Company estimates the fair value of aits reporting unit is less than its carrying value, we perform a quantitative analysis.units. If the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit, including goodwill, exceeds itsthe estimated fair value, notthen the excess is charged to exceed the total amount of goodwill allocated to that reporting unit.
Unforeseen events, changesearnings as an impairment loss. Significant judgment is required in circumstances, market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affectestimating the fair value of the Company’s assetsreporting unit and result in a non-cashperforming goodwill impairment charge. Some factors considered important that could trigger an impairment review includetests. The determination of fair value incorporates significant unobservable inputs. The Company records goodwill adjustments for changes to the following: significant underperformance relativepurchase price allocation prior to expected historical or projected future operating results, significant changes in the mannerend of the Company’s usemeasurement period, which is not to exceed one year from the acquisition date. The Company did not recognize any impairments of acquired assetsgoodwill for any of the periods presented.
We have five operating segments, defined as “U.S. Aperture Solutions,” “Canadian Aperture Solutions,” “U.S. Surface Solutions,” “Canadian Surface Solutions,” and “Shelter Solutions.” As each operating segment represents a reporting unit, goodwill is assigned to each reporting unit.
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 strategyoriginal customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture. The Company accrues for its overall businessthe estimated cost of product warranty at the time of sale based on historical experience, expectations regarding future costs to be incurred and significant negative industry or economic trends.information provided by third party actuarial estimates. Warranty costs are included within cost of goods sold.
(i) Leases.
The Company has leases for certain office, manufacturing sites; warehouse and distribution locations,locations; offices; and vehicles and equipment, including fleet vehicles.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. OurThe 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.component. The Company has elected to exclude leases with an initial term of 12 months or less from the consolidated balance sheetsConsolidated Balance Sheets and recognizes related lease payments in the consolidated statementsConsolidated Statements of operations(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 (“IBR”) is utilized, based on information available at the inception of the lease. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Accounting for leases requires judgment, including determining whether a contract contains a lease, the incremental borrowing rates to utilize for leases without a stated implicit rate, the reasonably certain holding period for a leased asset, and the allocation of consideration to lease and non-lease components. The allocation
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 lease and non-lease components for durable tooling is based onrelated financing using the Company’s best estimate of standalone price.effective interest method.
(j)
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, we arethe 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 ourthe Company’s products. Revenue is generally recognized when the product has shipped from the Company’s facility and control has transferred to the customer. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. For a portion of the Company's business, when the Company processes customer owned material, control is deemed to transfer to the customer as the processing is being completed. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.
The Company’s revenuesnet sales are adjusted for variable consideration, which includes customer volume rebates, and prompt payment discounts.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. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date, while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. Measurement of variable consideration is reviewed by management periodically and revenue isnet sales are adjusted accordingly. The Company does not have significant financing components. The Company recognizes installation revenue, primarilymainly within the stone veneer business, over the period for which the stone is installed, which is typically a very short duration.
Shipping and handling activities performed by the Companybilled to customers are considered activities to fulfill the sales of our products. Amounts billed for shippingtreated 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 net sales at the same point in time the related product revenue is recognized, while costs incurred for shipping and handling costs are includedexpenses as incurred and recorded within in cost of sales.
In accordance with certain contractual arrangements, the Company receives payment from our customers in advance related to performance obligations that are to be satisfiedsales in the future and recognizes such payments as deferred revenue, primarily related to the Company’s weathertightness warranties (see Warranty accounting policies below).Consolidated Statements of (Loss) Income.
A portion of the Company’s revenue,net sales, exclusively within the CommercialShelter 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 ESPestimated selling price based on normal pricing and discounting practices.
For 2023, one customer accounted for 13.4% of the Company’s net sales. The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Windows Net Sales Disaggregation: | | | | | |
| Vinyl windows | $ | 2,190,887 | | | $ | 1,763,565 | | | $ | 1,838,796 | |
| Aluminum windows | 85,735 | | | 74,672 | | | 53,622 | |
| Other | 45,655 | | | 51,388 | | | 38,029 | |
| Total | $ | 2,322,277 | | | $ | 1,889,625 | | | $ | 1,930,447 | |
| | | | | |
| Siding Net Sales Disaggregation: | | | | | |
| Vinyl siding | $ | 667,284 | | | $ | 523,724 | | | $ | 525,005 | |
| Metal | 293,427 | | | 255,267 | | | 263,018 | |
| Injection molded | 75,361 | | | 66,672 | | | 66,578 | |
| Stone | 87,948 | | | 86,457 | | | 92,228 | |
Other products & services(1) | 240,060 | | | 209,826 | | | 164,578 | |
| Total | $ | 1,364,080 | | | $ | 1,141,946 | | | $ | 1,111,407 | |
| | | | | |
| Commercial Net Sales Disaggregation: | | | | | |
Metal building products(2) | $ | 1,473,662 | | | $ | 1,107,733 | | | $ | 1,249,757 | |
Insulated metal panels(3) | 208,220 | | | 348,640 | | | 441,441 | |
| Metal coil coating | 214,898 | | | 129,425 | | | 156,695 | |
| Total | $ | 1,896,780 | | | $ | 1,585,798 | | | $ | 1,847,893 | |
| | | | | |
| Total Net Sales: | $ | 5,583,137 | | | $ | 4,617,369 | | | $ | 4,889,747 | |
(1)Other products & services primarily consist of installation of stone veneer products.
(2)The Company’s roll-up sheet doors (“DBCI”) business is onlyattributed to this customer are included in the results of operations through August 17, 2021 as a result of divestiture. See Note 5 — Divestitures for more information. The net sales of UCC, which was acquired on December 3, 2021, are included from the date of acquisition. See Note 4 — Acquisitions for more information.
(3)The Company’s insulated metal panels (“IMP”) business is only included in the results of operations through August 8, 2021 as a result of divestiture. See Note 5 — Divestitures for more information.
(k) Deferred Financing Costs. Deferred financing costs generally comprising facility, agency, and certain legal fees associated with issuing new debt and debt restructuring, are amortized over the contractual termall three of the related agreement using the effective interest method. See Note 13 — Long-Term Debt.Company’s reportable segments.
Advertising Costs
(l) Cost of SalesAdvertising costs are expensed as incurred. Advertising expense w.as $15.9 million for 2023 Cost of sales includes the cost of inventory sold during, $11.3 million for the period including costsfrom July 25, 2022 through December 31, 2022, $11.1 million for manufacturing, inbound freight, receiving, inspection, warehousing,the period from January 1, 2022 through July 24, 2022 and internal transfers less vendor rebates. Costs associated with shipping and handling the Company’s products are also included in cost of sales. Purchasing costs and engineering and drafting$16.9 million for 2021. These costs are included in selling, general and administrative expense.expenses on the Consolidated Statements of (Loss) Income.
(m) Warranty. Share-Based Compensation
Share-based compensation expense, measured as the fair value of an award on the date of grant. For time-based awards, expense 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 offersaccounts 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 number of warranties associated with the products it sells. The specific terms and conditions of these warranties vary dependingposition are measured based on the product sold. The Company’s warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factorslargest benefit that affect the Company’s warranty liabilities includeis 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, 2023 and 2022 given the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold.instruments relatively short maturities. The Company assesses the adequacycarrying amounts of the recorded warranty claimsindebtedness under revolving credit facilities approximate fair value as the interest rates are variable and adjustsreflective 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 amountsuse of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized. See Note 12 — Warranty.follows:
(n) Insurance.Level 1: Group medical insuranceObservable 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 purchased through Blue Cross Blue Shield (“BCBS”). The plans include a Preferred Provider Organization Plan (“PPO”)little or no market data and a Consumer Driven Health Plan (“CDHP”). These plans are managed-care plans utilizing networks to achieve discounts through negotiated rates with the providers within these networks. The claims incurred under these plans are self-funded for the first $500,000. The Company purchases individual stop loss reinsurance to limit the claims liability to $500,000 per covered individual per year. BCBS administers all claims, including claims processing, utilization review and network access charges.
Insurance is purchased for workers compensation and employer liability, general liability, property and auto liability. The Company utilizes either deductibles or self-insurance retentions (“SIR”) to limit the exposure to catastrophic loss. The workers compensation insurance has a $1,000,000 per-occurrence deductible. The property and auto liability insurances have per-occurrence deductibles of $500,000 each. The general liability insurance has a $1,000,000 SIR. Umbrella insurance coverage is purchased to protectwhich require us against claims that exceed the Company’s per-occurrence or aggregate limits set forth in the Company’s respective policies. All claims are adjusted utilizing a third-party claims administrator and insurance carrier claims adjusters.
Each reporting period, the Company records the costs of its health insurance plan, including paid claims, an estimate of the change in incurred but not reported (“IBNR”) claims, and administrative fees, when applicable, (collectively the “Plan Costs”) as general and administrative expenses on the consolidated statements of operations. The estimated IBNR claims are based upon (i) the level of paid claims under the plan over the prior 36 months, (ii) an estimated lag factor and (iii) an estimate of incurred and reported but not yet paid claims. The Company uses an actuary to determine the claims lag and estimated liability for IBNR claims.
For workers’ compensation costs, the Company monitors the number of accidents and the severity of such accidents to develop appropriate estimates for expected costs to provide both medical care and indemnity benefits, when applicable, forour own assumptions about how market participants would price the period of time that an employee is incapacitated and unable to work. These accruals are developed using independent third-party actuarial estimates of the expected cost for similar disabilities. For general liability and automobile claims, accruals are developed based on independent third-party actuarial estimates of the expected cost to resolve each claim, including damages and defense costs, based on legal and industry trends and the nature and severity of the claim. Accruals also include estimates for IBNR claims, and taxes and administrative fees, when applicable. Each reporting period, the Company records the costs of our workers’ compensation, general liability and automobile claims, including paid claims, an estimate of the change in IBNR claims, taxes and administrative fees as general and administrative expenses on the consolidated statements of operations.
(o) Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was $16.9 million, $15.1 million and $28.6 million in fiscal 2021, 2020 and 2019, respectively.assets or liabilities.
(p) Impairment of Long-Lived Assets. The Company assesses impairment of property, plant and equipment at an asset group level in accordance with the provisions of ASC 360, Property, Plant and Equipment. The Company assesses the recoverability of the carrying amount of property, plant and equipment if certain events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable, such as a significant decrease in market value of the asset groups or a significant change in our business conditions. If it is determined that the carrying value of an asset group is not recoverable based on expected undiscounted future cash flows, excluding interest charges, an impairment loss equal to the excess of the carrying amount of the asset group over its fair value is recorded. The fair value of an asset group is determined based on prices of similar assets adjusted for their remaining useful life.
(q) Share-Based Compensation. Compensation expense is recorded for restricted stock awards under the fair value method. Compensation expense for performance stock units (“PSUs”) is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. See Note 9 — Share-Based Compensation.
(r) Foreign Currency Remeasurement and Translation
. TheGains (losses) arising from transactions denominated in a currency other the functional currency forof the entity that is party to the transaction are included in net (loss) income on the Company’s Canadian operationsConsolidated Statements of (Loss) Income, including the remeasurement of foreign denominated intercompany loans at current exchange rates.
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.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 stockholders’ equity. The net foreign currency gains (losses) included in net income (loss) for fiscal 2021, 2020 and 2019 were $(3.1) million, $1.1 million and $1.2 million, respectively. Net foreign currency translation adjustments, net of tax, and included in other comprehensive income (loss) were $6.6 million, $17.3 million and $3.2 million for the fiscal 2021, 2020 and 2019, respectively.
The functional currency for the Company’s Mexico operations is the U.S. dollar. Adjustments resulting from the remeasurement of the local currency financial statements into the U.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income (loss) in the current period. Net foreign currency remeasurement gains (losses) were $(0.6) million, $0.2 million and $0.9 million for fiscal 2021, 2020 and 2019, respectively.Contingencies
(s) Contingencies. The Company establishes reserves for estimated loss contingencies and unasserted claims when it believes a loss is probable and the amount of the loss can be reasonably estimated. The Company’s contingent liability reservesliabilities are related primarily to litigation and environmental matters. Revisions to contingent liability reserves are reflected in income in the period in which there are changes in factsmatters and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon assumptions and estimates regarding the probable outcome of the matter. The Company estimatesrecords 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). Should the outcome differ from the assumptions and estimates or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known.
(t) Income taxes. The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The amounts recorded in our consolidated financial statements reflect estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states in which we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for federal, state, and foreign income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. The Company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, Canadian federal and provincial, Mexican federal and other jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.
(u) Acquisitions. The Company records acquisitions resultingloss 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 consolidationConsolidated Statements of a business using the acquisition method of accounting. Under this method, we record the assets acquired, including intangible assets that can be identified and named, and liabilities assumed based on their estimated fair values at the date of acquisition. Various fair value assumptions are used in the determination of these estimated fair values, including items such as sales growth rates, cost synergies, discount rates and other prospective financial information. The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill. We believe these estimates are based upon reasonable assumptions; however, they are inherently uncertain and unpredictable, and actual results may differ. Estimates associated with the accounting for acquisitions may change during the measurement period, which may be up to one year from the acquisition date. As a result, material adjustments during the measurement period are reflected in the comparative consolidated financial statements(Loss) Income in the period in which the adjustment amount is determined. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations. Newly acquired entities are included in our results from the date of their respective acquisitions. See Note 4 — Acquisitions.such changes occur.
3. ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also improves consistent application of and simplifies U.S. GAAP for
other areas of Topic 740 by clarifying and amending existing guidance. Effective January 1, 2021, the Company adopted this guidance. The application of ASU 2019-12 did not have a material effect on the consolidated financial statements.
Recent Accounting Pronouncements
In March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“Topic 848”), 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 LIBORthe London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of rate reform, and may be adopted as of March 12, 2020 throughreform. In December 31, 2022. The Company is evaluating the impact of electing to apply the amendments.
In October 2021,2022, the FASB issued ASU 2021-08, 2022-06,Business Combinations Reference Rate Reform (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers848), Deferral of the Sunset Date of Topic 848, which requiresthat deferred the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. This creates an exception to the general recognition and measurement principles in ASC 805. The Company will be required to adopt this guidance in the annual and interim periods for the fiscal year ending December 31, 2023, with early adoption permitted. The amendments in this ASU should be applied prospectively to business combinations occurring on or after the effectivesunset date of Topic 848 to December 2024, after which entities will no longer be permitted to apply the amendments. Therelief in Topic 848. During the second quarter of 2023, as the Company doestransitioned from LIBOR to alternative reference rates, the Company adopted Topic 848 which did not anticipate that the adoption of this guidance will have a material impact on its Condensed Consolidated Financial Statements or accompanying notes.
In November 2023, the consolidatedFASB issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. The ASU will likely result in us including the additional required disclosures when adopted. We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. Prospective application is required, with retrospective application permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.
4. ACQUISITIONSNote 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 | 793,858 | |
| Inventories | 767,460 | |
| Property, plant and equipment | 873,167 | |
| Lease right-of-use assets | 275,050 | |
| Goodwill | 1,599,327 | |
| Intangible assets | 2,436,000 | |
| Other assets | 119,920 | |
| Total assets acquired | 7,952,368 | |
| |
| Accounts payable | 329,896 | |
| Accrued liabilities | 634,915 | |
| Long-term debt | 2,467,210 | |
| Lease liabilities | 252,262 | |
| Deferred income tax liabilities | 706,768 | |
| Other liabilities | 288,636 | |
| Total liabilities assumed | 4,679,687 | |
| Net assets acquired | $ | 3,272,681 | |
During July 2023, the Company completed measurement period adjustments, which were mainly composed of a $291.5 million increase to property, plant and equipment and a $174.7 million decrease to intangible assets. The effect of measurement period adjustments on the estimated fair value elements were reflected as if the adjustments had been made as of the date of the Merger, including a $66.5 million cumulative catch-up to depreciation and amortization expense recorded during the three months ended July 1, 2023 resulting from the update in the fair market value of property, plant and equipment and intangible assets. The table below presents the Consolidated Statements of (Loss) Income line items impacted by the aforementioned adjustments for previously reported periods.
| | | | | | | | | | | | | | | | | |
| Increase / (Decrease) due to Depreciation and Amortization |
| Consolidated Statements of (Loss) Income Line Item | July 25, 2022
through
December 31, 2022 | | Three Months Ended
April 1, 2023 | | Cumulative Catch-Up Recorded
During Three Months Ended
July 1, 2023 |
| Cost of sales | $ | 38,852 | | | $ | 26,303 | | | $ | 65,155 | |
| Gross profit | $ | (38,852) | | | $ | (26,303) | | | $ | (65,155) | |
| Selling, general and administrative expenses | $ | (1,632) | | | $ | 2,963 | | | $ | 1,331 | |
| Income (loss) from operations | $ | (37,220) | | | $ | (29,266) | | | $ | (66,486) | |
As part of pushdown accounting, the Company recorded goodwill to the reporting units expected to benefit from the business combination. The goodwill is mainly attributable to costs 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 following table sets forth the allocation of goodwill by the Company’s reportable segments as of the date of the Merger:
| | | | | | | | | | | | | | | | | | | | |
| Aperture Solutions | | Surface Solutions | | Shelter Solutions | | Total Goodwill |
| $ | 714,394 | | | $ | 681,822 | | | $ | 203,111 | | | $ | 1,599,327 | |
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 fair value and weighted average estimated useful life of identifiable intangible assets consists of the following:
| | | | | | | | | | | |
| Fair Value | | Weighted Average Useful Life
(in years) |
| Customer lists and relationships | $ | 1,816,000 | | | 17 |
| Trademarks, trade names and other | 620,000 | | | 15 |
| Total | $ | 2,436,000 | | | |
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 net sales 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
In August 2023, the Company completed the acquisition of M.A.C. Métal Architectural Inc. (“MAC Metal”), which became an indirect wholly-owned subsidiary of the Company. Headquartered in Saint-Hubert, Quebec, MAC Metal serves the North American residential and commercial markets with high-end steel siding and roofing products. MAC Metal will be included in the Company’s Surface Solutions reportable segment. In December 2023, the Company completed the acquisition of the Eastern Architectural Systems (“EAS”) business, whose operations are included in the Company’s Aperture Solutions reportable segment. EAS is based in Ft. Myers, Florida, and manufactures custom-made aluminum and vinyl impact windows and doors.
The total purchase price for these acquisitions was $234.9 million comprised of upfront cash payments of $217.7 million and earn-out contingent consideration of $16.8 million related to the MAC Metal transaction. The transactions are subject to a final working capital adjustment. The earn-out is payable over two consecutive twelve-month periods, with the first period starting in the month following the close of the applicable acquisition and payments are based upon achieving certain adjusted EBITDA-based metrics, as defined in the purchase agreement. The purchase price of these acquisitions was provisionally allocated to the assets acquired and liabilities assumed, which related primarily to inventory of $15.8 million, property, plant and equipment of $22.0 million, goodwill of $91.8 million, intangible assets such as, customer lists and trademarks, of $75.8 million and $34.3 million, contingent consideration of $16.8 million and noncurrent deferred income tax liabilities of $12.9 million. The estimated fair-value of the contingent consideration is recognized in other long-term liabilities on the Company’s Consolidated Balance Sheet.
Union Corrugating Company Holdings, Inc.
OnIn December 3, 2021, the Company completed its acquisition of 100% ofacquired the issued and outstanding common stock of Union Corrugating Company Holdings, Inc. (“UCC”) for a purchase price of $216.8$214.2 million, subject to customary adjustmentsincluding a post-closing adjustment of $2.6 million that have not beenwas finalized asin the first quarter of December 31, 2021.2022. UCC is a leading provider of residential metal roofing, metal buildings, and roofing components. The addition of UCC advances our growth strategy by expanding our offering to customers in the high growth metal roofing market. This acquisition was funded through cash available on the balance sheet.Company’s Consolidated Balance Sheet. The Company reports UCC results within the CommercialShelter Solutions reportable segment.
The Company preliminarily determinedfollowing table summarizes the final fair value of the tangible and intangiblenet assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):acquired:
| | | | | |
| Assets acquired:Fair Value | |
| Cash | $ | 19,594 | |
| Accounts receivable | 20,82120,515 | |
Other receivables | 16 | |
| Inventories | 68,72766,420 | |
Prepaid expenses and other current assets | 1,356 | |
| Property, plant and equipment | 24,184 | |
| Lease right of use assets | 37,964 | |
| Trade name and customer relationship intangibles | 97,560 | |
| Goodwill | 140,34263,933 | |
| Other assets | 941,466 | |
| Total assets acquired | 313,098331,636 | |
Liabilities assumed: | |
| Accounts payable and other liabilities assumed | 32,73257,163 | |
Accrued expensesLease liabilities | 22,42737,964 | |
| Deferred income taxes | 1,28922,310 | |
Current portion of lease liability | 3,859 | |
Other current liabilities | 1,852 | |
Non-current portion of lease liabilities | 34,105 | |
| |
| Total liabilities assumed | 96,264117,437 | |
| Net assets acquired | $ | 216,834214,199 | |
The $140.3$63.9 million of preliminary goodwill was allocated to the CommercialShelter 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.
During the year ended December 31, 2021, UCC contributed net sales of $21.9 million and net income of $1.8 million, which have been included within the Company’s consolidated statements of operations. During the year ended December 31, 2021, the Company incurred $1.0 million of acquisition-related costs for UCC, all of which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
Due to the recent closing of the UCC transaction, the purchase price allocation is preliminary and will be finalized when valuations are complete and final assessment of the fair value of acquired assets and assumed liabilities are completed. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuations of accounts receivable, other receivables, inventories, prepaid expenses and other current assets, property, plant and equipment, lease right of use assets, goodwill, intangible assets, other assets, accounts payable, accrued expenses, other current liabilities, other long-term liabilities, lease liabilities, and deferred income taxes.
Cascade Windows
OnIn August 20, 2021, the Company completed its acquisition of Cascade Windows, Inc. (“Cascade Windows”) for $239.5237.7 million in cash, andincluding a post-closing adjustment of $1.8 million working capital adjustment that has not beenwas finalized asin the first quarter of December 31, 2021.2022. Cascade Windows serves the residential new construction and repair and remodel markets with energy efficient vinyl window and door products from various manufacturing facilities in the United States,U.S., expanding our manufacturing capabilities and creating new opportunities for us in the Western United States.U.S. This acquisition was funded through cash available on the balance sheet.Company’s Consolidated Balance Sheet. The Company reports Cascade Windows’ results within the WindowsAperture Solutions reportable segment.
The Company preliminarily determinedfollowing table summarizes the final fair value of the tangible and intangiblenet assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):acquired:
| | | | | |
| Assets acquired:Fair Value | |
| Cash | $ | 2,838 | |
| Accounts receivable | 17,39816,956 | |
Other receivables | 409 | |
| Inventories | 16,27815,392 | |
Prepaid expenses and other current assets | 1,538 | |
| Property, plant and equipment | 18,300 | |
| Lease right of use assets | 21,849 | |
Intangible assets (trade names/Trade name and customer relationships)relationship intangibles | 137,660 | |
| Goodwill | 110,816110,417 | |
| Other assets | 5002,556 | |
| Total assets acquired | 327,586325,968 | |
Liabilities assumed: | |
| Accounts payable and other liabilities assumed | 17,68034,861 | |
Accrued expensesLease liabilities | 7,48820,173 | |
| Deferred income taxes | 33,221 | |
Current portion of lease liability | 247 | |
Other current liabilities | 2,349 | |
Non-current portion of lease liabilities | 19,926 | |
Other long-term liabilities | 7,211 | |
| Total liabilities assumed | 88,12288,255 | |
| Net assets acquired | $ | 239,464237,713 | |
The $110.8$110.4 million of preliminary goodwill was allocated to the Windows segment. Goodwill from this acquisitionAperture Solutions reportable segment and is not deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
During the year ended December 31, 2021, Cascade Windows contributed net sales of $57.4 million and a net loss of $6.2 million, which have been included within the Company’s consolidated statements of operations. During the year ended December 31, 2021, the Company incurred $1.9 million of acquisition-related costs for Cascade Windows, $1.2 million of which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
The purchase price allocation for the acquisition of Cascade Windows remains subject to further adjustments, primarily associated with the finalization of the working capital adjustment, therefore the measurement period remained open as of December 31, 2021. The Company anticipates completing the acquisition accounting adjustments during the first half of fiscal 2022.
Prime Windows
OnIn 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 2two manufacturing facilities in the United States,U.S., expanding our manufacturing capabilities and creating new opportunities for us in the Western United States.U.S. This acquisition was funded through borrowings under the Company’s existing credit facilities. Prime Windows’ results are reported within the WindowsAperture Solutions reportable segment.
The Company preliminarily determinedfollowing table summarizes the final fair value of the tangible and intangiblenet assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):acquired:
| | | | | |
| Assets acquired:Fair Value | |
| Cash | $ | 997 | |
| Accounts receivable | 5,500 | |
| Inventories | 4,446 | |
| Prepaid expenses and other current assets | 823 | |
| Property, plant and equipment | 2,500 | |
| Lease right of use assets | 2,787 | |
Intangible assets (trade names/Trade name and customer relationships)relationship intangibles | 51,600 | |
| Goodwill | 33,148 | |
| Other assets | 50 | |
| Total assets acquired | 101,851 | |
Liabilities assumed: | |
| Accounts payable | 1,676 | |
| Other accrued expenses | 1,679 | |
| |
| Lease liabilities | 2,637 | |
| Other long-term liabilities | 829 | |
| Total liabilities assumed | 6,821 | |
| Net assets acquired | $ | 95,030 | |
The $33.1 million of goodwill was allocated to the Windows segment. Goodwill from this acquisition is expected to be deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to be realized.
During the year ended December 31, 2021, Prime Windows contributed net sales of $55.8 million and net income of $5.3 million, which have been included within the Company’s consolidated statements of operations. The Company incurred $1.0 million of acquisition-related costs for Prime Windows during the year ended December 31, 2021, $0.7 million of which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
The fair value of all assets acquired and liabilities assumed was finalized during the fourth quarter of 2021.
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 Siding segment.
TheDivestitures
Coil Coatings
In June 2022, the Company
determinedcompleted the
fair valuesale of the
tangiblecoil coatings business to BlueScope Steel Limited for initial cash proceeds of $500.0 million, subject to working capital and
intangible assets andother customary adjustments. In connection with the
liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands): | | | | | |
Assets acquired: | |
Cash | $ | 143 | |
Accounts receivable | 7,135 | |
Inventories | 670 | |
Prepaid expenses and other current assets | 277 | |
Property, plant and equipment | 1,042 | |
Lease right of use assets | 445 | |
Intangible assets (trade names/customer relationships) | 22,350 | |
Goodwill | 12,539 | |
Total assets acquired | 44,601 | |
Liabilities assumed: | |
Accounts payable | 1,149 | |
Other accrued expenses | 1,020 | |
Lease liabilities | 339 | |
Other long-term liabilities | 109 | |
Total liabilities assumed | 2,617 | |
Net assets acquired | $ | 41,984 | |
The $12.5 million of goodwill was allocated to the Siding segment and will be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized. The fair value of all assets acquired and liabilities assumed was finalized during the first quarter of 2021.
During the year ended December 31, 2020, the Company incurred $10.2 million of acquisition-related costs for Kleary, primarily consisting of a contingent earnout, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations. Strategic development and acquisition related costs for the year ended December 31, 2021 included a reduction of $4.2 million to the previously estimated accrual to reflect the final contingent earnout for the Kleary acquisition at approximately $5.4 million, which was paid as of October 2, 2021.
Environmental Stoneworks
On January 12, 2019,transaction, the Company entered into long-term supply agreements to secure a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC,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 Delaware limited liability company (“Environmental Stoneworks”),pre-tax gain of $394.2 million for the Members of Environmental Materials, LLC (the “Sellers”) and Charles P. Gallagher and Wayne C. Kocourek, solelycoil coatings divestiture, which is included in their capacity as the Seller Representative (as definedgain on divestitures in the Purchase Agreement), pursuant toConsolidated 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 on February 20, 2019,are recorded in selling, general and administrative expenses in the Company’s wholly-owned subsidiary, Ply Gem Industries, Inc., purchasedConsolidated Statements of (Loss) Income. During 2023, the Company recorded $10.1 million in expense resulting from a settlement to finalize working capital. 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 Sellers 100% of the outstanding limited liability company interests of Environmental Stoneworks for total consideration of $182.6 million, subject to certain post-closing adjustments. The transaction was financed through borrowings under the Company’s asset-based revolving credit facility. Environmental Stoneworks’ resultssale are reported within the SidingShelter Solutions reportable segment.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows (in thousands):
| | | | | | | | |
Assets acquired: | | |
Restricted cash | | $ | 3,379 | |
Accounts receivable | | 16,825 | |
Inventories | | 13,062 | |
Prepaid expenses and other current assets | | 3,677 | |
Property, plant and equipment | | 14,295 | |
Lease right-of-use assets | | 11,372 | |
Intangible assets (trade names/customer relationships) | | 91,170 | |
Goodwill | | 63,543 | |
Deferred taxes | | 474 | |
Other assets | | 157 | |
Total assets acquired | | 217,954 | |
Liabilities assumed: | | |
Accounts payable | | 5,910 | |
Other accrued expenses | | 14,666 | |
Lease liabilities | | 11,365 | |
Other long-term liabilities | | 3,450 | |
Total liabilities assumed | | 35,391 | |
Net assets acquired | | $ | 182,563 | |
The $63.5 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.
Unaudited Pro Forma Financial Information
The following table provides unaudited supplemental pro forma results for the Company for the years ended December 31, 2021, 2020 and 2019 as if the UCC, Cascade Windows, Prime Windows, Kleary and Environmental Stoneworks acquisitions had occurred on January 1, 2019 (in thousands except for per share data):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | | | December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Net sales | | | | $ | 5,977,230 | | | $ | 5,056,390 | | | $ | 5,387,135 | |
| Net income (loss) applicable to common shares | | | | 663,273 | | | (480,289) | | | 26,688 | |
| Net income (loss) per common share: | | | | | | | | |
| Basic | | | | $ | 5.26 | | | $ | (3.83) | | | $ | 0.21 | |
| Diluted | | | | $ | 5.23 | | | $ | (3.83) | | | $ | 0.21 | |
The unaudited supplemental pro forma financial information was prepared based on the historical information of the Company, UCC, Cascade Windows, Prime Windows, Kleary and Environmental Stoneworks. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the UCC, Cascade Windows, Prime Windows, Kleary and Environmental Stoneworks acquisitions occurred on January 1, 2019 or of future results.
5. DIVESTITURES
OnIn 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 CommercialShelter 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 statementsConsolidated Statements of operations.(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 approximately $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 statementsConsolidated Statements of operations.(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.
6. RESTRUCTURING AND IMPAIRMENT
The Company has various initiatives and programs in place within its business units to reduce SG&A, manufacturing costs and to optimize the Company’s combined manufacturing footprint. During the year ended December 31, 2021, the Company incurred restructuring charges of $1.3 million, $14.2 million and $10.1 million in the Windows, Siding and Commercial segments, respectively, and $0.6 million in corporate restructuring charges. Restructuring charges incurred to date since the current restructuring initiatives began in 2019 are $78.6 million. The following table summarizes the costs related to those restructuring initiatives and programs for periods indicated (in thousands):
| | | | | | | | | | | |
| Year Ended | | Cost
Incurred
To Date (since inception) |
| December 31, 2021 | |
| Severance | $ | 3,696 | | | $ | 39,927 | |
| Asset impairments | 22,210 | | | 30,078 | |
| Gain on sale of facilities, net | — | | | (1,298) | |
| Other restructuring costs | 341 | | | 9,877 | |
| Total restructuring costs | $ | 26,247 | | | $ | 78,584 | |
For the year ended December 31, 2021, total restructuring costs are recorded within restructuring and impairment costs in the consolidated statement of operations. The asset impairments of $22.2 million for the year ended December 31, 2021 included right-of-use lease assets in the Windows segment of $0.3 million; certain product line assets in the Siding segment for which the fair value of the assets was below their carrying amounts by $14.0 million; assets in the Commercial segment that were recorded at fair value less cost to sell, which was less than the assets’ carrying amount by $6.4 million; and the write-off of previously capitalized software development costs in the Commercial segment of $1.5 million.Note 4 — Inventories
The following table summarizes our severance liability, included within other accrued expenses onsets forth the consolidated balance sheets, and cash payments made pursuantcomponents of inventories:
| | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Raw materials | $ | 291,093 | | | $ | 312,380 | |
| Work in process | 59,336 | | | 67,424 | |
| Finished goods | 146,410 | | | 172,024 | |
| Total inventories | $ | 496,839 | | | $ | 551,828 | |
The following table sets forth the changes to the restructuring plans from inception through December 31, 2021 (in thousands):allowance for obsolete inventory:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Windows | | Siding | | Commercial | | Corporate | | Total |
| Balance, December 31, 2018 | $ | — | | | $ | 85 | | | $ | — | | | $ | 2,333 | | | $ | 2,418 | |
| Costs incurred | 1,094 | | | 1,834 | | | 2,721 | | | 4,009 | | | 9,658 | |
| Cash payments | (676) | | | (1,437) | | | (2,721) | | | (4,579) | | | (9,413) | |
| Balance, December 31, 2019 | $ | 418 | | | $ | 482 | | | $ | — | | | $ | 1,763 | | | $ | 2,663 | |
| Costs incurred | 4,294 | | | 2,705 | | | 16,561 | | | 3,013 | | | 26,573 | |
| Cash payments | (4,406) | | | (2,352) | | | (14,570) | | | (4,346) | | | (25,674) | |
| Balance, December 31, 2020 | $ | 306 | | | $ | 835 | | | $ | 1,991 | | | $ | 430 | | | $ | 3,562 | |
| Costs incurred | 971 | | | 264 | | | 2,004 | | | 457 | | | 3,696 | |
| Cash payments | (1,262) | | | (904) | | | (2,473) | | | (587) | | | (5,226) | |
| Balance, December 31, 2021 | $ | 15 | | | $ | 195 | | | $ | 1,522 | | | $ | 300 | | | $ | 2,032 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
Beginning balance(1) | $ | 2,227 | | | $ | — | | | | $ | 21,281 | | | $ | 22,172 | |
| Provisions | 1,890 | | | 3,805 | | | | 7,197 | | | 5,155 | |
| Dispositions | (3,970) | | | (1,578) | | | | (2,335) | | | (6,029) | |
| Other | 227 | | | — | | | | 3,417 | | | (17) | |
| Ending balance | $ | 374 | | | $ | 2,227 | | | | $ | 29,560 | | | $ | 21,281 | |
We expect to fully execute our restructuring initiatives and programs over(1) In connection with the next 12 to 24 months and we may incur future additional restructuring charges associated with these plans. We are unable at this time to make a good faithMerger, the beginning balance for the Successor period reflects acquisition-related adjustments of $29.6 million.
determination
Note 5 — Property, Plant and Equipment, Net
The following sets forth the components of cost estimates, or ranges of cost estimates, associated with future phases ofproperty, plant and equipment, net:
| | | | | | | | | | | | | | | | | | | | | | | |
| Range of Useful Lives
(in Years) | | Successor |
| | December 31, 2023 | | December 31, 2022 |
| Land | | | | | $ | 58,690 | | | $ | 16,970 | |
| Buildings and improvements | 10 | – | 40 | | 270,752 | | | 111,296 | |
| Machinery and equipment | 10 | – | 15 | | 856,140 | | | 526,764 | |
| | | | | 1,185,582 | | | 655,030 | |
| Less: accumulated depreciation and amortization | | | | | (296,479) | | | (36,966) | |
| Total property, plant and equipment, net | | | | | $ | 889,103 | | | $ | 618,064 | |
Depreciation and amortization expense related to property, plant and equipment was $241.3 million for 2023, $44.7 million for the plans orperiod from July 25, 2022 through December 31, 2022, $56.7 million for the total costs we may incur in connection with these plans.period from January 1, 2022 through July 24, 2022 and $103.0 million for 2021.
7. GOODWILL AND OTHER INTANGIBLE ASSETSNote 6 — Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance andfollowing table sets forth the changes in the carrying amount of goodwill by segment follows (in thousands):reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Windows | | Siding | | Commercial | | Total |
| Balance, December 31, 2019 | $ | 714,023 | | | $ | 807,280 | | | $ | 148,291 | | | $ | 1,669,594 | |
| Goodwill recognized from acquisition | — | | | 12,539 | | | — | | | 12,539 | |
| Impairment | (320,990) | | | (176,774) | | | (5,407) | | | (503,171) | |
| Currency translation | 3,991 | | | 10,000 | | | — | | | 13,991 | |
| Purchase accounting adjustments from prior year acquisitions | — | | | 1,776 | | | — | | | 1,776 | |
| Balance, December 31, 2020 | $ | 397,024 | | | $ | 654,821 | | | $ | 142,884 | | | $ | 1,194,729 | |
| Goodwill recognized from acquisitions | 143,964 | | | 122 | | | 140,342 | | | 284,428 | |
| Divestiture | — | | | — | | | (121,464) | | | (121,464) | |
| | | | | | | |
| Currency translation | 208 | | | 155 | | | — | | | 363 | |
| | | | | | | |
| Balance, December 31, 2021 | $ | 541,196 | | | $ | 655,098 | | | $ | 161,762 | | | $ | 1,358,056 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Aperture Solutions | | Surface Solutions | | Shelter
Solutions | | Total |
| Balance, December 31, 2021 (Predecessor) | $ | 541,196 | | | $ | 655,098 | | | $ | 161,762 | | | $ | 1,358,056 | |
| Currency translation | (750) | | | (561) | | | — | | | (1,311) | |
| Measurement period adjustments | (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 | 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 | |
| Go private measurement period adjustments | 90,385 | | | (108,630) | | | (70,976) | | | (89,221) | |
Acquisition related measurement period adjustments and other (1) | 58,520 | | | 27,065 | | | (903) | | | 84,682 | |
| Currency translation | (1,781) | | | (464) | | | — | | | (2,245) | |
| Balance, December 31, 2023 (Successor) | $ | 771,133 | | | $ | 708,423 | | | $ | 202,208 | | | $ | 1,681,764 | |
As a result(1)Measurement period adjustments have been recorded in conjunction with the acquisition of the decline in the Company’s market valuationMAC Metal and near-term economic uncertainties related to the COVID-19 pandemic,EAS during the first quarter of fiscal 2020, the Company determined that an interim goodwill impairment test was necessary. The Company determined that deterioration in discount ratesperiod. See Note 3 — Mergers and market multiples during the three months ended April 4, 2020 from the COVID-19 pandemic driven economic uncertainty when combined with lower forecasted discounted cash flows, decreased the fair values of the Company’s reporting units. The Company performed an impairment evaluation by comparing the fair market value of its reporting units, as determined using an equally weighted discounted cash flow model and a market approach, to its carrying value. It was determined that the Siding, Windows and Metal Coil Coating reporting units' carrying value each exceeded their fair value. As a result of this analysis, the Company recorded a goodwill impairment charge of approximately $321.0 millionAcquisitions for the Windows reporting unit, $176.8 million for the Siding reporting unit, and $5.4 million for the Metal Coil Coating reporting unit (which is within the Commercial segment). This non-cash charge did not affect the Company’s cash position, liquidity or debt covenant compliance, nor did it have any impact on future operations.
In addition to interim impairment tests under ASC 350, additional information.Intangibles — Goodwill and Other, the Company evaluated its property and equipment and intangible assets for impairment during the first quarter of fiscal 2020 in accordance with ASC 360, Property, Plant and Equipment. This analysis was triggered by a decrease in projected cash flows due to the depressed construction market. The impairment test results did not indicate that an impairment existed other than the $3.1 million included in restructuring and impairment charges, net, in the Company’s consolidated statement of operations for the three months ended April 4, 2020.
The Company performed its annual impairment assessment of goodwill during the fourth quarter of fiscal 2021 and 2020. The Company performed the annual impairment testing on each of its reporting units that had goodwill balances. The fair value of the Company’s reporting units is based on a blend of estimated discounted cash flows and a market approach. The results from each of these models are then weighted and combined into a single estimate of fair value for the Company’s reporting units. Estimated discounted cash flows are based on projected sales and related cost of sales. Publicly traded company multiples and acquisition multiples are derived from information on traded shares and analysis of recent acquisitions in the marketplace, respectively, for companies with operations similar to ours. The primary assumptions used in these various models include earnings multiples of acquisitions in a comparable industry, future cash flow estimates of each of the reporting units, weighted average cost of capital, working capital and capital expenditure requirements.
As a result of the annual impairment tests, the Company concluded that the estimated fair value of each of its reporting units exceeded its carrying value. However, there can be no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods.
Intangible Assets, Net
The following table that follows presentssets forth the major components of intangible assets as of December 31, 2021 and 2020 (in thousands). Intangible assets that are fully amortized are removed from the disclosures.assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of December 31, 2021 | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | |
| Trademarks/Trade names/other | 3 | – | 15 | | 7 | $ | 241,727 | | | $ | (76,574) | | | $ | 165,153 | |
| Customer lists and relationships | 7 | – | 20 | | 9 | 1,845,511 | | | (486,029) | | | 1,359,482 | |
| Total intangible assets | | | | | 8 | $ | 2,087,238 | | | $ | (562,603) | | | $ | 1,524,635 | |
| | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of December 31, 2020 | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | |
| Trademarks/Trade names | 5 | – | 15 | | 8 | $ | 248,155 | | | $ | (51,722) | | | $ | 196,433 | |
| Customer lists and relationships | 7 | – | 20 | | 9 | 1,758,611 | | | (370,440) | | | 1,388,171 | |
| Total intangible assets | | | | | 9 | $ | 2,006,766 | | | $ | (422,162) | | | $ | 1,584,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Life
(in Years) | | Weighted Average Amortization Period Remaining (Years) | | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of December 31, 2023: | | | | | | | | | | | |
| Trademarks, trade names and other | | 15 | | | 14 | | $ | 653,992 | | | $ | (59,208) | | | $ | 594,784 | |
| Customer lists and relationships | 3 | – | 19 | | 16 | | 1,883,757 | | | (192,473) | | | 1,691,284 | |
| Total intangible assets | | | | | | | $ | 2,537,749 | | | $ | (251,681) | | | $ | 2,286,068 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Life
(in Years) | | Weighted Average Amortization Period Remaining (Years) | | Cost | | Accumulated Amortization | | Net Carrying Value |
| As of December 31, 2022: | | | | | | | | | | | |
| 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 | |
Intangible assets are amortized on a straight-line basis or a basis consistent withbasis. The following table sets forth the expected future cash flows over their expected useful lives. Amortizationamortization expense of intangibles was $189.5 million, $181.0 million and $177.6 million in fiscal 2021, 2020 and 2019, respectively. related to intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Amortization expense | $ | 171,300 | | | $ | 85,400 | | | | $ | 109,500 | | | $ | 189,500 | |
The Company expects to recognizeexpected amortization expense over the next five fiscal years as follows (in thousands):
| | | | | |
| 2022 | $ | 196,157 | |
| 2023 | 196,144 | |
| 2024 | 195,487 | |
| 2025 | 195,304 | |
| 2026 | 195,120 | |
In accordance with ASC 350, Intangibles — Goodwill and Other, the Company evaluates the remaining useful life ofthereafter for acquired intangible assets on an annual basis. The Company reviews finite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying values may not be recoverable in accordance with ASC 360, Property, Plant and Equipment.recorded as of December 31, 2023 is as follows:
| | | | | |
| Amount |
| 2024 | $ | 191,053 | |
| 2025 | 172,858 | |
| 2026 | 147,386 | |
| 2027 | 147,386 | |
| 2028 | 144,952 | |
| Thereafter | 1,482,433 | |
| Total | $ | 2,286,068 | |
8. LEASESNote 7 — Other Current Liabilities
WeightedThe following table sets forth the components of other current liabilities: | | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Accrued insurance | $ | 22,190 | | | $ | 23,609 | |
| Accrued freight | 11,687 | | | 11,130 | |
| Accrued facilities | 917 | | | 4,687 | |
| Professional services | 2,000 | | | 10,380 | |
| Interest rate swaps | — | | | 7,000 | |
| Accrued interest | 50,692 | | | 48,595 | |
| Other accrued expenses | 41,841 | | | 44,195 | |
| Total other current liabilities | $ | 129,327 | | | $ | 149,596 | |
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 |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 |
Balance, beginning of period(1) | $ | 202,463 | | | $ | 203,011 | | | | $ | 218,356 | |
| Acquisitions | 2,721 | | | — | | | | 189 | |
| Divestitures | — | | | — | | | | (4,345) | |
| Warranties sold | 1,385 | | | 879 | | | | 1,052 | |
| Revenue recognized | (2,458) | | | (1,135) | | | | (1,383) | |
| Expense | 33,245 | | | 17,019 | | | | 26,910 | |
| Settlements | (43,119) | | | (17,311) | | | | (21,311) | |
| Balance, end of period | $ | 194,237 | | | $ | 202,463 | | | | $ | 219,468 | |
| Reflected as: | | | | | | |
| Current liabilities – Rebates, warranties and other customer-related liabilities | $ | 23,029 | | | $ | 25,304 | | | | $ | 26,888 | |
| Noncurrent liabilities – Other long-term liabilities | 171,208 | | | 177,159 | | | | 192,580 | |
| Total product warranty liability | $ | 194,237 | | | $ | 202,463 | | | | $ | 219,468 | |
(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, 2021 was as follows:2023:
| | | | | |
| Weighted-average remaining lease term | 6.97.4 years |
Weighted-average IBRincremental borrowing rate | 5.7410.63 | % |
The following table sets forth components of operating lease costs were as follows (in thousands):costs:
| | | | Year Ended December 31, 2022 | |
| | Year Ended |
| Successor | |
| | December 31, 2021 | | December 31, 2020 |
| Operating lease costs | | | |
| Successor | |
| | Successor | | | | Predecessor |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Fixed lease costs | Fixed lease costs | $ | 107,938 | | | $ | 113,760 | |
| Short-term lease costs | |
Variable lease costs(1) | Variable lease costs(1) | 102,646 | | | 70,795 | |
| (1) Includes short-term lease costs, which are immaterial. | |
CashThe following table sets forth cash and non-cash activitieslease activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Operating cash flows for operating leases | $ | 98,987 | | | $ | 34,104 | | | | $ | 42,069 | | | $ | 91,024 | |
Right-of-use assets obtained in exchange for new operating lease liabilities(1) | $ | 48,332 | | | $ | 277,724 | | | | $ | 10,601 | | | $ | 88,826 | |
(1) For the period July 25, 2022 through December 31, 2022, all leases that existing prior to the Merger were treated as follows (in thousands):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows for operating leases | $ | 91,024 | | | $ | 99,076 | |
| | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 88,826 | | | $ | 19,785 | |
FutureFor the year ended December 31, 2023, the Company renewed and terminated certain existing facility, transportation and equipment leases and received tenant improvement allowances, which resulted in a decrease of the net remeasurement of the existing lease right-of-use assets in the amount of $4.4 million.
The following table sets forth future minimum lease payments under non-cancelable leases as of December 31,
2021 were as follows (in thousands): | | | | | |
| Operating Leases |
| 2022 | $ | 89,202 | |
| 2023 | 65,893 | |
| 2024 | 52,382 | |
| 2025 | 43,976 | |
| 2026 | 36,016 | |
| Thereafter | 108,542 | |
| Total future minimum lease payments | 396,011 | |
| Less: interest | 71,800 | |
| Present value of future minimum lease payments | $ | 324,211 | |
| |
| As of December 31, 2021 | |
| Current portion of lease liabilities | $ | 73,150 | |
| Long-term portion of lease liabilities | 251,061 | |
| Total | $ | 324,211 | |
9. SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan, as amended (the “2003 Incentive Plan”), is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock awards, stock appreciation rights, cash awards, phantom stock awards, restricted stock unit awards (“RSUs”) and long-term incentive awards with performance conditions (“performance share units” or “PSUs”). Awards are generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). In connection with the Merger (as defined herein) with Ply Gem Parent, LLC (“Ply Gem”) , on November 16, 2018, awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, RSUs, and PSUs. A portion of the Founders Awards was not granted under the 2003 Incentive Plan but was instead granted pursuant to a separate equity-based compensation plan, the Long-Term Incentive Plan. These Founders Awards were subject to award agreements with the same terms and provisions as awards of the same type granted under the 2003 Incentive Plan. | | | | | |
| Amount |
| 2024 | $ | 96,379 | |
| 2025 | 88,626 | |
| 2026 | 81,219 | |
| 2027 | 43,643 | |
| 2028 | 32,328 | |
| Thereafter | 182,869 | |
| Total future minimum lease payments | 525,064 | |
| Less: interest | 173,049 | |
| Present value of future minimum lease payments | $ | 352,015 | |
As of December 31, 2021, and for all periods presented, the Founders Awards and our share-based awards granted under the 2003 Incentive Plan have consisted of RSUs, PSUs and stock options, none of which can be settled through cash payments. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment through the end of a specified time period and typically vest in annual increments over three to five years or earlier upon death, disability or a change in control. As a general rule, stock option awards expire on the earlier of (i) 10 years from the date of grant, (ii) 60 days after termination of employment or service for a reason other than death, disability or retirement, or (iii) 180 days after death, disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Committee may approve.
Our time-based restricted stock awards are typically subject to graded vesting over a service period, which is three to five years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically three years. Our share-based compensation arrangements are equity classified and we recognize compensation cost for these awards on a straight-line basis over the requisite service period for each award grant. In the case of performance-based awards, expense is recognized based upon management’s assessment of the probability that such performance conditions will be achieved. Certain of our awards provide for accelerated vesting upon a change of control or upon termination without cause or for good reason.
A total of approximately 6,594,000 and 8,497,000 shares were available at December 31, 2021 and 2020, respectively, under the 2003 Incentive Plan for further grants of awards.
Vesting of the PSUs granted as part of the Founders Awards was contingent upon the achievement of synergies captured from the Merger and continued employment. Based on achieved synergies during the period comprising the two fiscal years ended December 31, 2020, the Founders Awards vested at 200% of target amounts in November 2021. Vesting of the PSUs granted under the 2003 Incentive Plan during the years ended December 31, 2021 and 2020 are contingent upon achievement of a cumulative three-year EBITDA growth target with an additional modifier based on total stockholders return. The grant-date fair values of the PSUs granted during the years ended December 31, 2021 and 2020 were determined by Monte Carlo simulations.
Stock Option Awards
The fair value of each option award is estimated as of the date of grant using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized historical volatility of our stock over a preceding period commensurate with the expected term of the option. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not currently pay dividends on our Common Stock and have no current plans to do so in the future.
During fiscal 2021, 2020 and 2019, we granted 815,258, 1,120,644 and 359,873 stock options, respectively, and the weighted average grant-date fair value of options granted during fiscal 2021, 2020 and 2019 was $7.38, $2.13 and $1.97, respectively.
The assumptions for the option awards granted in fiscal 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Volatility rate | 49.03 | % | | 47.52 | % | | 39.87 | % |
| Expected term (in years) | 6.00 | | 6.00 | | 6.50 |
| Risk-free interest rate | 1.02 | % | | 0.48 | % | | 1.73 | % |
The following is a summary of stock option transactions during fiscal 2021, 2020 and 2019 (in thousands, except weighted average exercise prices and weighted average remaining life):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Life | | Aggregate
Intrinsic
Value |
| Balance, December 31, 2018 | 3,297 | | | 12.08 | | | | | |
| Granted | 360 | | | 4.67 | | | | | |
| | | | | | | |
| Forfeited | (713) | | | 12.16 | | | | | |
| Cancelled | (96) | | | 9.17 | | | | | |
| Balance, December 31, 2019 | 2,848 | | | 11.22 | | | | | |
| Granted | 1,121 | | | 4.86 | | | | | |
| | | | | | | |
| Forfeited | (539) | | | 11.26 | | | | | |
| Cancelled | (215) | | | 11.85 | | | | | |
| Balance, December 31, 2020 | 3,215 | | | 8.95 | | | | | |
| Granted | 815 | | | 15.01 | | | | | |
| Exercised | (301) | | | 10.85 | | | | | |
| Forfeited | (647) | | | 9.17 | | | | | |
| Cancelled | (37) | | | 10.37 | | | | | |
| Balance, December 31, 2021 | 3,045 | | | $ | 10.28 | | | 7.8 | | $ | 21,817 | |
| Exercisable at December 31, 2021 | 1,235 | | | $ | 9.23 | | | 7.0 | | $ | 10,136 | |
The following summarizes additional information concerning outstanding options at December 31, 2021 (in thousands, except weighted average remaining life and weighted average exercise prices):
| | | | | | | | | | | | | | |
| Options Outstanding |
Number of
Options | | Weighted Average
Remaining Life | | Weighted Average
Exercise Price |
| 1,119 | | | 8.0 years | | $ | 4.91 | |
| 1,926 | | | 7.8 years | | 13.40 | |
| | | | |
| 3,045 | | | 7.8 years | | $ | 10.28 | |
The following summarizes additional information concerning options exercisable at December 31, 2021 (in thousands, except weighted average exercise prices):
| | | | | | | | | | | | | | |
| Options Exercisable |
Number of
Options | | Weighted Average
Remaining Life | | Weighted Average
Exercise Price |
| 507 | | | 7.8 years | | $ | 4.83 | |
| 728 | | | 6.5 years | | 12.30 | |
| | | | |
| 1,235 | | | 7.0 years | | $ | 9.23 | |
There were 300,976 options exercised during fiscal 2021 and cash received from the option exercises was $3.3 million. The total intrinsic value of options exercised in fiscal 2021 was $1.5 million. The tax benefit realized for the tax deductions from options exercised totaled $0.6 million for fiscal 2021. No options were exercised during fiscal 2020 and 2019.
Restricted stock and performance awards
During fiscal 2021, 2020 and 2019, we granted time-based RSUs with a fair value of $18.7 million, $7.0 million and $3.3 million, respectively.
During the fiscal 2021, 2020 and 2019, we granted PSUs with fair values of approximately $28.0 million, $5.6 million and $0.4 million, respectively, to certain executives.
Restricted stock and performance award transactions during fiscal 2021, 2020 and 2019 were as follows (in thousands, except weighted average grant prices):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock and Performance Awards | | | | |
| Time-Based | | Performance-Based | | |
| Number of
Shares | | Weighted
Average
Grant Price | | Number of Shares(1) | | Weighted
Average
Grant Price | | | | |
| Balance, December 31, 2018 | 2,245 | | | $ | 12.57 | | | 1,037 | | | $ | 14.63 | | | | | |
| Granted | 703 | | | 5.40 | | | 76 | | | 4.67 | | | | | |
| Vested | (586) | | | 12.42 | | | (234) | | | 16.30 | | | | | |
| Forfeited | (543) | | | 11.00 | | | (168) | | | 13.09 | | | | | |
| Balance, December 31, 2019 | 1,819 | | | $ | 10.32 | | | 711 | | | $ | 13.38 | | | | | |
| Granted | 1,399 | | | 5.04 | | | 1,068 | | | 5.25 | | | | | |
| Vested | (422) | | | 11.77 | | | (192) | | | 19.65 | | | | | |
| Forfeited | (442) | | | 9.76 | | | (212) | | | 8.49 | | | | | |
| Balance, December 31, 2020 | 2,354 | | | $ | 7.02 | | | 1,375 | | | $ | 6.93 | | | | | |
| Granted | 1,248 | | | 14.97 | | | 1,525 | | | 24.48 | | | | | |
| Vested | (1,099) | | | 6.23 | | | (763) | | | 10.67 | | | | | |
| Forfeited | (511) | | | 9.64 | | | (698) | | | 11.38 | | | | | |
| Balance, December 31, 2021 | 1,992 | | | $ | 11.76 | | | 1,439 | | | $ | 17.73 | | | | | |
(1)The number of restricted stock shown reflects the shares that would be granted if the target level of performance is achieved. The number of shares actually issued may vary.
Share-Based Compensation Expense
Share-based compensation expense 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 defined and determined by management. We account for forfeitures of outstanding but unvested grants in the period they occur.
Share-based compensation expense recognized during fiscal 2021, 2020 and 2019 was $29.0 million, $17.1 million and $14.1 million, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $7.5 million, $4.4 million and $3.7 million in fiscal 2021, 2020 and 2019, respectively. Included in the share-based compensation expense during fiscal 2021 were accelerated awards of $1.0 million due to the retirement of the Company’s former CEO and modification of certain awards that included fully vesting certain restricted stock unit awards that would otherwise be forfeited at retirement, extending the post-retirement exercise period for stock options vesting at the retirement date, and allowing continued vesting of certain performance unit award that would otherwise be forfeited at the retirement date. As of December 31, 2021, we do not have any amounts capitalized for share-based compensation cost in inventory or similar assets.
Unrecognized share-based compensation expense and weighted average period over which expense attributable to unvested awards will be recognized are as follows (in millions, except weighted average remaining years):
| | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Unrecognized Share-Based Compensation Expense | | Weighted Average Remaining Years |
| Stock options | $ | 7.8 | | | 2.1 |
| Time-based restricted stock | 16.8 | | | 2.1 |
| Performance-based restricted stock | 19.7 | | | 1.6 |
| Total unrecognized share-based compensation expense | $ | 44.3 | | | |
10. EARNINGS PER COMMON SHARENote 10 — Long-Term Debt
Basic earnings per common share is computed by dividing net income allocated to common shares byThe following table sets forth the weighted average numbercomponents 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 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Numerator for Basic and Diluted Earnings Per Common Share: | | | | | |
| Net income (loss) applicable to common shares | $ | 658,044 | | | $ | (482,778) | | | $ | (15,390) | |
| Denominator for Basic and Diluted Earnings Per Common Share: | | | | | |
| Weighted average basic number of common shares outstanding | 126,058 | | | 125,562 | | | 125,576 | |
| Common stock equivalents: | | | | | |
| Employee stock options | 737 | | | — | | | — | |
| | | | | |
| Weighted average diluted number of common shares outstanding | 126,795 | | | 125,562 | | | 125,576 | |
| | | | | |
| Basic earnings (loss) per common share | $ | 5.22 | | | $ | (3.84) | | | $ | (0.12) | |
| Diluted earnings (loss) per common share | $ | 5.19 | | | $ | (3.84) | | | $ | (0.12) | |
| | | | | |
Incentive Plan securities excluded from dilution(1) | 275 | | 2,559 | | 4,480 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| | | December 31, 2023 | | December 31, 2022 |
| Effective Interest Rate | | Principal Outstanding | | Unamortized Fair Value Adjustment(1) | | Unamortized Discount and Issuance Costs | | Carrying Amount | | Principal Outstanding | | Unamortized Fair Value Adjustment(1) | | Unamortized Discount and Issuance Costs | | Carrying Amount |
| Term loan facility, due April 2028 | 8.57 | % | | $ | 2,528,500 | | | $ | (292,442) | | | $ | — | | | $ | 2,236,058 | | | $ | 2,554,500 | | | $ | (348,769) | | | $ | — | | | $ | 2,205,731 | |
| Term loan facility, due August 2028 | 9.69 | % | | 297,000 | | | — | | | (18,370) | | | 278,630 | | | 300,000 | | | — | | | (21,538) | | | $ | 278,462 | |
| 6.125% Senior Notes due January 2029 | 13.73 | % | | 318,699 | | | (87,050) | | | — | | | 231,649 | | | 365,541 | | | (111,524) | | | — | | | $ | 254,017 | |
| 8.750% Senior Secured Notes, due August 2028 | 10.61 | % | | 710,000 | | | — | | | (44,787) | | | 665,213 | | | 710,000 | | | — | | | (52,622) | | | $ | 657,378 | |
| Total long-term debt | | | $ | 3,854,199 | | | $ | (379,492) | | | $ | (63,157) | | | $ | 3,411,550 | | | $ | 3,930,041 | | | $ | (460,293) | | | $ | (74,160) | | | $ | 3,395,588 | |
| Reflected as: | | | | | | | | | | | | | | | | | |
| Current liabilities - Current portion of long-term debt | | | | $ | 29,000 | | | | | | | | | $ | 29,000 | |
| Non-current liabilities - Long-term debt | | | | 3,382,550 | | | | | | | | | 3,366,588 | |
| Total long-term debt | | | | $ | 3,411,550 | | | | | | | | | $ | 3,395,588 | |
| Fair value - Senior notes - Level 1 | | | | $ | 988,702 | | | | | | | | | $ | 907,993 | |
| Fair value Term loans - Level 2 | | | | 2,835,596 | | | | | | | | | 2,580,000 | |
| Total fair value | | | | $ | 3,824,298 | | | | | | | | | $ | 3,487,993 | |
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treatedIn July 2022, as a separate class in computing earnings per share. The calculationresult of earnings per share presented here excludes the income attributable to unvested restricted stock unitspushdown accounting related to our Incentive Plan from the numerator and excludesMerger, 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 anycarrying values of the fiscal periods presented are includedterm 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:
| | | | | |
| Amount |
| 2024 | $ | 29,000 | |
| 2025 | 29,000 | |
| 2026 | 29,000 | |
| 2027 | 29,000 | |
| 2028 | 3,419,500 | |
| 2029 | 318,699 | |
| Total | $ | 3,854,199 | |
Revolving Credit Facilities
The following table sets forth the Company’s availability under its credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Available | | Borrowings | | Letters of Credit and Priority Payables | | Available | | Borrowings | | Letters of Credit and Priority Payables |
| Asset-based lending facility | $ | 850,000 | | | $ | — | | | $ | 47,000 | | | $ | 850,000 | | | $ | — | | | $ | 48,000 | |
Cash flow revolver(1) | 92,000 | | | — | | | — | | | 115,000 | | | — | | | — | |
| First-in-last-out tranche asset-based lending facility | 95,000 | | | — | | | — | | | 95,000 | | | — | | | — | |
| Total | $ | 1,037,000 | | | $ | — | | | $ | 47,000 | | | $ | 1,060,000 | | | $ | — | | | $ | 48,000 | |
(1) Cash flow revolver commitments of $23.0 million matured in the computation of diluted earnings per common share if their effect was dilutive.
11. OTHER ACCRUED EXPENSES
Other accrued expenses are comprised of the following (in thousands): | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Sales and marketing | $ | 99,845 | | | $ | 69,236 | |
| Accrued warranty obligation and deferred warranty revenue | 30,181 | | | 26,094 | |
| Other accrued expenses | 190,363 | | | 152,563 | |
| Total other accrued expenses | $ | 320,389 | | | $ | 247,893 | |
12. WARRANTYMerger 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 following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the years ended December 31, 2021 and 2020 (in thousands):ABL FILO Facility terminates in July 2027. | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Beginning balance | $ | 216,230 | | | $ | 216,173 | |
| Acquisitions | 10,518 | | | 109 | |
| Warranties sold | 1,986 | | | 2,677 | |
| Revenue recognized | (2,650) | | | (2,746) | |
| Expense | 26,129 | | | 28,566 | |
| Settlements | (31,612) | | | (28,549) | |
| Divestiture | (2,245) | | | — | |
| Ending balance | 218,356 | | | 216,230 | |
| Less: current portion | 30,181 | | | 26,094 | |
| Total warranty, less current portion | $ | 188,175 | | | $ | 190,136 | |
The current portionproceeds 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 warranty liabilities is recorded within other accrued expenses and the long-term portion of the warranty liabilities is recorded within other long-term liabilities on the Company’s consolidated balance sheets.
13. LONG-TERM DEBT
Debt is comprised of the following (in thousands): | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Term loan facility due April 2028 | $ | 2,580,500 | | | $ | 2,497,967 | |
| | | |
| 8.00% senior notes due April 2026 | — | | | 645,000 | |
| 6.125% senior notes due January 2029 | 500,000 | | | 500,000 | |
Less: unamortized discounts and unamortized deferred financing costs(1) | (43,657) | | | (53,938) | |
| Total long-term debt, net of unamortized discounts and unamortized deferred financing costs | 3,036,843 | | | 3,589,029 | |
| Less: current portion of long-term debt | 26,000 | | | 25,600 | |
| Total long-term debt, less current portion | $ | 3,010,843 | | | $ | 3,563,429 | |
(1)Includes the unamortized discounts and unamortized deferred financing costs associated with the term loan facility, the 8.00% senior notes due April 2026 (included in the December 31, 2020 balance only as the notes were redeemed in full in April 2021), and the 6.125% senior notes due January 2029. The unamortized deferred financing costs associated with the asset-based and revolving credit facilities of $1.3 million and $1.7 million as of December 31, 2021 and 2020, respectively, are classified in other assets on the consolidated balance sheets.
The scheduled maturity of our debt is as follows (in thousands): | | | | | |
| 2022 | $ | 26,000 | |
| 2023 | 26,000 | |
| 2024 | 26,000 | |
| 2025 | 26,000 | |
| 2026 and thereafter | 2,976,500 | |
| $ | 3,080,500 | |
Term Loan Facility due April 2028 and Cash Flow Revolver
OnIn April 12, 2018, Ply Gem Midco entered into a Cash Flow Agreement (the "Current Cash(as amended from time to time, the “Cash Flow Credit Agreement"Agreement”), which provides for (i) a term loan facility (the “Existing Term“Term Loan Facility”) in an originalthe aggregate principal amount of $1,755.0$2,600.0 million, issued with a discount of 0.5%, and (ii) a cash flow-based revolving credit facility (the “Existing Cash“Cash Flow Revolver” and together with the Existing Term Loan Facility, the “Existing Cash Flow Facilities”) of up to $115.0 million.
On November 16, 2018, the Company entered into an incremental term loan facility in connection with the Merger, which increased the aggregate principal amount of the Existing Term Loan Facility by $805.0 million. The proceeds of this incremental term loan facility were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement and (c) repay $325.0 million of borrowings outstanding under the ABL Facility. On November 16, 2018, in In connection with the consummation of the Merger, NCIPly Gem merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Existing Cash Flow Facilities, andin which the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the ExistingTerm Loan Facility and Cash Flow Facilities.
Revolver (together the “Cash Flow Facilities”). On April 15, 2021,11, 2023, the Company entered into a Second Amendment to the Current Cash Flow Credit Agreement (the “Second Amendment"), among the Company, the several banks and other financial institutions party thereto (the "Cash Flow Lenders") and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), which amended the Current Cash Flow Credit Agreement to among other things:
•Terminate $92.0 million of commitments by Cash Flow Lenders underreplace the Company’s cash flow-based revolving credit facility of up to $115.0 million, maturing on April 12, 2023 (the “Existing Cash Flow Revolver”; and
•Replace such commitments with $92.0 million of extended cash flow-based revolving commitments, maturing on April 12, 2026 (the “Extended Cash Flow Revolver” and togetheradjusted LIBOR rate with the Existing Cash Flow Revolver, the “Current Cash Flow Revolver”).
On April 15, 2021, the Company entered into (i) a Third Amendment to Current Cash Flow Credit Agreement (the “Third Amendment”), among the Company, the subsidiary guarantors parties thereto, the Cash Flow Lenders party thereto and the Cash Flow Agent and (ii) an Increase Supplement (the “Increase Supplement”), between the Company and JPMorgan Chase Bank, N.A., as the increasing lender. The Third Amendment amended the Current Cash Flow Credit Agreement to, among other things, refinance the Existing Term Loan Facility in an original aggregate principal amount of $1,755.0 million with Tranche B Term Loans in an aggregate principal amount of approximately $2,491.6 million, maturing on April 12, 2028. The Increase Supplement supplemented the Current Cash Flow Credit Agreement to, among other things, increase the aggregate principal amount of the Tranche B Term Loan Facility by approximately $108.4 million (the “Incremental Tranche B Term Loans”), for a total principal amount of $2,600.0 million (the “Current Term Loan Facility” and together with the Current Cash Flow Revolver, the “Current Cash Flow Facilities”). Proceeds of the Incremental Tranche B Term Loans were used, together with cash on hand, (i) for the redemption of all of the 8.00% Senior Notes (as defined below) (the “Senior Notes Redemption”Secured Overnight Financing Rate (“SOFR”) and (ii) to pay any fees and expenses incurred in connection with the extension and refinancing of the Company’s senior credit facilities and the Senior Notes Redemption.
In connection with the Third Amendment and the Increase Supplement to the Current Cash Flow Credit Agreement, the Company incurred $24.8 million in financing costs of which $13.2 million was deferred and are being amortized using the effective interest method.rate.
The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity. The Current Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBORa Term SOFR rate with a credit spread adjustment of 0.10% (subject to a floor of 0.50%) plus an applicable margin of 3.25% per annum or (ii) an alternate base rate plus an applicable margin of 2.25% per annum. At December 31, 2021, the interest rates on the Current Term Loan Facility were as follows:
| | | | | |
| December 31, 2021 |
Interest rate | 3.75 | % |
Effective interest rate | 4.02 | % |
The Company entered into certain interest rate swap agreements in 2019 and 2021 to effectively convert a portion of its variable rate debt to fixed. See Note 14 — Derivatives.
Loans outstanding under the Current Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) a Daily Simple SOFR rate or a Term SOFR rate with (only in the case of Term SOFR rate borrowings with an adjusted LIBOR rateinterest period greater than one month) a credit spread adjustment of 0.10% (subject to a floor of 0.00%) plus an applicable margin ranging from 2.50% to 3.00% per annum depending on the Company’s secured leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on the Company’s secured leverage ratio. There are no amortization payments under the Current Cash Flow Revolver. Additionally, unused commitments under the Current Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio.
Both the Current Term Loan Facility and Current Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
Subject to certain exceptions, the Current Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1)(i) certain asset sales, (2)(ii) certain debt offerings and (3)(iii) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Current Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. No payments were required in 20212022 under the fiscal year 20202021 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.
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 (as defined below) 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 Notes in whole or in part at any time subject to certain prepayment premiums if the 6.125% Senior Notes were to be redeemed prior to September 15, 2025.
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 was January 15, 2023.
The 8.750% Senior Secured 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
The Company repurchased an aggregate principal amount of$46.8 million for $33.9 million in cash during the year ended December 31, 2023. The repurchases, which resulted in a write-off of associated unamortized debt discount and deferred financing costs, resulted in a loss of $0.2 million during 2023 were recognized as gain on extinguishment of debt in the Consolidated Statements of (Loss) Income.
Other Information
The obligations under the Current Cash Flow Credit AgreementCompany’s debt agreements are generally guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions,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 by:
•notes are also secured by a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor (other than ABL Priority Collateral (as defined below)), includingand in the capital stock of each direct material wholly-owned U.S. restricted subsidiary owned by the Company, and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Company or any subsidiary guarantor, subject to certain exceptions (the “Cash Flow Priority Collateral”),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 security interest will be senior tois tested only when specified availability is less than 10.0% of the security interest inlesser of (x) the foregoing assets securingthen applicable borrowing base and (y) the Current ABL Facility; and
•a perfected security interest inthen aggregate effective commitments under the ABL Priority Collateral, which security interest will be junior to the security interestFacility, and continuing until such time as specified availability has been in the ABL Priority Collateral securing the Current ABL Facility.
excess of such threshold for a period of 20 consecutive calendar days. The Current Cash Flow RevolverCredit 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.
ABL Facility due April 2026
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), which provides for an asset-based revolving credit facility (the “Existing ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). The Company and, at their option, certain of their subsidiaries are the borrowers under the Existing ABL Facility.
On October 15, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $36.0 million, which upsized the Existing ABL Facility to $396.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million.
On November 16, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $215.0 million in connection with the Merger, which upsized the Existing ABL Facility to $611.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Existing ABL Facility, and the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the Existing ABL Facility.
On April 15, 2021, the Company entered into Amendment No. 6 to the Current ABL Credit Agreement, by and among the Company, the subsidiary borrowers party thereto, the several banks and financial institutions party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent, which amended the ABL Credit Agreement in order to, among other things:
•Terminate the existing revolving commitments of each of the Extending ABL Credit Lenders (as defined in therein), originally maturing on April 12, 2023 (the “Existing ABL Commitments”); and
•Replace the Existing ABL Commitments with an extended revolving commitment of $611.0 million, maturing on April 12, 2026 (the “Current ABL Facility”).
Borrowing availability under the Current ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, eligible accounts receivable and eligible credit card receivables, less certain reserves and subject to certain other adjustments as set forth in the Current ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. As of December 31, 2021, the Company had the following in relation to the Current ABL Facility (in thousands):
| | | | | |
| December 31, 2021 |
Excess availability | $ | 565,576 | |
Revolving loans outstanding | 0 | |
Letters of credit outstanding | 40,257 | |
Loans outstanding under the Current ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a LIBOR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the Current ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
The obligations under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by the Company and the U.S. subsidiary guarantors and the proceeds of any of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral, and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the foregoing assets securing the Current Cash Flow Facilities; and
•a perfected security interest in the Cash Flow Priority Collateral, which security interest will be junior to the security interest in the Cash Flow Collateral securing the Current Cash Flow Facilities.
Additionally, the obligations of the Canadian borrowers under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions, and are secured by substantially all assets of the Canadian borrowers and the Canadian subsidiary guarantors, subject to certain exceptions.
The Current ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the Current ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days.
6.125% Senior Notes due January 2029
On September 24, 2020, the Company issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029 (“the 6.125% Senior Notes”). Proceeds from the 6.125% Senior Notes were used to repay outstanding amounts under the Company’s Current ABL Facility and Current Cash Flow Revolver. The 6.125% Senior Notes bear interest at 6.125% per annum and will mature on January 15, 2029. Interest is payable semi-annually in arrears on January 15 and July 15 commencing on January 15, 2021. The effective interest rate for the 6.125% Senior Notes was 6.33% as of December 31, 2021, after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
The 6.125% Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 6.125% Senior Notes are unsecured senior indebtedness and are effectively subordinated to all of the Company’s existing and future senior secured indebtedness, including indebtedness under the Current Term Loan Facility, Current Cash Flow Revolver and Current ABL Facility, and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 6.125% Senior Notes in whole or in part at any time as set forth below:
•prior to September 15, 2023, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date, plus the applicable make-whole premium;
•prior to September 15, 2023, up to 40% of the aggregate principal amount with the proceeds of certain equity offerings at a redemption price of 106.125% plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after September 15, 2023 and prior to September 15, 2024, at a price equal to 103.063% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date;
•on or after September 15, 2024 and prior to September 15, 2025, at a price equal to 101.531% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after September 15, 2025, at a price equal to 100.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date.
Redemption of 8.00% Senior Notes
On April 15, 2021, the Company redeemed the outstanding $645.0 million aggregate principal amount of the 8.00% Senior Notes due April 2026 (the “8.00% Senior Notes”) for $670.8 million using cash on hand and proceeds from the Incremental Tranche B Term Loans. The redemption resulted in a pre-tax loss on extinguishment of debt of $41.9 million during the year ended December 31, 2021, comprising a make-whole premium of $25.8 million and a write-off of $16.1 million in unamortized deferred financing costs.
Debt Covenants
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. As of December 31, 2021, theThe Company wasis in compliance with all of its covenants that were in effect on such date.
14. DERIVATIVES
We utilize derivative instruments, including interest rate swap agreements and foreign currency hedging contracts, to manage our exposure to interest rate risk and currency fluctuations. We only hold such instruments for economic hedging purposes, not for speculative or trading purposes. Our derivative instruments are transacted only with highly rated institutions, which reduces our exposure to credit risk in the eventas of nonperformance.December 31, 2023.
Interest Rate Swaps
We are exposed to interest rate risk associated with fluctuations in interest rates on our floating-rate Current Term Loan Facility. The objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we have entered into interest rate swap agreements as part of our interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
On a monthly basis, we net settle with our swap counterparties for the difference between the fixed rate specified in each swap agreement and the variable rate as applied to the notional amount of the swap.
In May 2019, the Company entered into four-yearuses certain interest rate swaps to mitigate variability in forecasted interest payments on $1,500.0 million of the Company’s Current Term Loan Facility. The interest rate swaps effectively convertedmanage a portion of the floating rate interest payment into a fixed rate interest payment. Three interest rate swaps each covered a notional amountrisk on its term loans. The following table sets forth the terms of $500.0 million. The Company designated the interest rate swaps as qualifying hedging instruments and accounted for these derivatives as cash flow hedges.
As discussed in Note 13 — Long-Term Debt, the Company refinanced its Term Loan Facility. Contemporaneously with the refinancing on April 15, 2021, we completed a series of transactions to modify ourCompany’s interest rate swap positions as follows: (i) we de-designated all existing interest rate swaps as cash flow hedges; (ii) we terminated 2 existing interest rate swaps with a notional value of $500.0 million each; (iii) we entered into 2 receive-fixed interest rate swaps with a notional amount of $250.0 million each, which are designed to offset the terms of an existing, active interest rate swap with a notional amount of $500.0 million; and (iv) we entered into 2 pay-fixed interest rate swaps with a notional amount of $750 million each, effectively blending the liability position of our existing interest rate swap agreements into the new swaps and extending the term of our hedged position to April 2026.agreements:
The amount remaining in accumulated other comprehensive loss for the de-designated and terminated swaps as of December 31, 2021 was approximately $44.7 million and is being amortized as an increase to interest expense over the effective period of the original swap agreements.
The new receive-fixed interest rate swaps remain undesignated to economically offset the now undesignated existing, active swap. The new receive-fixed and the existing, active swaps mature on July 12, 2023. Cash settlements related to these receive-fixed interest rate swaps are classified as operating activities in the consolidated statements of cash flows.
The new pay-fixed interest rate swaps also qualify as hybrid instruments in accordance with ASC 815, Derivatives and Hedging, consisting of a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The financing component is accounted for at amortized cost over the life of the swap while the embedded at-market derivative is accounted for at fair value. The new swaps are indexed to one-month LIBOR and are net settled on a monthly basis with the counterparty for the difference between the fixed rate of 2.0369% and 2.0340%, respectively, and the variable rate based upon one-month LIBOR (subject to a floor of 0.5%) as applied to the notional amount of the swaps. In connection with the transactions discussed above, no cash was exchanged between the Company and the counterparty. The liability of the terminated interest rate swaps as well as the inception value of the receive-fixed interest rate swap was blended into the new pay-fixed interest rate swap. The cash flows related to the portion treated as a financing component are classified as financing activities while the cash flows related to the portion treated as an at-market derivative are classified as operating activities in the consolidated statements of cash flows.
The key terms of interest rate swaps are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 | | |
| Effective Date | | Fixed Rate Paid (Received) | | Notional Amount | | Status | | Notional Amount | | Status | | Maturity Date |
| Entered into May 2019: | | | | | | | | | | | | |
| July 12, 2019 | | 2.1570 | % | | $ | — | | | Terminated | | $ | 500,000 | | | Active | | July 12, 2023 |
| July 12, 2019 | | 2.1560 | % | | — | | | Terminated | | 500,000 | | | Active | | July 12, 2023 |
| July 12, 2019 | | 2.1680 | % | | 500,000 | | | Active | | 500,000 | | | Active | | July 12, 2023 |
| | | | | | | | | | | | |
| Entered into April 2021: | | | | | | | | | | | | |
| April 15, 2021 | | 2.0369 | % | | 750,000 | | | Active | | | | | | April 15, 2026 |
| April 15, 2021 | | 2.0340 | % | | 750,000 | | | Active | | | | | | April 15, 2026 |
| April 15, 2021 | | (2.1680) | % | | (250,000) | | | Active | | | | | | July 12, 2023 |
| April 15, 2021 | | (2.1680) | % | | (250,000) | | | Active | | | | | | July 12, 2023 |
| | | | $ | 1,500,000 | | | | | $ | 1,500,000 | | | | | |
The embedded at-market derivative portion of our interest rate swap agreements is recognized at fair value on the consolidated balance sheets. It is valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.
Foreign Currency Forward Contracts
In December 2020 and during 2021, the Company entered into forward contracts to hedge a portion of its non-functional currency inventory purchases. These forward contracts were established to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar. The forward contracts are highly correlated to the changes in the U.S. dollar relative to the Canadian dollar. All of the Company’s foreign currency forward contracts are initially designated as qualifying hedging instruments and are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. Unrealized gains and losses on these contracts are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income or loss to cost of goods sold. The gains and losses on the derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings.
During the year ended December 31, 2021, the Company realized a loss of approximately $1.1 million within cost of goods sold in the consolidated statements of operations based on the foreign currency forward contracts described above. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows
of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings. As of December 31, 2021, the Company had a hedge asset of approximately $0.7 million and a gain of approximately $0.8 million in accumulated other comprehensive loss on the consolidated balance sheets. No hedge liability or asset or deferred gain or loss in accumulated other comprehensive loss existed as of December 31, 2020 related to the forward contracts.
Fair Values of Derivatives on the Consolidated Balance Sheets
The fair values of our derivatives and their presentation on the consolidated balance sheets as of December 31, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 |
| | | | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives not designated as hedging instruments | | Financial statement line item | | | | | | | | |
| Interest rate swaps | | Other assets(1) | | $ | 11,543 | | | $ | — | | | $ | — | | | $ | — | |
| | Other long-term liabilities(2) | | — | | | 11,543 | | | — | | | — | |
| Total | | | | $ | 11,543 | | | $ | 11,543 | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| Derivatives designated as hedging instruments | | Financial statement line item | | | | | | | | |
| Interest rate swaps | | Other accrued expenses(3) | | $ | — | | | $ | 13,127 | | | $ | — | | | $ | — | |
| | Other long-term liabilities(3) | | — | | | 28,279 | | | — | | | 75,770 | |
| Foreign currency forward contracts | | Prepaid expenses and other | | 728 | | | — | | | — | | | — | |
| | | | | | | | | | |
| Total | | | | $ | 728 | | | $ | 41,406 | | | $ | — | | | $ | 75,770 | |
| | | | | | | | | | | |
| May 2019 Swap(1) | | April 2021 Swaps |
| Notional amount | $ | 500,000 | | | $ | 1,500,000 | |
| Forecasted term loan interest payments being hedged | 1-month SOFR | | 1-month SOFR |
| Fixed rate paid | 2.1680 | % | | 2.0038 | % |
| Origination date | July 12, 2019 | | April 17, 2023 |
| Maturity date | July 12, 2023 | | April 15, 2026 |
| Fair value at December 31, 2023 - Other assets, net | $ | — | | | $ | 64,704 | |
| Fair value at December 31, 2022: | | | |
| Other current assets | $ | 7,000 | | | $ | — | |
| Other assets, net | $ | — | | | $ | 95,361 | |
| Other current liabilities | $ | — | | | $ | 7,000 | |
Level in fair value hierarchy (2) | Level 2 | | Level 2 |
(1)The balance as of December 31, 2021 is related to receive-fixed interest rate swaps for which the fair value option has been elected.May 2019 swap was de-designated from cash flow hedge accounting in April 2021.
(2)The balance as of December 31, 2021 is related to a pay-fixed May 2019 active interest rate swap which has been de-designated as a cash flow hedge.
(3)The balances as of December 31, 2021 include the financing component of the pay-fixed interest rate swaps.
Effect of Derivatives on the Consolidated Statements of Operations
The effect of our derivatives and their presentation on the consolidated statements of operations for the years ended December 31, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended | | |
| | | | December 31,
2021 | | December 31,
2020 | | |
| Derivatives not designated as hedging instruments | | Financial statement line item | | | | | | |
| Interest rate swaps | | Interest expense(1) | | $ | 21,164 | | | $ | — | | | |
| Foreign currency forward contracts | | Cost of sales | | 1,083 | | | — | | | |
| | | | | | | | |
| Derivatives designated as hedging instruments | | | | | | | | |
| Interest rate swaps | | Interest expense | | 15,998 | | | 24,198 | | | |
| | | | $ | 38,245 | | | $ | 24,198 | | | |
(1)For the year ended December 31, 2021, the entire balance related to the reclassification from accumulated other comprehensive loss to interest expense is due to de-designation from hedge accounting of all May 2019 interest rate swaps.
15. CD&R INVESTOR GROUP
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman
Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of the Company, which was converted into shares of our common stock on May 14, 2013.
In January 2014, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 8.5 million shares of Common Stock at a price to the public of $18.00 per share (the “2014 Secondary Offering”). The underwriters also exercised their option to purchase 1.275 million additional shares of Common Stock. In addition, the Company entered into an agreement with the CD&R Fund VIII Investor Group to repurchase 1.15 million shares of its Common Stock at a price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2014 Stock Repurchase”). The 2014 Stock Repurchase, which was completed at the same time as the 2014 Secondary Offering, represented a private, non-underwritten transaction between NCI and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors.
On July 25, 2016, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 9.0 million shares of our Common Stock at a price to the public of $16.15 per share (the “2016 Secondary Offering”). The underwriters also exercised their option to purchase 1.35 million additional shares of our Common Stock from the CD&R Fund VIII Investor Group. The aggregate offering price for the 10.35 million shares sold in the 2016 Secondary Offering was approximately $160.1 million, net of underwriting discounts and commissions. The CD&R Fund VIII Investor Group received all of the proceeds from the 2016 Secondary Offering and no shares in the 2016 Secondary Offering were sold by the Company or any of its officers or directors (although certain of our directors are affiliated with the CD&R Fund VIII Investor Group).
On July 18, 2016, the Company entered into an agreement with the CD&R Fund VIII Investor Group to repurchase approximately 2.9 million shares of our Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2016 Stock Repurchase”). The 2016 Stock Repurchase, which was completed concurrently with the 2016 Secondary Offering, represented a private, non-underwritten transaction between the Company and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors. See Note 20 — Stock Repurchase Program.
On December 11, 2017, the CD&R Fund VIII Investor Group completed a registered underwritten offering of 7,150,000 shares of the Company’s Common Stock at a price to the public of $19.36 per share (the “2017 Secondary Offering”). Pursuant to the underwriting agreement, at the CD&R Fund VIII Investor Group request, the Company purchased 1.15 million of the 7.15 million shares of the Company’s Common Stock from the underwriters in the 2017 Secondary Offering at a price per share equal to the price at which the underwriters purchased the shares from the CD&R Fund VIII Investor Group. The total amount the Company spent on these repurchases was $22.3 million.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018 (the “Ply Gem-Atrium Merger”).
Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between the Company and each of the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of the Company’s Common Stock that are held by the Investors following the consummation of the Merger.
On August 25, 2020, the Company filed a shelf registration statement on Form S-3, declared effective by the SEC on September 2, 2020, registering the resale of shares of the Company’s Common Stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company’s Common Stock held by the CD&R Fund VIII Investor Group and the Golden Gate Investor Group.
Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement. Pursuant to the terms of the New Registration Rights Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Registration Rights Agreement, dated as of October 20, 2009 (the “Old Registration Rights Agreement”), by and among the Company and the CD&R Fund VIII Investor Group.
At December 31, 2021 and 2020, the CD&R Investor Group owned approximately 48.8% and 49.4%, respectively, of the outstanding shares of the Company’s Common Stock.
16. RELATED PARTIES
Pursuant to the Investment Agreement and the New Stockholders Agreement, the CD&R Investor Group had the right to designate a number of directors to the Company’s Board of Directors that was equivalent to the CD&R VIII Investor Group’s percentage interest in the Company. Among other directors appointed by the CD&R Investor Group, our Board of Directors appointed John Krenicki, Nathan K. Sleeper and Jonathan L. Zrebiec to the Board of Directors. Messrs. Krenicki, Sleeper and Zrebiec are partners of Clayton, Dubilier & Rice, LLC, (“CD&R, LLC”), an affiliate of the CD&R Investor Group.
As a result of their respective positions with CD&R, LLC and its affiliates, one or more of Messrs. Krenicki, Sleeper and Zrebiec may be deemed to have an indirect material interest in certain agreements executed in connection with the Equity Investment and the Merger.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of December 31, 2021 and 2020 because of the relatively short maturities of these instruments. The carrying amounts of the indebtedness under the Current ABL Facility and Current Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. At December 31, 2021, there were no borrowings outstanding under the Current ABL Facility and no outstanding indebtedness under the Current Cash Flow Revolver. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective period ends were (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Term loan facility | $ | 2,580,500 | | | $ | 2,570,823 | | | $ | 2,497,967 | | | $ | 2,485,477 | |
| 8.00% Senior Notes | — | | | — | | | 645,000 | | | 674,025 | |
| 6.125% Senior Notes | 500,000 | | | 531,900 | | | 500,000 | | | 530,000 | |
The fair value of the term loan facility was based on recent trading activities of comparable market instruments, which are level 2 inputs and the fair values of the 8.00% and 6.125% senior notes were based on quoted prices in active markets for the identical liabilities, which are level 1 inputs.
Fair Value Measurements
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used as of December 31, 2021 and 2020.
Money market: Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds: Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
Deferred compensation plan liability: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
Interest rate swaps:Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market-based LIBORSOFR yield curves. These interest rate swaps are classified within Level 2 of the fair value
hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Foreign currency forward contracts: The fair value of the foreign currency forward contracts are classified within Level 2 of the fair value hierarchy because they are estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs.
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2021 and 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Short-term investments in deferred compensation plan:(1) | | | | | | | |
| Money market | $ | 24 | | | $ | — | | | $ | — | | | $ | 24 | |
| Mutual funds – Growth | 557 | | | — | | | — | | | 557 | |
| Mutual funds – Blend | 1,560 | | | — | | | — | | | 1,560 | |
| Mutual funds – Foreign blend | 467 | | | — | | | — | | | 467 | |
| Mutual funds – Fixed income | — | | | 151 | | | — | | | 151 | |
Total short-term investments in deferred compensation plan(2) | 2,608 | | | 151 | | | — | | | 2,759 | |
| Foreign currency forward contracts | — | | | 728 | | | — | | | 728 | |
Interest rate swap assets(3) | — | | | 11,543 | | | — | | | 11,543 | |
| Total assets | $ | 2,608 | | | $ | 12,422 | | | $ | — | | | $ | 15,030 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Deferred compensation plan liability(2) | $ | — | | | $ | 2,759 | | | $ | — | | | $ | 2,759 | |
| | | | | | | |
Interest rate swap liabilities(4) | — | | | 52,949 | | | — | | | 52,949 | |
| Total liabilities | $ | — | | | $ | 55,708 | | | $ | — | | | $ | 55,708 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Short-term investments in deferred compensation plan:(1) | | | | | | | |
| Money market | $ | 349 | | | $ | — | | | $ | — | | | $ | 349 | |
| Mutual funds – Growth | 487 | | | — | | | — | | | 487 | |
| Mutual funds – Blend | 1,006 | | | — | | | — | | | 1,006 | |
| Mutual funds – Foreign blend | 338 | | | — | | | — | | | 338 | |
| Mutual funds – Fixed income | — | | | 153 | | | — | | | 153 | |
Total short-term investments in deferred compensation plan(2) | 2,180 | | | 153 | | | — | | | 2,333 | |
| Total assets | $ | 2,180 | | | $ | 153 | | | $ | — | | | $ | 2,333 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Deferred compensation plan liability(2) | $ | — | | | $ | 2,339 | | | $ | — | | | $ | 2,339 | |
| Interest rate swap liabilities | — | | | 75,770 | | | — | | | 75,770 | |
| Total liabilities | $ | — | | | $ | 78,109 | | | $ | — | | | $ | 78,109 | |
(1)Unrealized holding gains (losses) were $0.2 million and $(0.5) million for the years ended December 31, 2021 and 2020, respectively.
(2)The Company records the short-term investments in deferred compensation plan within investments in debt and equity securities, at market, and the deferred compensation plan liability within accrued compensation and benefits on the consolidated balance sheets.
(3)The interest rate swap assets relate to receive-fixed interest rate swaps for which the fair value option has been elected.
(4)The balance as of December 31, 2021 includes $41.4 million related to the financing component of pay-fixed interest rate swaps and $11.5 million related to pay-fixed May 2019 active interest rate swaps which have been de-designated as cash flow hedges.
18. INCOME TAXES
Income tax expense is based on pretax financial accounting income. Deferred income taxes are recognized for the temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts for income tax purposes.
The following is a summary of the components of income (loss) before provision (benefit) for income taxes (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Domestic | $ | 818,635 | | | $ | (420,014) | | | $ | (12,016) | |
| Foreign | 83,192 | | | (57,201) | | | 1,401 | |
| $ | 901,827 | | | $ | (477,215) | | | $ | (10,615) | |
The components of the provision for income taxes consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Current: | | | | | |
| Federal | $ | 219,379 | | | $ | (1,343) | | | $ | (311) | |
| State | 64,509 | | | 7,316 | | | 7,219 | |
| Foreign | 11,590 | | | 3,909 | | | 3,952 | |
| Total current | 295,478 | | | 9,882 | | | 10,860 | |
| Deferred: | | | | | |
| Federal | (43,980) | | | 82 | | | 205 | |
| State | (18,363) | | | 1,462 | | | 1,875 | |
| Foreign | 2,833 | | | (5,863) | | | (8,165) | |
| Total deferred | (59,510) | | | (4,319) | | | (6,085) | |
| Total provision (benefit) | $ | 235,968 | | | $ | 5,563 | | | $ | 4,775 | |
The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Federal income tax at statutory rate | $ | 189,384 | | | $ | (100,215) | | | $ | (2,229) | |
| State income taxes | 34,071 | | | 7,482 | | | 8,059 | |
| | | | | |
| Non-deductible expenses | 180 | | | 217 | | | 62 | |
| | | | | |
| Gain on divestitures | 9,725 | | | — | | | — | |
| Compensation related expenses | 2,573 | | | 3,630 | | | 3,518 | |
| Meals and entertainment | 552 | | | 465 | | | 1,265 | |
| Tax credits | (14,285) | | | (3,343) | | | (7,179) | |
| Foreign income tax | 3,413 | | | (2,820) | | | (884) | |
| Employee fringe benefits | 480 | | | 443 | | | 474 | |
| Unrecognized tax benefits | 5,686 | | | (157) | | | (581) | |
| Reversal of valuation allowance | — | | | — | | | (3,981) | |
| Global intangible low-taxed income | 8,248 | | | 4,317 | | | 4,398 | |
| Goodwill impairment | — | | | 94,793 | | | — | |
| Transaction costs | — | | | — | | | 1,903 | |
| Other | (4,059) | | | 751 | | | (50) | |
| Total provision (benefit) | $ | 235,968 | | | $ | 5,563 | | | $ | 4,775 | |
The increase in the effective tax rate for the year ended December 31, 2021 is primarily a result of higher pre-tax earnings relating to the gains on the Insulated Metal Panels and DBCI divestitures. The Company’s statutory federal
corporate income tax rate for the year ended December 31, 2020 resulted from lower pre-tax earnings related to the goodwill impairment of $503.2 million, of which approximately $438.7 million had no tax basis, and the net impact of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) that was enacted by the United States on December 22, 2017.
Deferred income taxes reflect the net impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of the temporary differences as December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Deferred tax assets: | | | |
| Inventory obsolescence | $ | 4,363 | | | $ | 4,369 | |
| Bad debt reserve | 2,511 | | | 2,302 | |
| Accrued and deferred compensation | 13,136 | | | 7,522 | |
| Accrued insurance reserves | 7,895 | | | 8,429 | |
| | | |
| Net operating loss and tax credit carryover | 41,732 | | | 61,169 | |
| | | |
| Pension | 1,148 | | | 4,576 | |
| | | |
| Leases | 72,812 | | | 68,589 | |
| Warranty | 44,925 | | | 44,969 | |
| Other reserves | 52,635 | | | 48,258 | |
| Total deferred tax assets | 241,157 | | | 250,183 | |
| Less valuation allowance | (15,634) | | | (11,996) | |
| Net deferred tax assets | 225,523 | | | 238,187 | |
| | | |
| Deferred tax liabilities: | | | |
| Depreciation and amortization | (388,730) | | | (424,254) | |
| Stock basis | (12,733) | | | (12,826) | |
| Leases | (72,098) | | | (66,962) | |
| | | |
| Other | (2,296) | | | (2,070) | |
| Total deferred tax liabilities | (475,857) | | | (506,112) | |
| Total deferred tax liability, net | $ | (250,334) | | | $ | (267,925) | |
We carry out our business operations through legal entities in the U.S., Canada, Mexico and Costa Rica. These operations require that we file corporate income tax returns that are subject to U.S., state and foreign tax laws. We are subject to income tax audits in these multiple jurisdictions.
As of December 31, 2021, the $41.7 million net operating loss carryforward included $20.8 million for U.S federal losses, $13.3 million for U.S. state losses, and $7.6 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 2021, if unused. There are limitations on the utilization of certain net operating losses.
Valuation allowance
As of December 31, 2021, the Company remains in a valuation allowance position, in the amount of $15.6 million, against its deferred tax assets for certain state jurisdictions as it is currently deemed “more likely than not” that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these state jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowance as necessary.
The rollforward of the valuation allowance on deferred taxes is as follows for the periods indicated (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Beginning balance | $ | 11,996 | | | $ | 10,347 | | | $ | 19,497 | |
| Additions (reductions) | 3,638 | | | 1,649 | | | (9,150) | |
| | | | | |
| Ending balance | $ | 15,634 | | | $ | 11,996 | | | $ | 10,347 | |
Uncertain tax positions
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities.
As of December 31, 2021, the reserve was approximately $17.4 million, which includes interest and penalties of approximately $2.6 million and is recorded in other long-term liabilities in the accompanying consolidated balance sheets. Of this amount, approximately $14.8 million, if recognized would have an impact on the Company's effective tax rate. The Company has elected to treat interest and penalties on unrecognized tax benefits as income tax expense in its consolidated statement of operations. Interest and penalty charges have been recorded in the contingency reserve account within other long-term liabilities on the consolidated balance sheets.
The following is a rollforward of unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 |
| Unrecognized tax benefits at beginning of year | $ | 9,403 | | | $ | 10,107 | |
| Additions based on tax positions related to current year | 6,037 | | | 194 | |
| Reductions for tax positions of prior years | 15 | | | (39) | |
| Reductions resulting from expiration of statute of limitations | (610) | | | (859) | |
| Unrecognized tax benefits at end of year | $ | 14,845 | | | $ | 9,403 | |
CARES Act
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (“QIP”). Specifically, the CARES Act amends IRC §163(j) for tax years 2019 and 2020. The CARES Act increases the 30% adjusted taxable income threshold to 50% and allows taxpayers to elect to use their 2019 adjusted taxable income as their adjusted taxable income in the 2020 §163(j) calculation. The combination of these two factors will allow the Company to deduct additional interest expense for income tax purposes that would have been previously disallowed. Additionally, the Company deferred employer side social security payments for approximately $19.9 million as of December 31, 2020. In December 2021, the Company paid approximately $10 million in related deferred employer side social security payments and approximately $10 million has been recorded in current liabilities on the consolidated balance sheet as of December 31, 2021. The Company continues to evaluate the impact of the CARES Act on our financial position, results of operations, and cash flows.
Other tax considerations
As of December 31, 2021, the Company has not established U.S. deferred taxes on unremitted earnings for the Company’s foreign subsidiaries. The Company continues to consider these amounts to be permanently invested with the exception of its Mexican subsidiary. The indefinite reinvestment assertion continues to apply for the remaining foreign subsidiaries for purposes of determining deferred tax liabilities for U.S. state and foreign withholding tax purposes.
19. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands): | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Foreign exchange translation adjustments | $ | 22,741 | | | $ | 16,147 | |
| Unrealized loss on derivative instruments, net of tax benefit of $5,549 and $17,612, respectively | (23,407) | | | (58,625) | |
| Defined benefit pension plan actuarial losses, net of tax benefit of $1,854 and $5,049, respectively | (4,946) | | | (9,039) | |
| Accumulated other comprehensive loss | $ | (5,612) | | | $ | (51,517) | |
20. STOCK REPURCHASE PROGRAMNote 11 — Employee Benefit Plans
On October 10, 2017 and March 7, 2018, the Company announced that its Board of Directors authorized new stock repurchase programs for up to an aggregate of $50.0 million and $50.0 million, respectively, of the Company’s Common Stock for a cumulative total of $100.0 million.Defined Benefit Plans
During fiscal 2021 and 2019, there were no stock repurchases under the stock repurchase programs. During fiscal 2020, the Company repurchased 1.1 million shares of its Common Stock for $6.4 million through open-market purchases under the authorized stock repurchase programs. As of December 31, 2021, approximately $49.1 million remains available for stock repurchases under the program authorized on March 7, 2018. The authorized programs have no time limit on their duration, but our Current Cash Flow Credit Agreement and Current ABL Credit Agreement apply certain limitations on our repurchase of shares of our Common Stock. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
In addition to the Common Stock repurchases, the Company also withheld shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock units, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
During fiscal 2021, 2020 and 2019, the Company canceled 0.6 million, 1.3 million and 0.3 million shares, respectively, of which 1.1 million canceled shares, for fiscal 2020, related to repurchased shares under stock repurchase programs. The remainder of the canceled shares related to shares used to satisfy minimum tax withholding obligations in connection with the vesting of stock awards. The cancellations resulted in $9.7 million, $8.0 million and $2.4 million decreases in both additional paid-in capital and treasury stock during fiscal 2021, 2020 and 2019, respectively.
Changes in treasury stock, at cost, were as follows (in thousands):
| | | | | | | | | | | |
| Number of
Shares | | Amount |
| Balance, December 31, 2018 | 111 | | | $ | 1,678 | |
| Purchases | 257 | | | 1,934 | |
| Retirements | (307) | | | (2,423) | |
| Deferred compensation obligation | (6) | | | (86) | |
| Balance, December 31, 2019 | 56 | | | $ | 1,103 | |
| Purchases | 1,298 | | | 7,994 | |
| Retirements | (1,299) | | | (7,995) | |
| Deferred compensation obligation | (30) | | | (592) | |
| Balance, December 31, 2020 | 25 | | | $ | 510 | |
| Purchases | 612 | | | 9,685 | |
| Retirements | (612) | | | (9,685) | |
| Deferred compensation obligation | (4) | | | (86) | |
| Balance, December 31, 2021 | 21 | | | $ | 424 | |
21. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan — The Company has a 401(k) profit sharing plan (“Savings Plan”) that allows participation for all eligible employees. The Savings Plan allows the Company to match between 50% and 100% of the participant’s
contributions up to 5% of a participant’s pre-tax deferrals. Contributions expense for fiscal 2021, 2020 and 2019 was $16.3 million, $16.2 million and $13.3 million, respectively, for matching contributions to the Savings Plan.
Deferred Compensation Plan — The Company has an Amended and Restated Deferred Compensation Plan (as amended and restated, the “Deferred Compensation Plan”) that allows its officers and key employees to defer up to 80% of their annual salary and up to 90% of their bonus on a pre-tax basis until a specified date in the future, including at or after retirement. Additionally, the Deferred Compensation Plan allows the Company’s directors to defer up to 100% of their annual fees and meeting attendance fees until a specified date in the future, including at or after retirement. The Deferred Compensation Plan also permits the Company to make contributions on behalf of its key employees who are impacted by the federal tax compensation limits under the Savings Plan, and to receive a restoration matching amount which, under the current Savings Plan terms, mirrors the Savings Plan matching levels based on the Company’s performance. The Deferred Compensation Plan provides for the Company to make discretionary contributions to employees who have elected to defer compensation under the plan. Deferred Compensation Plan participants will vest in the Company’s discretionary contributions ratably over three years from the date of each of the Company’s discretionary contributions.
As of December 31, 2021 and 2020, the liability balance of the Deferred Compensation Plan was $2.8 million and $2.3 million, respectively, and was included in accrued compensation and benefits on the consolidated balance sheets. The Company has not made any discretionary contributions to the Deferred Compensation Plan. A rabbi trust is used to fund the Deferred Compensation Plan and an administrative committee manages the Deferred Compensation Plan and its assets. The investments in the rabbi trust were $2.8 million and $2.3 million as of December 31, 2021 and 2020, respectively. The rabbi trust investments include debt and equity securities as well as cash equivalents and are accounted for as trading securities.
Defined Benefit Plans — With the acquisition of RCC on April 7, 2006, the Company assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds and fixed income securities.
On January 16, 2015, the Company assumed noncontributorycertain defined benefit plans covering certain hourly employees (the “Coil Coating Benefit Plans”) which are closed to new participants. Benefits under the Coil Coating Benefit Plans are calculated based on fixed amounts for each year of service rendered. The Company also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”). The contributions to the OPEB Plans by retirees vary from none to 25% of the total premiums paid. Plan assets of the Coil Coating Benefit Plans are invested in fixed income funds. Currently, the Company’s policy is to fund the Coil Coating Benefit Plans as required by minimum funding standards of the Internal Revenue Code.
As a result of the Merger on November 16, 2018, the Company assumed the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc. Retirement Plan (the “MW Plan”). The Ply Gem Plan was frozen during 1998, andwith no further increases in benefits for participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for salaried participants during 2004In connection with the sale of the coil coatings business on June 28, 2022, the Company transferred two defined benefit plans and non-salaried participants during 2005. No additional participants may enter thean other post-employment benefit plan but increases in benefits for participants as a result of increase in service years or compensation will occur.
The Company refers to the RCC Pensionpurchaser resulting in no further benefit obligation at the time of sale. As of December 31, 2023 the MW Manufacturers, Inc. Retirement Plan the Coil Coating Benefit Plans,and the Ply Gem Group Pension Plan andwere both merged into the MW Plan collectively as the “Defined Benefit Plans” in this Note.Robertson-Ceco Corporation Master Pension Plan. The merger does not impact (in aggregate) benefits of any participant, associated plan obligations, assets or funded status.
Assumptions
—WeightedThe following table sets forth the weighted average actuarial assumptions used to determine benefit obligations were as follows:obligations: | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans | | OPEB Plans |
| December 31,
2021 | | December 31,
2020 | | December 31,
2021 | | December 31,
2020 |
| Discount rate | 2.85 | % | | 2.50 | % | | 2.85 | % | | 2.45 | % |
| | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Discount rate | 5.70 | % | | 5.45 | % |
WeightedThe following table sets forth the weighted average actuarial assumptions used to determine net periodic benefit cost (income) were as follows:: | | | | Year Ended December 31, 2022 | | | | | Year Ended December 31, 2022 |
| | Defined Benefit Plans | | OPEB Plans |
| FY 2021 | | FY 2020 | | FY 2021 | | FY 2020 |
| Successor | |
| Successor | |
| Successor | | | | Predecessor |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 |
| Discount rate | Discount rate | 2.50 | % | | 3.30 | % | | 2.45 | % | | 3.20 | % | Discount rate | 5.30 | % | | 4.40 | % | | | 2.85 | % |
| Expected return on plan assets | Expected return on plan assets | 5.95 | % | | 5.87 | % | | n/a | | n/a | Expected return on plan assets | 5.17 | % | | 5.16 | % | | | 4.85 | % |
The basis used to determine the expected long-term rate of return on assets assumptions for the Defined Benefit Plansdefined benefit plans was recent market performance and historical returns. The assumptions for the plans are primarily long-term, prospective rates.
The health care cost trend rate assumed for 2022 is 6.00% and is assumed to decline each year to an ultimate trend rate of 4.00%, which is expected to be achieved in 2030.
Funded status—The changes in the projected benefit obligation, plan assets and funded status, and the amounts recognized on our consolidated balance sheets were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans | | OPEB Plans |
| FY 2021 | | FY 2020 | | FY 2021 | | FY 2020 |
| Change in benefit obligation | | | | | | | |
| Benefit obligation at beginning of period | $ | 104,934 | | | $ | 101,148 | | | $ | 7,575 | | | $ | 7,778 | |
| Service cost | 54 | | | 46 | | | 17 | | | 17 | |
| Interest cost | 2,542 | | | 3,231 | | | 178 | | | 237 | |
| Benefits paid | (6,641) | | | (6,883) | | | (985) | | | (661) | |
| Actuarial (gains) losses | (3,755) | | | 7,392 | | | (283) | | | 204 | |
| | | | | | | |
| | | | | | | |
| Benefit obligation at end of period | $ | 97,134 | | | $ | 104,934 | | | $ | 6,502 | | | $ | 7,575 | |
| Accumulated benefit obligation at end of period | $ | 97,134 | | | $ | 104,934 | | | | | |
| | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of assets at beginning of period | $ | 94,215 | | | $ | 86,105 | | | $ | — | | | $ | — | |
| Actual return on plan assets | 8,162 | | | 10,574 | | | — | | | — | |
| Company contributions | 3,218 | | | 4,419 | | | 985 | | | 661 | |
| Benefits paid | (6,641) | | | (6,883) | | | (985) | | | (661) | |
| | | | | | | |
| Fair value of assets at end of period | $ | 98,954 | | | $ | 94,215 | | | $ | — | | | $ | — | |
| | | | | | | |
| Funded status at end of period | $ | 1,820 | | | $ | (10,719) | | | $ | (6,502) | | | $ | (7,575) | |
| | | | | | | |
| Amounts recognized on the consolidated balance sheets | | | | | | | |
| Noncurrent assets | $ | 5,098 | | | $ | 5,056 | | | $ | — | | | $ | — | |
| Current liabilities | — | | | — | | | (546) | | | (656) | |
| Noncurrent liabilities | (3,278) | | | (15,775) | | | (5,956) | | | (6,919) | |
| $ | 1,820 | | | $ | (10,719) | | | $ | (6,502) | | | $ | (7,575) | |
Certain of our defined pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations and the fair value of plan assets were as follows (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Projected benefit obligations | $ | 46,372 | | | $ | 90,267 | |
| Fair value of plan assets | 43,093 | | | 74,491 | |
| Funded status | $ | (3,279) | | | $ | (15,776) | |
Plan assets—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, 20212023, 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 2020,funded status, and the amounts recognized on the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 |
| | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 |
| Change in benefit obligation: | | | | | | |
| Beginning of period | $ | 63,464 | | | $ | 70,676 | | | | $ | 97,134 | |
| Service cost | — | | | — | | | | 23 | |
| Interest cost | 2,486 | | | 1,254 | | | | 1,529 | |
| Benefits paid | (3,360) | | | (2,607) | | | | (3,339) | |
| Settlements | (27,097) | | | — | | | | — | |
| Actuarial gains | (51) | | | (5,859) | | | | (13,523) | |
| Divestitures | — | | | — | | | | (11,148) | |
| End of period | $ | 35,442 | | | $ | 63,464 | | | | $ | 70,676 | |
| Accumulated benefit obligation at end of period | $ | 35,442 | | | $ | 63,464 | | | | $ | 70,676 | |
| | | | | | |
| Change in plan assets: | | | | | | |
| Beginning of period | $ | 56,737 | | | $ | 63,627 | | | | $ | 98,954 | |
| Actual return on plan assets | 1,335 | | | (4,284) | | | | (16,524) | |
| Benefits paid | (3,360) | | | (2,606) | | | | (3,339) | |
| Settlements | (27,098) | | | — | | | | — | |
| Divestitures | — | | | — | | | | (15,464) | |
| End of period | $ | 27,614 | | | $ | 56,737 | | | | $ | 63,627 | |
| | | | | | |
| Funded status at end of period | $ | (7,828) | | | $ | (6,727) | | | | $ | (7,049) | |
| | | | | | |
| | | Successor |
| | | December 31, 2023 | | | December 31, 2022 |
| Amounts recognized on the Consolidated Balance Sheets - Noncurrent liabilities | | | (7,828) | | | | (6,727) | |
The following table sets forth the weighted average asset allocations by asset category for the Defined Benefit Plans were as follows (in thousands):defined benefit plans:
| | Successor | | | Successor |
| Investment type | Investment type | December 31,
2021 | | December 31,
2020 | Investment type | December 31, 2023 | | | December 31, 2022 |
| Equity securities | Equity securities | 31 | % | | 60 | % | Equity securities | 38 | % | | | 38 | % |
| Debt securities | Debt securities | 67 | % | | 34 | % | Debt securities | 59 | % | | | 60 | % |
| | Real estate | Real estate | 2 | % | | 6 | % | Real estate | 3 | % | | | 2 | % |
| | Total | Total | 100 | % | | 100 | % | 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.
We have set the target asset allocations for the RCC Pension Plan and the Ply Gem Plan at 30% equity and 70% fixed income, and the MW Plan at 50% equity and 50% fixed income. The Coil Coating Benefit Plans have a target asset allocation of 100% fixed income.
The fair values of the assets of the Defined Benefit Plansdefined benefit plans at December 31, 20212023 and 2020,December 31, 2022, by asset category and by levels of fair value as further defined in Note 17 — Fair Value of Financial Instruments and Fair Value Measurementswere as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Asset category | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Cash and cash equivalents | $ | 20 | | | $ | — | | | $ | 20 | | | $ | 48 | | | $ | — | | | $ | 48 | |
| Mutual funds: | | | | | | | | | | | |
| Growth funds | 6,649 | | | — | | | 6,649 | | | 11,677 | | | — | | | 11,677 | |
| Real estate funds | 2,072 | | | — | | | 2,072 | | | 5,966 | | | — | | | 5,966 | |
| | | | | | | | | | | |
| Equity income funds | 6,197 | | | — | | | 6,197 | | | 9,031 | | | — | | | 9,031 | |
| Index funds | 12,642 | | | — | | | 12,642 | | | 26,364 | | | — | | | 26,364 | |
| International equity funds | 4,883 | | | — | | | 4,883 | | | 8,844 | | | — | | | 8,844 | |
| Fixed income funds | 12,982 | | | 53,509 | | | 66,491 | | | 12,562 | | | 19,723 | | | 32,285 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 45,445 | | | $ | 53,509 | | | $ | 98,954 | | | $ | 74,492 | | | $ | 19,723 | | | $ | 94,215 | |
Net periodic benefit cost (income) — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Cash and cash equivalents | $ | 17 | | | $ | — | | | $ | 17 | | | $ | 27 | | | $ | — | | | $ | 27 | |
| Mutual funds: | | | | | | | | | | | |
| Growth funds | 2,195 | | | — | | | 2,195 | | | 4,271 | | | — | | | 4,271 | |
| Real estate funds | 762 | | | — | | | 762 | | | 1,395 | | | — | | | 1,395 | |
| Equity income funds | 1,994 | | | — | | | 1,994 | | | 4,217 | | | — | | | 4,217 | |
| Index funds | 4,440 | | | — | | | 4,440 | | | 9,036 | | | — | | | 9,036 | |
| International equity funds | 1,817 | | | — | | | 1,817 | | | 3,795 | | | — | | | 3,795 | |
| Fixed income funds | 3,314 | | | 13,075 | | | 16,389 | | | 6,680 | | | 27,316 | | | 33,996 | |
| Total | $ | 14,539 | | | $ | 13,075 | | | $ | 27,614 | | | $ | 29,421 | | | $ | 27,316 | | | $ | 56,737 | |
The
following table sets forth the components of the net periodic benefit
cost (income) were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans |
| FY 2021 | | FY 2020 | | FY 2019 |
| Service cost | $ | 54 | | | $ | 46 | | | $ | 42 | |
| Interest cost | 2,542 | | | 3,231 | | | 3,897 | |
| Expected return on assets | (5,439) | | | (4,958) | | | (4,935) | |
| Amortization of prior service cost | 65 | | | 62 | | | 58 | |
| Amortization of loss | 416 | | | 433 | | | 1,313 | |
| Net periodic benefit cost (income) | $ | (2,362) | | | $ | (1,186) | | | $ | 375 | |
| | | | Year Ended December 31, 2022 | |
| | OPEB Plans |
| Successor | |
| | FY 2021 | | FY 2020 | | FY 2019 |
| Successor | |
| | Successor | | | | Predecessor |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Service cost | Service cost | $ | 17 | | | $ | 17 | | | $ | 22 | |
| Interest cost | Interest cost | 178 | | | 237 | | | 262 | |
| | Expected return on assets | |
| Amortization of prior service cost | |
| Amortization of loss | Amortization of loss | 70 | | | 108 | | | — | |
| Net periodic benefit cost | $ | 265 | | | $ | 362 | | | $ | 284 | |
| Net periodic benefit income | |
The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit income are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans | | OPEB Plans |
| December 31,
2021 | | December 31,
2020 | | December 31,
2021 | | December 31,
2020 |
| Unrecognized actuarial loss | $ | 5,450 | | | $ | 12,345 | | | $ | 1,350 | | | $ | 1,703 | |
| Unrecognized prior service cost | — | | | 65 | | | — | | | — | |
| Total | $ | 5,450 | | | $ | 12,410 | | | $ | 1,350 | | | $ | 1,703 | |
Unrecognized actuarial gains (losses), net of tax, of $4.1 million and $(1.1) million during fiscal 2021 and 2020, respectively, are included in other comprehensive income (loss) infollowing table sets forth the consolidated statements of comprehensive income (loss).
The changes in plan assets and benefit obligation recognized in other comprehensive income (loss) are as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Defined Benefit Plans |
| FY 2021 | | FY 2020 | | FY 2019 |
| Net actuarial loss (gain) | $ | (6,479) | | | $ | 1,777 | | | $ | (315) | |
| Amortization of net actuarial loss | (416) | | | (433) | | | (1,313) | |
| Amortization of prior service cost | (65) | | | (63) | | | (58) | |
| | | | | |
| Total recognized in other comprehensive income (loss) | $ | (6,960) | | | $ | 1,281 | | | $ | (1,686) | |
| | | | | | | | | | | | | | | | | |
| OPEB Plans |
| FY 2021 | | FY 2020 | | FY 2019 |
| Net actuarial loss (gain) | $ | (283) | | | $ | 204 | | | $ | 1,367 | |
| Amortization of net actuarial loss | (70) | | | (108) | | | — |
| | | | | |
| | | | | |
| Total recognized in other comprehensive income (loss) | $ | (353) | | | $ | 96 | | | $ | 1,367 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Net unrecognized actuarial loss (gain) | $ | 439 | | | $ | (278) | | | | $ | 9,966 | | | $ | (6,479) | |
| Recognition of net actuarial loss due to settlement | (17) | | | — | | | | — | | | — | |
| Amortization of net actuarial gain (loss) | — | | | — | | | | 117 | | | (416) | |
| Amortization of prior service cost | — | | | — | | | | — | | | (65) | |
| Total recognized in other comprehensive (loss) income | $ | 422 | | | $ | (278) | | | | $ | 10,083 | | | $ | (6,960) | |
We expect to contribute $0.5$2.5 million to the OPEBDefined Benefit Plans in fiscal 2022.Fiscal Year Ending 2024. We expect the following benefit payments to be made (in thousands):made:
| | | | | | | | | | | |
| Fiscal years ending | Defined
Benefit Plans | | OPEB Plans |
| 2022 | $ | 6,554 | | | $ | 554 | |
| 2023 | 6,522 | | | 539 | |
| 2024 | 6,417 | | | 485 | |
| 2025 | 6,337 | | | 463 | |
| 2026 | 6,268 | | | 391 | |
| 2027 - 2031 | 29,529 | | | 1,923 | |
| | | | | |
| Years ending | Amount |
| 2024 | $ | 3,323 | |
| 2025 | 3,259 | |
| 2026 | 3,202 | |
| 2027 | 3,136 | |
| 2028 | 3,048 | |
| Thereafter | 13,960 | |
| $ | 29,928 | |
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 $16.1 million for 2023, $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, and $16.3 million for 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, 2023, the Company had $27.6 million of employee-related liabilities and $1.2 million of other long-term liabilities on its Consolidated Balance Sheet related to the Pre-Merger Awards that will be settled in cash. For 2023, the Company paid out $97.5 million of cash to settle Pre-Merger Awards.
Incentive Units
Post the Merger in 2022 and pursuant to an incentive unit grant agreement, certain participants were granted incentive units in Camelot Return Ultimate, L.P. (the “Partnership”). Each incentive unit represents a conditional right to receive distributions from Camelot Parent in excess of the “participation threshold” of the incentive unit, as set forth in the grant documentation. In 2022, 0.8 million of incentive units were granted with no forfeitures. In 2023, 0.2 million of incentive units were granted with 0.1 million in forfeitures.
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. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model, and the following weighted average assumptions:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 |
| Underlying price | $ | 100.00 | | | $ | 100.00 | |
| Volatility rate | 45.2 | % | | 45.5 | % |
| Expected term (in years) | 6.1 | | 6.1 |
| Risk-free interest rate | 4.1 | % | | 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 year ended December 31, 2023, the amount of expense recognized from the Pre-Merger Awards was $16.6 million and from the incentive units was $8.3 million. For the period from July 25, 2022 through December 31, 2022, the amount of expense recognized from the Pre-Merger Awards was $21.9 million and from the incentive units was $2.3 million. As of December 31, 2023, the Company estimates that unrecognized expense is expected to be recognized over a weighted-average period of 3.5 years totaling $35.7 million, of which $3.5 million relates to Pre-Merger Awards and $32.2 relates to incentive units.
22. SEGMENT INFORMATIONNote 13 — Income Taxes
The following table sets forth the components of the provision for income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Current: | | | | | | | | |
| Federal | $ | 63,036 | | | $ | 14,096 | | | | $ | 148,371 | | | $ | 219,379 | |
| State | 9,692 | | | 3,307 | | | | 38,814 | | | 64,509 | |
| Foreign | 17,634 | | | 4,480 | | | | 5,315 | | | 11,590 | |
| Total current | 90,362 | | | 21,883 | | | | 192,500 | | | 295,478 | |
| Deferred: | | | | | | | | |
| Federal | (94,580) | | | (31,529) | | | | (23,867) | | | (43,980) | |
| State | (33,605) | | | (5,632) | | | | (4,637) | | | (18,363) | |
| Foreign | (5,567) | | | 205 | | | | 1,818 | | | 2,833 | |
| Total deferred | (133,752) | | | (36,956) | | | | (26,686) | | | (59,510) | |
| Total income taxes | $ | (43,390) | | | $ | (15,073) | | | | $ | 165,814 | | | $ | 235,968 | |
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 |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Federal income tax statutory rate | 21.0 | % | | 21.0 | % | | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal income tax | 6.1 | % | | 3.9 | % | | | 4.0 | % | | 3.8 | % |
| Non-deductible expenses | 0.7 | % | | (1.1) | % | | | 0.6 | % | | 0.2 | % |
| Foreign tax and other credits | 2.3 | % | | 8.9 | % | | | (0.2) | % | | (1.6) | % |
| Section 1245 recapture | (2.1) | % | | — | % | | | — | % | | — | % |
| Uncertain tax positions | 1.3 | % | | — | % | | | 0.1 | % | | 0.6 | % |
| Compensation related expenses | (4.2) | % | | (3.5) | % | | | 0.1 | % | | 0.3 | % |
| Global intangible low-taxed income | — | % | | (8.7) | % | | | — | % | | 0.9 | % |
State rate differential(1) | 10.9 | % | | — | % | | | — | % | | — | % |
| Foreign rate differential | (2.2) | % | | (1.4) | % | | | 0.2 | % | | 0.4 | % |
| Other | 2.7 | % | | 0.1 | % | | | (0.3) | % | | 0.6 | % |
| Effective tax rate | 36.5 | % | | 19.2 | % | | | 25.5 | % | | 26.2 | % |
(1)Related to the Merger transaction and internal restructuring.
The net deferred income tax liability consists of the following:
| | | | | | | | | | | |
| Successor |
| December 31, 2023 | | December 31, 2022 |
| Deferred tax assets: | | | |
| Inventory obsolescence | $ | 9,215 | | | $ | 9,678 | |
| Allowance for credit losses | 5,170 | | | 3,341 | |
| Accrued and deferred compensation | 13,090 | | | 20,942 | |
| Accrued insurance liability | 12,124 | | | 9,268 | |
| Net operating loss and tax credit carryover | 15,102 | | | 27,211 | |
| Defined benefit plans | 2,232 | | | 2,221 | |
| Leases | 82,929 | | | 84,144 | |
| Section 163(j) interest | 46,274 | | | 19,371 | |
| Section 174 costs | 20,942 | | | 7,219 | |
| Warranty liabilities | 39,860 | | | 42,843 | |
| Other | 28,928 | | | 28,903 | |
| Total deferred income tax assets | 275,866 | | | 255,141 | |
| Valuation allowance | (1,578) | | | (3,158) | |
| Net deferred income tax assets | 274,288 | | | 251,983 | |
| | | |
| Deferred income tax liabilities: | | | |
| Intangible assets | (491,948) | | | (573,826) | |
| Property-related items | (124,826) | | | (90,042) | |
| Stock basis | (15,197) | | | (12,680) | |
| Leases | (87,964) | | | (84,203) | |
| Debt | (82,866) | | | (103,671) | |
| Other | (24,672) | | | (38,612) | |
| Total deferred income tax liabilities | (827,473) | | | (903,034) | |
| Total deferred income tax liability, net | $ | (553,185) | | | $ | (651,051) | |
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, 2023, the $15.1 million net operating loss carryforward included $11.6 million for U.S federal losses, $2.7 million for U.S. state losses, and $0.8 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 2023, 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 |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
Beginning balance(1) | $ | 3,158 | | | $ | 3,006 | | | | $ | 15,634 | | | $ | 11,996 | |
| Additions (reductions) | (1,580) | | | 152 | | | | (3,004) | | | 3,638 | |
| Ending balance | $ | 1,578 | | | $ | 3,158 | | | | $ | 12,630 | | | $ | 15,634 | |
(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 |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Beginning balance | $ | 14,756 | | | $ | 14,928 | | | | $ | 14,845 | | | $ | 9,403 | |
| Additions based on tax positions related to current year | 245 | | | 232 | | | | — | | | 6,037 | |
| Additions (reductions) for tax positions of prior years | (52) | | | 5 | | | | 83 | | | 15 | |
| Reductions resulting from expiration of statute of limitations | (2,799) | | | (409) | | | | — | | | (610) | |
| Ending balance | $ | 12,150 | | | $ | 14,756 | | | | $ | 14,928 | | | $ | 14,845 | |
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, 2023, the reserve was $16.8 million, which includes interest and penalties of $4.7 million and is recorded in other long-term liabilities in the accompanying Consolidated Balance Sheets. Of this amount, $12.2 million, if recognized would have an impact on the Company's effective tax rate. Interest and penalties were $1.4 million for 2023, $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. 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 $10.7 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, 2023 and 2022 because of the relatively short maturities of these instruments. The carrying amount of the contingent consideration approximates fair value because it was recorded as of December 31, 2023 during the measurement period.
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, 2023, the fair value of the short-term investments was $1.93 million, of which $1.87 million and $0.06 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, 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 | |
| | | | | | | | | |
| | | | | | | | | |
| 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, 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 | |
| | | | | | | | | |
| Balance, December 31, 2022 (Successor) | $ | (6,789) | | | $ | 40,962 | | | $ | 336 | | | $ | — | | | $ | 34,509 | |
| Other comprehensive (loss) income | (2,764) | | | (14,362) | | | 484 | | | — | | | (16,642) | |
| Balance, December 31, 2023 (Successor) | $ | (9,553) | | | $ | 26,600 | | | $ | 820 | | | $ | — | | | $ | 17,867 | |
Note 16 — Reportable Segment and Geographical Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available andthat is evaluated on a regular basisregularly by the chief operating decision maker to make decisions regarding(“CODM”) for purposes of allocating resources and evaluating financial performance. Our CODM, the allocationChief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about our five operating segments, for the purposes of allocating resources to the segment and assess the performance of the segment.evaluating financial performance. The Company has 3is organized in three reportable segments: Windows, SidingAperture Solutions, Surface Solutions and Commercial.Shelter Solutions, which operate principally in the U.S. with limited operations in Canada.
These operating•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 follow the same accounting policies usedseparately for our consolidated financial statements. We evaluate a segment’spurposes of making decisions about resources and evaluating performance. Management evaluates performance on a U.S. GAAPthe basis based primarily upon operatingof segment earnings before interest, income before corporate expenses.taxes, depreciation and amortization (“Adjusted reportable segment EBITDA”).
Corporate assets consist primarily of cash, investments, prepaidoperating expenses current and deferred taxes and property, plant and equipment associated with our headquarters in Cary, North Carolina and office in Houston, Texas. These items (and income and expenses related to these items) are not allocated to the operatingreportable segments. Corporate unallocatedand Other consists specifically of corporate operating expenses primarily include share-based compensation expenses, restructuring charges, acquisition-related costs,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 net sales or expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, loss on extinguishment of debt and other income (expense).
Summary financial data attributable to the segments for the periods indicated is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Net sales: | | | | | |
| Windows | $ | 2,322,277 | | | $ | 1,889,625 | | | $ | 1,930,447 | |
| Siding | 1,364,080 | | | 1,141,946 | | | 1,111,407 | |
| Commercial | 1,896,780 | | | 1,585,798 | | | 1,847,893 | |
| Total net sales | $ | 5,583,137 | | | $ | 4,617,369 | | | $ | 4,889,747 | |
| Operating income (loss): | | | | | |
| Windows | $ | 100,725 | | | $ | (223,646) | | | $ | 92,538 | |
| Siding | 137,772 | | | (61,930) | | | 66,273 | |
| Commercial | 1,104,335 | | | 159,586 | | | 201,073 | |
| Corporate | (205,587) | | | (140,516) | | | (145,148) | |
| Total operating income (loss) | $ | 1,137,245 | | | $ | (266,506) | | | $ | 214,736 | |
| Unallocated other expense, net | (235,418) | | | (210,709) | | | (225,351) | |
| Income (loss) before income taxes | $ | 901,827 | | | $ | (477,215) | | | $ | (10,615) | |
| Depreciation and amortization: | | | | | |
| Windows | $ | 134,626 | | | $ | 121,519 | | | $ | 94,737 | |
| Siding | 116,660 | | | 113,737 | | | 121,004 | |
| Commercial | 36,282 | | | 45,213 | | | 44,550 | |
| Corporate | 5,333 | | | 4,133 | | | 3,473 | |
| Total depreciation and amortization expense | $ | 292,901 | | | $ | 284,602 | | | $ | 263,764 | |
| Capital expenditures: | | | | | |
| Windows | $ | 49,001 | | | $ | 22,197 | | | $ | 43,408 | |
| Siding | 33,198 | | | 28,558 | | | 22,695 | |
| Commercial | 16,934 | | | 26,833 | | | 51,144 | |
| Corporate | 15,582 | | | 4,263 | | | 3,838 | |
| Total capital expenditures | $ | 114,715 | | | $ | 81,851 | | | $ | 121,085 | |
| | | | | |
| | | December 31,
2021 | | December 31,
2020 |
| Property, plant and equipment, net: | | | | | |
| Windows | | | $ | 251,627 | | | $ | 223,206 | |
| Siding | | | 155,346 | | | 159,761 | |
| Commercial | | | 174,440 | | | 227,391 | |
| Corporate | | | 30,882 | | | 21,463 | |
| Total property, plant and equipment, net | | | $ | 612,295 | | | $ | 631,821 | |
| Total assets: | | | | | |
| Windows | | | $ | 2,223,098 | | | $ | 1,717,032 | |
| Siding | | | 2,060,275 | | | 2,123,615 | |
| Commercial | | | 1,073,264 | | | 890,380 | |
| Corporate | | | 470,823 | | | 747,463 | |
| Total assets | | | $ | 5,827,460 | | | $ | 5,478,490 | |
The following table sets forth financial data by reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Net sales: | | | | | | | | |
| Aperture Solutions | $ | 2,476,870 | | | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,322,277 | |
| Surface Solutions | 1,264,173 | | | 592,449 | | | | 839,130 | | | 1,364,080 | |
| Shelter Solutions | 1,661,391 | | | 905,288 | | | | 1,253,335 | | | 1,896,780 | |
| Total net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | |
| Adjusted reportable segment EBITDA: | | | | | | | | |
| Aperture Solutions | $ | 336,095 | | | $ | 149,433 | | | | $ | 202,682 | | | $ | 239,491 | |
| Surface Solutions | 224,561 | | | 57,331 | | | | 143,880 | | | 265,671 | |
| Shelter Solutions | 322,874 | | | 177,537 | | | | 209,156 | | | 323,533 | |
| Total reportable adjusted segment EBITDA | 883,530 | | | 384,301 | | | | 555,718 | | | 828,695 | |
| Corporate and Other | (230,739) | | | (172,331) | | | | 331,996 | | | 601,451 | |
| Depreciation and amortization | (412,597) | | | (130,153) | | | | (166,177) | | | (292,901) | |
| Interest expense | (380,706) | | | (157,191) | | | | (101,078) | | | (191,301) | |
| Foreign exchange (loss) gain | 6,768 | | | (4,809) | | | | 686 | | | (3,749) | |
| Gain (loss) on extinguishment of debt | (184) | | | 474 | | | | 28,354 | | | (42,234) | |
| Other income, net | 15,013 | | | 1,140 | | | | 101 | | | 1,866 | |
| Loss (income) before income taxes | $ | (118,915) | | | $ | (78,569) | | | | $ | 649,600 | | | $ | 901,827 | |
| | | | | | | | |
| Depreciation and amortization: | | | | | | | | |
| Aperture Solutions | $ | 179,611 | | | $ | 64,348 | | | | $ | 79,816 | | | $ | 134,626 | |
| Surface Solutions | 88,597 | | | 52,621 | | | | 65,225 | | | 116,660 | |
| Shelter Solutions | 139,481 | | | 10,291 | | | | 18,016 | | | 36,282 | |
| Corporate | 4,908 | | | 2,893 | | | | 3,120 | | | 5,333 | |
| Total depreciation and amortization expense | $ | 412,597 | | | $ | 130,153 | | | | $ | 166,177 | | | $ | 292,901 | |
| Capital expenditures: | | | | | | | | |
| Aperture Solutions | $ | 57,327 | | | $ | 43,741 | | | | $ | 22,935 | | | $ | 49,001 | |
| Surface Solutions | 49,926 | | | 13,470 | | | | 17,304 | | | 33,198 | |
| Shelter Solutions | 74,561 | | | 28,909 | | | | 16,153 | | | 16,934 | |
| Corporate | 12,121 | | | 11,888 | | | | 8,456 | | | 15,582 | |
| Total capital expenditures | $ | 193,935 | | | $ | 98,008 | | | | $ | 64,848 | | | $ | 114,715 | |
| | | | | | | | |
| | | | | | Successor |
| | | | | | December 31, 2023 | | December 31, 2022 |
| Property, plant and equipment, net: | | | | | | | | |
| Aperture Solutions | | | | | | $ | 327,098 | | | $ | 273,709 | |
| Surface Solutions | | | | | | 205,338 | | | 167,096 | |
| Shelter Solutions | | | | | | 345,207 | | | 139,382 | |
| Corporate | | | | | | 11,460 | | | 37,877 | |
| Total property, plant and equipment, net | | | | | | $ | 889,103 | | | $ | 618,064 | |
| Total assets: | | | | | | | | |
| Aperture Solutions | | | | | | $ | 2,934,102 | | | $ | 2,153,378 | |
| Surface Solutions | | | | | | 2,268,443 | | | 2,099,244 | |
| Shelter Solutions | | | | | | 1,111,679 | | | 973,718 | |
| Corporate | | | | | | 619,117 | | | 1,967,310 | |
| Total assets | | | | | | $ | 6,933,341 | | | $ | 7,193,650 | |
The following table sets forth net sales disaggregated by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Aperture Solutions: | | | | | | | | |
| Vinyl windows | $ | 2,359,305 | | | $ | 1,178,609 | | | | $ | 1,542,525 | | | $ | 2,190,887 | |
| Aluminum windows | 67,160 | | | 37,653 | | | | 55,078 | | | 85,735 | |
| Other | 50,405 | | | 30,149 | | | | 46,016 | | | 45,655 | |
| Total | $ | 2,476,870 | | | $ | 1,246,411 | | | | $ | 1,643,619 | | | $ | 2,322,277 | |
| | | | | | | | |
| Surface Solutions: | | | | | | | | |
| Vinyl siding | $ | 611,749 | | | $ | 283,298 | | | | $ | 415,534 | | | $ | 667,284 | |
| Metal | 329,363 | | | 136,851 | | | | 185,097 | | | 293,427 | |
| Injection molded | 58,517 | | | 25,153 | | | | 41,841 | | | 75,361 | |
| Stone | 74,326 | | | 42,706 | | | | 51,904 | | | 87,948 | |
| Stone veneer installation and other | 190,218 | | | 104,441 | | | | 144,754 | | | 240,060 | |
| Total | $ | 1,264,173 | | | $ | 592,449 | | | | $ | 839,130 | | | $ | 1,364,080 | |
| | | | | | | | |
| Shelter Solutions: | | | | | | | | |
| Metal building products | $ | 1,661,391 | | | $ | 905,288 | | | | $ | 1,140,259 | | | $ | 1,473,662 | |
| Insulated metal panels | — | | | — | | | | — | | | 208,220 | |
| Metal coil coating | — | | | — | | | | 113,076 | | | 214,898 | |
| Total | $ | 1,661,391 | | | $ | 905,288 | | | | $ | 1,253,335 | | | $ | 1,896,780 | |
| | | | | | | | |
| Total net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | |
Summary
The following tables set forth financial data attributable to various geographic
regions for the periods indicated is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Total sales: | | | | | |
| United States of America | $ | 5,132,085 | | | $ | 4,304,559 | | | $ | 4,526,385 | |
| Canada | 422,867 | | | 305,780 | | | 340,250 | |
| Mexico | 9,417 | | | 3,093 | | | 3,381 | |
| All other | 18,768 | | | 3,937 | | | 19,731 | |
| Total net sales | $ | 5,583,137 | | | $ | 4,617,369 | | | $ | 4,889,747 | |
| | | | | |
| | | December 31,
2021 | | December 31,
2020 |
| Long-lived assets: | | | | | |
| United States of America | | | $ | 3,213,052 | | | $ | 3,107,027 | |
| Canada | | | 270,752 | | | 292,503 | |
| Costa Rica | | | 324 | | | 189 | |
| Mexico | | | 10,858 | | | 11,435 | |
| Total long-lived assets | | | $ | 3,494,986 | | | $ | 3,411,154 | |
Sales | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Total net sales: | | | | | | | | |
| U.S. | $ | 4,983,912 | | | $ | 2,537,101 | | | | $ | 3,466,127 | | | $ | 5,132,085 | |
| Canada | 415,134 | | | 199,466 | | | | 261,796 | | | 422,867 | |
| All other | 3,388 | | | 7,581 | | | | 8,161 | | | 28,185 | |
| Total net sales | $ | 5,402,434 | | | $ | 2,744,148 | | | | $ | 3,736,084 | | | $ | 5,583,137 | |
| | | | | | | | |
| | | | | | Successor |
| | | | | | December 31, 2023 | | December 31, 2022 |
| Long-lived assets: | | | | | | | | |
| U.S. | | | | | | $ | 1,130,197 | | | $ | 891,122 | |
| Canada | | | | | | 104,960 | | | 81,516 | |
| All other | | | | | | 19,238 | | | 10,978 | |
| Total long-lived assets | | | | | | $ | 1,254,395 | | | $ | 983,616 | |
Net 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.
23. CONTINGENCIESNote 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 and/or its subsidiariesmay become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. The Company regularly reviews the status of ongoing proceedings and other contingent matters along with legal counsel. Liabilities for such items are recorded when it is probable that the liability has been incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of December 31, 2021.
Environmental
The Company’s operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of its employees and the end-users of its products; regulate the materials used in its products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could result in substantial fines or penalties, injunctive relief, consent orders, requirements to install pollution controls or other abatement equipment, or civil sanctions.impact the Company's current and future operations.
The Company could be held liable for costs to investigate, remediate or otherwise address contaminationbelieves it is in material compliance with all applicable laws and regulations and has recorded a liability of $8.8 million at any real property it has ever owned, operated or used as a disposal site, orDecember 31, 2023 and $8.8 million at other sites where we or predecessors may have released hazardous materials. The Company could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.December 31, 2022.
MW Manufacturers, Inc. (“MW”)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. and certain directors of Cornerstone Building Brands in the Delaware Court of Chancery. In January 2022, the Court approved a Stipulation of Compromise and Settlement setting forth the parties agreement to settle the litigation. The Company received cash settlement proceeds from the defendant’s insurers of $76.5 million in March 2022 and recognized a gain on legal settlements in the Consolidated Statements of (Loss) Income.
In January 2023, a subsidiarypurported former stockholders filed two separate complaints challenging the fairness of Ply Gem Industries, Inc.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., entered into a September 2011 Administrative Order on Consent withC.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 U.S. Environmental Protection Agency (“EPA”) underplaintiffs allege that CD&R and its affiliates controlled the Corrective Action Program to address known releases of hazardous substances at MW’s Rocky Mount, Virginia property. A Phase I RCRA Facility Investigation (“RFI”) was submittedCompany prior to the Virginia Departmenttransaction and that certain directors and officers of Environmental Quality (“VDEQ”)the Company, as well as CD&R and its affiliates, breached their fiduciary duties and engaged in December 2015,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 a Phase II RFIcosts. The court consolidated the two cases, and on May 3, 2023, selected Whitebark Value Partners LP as lead plaintiff. On July 14, 2023, the Human Health Risk Assessment and Baseline Ecological Risk Assessment were submitted in October 2018. A Limited Corrective Measures Study baseddefendants moved to dismiss the operative complaint. The motion to dismiss was denied on the investigations was submitted to the VDEQ for review and approval in September 2019. Upon completion of a 30-day public comment period, the VDEQ issued its Final Decision and Response to Comments approving a final remedy in May 2021. The final remedy consists of continuing groundwater monitoring until the VDEQ’s corrective actions have been met; and implementing and complying with land use restrictions and institutional controls imposed by an environmental covenant.January 10, 2024. The Company has recordedintends to vigorously defend against these claims. 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.
In June 2023, a liabilitypurported former stockholder filed a class action complaint in the United States District Court for the District of $4.5 million for this MW site, of which $1.0 million is in other current liabilities and $3.5 million is in other long-term liabilities onDelaware alleging that the Company’s consolidated balance sheet as of December 31, 2021.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska, referred to as the PCE/TCE Northeast Contamination Site (“PCE/TCE Site”). Kroy Building Products, Inc. (“KBP”), a subsidiary of Ply Gem Industries, Inc., has been identified as a potentially responsible party at the site and has liability for investigation and remediation costs associated with the contamination. In May 2019, KBP and an unrelated respondent entered into an Administrative Settlement Agreement and Order on Consent with the EPA to conduct a Remedial Investigation/Feasibility Study (“RI/FS”) of the PCE/TCE Site. A final RI/FS Work Plan was approved by EPA in December 2019. NaN phases of RI field sampling have been completed through May 2021 and a Monitoring Well Plan was approved by EPA in November 2021. The Company has recorded a liability of $4.4 million within other current liabilities on its consolidated balance sheet as of December 31, 2021. If necessary, the Company will adjust our remediation liability if the RI/FS scope materially changes or the EPA imposes additional investigative requirements. The Company may be able to recover a portion of costs incurreddisclosures issued in connection with the PCE/TCE Site from other potentially responsible parties, though thereCD&R Merger were materially misleading in violation of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934. The complaint is no assurance we would receivecaptioned Water Island Merger Arbitrage Institutional Commingled Master Fund, L.P. v. Cornerstone Building Brands et al., Case No. 1:23-cv-00701 (D. Del.). The complaint alleges that the Company’s directors and officers issued misleading disclosures, which caused stockholders to approve the CD&R Merger at an unfair price. The plaintiff seeks unspecified monetary damages, interest, attorneys’ fees, expenses, and costs. On December 8, 2023, the defendants moved to dismiss the operative complaint, and, in the alternative, to stay the litigation. The Company intends to vigorously defend against these claims. The Company cannot predict with any funds.
Based on current information,degree of certainty the Company is not awareoutcome of this matter or determine the extent of any environmental compliance obligations, claimspotential liabilities. The Company also cannot provide an estimate of the possible loss or investigationsrange 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 results of operations, cash flows or financial position except as otherwise disclosed in the Company’s consolidated financial statements. However, there can be no guarantee that previously known or newly discovered matters will not result in material costs or liabilities.
Litigation
The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019. The Company has a $3.9 million liability related to the settlement in other current liabilities on the Company’s consolidated balance sheet as of December 31, 2021.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action Complaint in the Delaware Court of Chancery against Clayton Dubilier & Rice, LLC (“CD&R”), Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), and certain directors of the Company. Voigt purported to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholders of the Company, and derivatively on behalf of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserted claims for breach of fiduciary duty and unjust enrichment against CD&R Fund VIII and CD&R, and for breach of fiduciary duty against 12 director defendants in connection with the Merger. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to 4 of the director defendants. Voigt sought damages in an amount to be determined at trial. On August 25, 2021, the parties to the case filed a Stipulation of Compromise and Settlement (“Stipulation”) setting forth their agreement to settle the litigation. The Stipulation provides for CD&R, CD&R Fund VIII, and the 8 director defendants to cause their respective insurers to pay a total of $100 million into an escrow account that will be used to pay escrow expenses, satisfy any fee and incentive amounts awarded by the court in favor of plaintiff and plaintiff’s counsel, and distribute the remaining funds to the Company. The Stipulation further provided that plaintiff’s counsel would apply for an award of attorneys’ fees and litigation expenses in an amount of up to 23.5% of the $100 million payment by the insurers, and that an incentive award for the named plaintiff will be paid solely from the amount of plaintiff attorneys’ fees awarded. This Stipulation required court approval. On January 19, 2022, the Court held a hearing, verbally approved the Stipulation, and approved the plaintiff’s counsel’s application for a fee award of 23.5% of the $100 millioncondition.
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 | | December 31, 2021 |
| Numerator for Basic and Diluted Earnings Per Common Share - Net income (loss) applicable to common shares | $ | 480,211 | | | $ | 658,044 | |
| Denominator for Basic and Diluted Earnings Per Common Share: | | | |
| Weighted average basic number of common shares outstanding | 127,316 | | | 126,058 | |
| Employee stock options | 1,578 | | | 737 | |
| Weighted average diluted number of common shares outstanding | 128,894 | | | 126,795 | |
| Basic earnings (loss) per common share | $ | 3.77 | | | $ | 5.22 | |
| Diluted earnings (loss) per common share | $ | 3.73 | | | $ | 5.19 | |
Incentive Plan securities excluded from dilution(1) | 30 | | 275 |
settlement(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 incentive award. On January 20, 2022,income attributable to unvested restricted stock units related to our Incentive Plan from the Court entered an Ordernumerator and Final Judgment approvingexcludes the Stipulation. The Stipulation represents a gain contingencydilutive 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 accordance with ASC 450, Contingencies, that hasthe computation of diluted earnings per common share if their effect was dilutive.
Earnings per common share is not been recordedpresented for the Successor period as the matter was not resolved as of December 31, 2021. The proceeds fromCompany’s common stock is no longer publicly traded either on a stock exchange or in the Stipulation will be recorded when received.over-the-counter market.
Other contingencies
Note 19 — Supplemental Cash Flow Information
The Company’s importsfollowing table sets forth supplemental cash flow information and non-cash investing and financing activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | |
| | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2023 | | July 25, 2022
through
December 31, 2022 | | | January 1, 2022
through
July 24, 2022 | | Year Ended December 31, 2021 |
| Supplemental cash flow information: | | | | | | | | |
| Interest paid, net of amounts capitalized | $ | 287,143 | | | $ | 73,726 | | | | $ | 103,074 | | | $ | 178,330 | |
| Income taxes paid (refunded) | $ | 36,316 | | | $ | 187,777 | | | | $ | 56,243 | | | $ | 267,399 | |
| | | | | | | | |
| Supplemental non-cash investing and financing activities: | | | | | | | | |
| Pushdown fair value adjustments | $ | — | | | $ | 1,522,432 | | | | $ | — | | | $ | — | |
Note 20 — Subsequent Events
In January 2024, the Board of fabricated structural steel (“FSS”) from its Mexican affiliate, Building Systems de Mexico S.A. de C.V. (“BSM”) were subject to antidumping (“AD”) and countervailing duty (“CVD”) tariff proceedings before the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“USITC”). The proceedings were initiated in February 2019 by the American Institute of Steel Construction (“AISC”) against FSS being imported into the USA from Mexico, Canada, and China. In 2019, the DOC issued preliminary tariff rates and in 2020 finalized CVD and AD tariff rates of 0% and 8.47%, respectively, for the Company’s imports of FSS from BSM. However, in February 2020, inDirectors paid a 3 to 2 vote, the USITC concluded there was no injury or threat of injury to the domestic FSS industry. In March 2020 the USITC opinion was publisheddividend on our common stock in the Federal Register, ceasing the Company’s requirementaggregate amount of $231.6 million, which was received by our direct parent, Camelot Parent, and further distributed to pay the AD and CVD tariffs. The Company received full reimbursement for the $4.1 million in tariffs previously deposited with United States Customs and Border Protection and recorded a reduction in costs of sales during the fiscal year ended December 31, 2020. This matter was appealed by the AISC and, on September 22, 2021, the U.S. Court of International Trade (“CIT”) issuedCamelot Return Parent, an opinion upholding the USITC’s determination that there was no injury or threat of injury to the domestic FSS industry caused by the cumulated imports of FSS from Mexico, Canada, and China. The AISC has appealed the CIT decision to the U.S. Court of Appeals for the Federal Circuit (“CAFC”). The Company will continue to vigorously advocate its position, that its import of FSS from BSM should not be subject to any CVD or AD tariffs, in all tribunals including the CAFC as well as the tribunal established pursuant to the North American Free Trade Agreement (“NAFTA”). The Company’s position is in agreement with, and bolstered by, the USITC’s determination that FSS imports do not cause material injury or threaten material injury to the U.S. industry and the CIT’s sustainingindirect parent of the USITC’s final negative injury determination. We have evaluated this matter in accordance with ASC 450, Contingencies, and concluded that no liabilityCompany. Camelot Return Parent used the funds received to the Company is probable and estimable asredeem all 1,950,000 preferred units of December 31, 2021.Camelot Return Parent held by CD&R Pisces Holdings, L.P.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021.2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management believes that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021,2023, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at such reasonable assurance level.
Management’s report on internal control over financial reporting is included in Item 8 and is incorporated herein by reference.
Internal Control over Financial Reporting
We are currently in the process of assessing the internal controls of Union Corrugating Company Holdings, Inc. (“UCC”), Cascade Windows Inc. (“Cascade Windows”) and Prime Windows LLC (“Prime Windows”) as part of the post-close acquisition integration process. UCC, Cascade Windows and Prime Windows have been excluded from our assessment of internal control over financial reporting as of December 31, 2021. The total assets and revenues excluded from management’s assessment represent 10.9% and 2.4%, respectively, of the consolidated financial statements as of and for the year ended December 31, 2021.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 20212023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and Amended and Restated By-Laws (the “Bylaws”) provide that the number of directors shall be fixed from time to time pursuant to a resolution adopted by a majority of the directors. In August 2022, pursuant to a unanimous consent adopted by our Board of Directors (the “Board”), the number of members constituting our Board was fixed at nine. There are no vacancies on the Board.
In accordance with our Bylaws, our directors are elected annually by our stockholders. Under our Bylaws, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on our Board resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by a vote of the stockholders at any regular or special meeting of the stockholders (or by written consent in lieu of such meeting), and directors so elected shall hold office until the annual meeting of stockholders at which the term of office of the class to which the director has been elected expires. Under our Corporate Governance Guidelines, no person may stand for election as a director or be recommended for appointment by the Company’s stockholders if, on the date of any annual or special meeting held for the purpose of electing directors, such person shall have surpassed the age of 75.
The following table lists our current directors:
Directors and Executive Officers
Directors
| | | | | | | | | | | | | | |
| Name | | Age | | Position |
| Kathleen J. Affeldt | | 75 | | Director |
| Naomi Garlick | | 31 | | Director |
| Wilbert W. James, Jr. | | 67 | | Director |
| Daniel C. Janki | | 55 | | Director |
| John Krenicki, Jr. | | 61 | | Chairman |
| Rose Lee | | 58 | | Director, President and Chief Executive Officer |
| Timothy J. O’Brien | | 60 | | Director |
| Nathan K. Sleeper | | 50 | | Director |
| Tyler Young | | 36 | | Director |
Our Board believes that each of our directors is highly qualified to serve as a member of our Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications of our Board. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions with some of the most reputable organizations in the world.
Our Board recognizes that directors with diverse backgrounds, attributes, perspectives and experiences can positively enhance the performance and deliberations of the Board. In addition to valuing diversity of backgrounds, qualifications, experiences, viewpoints, geographic location, education, skills, expertise and professional and industry experience, the Board seeks to include directors with diverse personal characteristics, including with respect to race, ethnicity, age, gender identity and sexual orientation, in order to ensure that diverse perspectives are included on the Board. Thirty-Three percent (33%) of our directors are diverse by gender, and twenty-two percent (22%) are diverse by race and ethnicity.
Kathleen J. Affeldt
Ms. Affeldt, age 75, has served as a director since November 2009. Ms. Affeldt is the Chair of the Compensation Committee. Ms. Affeldt retired from Lexmark International, Inc., a developer, manufacturer and supplier of printing and imaging solutions for offices and homes, in February 2003, where she had been Vice President of Human Resources since July 1996. She joined Lexmark International, Inc. when it became an independent company in 1991 as the Director of Human Resources. Ms. Affeldt began her career at IBM in 1969, specializing in sales of supply chain systems. She later held a number of human resources management positions. Ms. Affeldt has served as a director of BTE Technologies, Inc. and SIRVA, Inc. She also served as a director of Sally Beauty Holdings, Inc. and as the Chair of that board’s compensation committee. She further served as a director and Chair of the compensation committee of HD Supply Holdings, Inc. Ms. Affeldt attended the State University of New York and Hunter College in New York City, majoring in business administration.
Director Qualifications: Ms. Affeldt’s experience in large, multinational companies in general, as well as in the human resources field in particular, provides our Board with insight into the attraction, motivation and retention of personnel. Additionally, her service on the boards of other public companies brings to our Board valuable insight into the strategic, financial and personnel challenges faced by companies similar to the Company.
Naomi Garlick
Ms. Garlick, age 31, has served as director since December 2023 and is a member of the Audit Committee. Ms. Garlick is a Principal of Clayton, Dubilier and Rice, LLC (“CD&R”) which she joined in 2023 and where she is mainly engaged in evaluating investment opportunities in the industrials vertical. Prior to joining CD&R, Ms. Garlick was with Brightstar Capital Partners, where she worked in industrials, consumer, and business services. Ms. Garlick started her career in high-yield credit at Goldman Sachs & Co., followed by three years as an investment banking analyst at Moelis & Company. Ms. Garlick has a master of business administration degree from The Wharton School of the University of Pennsylvania, and a bachelor of arts degree in mathematics and economics from Lafayette College.
Director Qualifications: Ms. Garlick’s experience in the finance, accounting and economics, particularly with industrial companies, provides our Board with insight into business strategy, financial decision-making and the macroeconomic environment in which we operate.
Wilbert W. James, Jr.
Mr. James, age 67, has served as a director since May 2019. Mr. James is a member of the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. James had a 30-year career with Toyota Motors, with his most recent role as President of Toyota Motor Manufacturing of Kentucky (July 2010 - December 2017). In that role, he led Toyota’s largest automotive manufacturing plant in the world and oversaw a nearly $6 billion operation, which employed over 7,500 people. Additionally, he championed quality initiatives for Toyota’s fourteen North American manufacturing plants. Mr. James currently serves as a director on the board of Atkore International. He also served as a director of Central Bank & Trust and Piston Group. Mr. James earned an associate degree in Applied Science from Old Dominion University, a bachelor of science degree in mechanical engineering technology from Old Dominion University, as well as an honorary doctorate degree in mechanical engineering technology from the University of Kentucky and an honorary degree from the University of Pikeville in 2015.
Director Qualifications: Mr. James’s leadership roles in global manufacturing bring to our Board an understanding of the global business environment and valuable insight into the operations of large, complex manufacturing enterprises as well as corporate social responsibility, product development and supply chain matters.
Daniel C. Janki
Mr. Janki, age 55, has served as a director since May 2019. Mr. Janki is the Chair of the Audit Committee. Mr. Janki has served as the Executive Vice President and Chief Financial Officer of Delta Airlines since July 2021. Prior to joining Delta, Mr. Janki was the Senior Vice President - Chief Executive Officer (“CEO”) and President of Power Portfolio at General Electric Company. Mr. Janki is also a national board member for BuildOn, and an advisory board member for the CFO RoundTable. Mr. Janki is a certified public accountant. Mr. Janki earned degrees in finance and accounting from The Ohio State University.
Director Qualifications: Mr. Janki’s leadership role for a large, multinational conglomerate brings to our Board an understanding of the global business environment, business strategy, and financial management. Further, Mr. Janki’s background as a certified public accountant provides the Audit Committee with valuable financial expertise.
John Krenicki, Jr.
Mr. Krenicki, age 61, has served as director since November 2018, and as Chair of the Board since July 2022. He serves on the Compensation Committee and is the Chair of the Nominating and Corporate Governance Committee. Mr. Krenicki is Vice Chair at CD&R and is Chair of Brand Industrial Holdings, Inc. (parent entity of Brand Industrial Services, Inc.) and Artera Services Holdco, LLC (formerly, PowerTeam Services, LLC). He is also a director at Devon Energy Corporation. Previously, Mr. Krenicki built a 29-year career at General Electric Co., where he served as Vice Chair as well as President and CEO of GE Energy, among other executive positions. He earned a bachelor of science degree in mechanical engineering from the University of Connecticut. He received a master of science degree in management from Purdue University.
Director Qualifications: Mr. Krenicki’s executive and director experience in diverse manufacturing and services enterprises bring to our Board an understanding of the global business environment, business strategy and valuable insight into the operations of large, complex manufacturing operations.
Rose Lee
Ms. Lee, age 58, has served as President and Chief Executive Officer since September 2021, joining the board of directors at the same time. Prior to joining the Company, Ms. Lee was President of the DuPont Water & Protection reporting segment where she led a diverse business creating water, shelter and safety solutions for a more sustainable world. Ms. Lee also previously held senior leadership positions at Saint-Gobain in general management roles serving the construction, transportation, energy and defense sectors, and as Strategy Director and Chief Information Officer of the North America region. Prior to Saint-Gobain, she held various engineering and management positions at Pratt & Whitney, now part of Raytheon Technologies, and was a Senior Consultant at Booz Allen Hamilton. Ms. Lee is also an independent board member of Honeywell International Inc. and a former board member of Crown Holdings, Inc. and DSS+. In 2022, Ms. Lee was named to the National Association of Manufacturers’ board of directors, where she serves on its executive committee. She also serves as the 2023 Chair for the Manufacturing Institute’s Women MAKE America initiative. Ms. Lee is a member of the Policy Advisory Board for Harvard’s Joint Center for Housing Studies and has served as a member of the Economic Advisory Council for the Federal Reserve Bank of Philadelphia. Ms. Lee earned a bachelor of science in aerospace engineering from Cornell University, a master of science in mechanical engineering from Rensselaer Polytechnic Institute and a master of business administration degree from the Massachusetts Institute of Technology.
Director Qualifications: Ms. Lee brings senior management experience to the Board from her role as president of a global business segment of an NYSE-listed international manufacturing company. She also has corporate governance, Environmental, Social, and Governance (“ESG”) experience, and brings a deep knowledge of operations, engineering and technology matters that provides the Board with operational expertise.
Timothy J. O’Brien
Mr. O’Brien, age 60, has served as a director since November 2018 and he currently serves on the Audit Committee. Mr. O’Brien has served as the President and Chief Executive Officer of Wilsonart International Holdings LLC since January 2013. Prior to joining Wilsonart, Mr. O’Brien served as Vice President and General Manager of SABIC Innovative Plastic, responsible for the engineering resins business in the Americas and Europe. SABIC Innovative Plastics, a business unit of Saudi Basic Industries Corporation (“SABIC”), was founded in 2007 with the acquisition of GE Plastics. Mr. O’Brien began his career at General Electric as a Sales Representative for GE Lighting. Throughout his 24-year career at GE, he also held roles of increasing responsibility in sales, product management and general management, including Vice President of Sales and Distribution Operations for the Asia Pacific, based in Singapore. Prior to GE Plastics, Mr. O’Brien served as Senior Vice President for Commercial Finance with GE Capital until 2003, running a global computer leasing business. Mr. O’Brien earned his bachelor’s degree from Northeastern University in Massachusetts and his MBA from Baldwin Wallace College in Ohio.
Director Qualifications: Mr. O’Brien’s leadership roles in global manufacturing bring to our Board an understanding of the global manufacturing environment and valuable insight into businesses with large, complex manufacturing operations.
Nathan K. Sleeper
Mr. Sleeper, age 50, has served as a director since October 2009. Mr. Sleeper joined CD&R in 2000, and as of January 1, 2020, became the Chief Executive Officer of CD&R. Mr. Sleeper chairs its Executive Committee and is a member of its Investment, Operating Review and Compliance committees. He also leads the firm’s industrials investment vertical and is responsible for firm operations. Prior to joining CD&R, he worked in the investment banking division of Goldman Sachs & Co. LLC and at investment firm Tiger Management Corp. Mr. Sleeper also currently serves as a director of ASP Flag Holdings LP (parent entity of Foundation Building Materials, Inc.); Brand Industrial Holdings, Inc. (parent entity of Brand Industrial Services, Inc.); Core & Main, Artera Services Holdco, LLC (formerly, PowerTeam Services LLC); CD&R Hydra Buyer, Inc., CD&R Hydra Midco, Inc., and CD&R Hydra Holdings, Inc. (parent entities of SunSource Holdings, Inc.); INDICOR Holdings, LLC; Multi-Color Corporation; Pursuit Aerospace; White Cap Parent, LLC; and Veritiv Corporation. Mr. Sleeper previously served as a director of Beacon Roofing Supply, Inc., Atkore International Group Inc., CHC Group Ltd., Culligan Ltd, HD Supply Holdings, Inc., Hertz Global Holdings, Inc., Hussmann International Inc., Ply Gem Parent, LLC, Roofing Supply Group, LLC, US Foods, Inc. and Wilsonart International Holdings LLC. He is a member of the Business Council and the Madison Boys and Girls Club, serves on the Williams College Board of Trustees, as well as on the investment committee for the college’s endowment. Mr. Sleeper holds a bachelor of arts degree from Williams College and a master of business administration degree from Harvard Business School.
Director Qualifications: Mr. Sleeper’s broad experience in the financial and investing communities brings to our Board important insights into business strategy and areas to improve our financial performance. He also serves on a number of boards.
Tyler Young
Mr. Young, age 36, has served as a director since August 2022. He serves on the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Young joined CD&R in 2011 and is principally engaged in evaluating investment opportunities in the industrials sector. Prior to joining CD&R, he held positions with PayPal and LinkedIn and worked in the investment banking division of Bank of America Merrill Lynch. He currently serves as a director of Wilsonart International Holdings LLC; CD&R Hydra Buyer, Inc., CD&R Hyrda Midco, Inc., and CD&R Hydra Holdings, Inc. (parent entities of SunSource Holdings, Inc.); ASP Flag Holdings LP (parent entity of Foundation Building Materials, Inc.); and White Cap Parent, LLC. Mr. Young holds a bachelor of arts degree in economics from Dartmouth College and holds a master of business administration degree from Harvard Business School.
Director Qualifications: Mr. Young’s experience in the financial and investing community provides our Board with insight financial reporting and oversight and business strategy.
Executive Officers
| | | | | | | | | | | | | | |
| Name | | Age | | Position |
| Rose Lee | | 58 | | President and Chief Executive Officer |
| Jeffrey S. Lee | | 55 | | Executive Vice President and Chief Financial Officer |
| Matthew R. Ackley | | 43 | | President, Shelter Solutions |
| Petar Andrich | | 53 | | Executive Vice President and Chief Human Resources Officer |
| Alena S. Brenner | | 47 | | Executive Vice President, General Counsel and Corporate Secretary |
| Melissa M. Jones | | 45 | | President, Surface Solutions- U.S. |
| Colleen S. Pritchett | | 50 | | President, Aperture Solutions- U.S. |
Information concerning the business experience of Ms. Lee is provided under the section titled “Directors” above.
Jeffrey S. Lee
Mr. Lee, age 55, has served as Executive Vice President, Chief Financial Officer since June 2019. Mr. Lee also served as Chief Accounting Officer and Treasurer from July 2020 until July 2022. Prior to joining the Company, Mr. Lee was Senior Vice President and Chief Financial Officer of Wilsonart International Holdings LLC since 2014, a global manufacturer and distributor of decorative engineered surfaces for the commercial and residential markets. Prior to Wilsonart, Mr. Lee was the Executive Vice President and Corporate Chief Financial Officer for Contech LLC. Mr. Lee began his career at Eaton Corporation where he had a twelve-year career with various finance and operational roles of increasing responsibility. Mr. Lee currently serves on the board of Wilsonart International Holdings LLC. Mr. Lee holds a bachelor of science degree in accounting from the University of Utah and a master of business administration degree from Duke University. He is also a Six Sigma Champion and received Lean Training at the University of Tennessee.
Matthew R. Ackley
Mr. Ackley, age 43, has served as President of our Shelters Solutions business unit since November 2021. Prior to being promoted to his current responsibilities, Mr. Ackley served as President, Engineered Building Systems. Mr. Ackley has nearly twenty years of accomplished leadership in the building materials industry. Prior to joining the Company, he served as Vice President, Sales for USG Corporation, overseeing its Commercial Ceilings and Corporate Account teams, where he led strategic planning, sales execution and revenue and profit growth efforts. Mr. Ackley spent much of his career at USG Corporation holding roles of increasing responsibility, including: Vice President, Architectural Sales; Area Manager Central; Senior Manager, Investor Relations; Category Manager, Interior Walls - L&W Supply; and several other roles in sales and operations. He holds a bachelor of arts degree in economics and Spanish from the University of Redlands and a master of business administration degree from Pepperdine University.
Petar Andrich
Mr. Andrich, age 53, has served as our Executive Vice President, Chief Human Resources Officer since July 2023. Mr. Andrich has nearly thirty years of global leadership experience in the industrials sector. Previously, he was the Chief Human Resources Officer for Calumet Specialty Products Partners, L.P., a leading specialty petroleum products company. Prior to Calumet, Mr. Andrich held various roles of increasing responsibility at Amcor, ASR Group, British Petroleum, General Electric and PPG Industries. Mr. Andrich holds a bachelor’s degree from Purdue University and a master’s degree from the University of West Florida.
Alena S. Brenner
Ms. Brenner, age 47, has served as our Executive Vice President, General Counsel and Corporate Secretary since April 2021. Before joining the Company, Ms. Brenner served as Vice President and Deputy General Counsel of Ryder System, Inc., a transportation and logistics company, where she advanced through various leadership roles since January 2012, most recently serving as Vice President and Deputy General Counsel. Prior to her work with Ryder System, Inc., Ms. Brenner was the Director of Commercial Law and Mergers and Acquisitions (“M&A”) at the New York headquarters for Anheuser-Busch InBev. She previously spent over eight years at the New York City office of the law firm Hunton & Williams (now Hunton Andrews Kurth LLP) working in the Global Capital Markets and M&A group. Ms. Brenner earned a bachelor of science degree in industrial and labor relations from Cornell University and a juris doctorate degree from Fordham University School of Law.
Melissa M. Jones
Ms. Jones, age 45, serves as President of our Surface Solutions – U.S. business unit, having joined the Company in July 2022. Ms. Jones brings more than twenty years of leadership experience and demonstrated success delivering revenue and profit growth through customer-centric organic growth strategies, M&A integration, operational excellence, and commercial excellence in the industrial machinery and electrical manufacturing industries. Most recently, Ms. Jones served as Group President of Commercial Water Solutions at Pentair, a global water treatment and solutions company, where she also held other various roles of increasing responsibility. Prior to Pentair, Ms. Jones was Director of Product, Channel and Marketing at Generac Power Systems and Director of Marketing at Johnson Controls. She has also worked in corporate marketing functions at Abbott Laboratories, Milwaukee Tool and Stanley Black & Decker. Ms. Jones holds a bachelor of arts degree in economics from St. Mary’s Honors College of Maryland and a master of business administration degree from the University of Maryland.
Colleen S. Pritchett
Ms. Pritchett, age 50, serves as President of our Aperture Solutions – U.S. business unit since in August, 2022. Ms. Pritchett has over twenty years of global leadership experience with demonstrated success improving operations and expanding product portfolios through innovation and growth strategies in the industrial, electronics, aerospace and building materials industries. Prior to this, Ms. Pritchett served as President of Americas Aerospace, a division of Hexcel Corporation. Prior to Hexcel, Ms. Pritchett spent twenty-two years in various roles of increasing responsibility with DuPont. Ms. Pritchett also serves on the board of directors of Carpenter Technology Corporation. Ms. Pritchett received her bachelor of science degree in chemical engineering from Penn State University and a master of business administration degree from Goizueta Business School at Emory University. She also has leadership training from the Harvard Business School Leadership Program and the Women in Governance Program at University of California, Los Angeles.
Board of Directors
Board Committees
Our Board has three standing committees — the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. Each of the three committees regularly discusses with the Board at Board meetings the work it has performed to fully discharge its responsibilities, and it may also report to the Board at any time regarding any matter it deems of sufficient importance.
Board and Committee Appointments
Below is a table disclosing our Board and current committee compositions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Board | | Audit | | Compensation | | Nominating and
Corporate
Governance |
| Kathleen J. Affeldt | | Member | | | | Chair | | |
Naomi Garlick(1) | | Member | | Member | | | | |
| Wilbert W. James, Jr. | | Member | | | | Member | | Member |
| Daniel C. Janki | | Member | | Chair | | | | |
| John Krenicki, Jr. | | Chair | | | | Member | | Chair |
| Rose Lee | | Member | | | | | | |
| Timothy J. O'Brien | | Member | | Member | | | | |
| Nathan K. Sleeper | | Member | | | | | | |
| Tyler Young | | Member | | Member | | Member | | Member |
| | | | | | | | |
| Meetings held during 2023 | | 5 | | 9 | | 4 | | 4 |
(1) Ms. Garlick joined the Board in December 2023.
Audit Committee
The Audit Committee is responsible for engaging and discharging the independent auditors, as well as monitoring audit functions and procedures. The Audit Committee also provides assistance to the Board regarding its oversight of the Company’s financial statements, accounting, risk management and internal control practices. In discharging its duties, the Audit Committee has the authority to retain independent legal, accounting and other advisors and has the sole authority to appoint, retain, replace or terminate the independent auditor.
The Audit Committee is composed solely of directors who have the requisite financial literacy to serve on the Audit Committee, as determined by our Board.
Our Board, after reviewing all of the relevant facts, circumstances and attributes, has determined that Mr. Janki, the Chair of our Audit Committee, is an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K.
The Audit Committee operates under a written Audit Committee Charter adopted by our Board.
Compensation Committee
The Compensation Committee is responsible for reviewing and making recommendations to our Board on all matters relating to compensation and benefits provided to executive management. The Compensation Committee also helps oversee the Company’s policies and strategies related to talent management and development for executive and senior management. The Compensation Committee is permitted to delegate its authority on all matters for which it is responsible to subcommittees consisting of one or more members.
The Compensation Committee operates under a Compensation Committee Charter adopted by our Board.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for recommending qualified candidates to serve on our Board and evaluating, implementing and overseeing the standards and guidelines for the governance of the Company, including monitoring compliance with those standards and guidelines, as well as overseeing succession planning and evaluating the performance of the Board.
The Nominating and Corporate Governance Committee operates under a Nominating and Corporate Governance Committee Charter adopted by our Board.
In identifying and evaluating nominees for director, the Nominating and Corporate Governance Committee first looks at the overall size and structure of our Board to determine the need to add or remove directors and to determine if there are any specific qualities or skills that would complement the existing strengths of our Board, taking into account the overall diversity of the Board and its committees.
The Board provides standards for directors in the Board’s Corporate Governance Guidelines and Nominating and Corporate Governance Committee Charter. The Corporate Governance Guidelines set forth the requisite skills and characteristics that the Board seeks in Board members, including, but not limited to:
•High personal and professional ethics, strength of character, integrity, and values;
•Education, experience, intelligence, independence, fairness, reasoning ability, practical wisdom and vision to exercise sound, mature judgments;
•Time and effort necessary to learn the Company’s business;
•Breadth of viewpoint and experience necessary for an understanding of the Company’s diverse constituencies;
•Personality, tact, sensitivity, and perspective to participate in deliberations in a constructive and collegial manner;
•Ability to objectively appraise the performance of management of the Company and in independent mind willing to question management’s assumptions when appropriate and;
•No conflicts of interest that would interfere with the Board members’s ability to discharge their duties.
In evaluating candidates for our Board, our Board considers the Company’s priorities related to our culture and social sustainability objectives, with a focus on age, race, gender, and other forms of diversity in the composition of our Board. Our Board seeks candidates that reflect and support our efforts to create a work environment that is diverse, inclusive and equitable, and to benefit from the variety of experiences and backgrounds that diverse members bring to our organization.
As part of its periodic self-assessment process, our Board annually reviews the diversity of specific skills and experiences necessary for the optimal functioning of our Board in its oversight of the Company over both the short- and long-term.
Corporate Governance
Our Board has adopted Corporate Governance Guidelines to provide guidance on corporate governance matters. These guidelines provide a framework for our corporate governance initiatives and cover topics including, but not limited to, director qualification and responsibilities, Board composition, director compensation and management and succession planning. The Nominating and Corporate Governance Committee is responsible for overseeing and reviewing the guidelines and reporting and recommending to our Board any changes to the guidelines. Our Board is committed to ensuring that the Board is comprised of directors with an appropriate mix of skills, experiences and backgrounds to meet both the Board’s current and long-term needs.
Our Board has adopted a Code of Business Conduct, and Ethics, a copy of which is designed to help officers, directors and employees resolve ethical issues in an increasingly complex business environment. The Code of Conduct is applicable to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and other persons performing similar functions. The Code of Conduct covers topics, including but not limited to, conflicts of interest, confidentiality of information and compliance with laws and regulations. In 2023, we updated the Code of Conduct to align with the Company’s current organizational and operational structure, applicable regulatory requirements and risk profile.
Our Code of Conduct is available, free of charge, on our internet website, along with other corporate governance information, at www.cornerstonebuildingbrands.com under the heading “Investors — Sustainability — Governance.Governance — Governance Documents.” Any amendments to or
Waivers from our Code of Conduct are discouraged, and any waivers from the Code of BusinessConduct that relate to any officer or director must be approved by our Board, and will be disclosed to the fullest extent as required by law and will be posted on our website at www.cornerstonebuildingbrands.com within four business days of any such waiver.
The Board’s Role in Risk Oversight
The Board has ultimate responsibility for risk oversight. Management is responsible for the day-to-day management of the risks we face. The Board and its committees provide active oversight in connection with those efforts of the management, with a particular focus on ensuring that the Company’s risk management practices are appropriate. Such risk management practices involve designing or updating policies with respect to compliance, cybersecurity, data privacy, climate and succession planning. The Company maintains an enterprise-wide risk management program that includes a multi-factor, qualitative and quantitative process designed to identify and to assess the likelihood, timing and impact of the most critical risks to achieving the Company’s strategic objectives. The Board exercises its risk oversight responsibilities through periodic briefing and informational sessions provided by management that cover the significant risks that the Company faces with a focus on how the Company is seeking to manage and mitigate risk. The Audit Committee oversees management’s implementation and maintenance of the Company’s enterprise-wide risk management process, as well as risks related to, among other things, financial reporting, internal controls, compliance, cybersecurity and data protection. The Compensation Committee oversees risk related to, among other things, the Company’s compensation policies and programs. The Nominating and Governance Committee oversees risk related to, among other things, the Company’s corporate governance structure, policies and practices, including ESG and corporate social responsibility matters, the Board’s composition, succession planning and the Company’s culture.
Risk Analysis of Our Compensation Plans
Frederic W. Cook & Co. (“FW Cook”) was engaged by the Compensation Committee to assist with the assessment of risk arising from the Company’s executive compensation programs and policies. FW Cook’s assessment covered each material element of the executive compensation programs, including our compensation mix of (i) fixed components like salary and benefits, (ii) annual incentives that reward overall financial performance, and (iii) multi-year equity awards tied to increases in Company value. Based on these assessments, the Company concluded that our policies and practices do not create risk that is reasonably likely to have a material adverse effect on the Company or to encourage excessive and unnecessary risk taking by executive officers or other employees, because these programs are designed to encourage employees to remain focused on both our short- and long-term operational and financial goals that are drivers of long-term sustained increases in Company value. FW Cook’s assessments also took into account that our compensation opportunities are generally measured by a variety of performance metrics, and the program includes a pay mix that is balanced between short- and long-term incentive compensation, including caps on incentive awards and incorporates risk mitigation policies such as clawback policies.
Sustainability
During June 2023 we published our Environmental, Social & Governance Report to cover the 2022 calendar year. This report is informed by several reporting frameworks and is in accordance with the 2021 GRI Universal Standards, the Task Force on Climate-Related Financial Disclosure and in partial alignment with the SASB: Building Products & Furnishing Standards. The report documents our progress toward our sustainability objectives and outlines what we aspire to achieve in the future. We recognize our responsibility to increase our positive impact on sustainability issues affecting our environment, our society and the world.
This belief is embodied in our business strategy, which serves as a guidepost for building our capabilities as a customer-first, solutions-driven company. We aim to focus on the responsible, sustainable solutions our services and products can offer while, in parallel, evaluating our environmental footprint, creating a safe and inclusive work environment for our employees, and improving the communities we serve.
We are dedicated to constantly improving the sustainability of our solutions through operational efficiencies that reduce our environmental impact while increasing the life cycle and recyclability of our products. We believe recyclable and environmentally favorable products help conserve natural resources and reduce our products’ overall environmental impact. We operate lean manufacturing processes to reduce, reuse and recycle waste where possible through both internal initiatives and in partnership with suppliers and other third-party vendors.
We are mindful of the harmful effects of global climate change and the contributions to climate change from our manufacturing operations, the transportation and distribution of products, and the end-use of building construction products. In 2023, we analyzed utility provider data (i.e., electricity, natural gas, and water) to assist with energy procurement and analyze our greenhouse gas emissions, and assist with sustainability reporting. Based on this data, we selected specific sites to conduct third-party utility audits to help dictate sustainability initiatives.
In 2023, we continued our sustainability journey by establishing baselines for key sustainability metrics, implementing a SaaS application to operationalize our sustainability data, and engaging our supply chain with a Supplier Code of Conduct and Ethicssustainability questionnaire. We continue to engage with our stakeholders to regularly communicate progress, share meaningful sustainability achievements and stories, and outline future sustainability priorities and goals. Our Nominating and Corporate Governance Committee oversees our sustainability efforts, and we believe that applyour robust governance framework ensures that sustainability is an essential part of our Company’s culture and strategy.
Human Capital Management
Talent acquisition, engagement and retention are among of our highest priorities because our employees design and build our exterior building products for our customers. Our core values guide us in creating the environment where we can all win together. This starts with our emphasis on occupational health, safety and employee well-being in our operations. To attract and retain the best employees, we focus on providing competitive pay and benefits. We provide benefit programs with the goal of improving the physical, mental and financial wellness of our employees throughout their lifetime. Some examples in the United States (“ U.S”). include base and variable pay, medical and dental coverage, paid time off and retirement saving plans with a Company match. We continually review wages to ensure we are fair, equitable, competitive and can attract and retain the best talent. We recruit our talent from a wide range of industries and use many different methods to attract a diverse pool of applicants including community job fairs, job boards, social media, and employee or community agency referrals. We aim to hire and train candidates using a process that is free from biases for or against any individual or group of candidates. We commit to creating a safe and inclusive work environment for our employees. Embracing all employees and applicants, no matter their background, race, age, sexual orientation and identity, and delivering a transparent, fair and engaging experience across the organization are both core to our talent management strategy.
Diversity, Equity & Inclusion (“DE&I”) is foundational to the successful execution of our business strategy. Building a strong, growing organization begins with our employees, a team comprised of people from many backgrounds, each adding a unique and valued contribution to the success of our organization. In 2021, to further support our employees and integrate DE&I into our Company culture, we formed various employee resource groups (“ERGs”) for women, people of color, LGBTQ+ and veterans, providing employees with opportunities to express opinions, develop professional skills, find peer support and mentorship, and increase overall engagement through a tangible sense of belonging. Each group has a core active group who meet monthly and the ERGs meet together once per quarter. Our success depends on valuing all individuals and leveraging our diverse talent.
Cybersecurity and Data Privacy
Our cybersecurity policy applies to all of our employees, contractors, consultants, third-party service providers and vendors. Our core cybersecurity objectives are related to the overall protection of systems, people, assets, data and security. Our cybersecurity policy contains preventative and detective measures to protect against cyber-attacks that seek to (i) acquire confidential information, (ii) corrupt, damage or destroy information and systems and (iii) flood network resources to render them unavailable. Our employees are required to participate in regular cybersecurity awareness campaigns along with annual cybersecurity, privacy and information training.
Item 11. Executive Compensation.
Compensation Discussion & Analysis
This Compensation Discussion & Analysis (“CD&A”) provides information regarding the Company’s compensation programs for the named executive officers of the Company (the “NEOs”) for year ended December 31, 2023 (“2023”). As such, our NEOs include:
•Rose Lee, President and Chief Executive Officer;
•Jeffrey S. Lee, Executive Vice President, Chief Financial Officer;
•Alena S. Brenner, Executive Vice President, General Counsel and Corporate Secretary
•Petar Andrich, Executive Vice President and Chief Human Resources Officer
•Matthew R. Ackley, President, Shelter Solutions
•Katy K. Theroux, Former Executive Vice President and Chief Human Resources Officer (1)
(1) Ms. Theroux separated from the Company effective June 2023.
Summary and Highlights for 2023
Compensation Highlights for 2023
During 2022 and 2023, our indirect parent, Camelot Return Ultimate, LP, a Delaware limited partnership (the “Partnership” or “Camelot Parent”), granted equity awards to certain key employees considered critical to the success of our Company, including our NEOs, which consisted of interests in future profits of the Partnership. See “Executive Compensation – Long-Term Incentive Awards Granted to NEOs in 2022”.
In June 2023, Ms. Theroux, ceased to serve as Executive Vice President, Chief Human Resources Officer of the Company. Ms. Theroux received the severance benefits pursuant to the employment agreement entered into in June 2016 (“Employment Agreement”) that are payable upon resignation to Ms. Theroux for “Good Reason” as defined in the Employment Agreement. Ms. Theroux also provided consulting and advisory services through December 31, 2023 and her services during this period were treated as service for purposes of vesting in the value of her equity awards that vested through December 31, 2023.
Performance Highlights in 2023
We delivered strong financial results in 2023 while navigating lower sales volumes and fluctuating commodity costs and other operational challenges. Leveraging our ability to quickly adapt to changing market dynamics and our agile execution capabilities, we maintained price discipline across all reportable segments, which offset volume and inflationary pressures. Additionally, we benefited from cost take-out initiatives through the Cornerstone Production System.
In addition to our strong performance, we remained focused on enhancing long-term growth by taking actions to optimize our portfolio. During 2023, we acquired M.A.C. Métal Architectural Inc. (“MAC Metal”) and Eastern Architectural Systems (“EAS”), which furthered growth in markets that are core to our operations and strengthened our ability to serve all customers and channels with a comprehensive portfolio of materials, products and brands.
Executive Compensation Governance
Compensation Philosophy and Objectives of the Company’s Compensation Program
Our executive compensation philosophy is based on the principle that executive pay should be linked to the performance of the Company. Our Compensation Committee has established the following objectives for our executive compensation programs:
•Attract, retain and motivate exceptional executives;
•Reward performance measured against established goals;
•Provide incentives for future performance; and
•Align executives’ long-term interests with long-term value creation.
In support of these goals, we designed our compensation programs to reward excellent short-term performance and to encourage executives’ commitment to the Company’s long-term, strategic business goals. In 2022, the Board of Directors of Camelot Parent (the “Parent Board”), implemented a long-term incentive program consisting of grants of equity from Camelot Parent. This equity is designed to create alignment between our shareholder and Company management by enabling the management team to receive a return based upon the appreciation of the Partnership’s equity value that will be created through execution of the long-term strategic plan and profitable growth of the Partnership and its subsidiaries, including the Company.
Determination and Administration of Compensation Programs and Amounts
Decisions regarding executive compensation are based primarily on the assessment by the Compensation Committee of each NEO’s leadership and operational performance, and potential to enhance long-term value to the Company. Since February 2015, the Compensation Committee has retained a compensation consultant, FW Cook, to assist it in its comprehensive review of the Company’s executive compensation program. During 2023, FW Cook continued to advise the Compensation Committee regarding compensation packages for existing executives, new hires, and promotions and other governance related matters (see “Executive Compensation — Compensation of Directors”). The Compensation Committee also relies on its judgment, prior experience, and the judgment of our CEO, Ms. Lee, about each individual NEO in determining the amount and combination of compensation elements and whether each payment or award appropriately encourages and rewards performance. The Compensation Committee meets regularly in separate executive sessions without management personnel present and also requests periodically that our officers or employees attend meetings.
Based on (i) the benchmarking data prepared by FW Cook, (ii) discussions with and recommendations by Ms. Lee during 2023 and (iii) our pay-for-performance policies, the Compensation Committee determined to maintain our existing executive compensation programs during 2023.
Role of the Compensation Committee
Key factors considered by the Compensation Committee in this regard include:
•Actual performance compared to pre-established financial, operational and strategic goals for the Company;
•Individual contribution to the Company’s financial results, particularly with respect to key measures such as net sales, adjusted EBITDA and working capital as a percentage of net sales;
•Effectiveness in leading our initiatives to enhance quality and value provided to customers; and
•Individual commitment and contribution to a culture defined by our core values of safety, integrity and inclusion.
The Compensation Committee also considered the appropriate balance between incentives for short- and long-term performance as well as internal “pay equity” — in other words, the relative differences in compensation among the executive officers. In addition, our Compensation Committee has reviewed our compensation policies as generally applicable to our employees and believes that our policies do not encourage excessive and unnecessary risk-taking. See “Item 10. Directors, Executive Officers and Corporate Governance –– Risk Analysis of Our Compensation Plans.”
Role of Management
During 2023, Ms. Lee, Mr. Lee, Ms. Brenner, Mr. Andrich and other senior executives attended certain Compensation Committee meetings at the Compensation Committee’s request to advise the Compensation Committee regarding our performance and to recommend compensation and benefits for our NEOs (other than the CEO). Our management, under the leadership of Ms. Lee, plays an important role in establishing and maintaining our compensation programs for our NEOs. Management’s role includes recommending plans and programs to the Compensation Committee, implementing the Compensation Committee’s decisions regarding the plans and programs and assisting and administering plans in support of the Compensation Committee. The Compensation Committee also relied to a certain extent on Ms. Lee’s evaluations of other NEOs whose day-to-day performance was not as visible to the Compensation Committee as it was to Ms. Lee.
Role of Independent Advisors
The Compensation Committee’s charter provides that it may retain advisors, including compensation consultants, in its sole discretion. The Compensation Committee has assessed the independence of FW Cook pursuant to SEC and NYSE rules and has determined that FW Cook does not have any economic interest or other relationship that would create a conflict with its services to the Compensation Committee.
Peer Group
In assessing compensation elements and making compensation decisions for our executive officers, our Compensation Committee considers the executive compensation practices of a peer group of companies of similar size to the Company in related industries. In 2020, our Compensation Committee adopted a revised compensation peer group with the assistance of FW Cook. The changes to the compensation peer group were made to include companies that better align with the Company’s operations and directorsbusiness model. The following peer group was used in making compensation decisions for our NEOs during 2023:
| | | | | | | | |
| Acuity Brands, Inc. | JELD-WEN Holding, Inc. | Masonite International Corporation |
| Carlisle Companies Inc. | Leggett & Platt, Inc. | Mohawk Industries, Inc. |
| Fortune Brands Home & Security, Inc. | Lennox International, Inc. | nVent Electric plc |
| Generac Holdings Inc. | Louisiana-Pacific Corporation | Owens Corning |
| Hubbell Inc. | Masco Corporation | |
The Company’s net sales fall between the median and 75th percentile of the peer companies.
CEO Compensation
The Compensation Committee is directly responsible for determining the salary level of the CEO and all awards and grants to the CEO. In September 2021, the Company entered into an employment agreement with our current CEO, Ms. Lee, in connection with her appointment. Ms. Lee’s compensation has a strong performance orientation, with annual incentive payouts linked to financial results and Incentive Unit, as defined in “Long-Term Incentive Awards under the Equity Plan” in this section, value driven by Company value creation. Ms. Lee’s overall compensation package has also been set at a level that we believe provides appropriate differentiation between CEO compensation and the compensation of other executive officers hired from time to time.
Elements of Executive Compensation
The principle elements of compensation provided to our NEOs consist of a base salary, the opportunity to earn a bonus under the Company’s Bonus Program and long-term incentive compensation under the Camelot Return Ultimate 2022 Equity Incentive Plan (“Equity Plan”).
Base Salary
The Compensation Committee annually reviews base salaries and makes adjustments in light of competitive data regarding a peer group of companies as well as a NEO’s responsibilities, experience and performance levels relative to other executives and the potential for making significant contributions in the future, to ensure that salary levels remain appropriate and competitive. Base salary provides the foundation for calculating other benefits such as annual cash bonus and discretionary matching under the 401(k) plan, so the executive’s individual performance has a significant impact on both salary and the benefits derived from salary.
| | | | | | | | |
| Named Executive Officer | | 2023 Base Salary |
| Rose Lee | | $ | 1,150,000 | |
| Jeffrey S. Lee | | 630,000 |
| Alena S. Brenner | | 450,000 |
| Petar Andrich | | 445,000 |
| Matthew R. Ackley | | 450,000 |
| Katy K. Theroux | | 450,000 |
Annual Bonus
Short-term annual cash incentive compensation is provided through our Bonus Program, under which annual cash bonuses may be paid to executives to reward their contributions to our business during the year.
2023 Performance Criteria
For purposes of the annual bonus metrics, on a Pro Forma basis reflecting the impact of acquisitions, “Pro Forma Adjusted EBITDA” excludes interest expense, income taxes, depreciation and amortization, share-based compensation, strategic development and acquisition-related costs, gains on divestitures and legal settlements, and certain other items excluded in order to more accurately reflect current underlying operating performance. Pro Forma Adjusted EBITDA also reflects the impact of companies acquired during the year, adjusted for a full year of performance. For additional information regarding Adjusted EBITDA, including a detailed calculation and reconciliation to the most comparable GAAP measure, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Non-GAAP Financial Measures”.
Under the 2023 Bonus Program, the threshold of achievement of Pro Forma Adjusted EBITDA and Pro Forma Working Capital as a Percentage of Net Sales metrics is set at either the prior year’s actual performance results or, in the case of EBITDA, 80% of the current year plan target, whichever is greater. Additionally, the Pro Forma Adjusted EBITDA threshold must be met in order for payment to be earned in respect of the Pro Forma Working Capital as a Percentage of Net Sales metric, or payout will be postedcapped at the target payout percentage, typically 100%.
The payout for threshold levels of achievement, the beginning level at which payouts can be earned, was 50%, and the payout for maximum levels of achievement was 200%. Our Company believes this plan design keeps employees focused on the most important performance measures and incentivizes achievement of our goals.
For performance at or above the threshold, payments under the Bonus Program are made as follows for corporate executives such as Mses. Lee, Brenner and Theroux and Messrs. Lee and Andrich, except for Mr. Ackley, whose plan also includes a measure of business unit performance:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metric | | Weighting | | Threshold
(50% Earned) | | Target
(100% Earned) | | Maximum
(200% Earned) |
| Pro Forma Adjusted EBITDA | | 80% | | 94% of goal | | $710.5 million | | 111% of goal |
| Pro Forma Working Capital as % of Net Sales | | 20% | | 106% of goal | | 15.9% | | 94% of goal |
Adjusted EBITDA and working capital performance between these three levels is determined by linear interpolation. Total annual bonuses for all employees, including non-management employees, may not exceed 15% of the Company’s adjusted pre-tax profit for 2023, calculated in accordance with the Bonus Program, before accrual for bonuses and before share-based compensation expense under the Incentive Plan.
2023 Bonus Earned
In 2023, each NEO was assigned a target annual bonus equal to a percentage of his or her base salary, as set forth in the table below. See “Executive Compensation — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
For corporate executives such as Mses. Lee, Brenner, Theroux and Messrs. Lee and Andrich during 2023, the Company achieved Pro Forma Adjusted EBITDA of $751.7 million against target Pro Forma Adjusted EBITDA of $710.5 million and working capital of 16.9% of net sales against a target working capital of 15.9% of net sales. This achievement level corresponded to a bonus payout at 154.3% of the portion of the target annual bonus based on Pro Forma Adjusted EBITDA, and a bonus payout at 53.5% of the portion of the target annual bonus based on working capital, resulting in a total payout at 134.1% of target bonus levels. Mr. Ackely’s bonus also included a measure of business unit performance. Coupled with the Company achievement metrics noted above as part of the business unit bonus program, Mr. Ackley achieved a total payout at 146.3% of target bonus levels.
The Compensation Committee did not revise or reset performance goals during the year, nor did it exercise any discretion to increase or decrease these payout levels, resulting in the bonuses shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Named Executive Officer | | 2023
Target Bonus % Salary | | 2023
Target Bonus ($) | | 2023
% of Target Earned | | 2023
Bonus Earned ($) | |
| Rose Lee | | 122 | (1 ) | 1,400,007 | (1 ) | 134 | | 1,878,436 | | |
| Jeffrey S. Lee | | 90 | | 567,000 | | 134 | | 760,763 | | |
| Alena S. Brenner | | 75 | | 337,500 | | 134 | | 452,835 | | |
| Petar Andrich | | 75 | | 147,216 | (2 ) | 134 | | 197,524 | | (2 ) |
| Matthew R. Ackley | | 75 | | 337,500 | | 146 | | 493,771 | | |
| Katy K. Theroux | | 75 | | 167,363 | (2 ) | 134 | | 224,557 | | (2 ) |
(1) Target bonus as a percentage of salary and target bonus was based on 120% as a percent of salary through August 2023 and 125% thereafter.
(2) Bonuses are pro-rated based upon hire and separation dates during 2023.
Long-Term Incentive Compensation
Prior to the Merger, our long-term incentive compensation program consisted of annual grants of equity-based awards, including stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) under a stockholder-approved equity-based compensation plan (the “Pre-Merger Plan"). In connection with the Merger, our Parent Board adopted the Equity Plan, under which each of our NEOs received a one-time grant of equity interests that will allow them to receive a return based upon the appreciation of the Partnership’s equity value from the date of grant as described below.
We believe that equity awards to our websiteNEOs must be sufficient in size to provide a strong, long-term performance and retention incentive for executives and to increase their vested interest in the Company and the Partnership. The value of the equity awards granted to NEOs is based on the individual’s strategic role in generating long-term value creation for the Company and the Partnership.
Long-Term Incentive Awards under the Equity Plan
Our NEOs participate in the Equity Plan. The Equity Plan was adopted by the Parent Board in October 2022. The Equity Plan was formed to promote the long-term growth and profitability of the Partnership and its subsidiaries, including the Company, by providing those persons who are involved with the growth of the Partnership and its subsidiaries a grant of Class B Units (“Incentive Units”) in the Partnership, thereby encouraging such persons to contribute to and participate in the success of the Partnership and its subsidiaries, including the Company. Each Incentive Unit represents a conditional right to receive distributions from Camelot Parent in excess of the “participation threshold” of the Incentive Unit (as set forth in grant documentation). The Parent Board of the Partnership believed the best way to encourage NEOs to contribute and participate in the success of the Partnership and the Company was to provide a grant of Incentive Units to our NEOs with a significant vesting period and, at the same time, provide the opportunity to purchase Class A Units in the Partnership. Therefore, in October 2022, our NEOs were granted Incentive Units and were also offered the opportunity to purchase Class A Units in the Partnership under the Equity Plan. The Compensation Committee made a decision in 2023 to grant additional Incentive Units to certain NEOs based upon their contributions to the Company. Furthermore, Mr. Andrich was granted thirty-six thousand shares subsequent to his hire in August 2023.
At the end of 2023, the Parent Board was comprised of Ms. Lee, Ms. Garlick, and Messrs. Krenicki, Sleeper and Young. Ms. Lee did not participate in any discussions with the Parent Board related to the grant of Incentive Units to herself. All grants made under the Equity Plan have been and will in the future be in the form of Class A and Class B Units in the Partnership.
The number of Incentive Units granted during 2023 to each NEO is set forth in the following table:
| | | | | | | | |
| Named Executive Officers | | Incentive Units Granted |
| Rose Lee | | — |
| Jeffrey S. Lee | | — |
| Alena S. Brenner | | 5,000 |
| Petar Andrich | | 36,000 |
| Matthew R. Ackley | | — |
| Katy K. Theroux | | — |
Vesting Terms Applicable to Incentive Units
The Incentive Units also function as a retention device by vesting in five equal annual installments over five years, subject, in each case, to the NEO’s continued employment or service with the Company through the applicable vesting date. The Incentive Units (both vested and unvested) are subject to forfeiture if the NEO’s employment is terminated with cause (as defined in the Equity Plan) or if the NEO fails to comply with confidentiality, non-competition, non-solicitation, nondisparagement, and other restrictive covenants under the Equity Plan, and unvested Incentive Units are subject to forfeiture in the event of the NEO’s termination of employment by the Company without cause or upon the NEO’s resignation for any reason. The Incentive Units also provide for accelerated vesting of any unvested portion of Incentive Units upon the consummation of a sale of the Partnership in certain circumstances or in the case of the NEO’s death or disability. See “Executive Compensation – Potential Payments upon Termination or Change in Control – Equity Incentive Awards.”
Retirement Benefits
Our executive officers, including our NEOs, are eligible to participate in our tax-qualified 401(k) plan. In addition, we believe that benefit programs that address the unique circumstances of executives in light of limitations imposed on benefits payable from qualified welfare, profit-sharing and retirement plans are critical in attracting and retaining quality executives. Therefore, we have adopted a Deferred Compensation Plan (“DCP”) that allows key employees to elect to defer a portion of their annual salary and annual cash bonus, subject to certain specified maximum deferral amounts. As of December 31, 2023, none of our employees elected to participate. See “Compensation — Nonqualified Deferred Compensation” for additional details regarding the terms of the DCP.
Other Compensation
Employment Agreements, Separation Agreement and Termination Benefits
The Company has entered into employment agreements with certain NEOs. The descriptions herein pertain to their employment agreements as in effect during 2023. The initial terms of Mses. Lee’s and Brenner’s and Mr. Lee’s employment agreements have expired, and each such agreement has been automatically extended for a period of one year. The employment agreements generally provide for a base salary, target annual bonus and long-term incentive opportunities. In addition, the employment agreements include restrictive covenants, including confidentiality, non-competition, non-solicitation and non-disparagement covenants.
The employment agreements, Severance Plan, and certain other compensation arrangements of the Company include provisions providing for special payments or benefits upon specified termination events or in connection with the occurrence of a change in control of the Company. However, these arrangements do not include “gross-ups” for golden parachute excise taxes or other taxes. We believe that these termination and change in control benefits provide covered NEOs an incentive to act in the Company’s best interest during a change-in-control transaction despite the risk of losing their jobs or a significant change in the nature of their benefits and responsibilities. We also believe that, in some cases, our termination and change in control benefits are necessary to attract and retain certain executives. For a description of the terms of the employment agreements, consulting agreements, severance agreements and equity awards, see “Executive Compensation — Potential Payments upon Termination or Change in Control.”
In March 2023, Katy K. Theroux, Former Executive Vice President, Chief Human Resources Officer, informed the Company that she would decline the Company’s request to relocate to the Company’s headquarters in Cary, North Carolina due to family circumstances. Pursuant to her agreement, Ms. Theroux departed the Company in June 2023. Ms. Theroux continued to be available for consulting and advisory support through December 31, 2023 to ensure a smooth transition (“Transition Period”).
Ms. Theroux received the severance benefits pursuant to Ms. Theroux’s existing Employment Agreement that are payable upon resignation by Ms. Theroux for “Good Reason” as defined in the Employment Agreement.
In exchange for Ms. Theroux’s agreement to provide consulting and advisory services through the Transition Period, Ms. Theroux’s services during this period were treated as service for purposes of vesting in the value of her equity awards that vest through the end of the Transition Period.
Perquisites and Personal Benefits
We offer limited perquisites or personal benefits to our NEOs. We provide certain financial planning services and, on occasion, entertainment related expenses (e.g., concert tickets) for certain employees, including some of our NEOs.
In January 2022, the Compensation Committee approved Ms. Lee’s use of the Company’s aircraft for limited personal trips through June 2023, between Raleigh and Philadelphia, where Ms. Lee’s family resided through part of 2023, no more than once a month, the cost of which is imputed income.
Gross-Ups
With the exception of limited, one-time tax indemnification in connection with the incurrence of relocation expenses under our relocation policy, the Company generally does not provide for any tax assistance or “gross-ups” for any of its executives.
Clawback Policy
The Company has a clawback policy (the “Clawback Policy”) to better align our compensation practices with the Company’s interests by providing a mechanism to recover cash, stock or other incentive compensation in certain circumstances if a covered employee commits fraud or misconduct, or if the incentive compensation was based on inaccurate financial information resulting from fraud, misconduct or gross negligence.
Our Clawback Policy allows recovery of all forms of compensation paid to covered employees pursuant to any incentive-based compensation plan, if (i) the Company is required to prepare a material accounting restatement due to noncompliance with any financial reporting requirement under the U.S. securities laws, and such noncompliance is the result of the fraud, misconduct or gross negligence of a covered employee, or (ii) a covered employee has committed fraud or misconduct (regardless of whether a restatement occurs). Examples of “misconduct” under the policy include material acts of dishonesty or misrepresentation, acts constituting “cause” under the terms of a covered employee’s employment agreement, acts or omissions that could reasonably be expected to cause financial or reputational harm to the Company, and material violations of Company policy.
The Clawback Policy, which covers all current and former executive officers (including the NEOs), applies to all incentive compensation that is earned or vested after the date the policy was adopted (regardless of when granted). Upon a determination that the Clawback Policy will be applied, the Board may recover, (i) in the case of fraud or misconduct, up to the amount of incentive compensation received in any of the three completed fiscal years prior to the fiscal year in which the Board determines that the executive officer committed conduct giving rise to recoupment under the policy, and (ii) in the case of a material accounting restatement, up to the amount of incentive compensation received in any of the three completed fiscal years ending with (and inclusive of) the fiscal year subject to such restatement. The Board, with input from the Compensation Committee and the Audit Committee, has sole discretion to determine whether and how to apply the Clawback Policy. In determining whether to recover compensation, the Board may take into account any and all factors that it determines to be appropriate and relevant under the circumstances, including the likelihood and costs of recovery, compliance with applicable law, the ability of the executive officer to repay such amount, the tax consequences of the original payment and/or the recoupment to the executive officer (including whether recoupment shall be on a pre-tax or post-tax basis), and any other potentially adverse consequences for the Company or the executive officer arising from seeking enforcement of the policy.
Compensation Committee Interlocks and Insider Participation
During 2023, no member of the Compensation Committee served as an executive officer of the Company, and, except as described in “Transactions with Related Persons” below, no such person had any relationship with the Company requiring disclosure herein. During 2023, there were no Compensation Committee interlocks with other companies.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the above CD&A with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the CD&A be included in this Annual Report.
KATHLEEN J. AFFELDT, Chair
WILBERT W. JAMES, JR.
JOHN KRENICKI, JR.
TYLER YOUNG
Executive Compensation
2023 Summary Compensation Table
The following table shows information regarding the total compensation paid to the NEOs for each of our last three completed fiscal years. The compensation reflected for each individual was for their services provided in all capacities to us.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name & Principal Position | | Year | | Salary
($) | | Bonus
($)(1) | | Stock
Awards
($) | | Option
Awards
($)(2) | | Non-Equity
Incentive Plan
Compensation
($)(3) | | All Other
Compensation
($)(4) | | Total
($) |
| Rose Lee | | 2023 | | 1,051,923 | | | 2,135,617 | | | — | | | — | | | 13,182,745 | | | 162,395 | | | 16,532,680 | |
| President and Chief Executive Officer | | 2022 | | 1,000,000 | | | 2,135,610 | | | — | | | 9,952,000 | | | 1,920,000 | | | 27,281 | | | 15,034,891 | |
| 2021 | | 326,923 | | | 500,000 | | | 9,715,047 | | | 2,432,003 | | | 615,452 | | | 13,484 | | | 13,602,909 | |
| Jeffrey S. Lee | | 2023 | | 625,385 | | | 3,633,506 | | | — | | | — | | | 4,452,053 | | | 30,590 | | | 8,741,534 | |
| Executive Vice President and Chief Financial Officer | | 2022 | | 600,000 | | | 1,778,321 | | | — | | | 4,976,000 | | | 10,749,171 | | | 29,572 | | | 18,133,064 | |
| 2021 | | 600,000 | | | — | | | 1,996,969 | | | 577,256 | | | 864,000 | | | 422,502 | | | 4,460,727 | |
| Alena S. Brenner | | 2023 | | 450,000 | | | 438,624 | | | — | | | 242,955 | | | 1,442,263 | | | 30,482 | | | 2,604,324 | |
| Executive Vice President, General Counsel and Corporate Secretary | | 2022 | | 415,385 | | | — | | | — | | | 1,244,000 | | | 540,000 | | | 33,221 | | | 2,232,606 | |
| 2021 | | 300,000 | | | — | | | 1,012,461 | | | 250,012 | | | 480,000 | | | 68,109 | | | 2,110,582 | |
| Petar Andrich | | 2023 | | 196,827 | | | 275,000 | | | — | | | 1,749,274 | | | 197,463 | | | 123,072 | | | 2,541,636 | |
| Executive Vice President, Chief Human Resources Officer | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Matthew R. Ackley | | 2023 | | 442,308 | | | 84,747 | | | — | | | — | | | 804,082 | | | 32,717 | | | 1,363,854 | |
| President, Shelter Solutions | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Katy K. Theroux | | 2023 | | 230,192 | | | 1,442,954 | | | — | | | — | | | 1,744,527 | | | 502,078 | | | 3,919,751 | |
| Former Executive Vice President, Chief Human Resources Officer | | 2022 | | 450,000 | | | 607,434 | | | — | | | 1,990,400 | | | 5,153,164 | | | 26,856 | | | 8,227,854 | |
| 2021 | | 450,000 | | | — | | | 822,284 | | | 237,699 | | | 540,000 | | | 321,887 | | | 2,371,870 | |
(1) For 2023, for Mses. Lee, Brenner and Theroux and Messrs. Lee and Ackley, the amounts in the column represent time-vesting cash-based amounts received in exchange for options and RSU awards granted under the Pre-Merger Plan in connection with the Merger ("Replacement Awards") that vested during the year, as set forth in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Named Executive Officer | | Replacement Option Awards ($) | | Replacement RSU Awards ($) | | Non-Performance Bonus Awards ($) | | Total ($) |
| Rose Lee | | 629,921 | | 1,505,696 | | — | | 2,135,617 |
| Jeffrey S. Lee | | 2,456,222 | | 1,177,284 | | — | | 3,633,506 |
| Alena S. Brenner | | 131,042 | | 307,582 | | — | | 438,624 |
| Petar Andrich | | — | | | — | | | 275,000 | | | 275,000 |
| Matthew R. Ackley | | — | | | 84,747 | | | — | | | 84,747 |
| Katy K. Theroux | | 890,227 | | | 552,727 | | | — | | | 1,442,954 |
The Replacement Awards above were originally granted in 2021 as Options or RSUs under the Pre-Merger Plan, were subsequently converted into cash-based awards as a result of the Merger, based on the Merger consideration price of $24.65 per share, and vested on the same time vesting schedule as the options and RSUs that they replaced. During 2023, Mr. Andrich received a one-time non-performance bonus upon his hire.
(2) The Company believes that, despite the fact that the Incentive Units do not require the payment of an exercise price, they are most similar economically to stock appreciation rights or stock options, and as such, they are properly classified as “options” under the definition provided in Item 402 of Regulation S-K as an instrument with an “option-like feature.” The amounts disclosed in this column are computed using acceptable valuation methodologies in accordance with FASB ASC Topic 718 under U.S. GAAP.
(3) The items comprising “Non-Equity Incentive Plan Compensation” for 2023 are:
| | | | | | | | | | | | | | | | | | | | |
| Named Executive Officer | | Bonus Program ($) | | Replacement PSU Awards ($) | | Total ($) |
| Rose Lee | | 1,877,857 | | 11,304,888 | | 13,182,745 |
| Jeffrey S. Lee | | 760,528 | | 3,691,525 | | 4,452,053 |
| Alena S. Brenner | | 452,696 | | 989,567 | | 1,442,263 |
| Petar Andrich | | 197,463 | | — | | 197,463 |
| Matthew R. Ackley | | 493,719 | | 310,363 | | 804,082 |
| Katy K. Theroux | | 224,487 | | 1,520,040 | | 1,744,527 |
The Replacement PSU Awards above were originally granted in 2021 as PSUs under the Pre-Merger Plan, were subsequently converted into cash-based awards as a result of the Merger and were earned based on achievement of the applicable 2021-2023 EBITDA CAGR targets. These awards and the Bonus Program will be paid out in 2024. The items comprising “Non-Equity Incentive Plan Compensation” for 2023 are comparable to the prior year and for and 2021 is only the Company’s Bonus Program. See “Executive Compensation — Compensation Discussion & Analysis — Annual Bonus.”
(4) The items comprising “All Other Compensation” for 2023 are:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Named Executive Officer | | Perquisites and Other Personal Benefits ($)(a) | | Tax Reimbursements ($)(b) | | Contributions to Defined Contribution Plans ($)(c) | | Insurance Premiums ($)(d) |
| Rose Lee | | 109,631 | | 38,874 | | 13,200 | | 690 |
| Jeffrey S. Lee | | 17,012 | | — | | 13,200 | | 378 |
| Alena S. Brenner | | 17,012 | | — | | 13,200 | | 270 |
| Peter Andrich | | 88,618 | | 34,320 | | — | | 134 |
| Matthew R. Ackley | | 19,247 | | — | | 13,200 | | 270 |
| Katy K. Theroux | | 492,596 | | — | | 9,346 | | 136 |
(a) For Ms. Lee, the amount in this column reflects Ms. Lee’s use of the Company aircraft in accordance with Company procedures and policies regarding executives’ personal periodic use of the Company aircraft to increase efficiency and pursuant to policies of the Company under which Ms. Lee may use the Company aircraft for such periodic travel through June 30, 2023. Additionally, Ms. Lee received financial planning services and relocation expenses. For Mr. Lee, the amount in this column reflects personal entertainment and related expenses (e.g., concert tickets) and receipt of financial planning services. For Ms. Brenner, the amount in this column reflects personal entertainment and related expenses (e.g., concert tickets) and receipt of financial planning services. For Mr. Andrich the amount reflects relocation expenses and the receipt of financial planning services. Mr. Ackley’s amount primarily reflects financial planning services. For Ms. Theroux, the amount is comprised of severance and financial planning services.
(b) Amount in this column reflects a tax gross-up in connection with Ms. Lee’s and Mr. Andrich’s relocation expenses.
(c) Amounts in this column reflects Company 401(k) matching contributions.
(d) Amounts in this column reflects the taxable value of a life insurance benefit.
2023 Grants of Plan-Based Awards Table
The following table sets forth information concerning grants of awards to each of the Named Executive Officers during 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | | All Other
Stock
Awards;
Number of Shares of
Stock
or Units
(#) | | All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) | | Exercise
or Base
Price of
Option
Awards
($)(2) | | Grant Date
Fair Value
of Stock
and Option
Awards
($)(3) |
| Named Executive Officer | | Grant Date | | Award Type | | Threshold
($) | | Target
($) | | Maximum
($) | | | | |
| Ms. Lee | | | | Bonus Program(1) | | 700,004 | | 1,400,007 | | 2,800,014 | | — | | — | | — | | — |
| | | | Incentive Unit | | — | | — | | — | | — | | — | | — | | — |
| Mr. Lee | | | | Bonus Program(1) | | 283,500 | | 567,000 | | 1,134,000 | | — | | — | | — | | — |
| | | | Incentive Unit | | — | | — | | — | | — | | — | | — | | — |
| Ms. Brenner | | | | Bonus Program(1) | | 168,750 | | 337,500 | | 675,000 | | — | | — | | — | | — |
| | 02/22/2023 | | Incentive Unit | | — | | — | | — | | — | | 5,000 | | 100.00 | | 242,955 |
| Mr. Andrich | | | | Bonus Program(1) | | 73,608 | | 147,216 | | 294,432 | | — | | — | | — | | — |
| | 08/10/2023 | | Incentive Unit | | — | | — | | — | | — | | 36,000 | | 100.00 | | 1,749,724 |
| Mr. Ackley | | | | Bonus Program(1) | | 168,750 | | 337,500 | | 675,000 | | — | | — | | — | | — |
| | | | Incentive Unit | | — | | — | | — | | — | | — | | — | | — |
| Ms. Theroux | | | | Bonus Program(1) | | 83,682 | | 167,363 | | 334,726 | | — | | — | | — | | — |
| | | | Incentive Unit | | — | | — | | — | | — | | — | | — | | — |
(1) Represents threshold, target and maximum amounts potentially payable under the Company’s Bonus Program for 2023. Amounts reflect pro-rated adjustments for hire date for Mr. Andrich and separation date for Ms. Theroux, as well as changes to target bonus as a percentage of salary for Ms. Lee in August 2023. See “Executive Compensation — Compensation Discussion & Analysis — Annual Bonus.”
(2) The Company believes that, despite the fact that the Incentive Units do not require the payment of an exercise price, they are most similar economically to stock appreciation rights or stock options, and as such, they are properly classified as “options” under the definition provided in Item 402 of Regulation S-K as an instrument with an “option-like feature.” The Incentive Units do not have an “exercise price” in the same sense that a true stock option award would have an exercise price. Instead, each Incentive Unit has a “hurdle price” or “threshold” associated with the award. Each Incentive Award will entitle the holder to receive distributions only if the aggregate distributions made by Management Holdings in respect of each common unit issued and outstanding on or prior to date of the grant of the incentive unit exceeds the hurdle price or threshold. The figure reflected in this column is the threshold assigned to each Incentive Unit and were set at the time of grant.
(3) The amounts disclosed in this column are computed using acceptable valuation methodologies in accordance with FASB ASC Topic 718 under U.S. GAAP.
Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
The Company has entered into employment agreements with certain of its NEOs. For a description of the material terms of the employment agreements and for a discussion of enhanced severance benefits upon certain terminations in connection with a change in control of the Company, see “Executive Compensation — Potential Payments Upon Termination or Change in Control — Employment Agreements.”
2023 Long-Term Incentive Awards
As described above, the Company made grants of long-term incentives to certain NEOs in 2023. See “Executive Compensation — Compensation Discussion & Analysis — Long-Term Incentive Compensation — Long-Term Incentive Awards Granted to NEOs in 2023.”
Outstanding Equity Awards at Year-End
The following table sets forth information concerning unvested awards for each NEO as of December 31, 2023. The market value of unvested or unearned awards is calculated using the Merger closing price of $24.65.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards(1) |
| Named Executive Officer | | Number of
Securities
Underlying
Unexercised
Options Exercisable
(#) | | Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#) | | Option
Exercise
Price
($) | | Option
Expiration
Date | | Grant
Award Date |
| Ms. Lee | | 40,000 | | | 160,000 | | | 100.00 | | N/A | | 10/7/2022 |
| Mr. Lee | | 20,000 | | | 80,000 | | | 100.00 | | N/A | | 10/7/2022 |
| Ms. Brenner | | 5,000 | | | 20,000 | | | 100.00 | | N/A | | 10/7/2022 |
| | — | | | 5,000 | | | 100.00 | | N/A | | 2/22/2023 |
| Mr. Andrich | | — | | | 36,000 | | | 100.00 | | N/A | | 8/10/2023 |
| Mr. Ackley | | 8,000 | | | 32,000 | | | 100.00 | | N/A | | 10/7/2022 |
(1) On October 7, 2022 and during 2023, certain NEOs received a grant of Incentive Units in the Partnership. The Incentive Units provide the holder with the opportunity to receive, upon certain events, a return based upon the appreciation of the Partnership’s equity value from the date of the grant. The Incentive Units do not require the payment of an exercise price, nor do they have an expiration date; however, they only entitle the holder thereof to receive value if and to the extent the underlying security appreciates in value following the grant of the award. Because of this appreciation feature, the Company believes profits interest awards are economically similar to stock options or stock appreciation rights for purposes of the SEC disclosure rules.
Pension Benefits
We do not sponsor or maintain any plans that provide for specified retirement payments or benefits, such as tax-qualified defined benefit plans or supplemental executive retirement plans, for our NEOs.
Nonqualified Deferred Compensation
Certain of our employees and non-employee directors of the Company selected by the Compensation Committee are eligible to participate in the Company’s nonqualified deferred compensation plan (“DCP”). The DCP is a nonqualified retirement plan created to provide specified benefits to our highly compensated employees and directors. The DCP allows employees to defer up to 80% of their annual salaries and up to 90% of their annual cash bonuses, and allows the Company’s non-employee directors to defer up to 100% of their annual retainer fees, until a specified date in the future, including at or after retirement. None of our NEOs participated in the DCP during 2023.
Potential Payments upon Termination or Change in Control
We describe below certain payments and benefits that would be received by our NEOs upon specified terminations of their employment, and upon a change in control of the Company, under the employment agreements to which we and our NEOs are parties and under the Severance Plan, as well as under our Incentive Plan and the outstanding equity awards as of the end of 2023. Certain NEOs that do not have employment agreements are part of the severance plan that has similar terms relating to potential payments upon termination or change of control.
Employment Agreements and Severance Plan
Certain NEOs have an employment agreement with the Company or are participants in the Severance Plan providing for severance payments and termination benefits upon a future termination of an NEO’s employment that is a qualifying termination (i.e., upon termination by the Company without “cause” or by the employee with “good reason”), both prior to and following a change in control of the Company. Severance payments and termination benefits are also payable upon a qualifying termination of an NEO that does not occur during a potential change in control period or within two years following a change in control of the Company.
Where a qualifying termination occurs, other than during a potential change in control period and other than within two years following a change in control of the Company, each employment agreement or, where applicable, the severance plan, provides (or provided) for (i) payment of one times (two times, in the case of Ms. Lee) the NEO’s then-current base salary, payable in equal installments on regular payroll dates over the course of the one-year period (two-year period, in the case of Ms. Lee) immediately following the date of termination, (ii) a prorated annual bonus based on actual performance in the year of termination, (iii) a maximum of twelve months of continued coverage (under COBRA) in the case of Ms. Lee, a lump sum cash payment equal to eighteen months of the premium cost of family medical coverage at the active-employee rate) and (iv) in the case of Ms. Lee, payment of two times their target annual bonus payable in equal installments over two years (each, a “Qualifying Termination Severance Package”).
In connection with a qualifying termination during a potential change in control period or within two years following a change in control of the Company, the Severance Plan and Mr. Lee’s and Ms. Brenner’s employment agreements provide for (i) payment of one times the NEO’s then-current base salary (payable in equal installments on regular payroll dates over the course of the one-year period under the Severance Plan, or, for Mr. Lee and Ms. Brenner to the maximum extent practicable, in a lump sum), (ii) an additional lump-sum cash severance payment in an amount equal to the sum of (x) one times the NEO’s then-current base salary and (y) two times the NEO’s target annual bonus for the fiscal year in which the termination occurs, (iii) a pro-rated annual bonus payment based on actual performance in the year of termination and (iv) an additional six months (for a maximum of eighteen months) of continued COBRA coverage.
For purposes of the employment agreements and the Severance Plan, “change in control” means (A) any person becomes the beneficial owner of 25% or more of the combined voting power of Cornerstone Building Brands, (B) as a result of, or in connection with, a tender or exchange offer, merger or other business combination, persons who were directors immediately before the transaction cease to constitute the majority of the Board, (C) the Company is merged or consolidated with another company or transfers substantially all of its assets to another company and, as a result, either (i) less than 50% of the outstanding voting securities of the resulting company are owned in the aggregate by former Cornerstone Building Brands stockholders or (ii) 50% or more of the outstanding voting securities of the resulting company continue to be owned in the aggregate by former Cornerstone Building Brands stockholders but other than in substantially the same relative proportions as immediately prior to the transaction, or (D) a tender or exchange offer is made for 25% or more of the combined voting power of the Company.
To the extent payments to a NEO under an employment agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code, the payments to be received by the NEO may be reduced to the extent a reduction in the payment amount would put the officer in a better after-tax position than he or she would be in if the excise tax under Section 4999 were imposed on such payments.
Ms. Theroux’s Separation
On March 12, 2023, Katy K. Theroux, Former Executive Vice President, Chief Human Resources Officer informed the Company that she would decline the Company’s request to relocate to the Company’s headquarters in Cary, North Carolina due to family circumstances. Consequently, the Company and Ms. Theroux have decided that Ms. Theroux will depart from the Company on June 30, 2023. Ms. Theroux continued to be available for consulting and advisory support through December 31, 2023 to ensure a smooth transition.
Ms. Theroux received the severance benefits pursuant to Ms. Theroux existing Employment Agreement entered into between the Company and Ms. Theroux dated June 1, 2016 that are payable upon resignation by Ms. Theroux for “Good Reason” as defined in the Employment Agreement.
In exchange for Ms. Theroux’s agreement to provide consulting and advisory services through the Transition Period, Ms. Theroux’s services during this period were treated as service for purposes of vesting in the value of her equity awards that vest through the end of the Transition Period.
Equity Incentive Awards
Upon a sale of the Partnership, all outstanding and unvested Incentive Units will become fully vested and participate in proceeds from such sale unless certain conditions specified in the Equity Plan are met, including the replacement of such Incentive Units with alternative awards having substantially equivalent or better terms.
Termination Payments
The following table estimates the value of the payments and benefits that each of our NEOs would receive their employment terminated on December 31, 2023 under the circumstances shown and making the following assumptions. The table excludes (i) amounts accrued through the end of 2023 that would be paid in the normal course of continued employment, such as accrued but unpaid salary and (ii) benefits generally available to all of our salaried employees.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Named Executive Officer | | Benefit | | Termination for Cause
($) | | Termination Without Good Reason by Executive (including Retirement)(1) ($) | | Termination Without Cause or by Executive for Good Reason(2) ($) | | Change in Control
($) | | Change in Control followed by Termination Without Cause or by Executive for Good Reason(3) ($) | | Disability(4) ($) | | Death(4) ($) |
| Ms. Lee | | Non-CIC Severance | | — | | 1,877,857 | | 7,014,009 | | — | | 7,014,009 | | 1,877,857 | | 1,877,857 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 1,150,000 |
| | Accelerated FY 2021 Awards | | — | | — | | 11,304,888 | | — | | 13,440,973 | | 13,440,973 | | 13,440,973 |
| Mr. Lee | | Non-CIC Severance | | — | | 760,528 | | 1,413,898 | | — | | 3,189,583 | | 760,528 | | 760,528 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 630,000 |
| | Accelerated FY 2021 Awards | | — | | — | | 3,691,525 | | — | | 4,242,812 | | 4,242,812 | | 4,242,812 |
| Ms. Brenner | | Non-CIC Severance | | — | | 452,696 | | 918,110 | | — | | 2,050,817 | | 452,696 | | 452,696 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 450,000 |
| | Accelerated FY 2021 Awards | | — | | — | | 989,567 | | — | | 1,428,211 | | 1,428,211 | | 1,428,211 |
| Mr. Andrich | | Non-CIC Severance | | — | | 197,463 | | 649,914 | | — | | 1,766,139 | | 197,463 | | 197,463 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 445,000 |
| Mr. Ackley | | Non-CIC Severance | | — | | 493,719 | | 517,088 | | — | | 2,103,773 | | 493,719 | | 493,719 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 450,000 |
| | Accelerated FY 2021 Awards | | — | | — | | 310,363 | | — | | 407,558 | | 407,558 | | 407,558 |
Ms. Theroux(5) | | Non-CIC Severance | | — | | 224,487 | | 698,588 | | — | | 1,835,636 | | 224,487 | | 224,487 |
| | Life Insurance | | — | | — | | — | | — | | — | | — | | 450,000 |
| | Accelerated FY 2021 Awards | | — | | — | | 1,520,040 | | — | | 1,520,040 | | 1,520,040 | | 1,520,040 |
(1) Amounts reflect prorated annual bonus based on actual performance. Refer to section titled “2023 Bonus Earned” for additional information.
(2) Amounts include those payments described above as the CodeQualifying Termination Severance Package and vesting of Business Conductperformance-based awards based on the Company’s performance at the end of the applicable performance period on a pro-rata basis commensurate with the time employed prior to departure.
(3) For Ms. Lee, the amounts equals the payment that would occur for a termination without cause or by executive for good reason as well as the accelerated vesting of all time-based awards. For all other Named Executive officers, the amount equals the payment that would occur for a termination without cause or by executive for good reason plus (i) an additional lump-sum cash severance payment in an amount equal to the sum of (x) one times the NEO’s then-current base salary and Ethics(y) two times the NEO’s target annual bonus, (ii) accelerated vesting of all time-based awards.
(4) Amounts include (i) prorated annual bonus based on actual performance and (ii) accelerated vesting of all time-based awards. In the case of death, the amounts also include life insurance proceeds and vesting of performance-based awards based on the Company’s performance at the end of the applicable performance period on a pro-rata basis commensurate with the time employed prior to departure.
(5) Ms. Theroux departed from the Company on June 30, 2023. Ms. Theroux received the severance benefits that are payable upon resignation by Ms. Theroux for “Good Reason” which included a base salary of $450,000, prorated annual cash bonus through the separation date of June 30, 2023, and COBRA continuation coverage for 12 months valued at $24,102. In addition, in exchange for Ms. Theroux’s agreement to be provide consulting and advisory services through the Transition Period, Ms. Theroux’s services during this period were treated as noted above. However,service for purposes of vesting in the informationvalue of her equity awards that vest through the end of the Transition Period.
Pay Ratio Disclosure
Pursuant to Item 402(u) of Regulation S-K and Section 953(b) of the Dodd-Frank Act, presented below is the ratio of the annual total compensation of our CEO, Ms. Lee, compared to the annual total compensation of our median employee (excluding Ms. Lee).
The ratio presented below is a reasonable estimate calculated in a manner consistent with Item 402(u) and includes the value of certain one-time, make-whole awards. The SEC’s rules for identifying the median employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee populations and compensation practices. As a result, the pay ratio reported by other companies may not be comparable to the pay ratio reported below, as other companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates, and assumptions in calculating their own pay ratios.
In accordance with SEC requirements, we determined that there have been no changes to our employee population or compensation arrangements in 2023 that we believe would significantly affect our pay ratio disclosure. In determining our pay ratio for fiscal 2022-23, we used the same median employee as was identified last year according to the process outlined below.
We identified our median employee from all full-time and part-time workers who were included as employees on our website is not incorporated by reference into this Form 10-K.payroll records as of a determination date of December 31, 2023. The median was identified using base pay, overtime and bonuses. International employees’ pay was converted to U.S. dollar equivalents using exchange rates as of the determination date and pay was annualized for any employees hired during the period.
The informationtotal compensation earned by Ms. Lee during 2023, as determined under Item 402 of Regulation S-K, was $16,532,680. The total compensation earned during the captions “Proposal 1: Electionsame period by our median employee, as determined under Item 402 of Directors,” “Management,” “Delinquent Section 16(a) Reports,” “BoardRegulation S-K, was $55,356. The ratio of Directors”Ms. Lee’s total compensation to our median employee’s total compensation for 2023 is 299:1.
Director Compensation
Directors of the Company who are also employees of the Company do not receive additional compensation for their service as directors. Non-employee directors of the Company receive compensation in addition to reimbursement for expenses incurred to attend and/or participate in meetings. In 2023, each non-employee director received an annual retainer fee, and “Corporate Governance”certain non-employee directors receive additional annual retainer fees for their service as committee chairs or members, as set forth in the following table:
| | | | | | | | |
| Role | | Annual Retainer Fee ($) |
| All Non-Employee Directors | | 110,000 | |
| Audit Committee Chair | | 22,500 | |
| Compensation Committee Chair | | 17,000 | |
In addition, in August 2023, each non-employee director received Incentive Units having an aggregate fair market value of $53,450. These Incentive Units will vest on the earlier of (a) July 25, 2024 and (b) the date the relevant director is unable to stand for re-election due to mandatory retirement under our Corporate Governance Guidelines.
As a result of their affiliation with CD&R, Messrs. Garlick, Krenicki, Sleeper and Young did not receive any of the compensation offered to other non-employee directors, except for reimbursement of expenses incurred to attend or participate in meetings.
Our non-employee directors are also eligible to participate in our definitive proxy statement forDCP and may elect to defer a portion of their annual retainer fees, subject to certain specified maximum deferral amounts. None of our annual meeting of stockholders to be held on May 19, 2022 is incorporated by reference herein.
Item 11. directors participated in the DCP during 2023. See “Executive Compensation.Compensation — Nonqualified Deferred Compensation” for additional details regarding the terms of the DCP.
2023 Director Compensation Table
The following table provides information underconcerning the captions “Compensation Discussion & Analysis,” “Compensationcompensation of our non-employee directors during 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash
($)(1)(2) | | Stock
Awards
($) | | Incentive Unit Awards
($) | | All Other
Compensation
($) | | Total
($) |
| Kathleen J. Affeldt | | 127,000 | | — | | 53,450 | | — | | 180,450 |
| Naomi Garlick | | — | | — | | — | | — | | — |
| Wilbert W. James, Jr. | | 110,000 | | — | | 53,450 | | — | | 163,450 |
| Daniel C. Janki | | 132,500 | | — | | 53,450 | | — | | 185,950 |
| John Krenicki | | — | | — | | — | | — | | — |
| Timothy J. O’Brien | | 110,000 | | — | | 53,450 | | — | | 163,450 |
| Nathan K. Sleeper | | — | | — | | — | | — | | — |
| Tyler Young | | — | | — | | — | | — | | — |
(1) Includes amounts earned during 2023 with respect to annual retainer fees and supplemental retainer fees for Committee Report”Chairs.
(2) Ms. Garlick, and “Executive Compensation” in our definitive proxy statement for our annual meetingMessrs. Krenicki, Sleeper and Young are not eligible to receive this compensation as employees or partners of stockholders to be held on May 19, 2022 is incorporated by reference herein.CD&R.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners and Management
The information underAfter the caption “Outstanding Capital Stock” inclosing of the Merger, Camelot Parent became the indirect owner of all the outstanding shares of Company common stock that CD&R did not already own. As a result, all of the issued and outstanding shares of Company common stock is owned by Camelot Parent. None of our definitive proxy statement for our annual meetingofficers or directors beneficially own shares of stockholders to be held on May 19, 2022 is incorporated by reference herein.Company common stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
At the closing of the Merger, the Company delisted its common stock on the NYSE. As a result, the Company is no longer required to comply with the NYSE’s corporate governance requirements, including the requirement that a majority of its Board be comprised of independent directors. Following the Merger and the removal of our common stock from listing on the NYSE, the Company is no longer subject to the independence requirements for its Board or Board committees. If the Company were subject to the listing standards of the NYSE, we believe that each of Ms. Affeldt and Messrs. James, Janki and O’Brien could be determined to be “independent” as defined by the listing standards of the NYSE.
Our Board met five times during 2023. Each of our directors attended 75% or more of the aggregate of the total number of meetings of our Board held during the period in which they were a director and the total number of meetings held by all board committees on which they served during the periods that they served.
Our non-management directors meet without the presence of management at regularly scheduled executive sessions. These executive sessions typically occur before or after regularly scheduled meetings of our Board. The presiding director of these executive sessions is the Chair of the Board.
Transactions with Related Persons
Policies and Procedures
The Nominating and Corporate Governance Committee has approved and adopted a written statement of policy and procedures with respect to related party transactions, which was further updated in December 2023. This policy covers the review, approval or ratification of transactions between us and “related parties” (generally, directors, executive officers and their immediate family members, beneficial owners of 5% or more of any class of our securities, and any entity in which any such persons are employed, are principals, partners or hold a similar position or in which they have a beneficial interest of 5% or more). The policy generally requires that any related party transaction be approved by the Nominating and Corporate Governance Committee or its Chair in advance of the consummation or material amendment of the transaction, subject to exceptions. Under the policy, prior to entering into a related party transaction, a related party must make full written disclosure of all of the facts and circumstances relating to the transaction to our Chief Financial Officer or General Counsel, who must assess this information underand decide whether it is a related party transaction. If either of the captions “Board of Directors”Chief Financial Officer or General Counsel makes this determination, they must submit the transaction to the Nominating and “Transactions with Related Persons” in our definitive proxy statementCorporate Governance Committee or to its Chair for our annual meeting of stockholders to be held on May 19, 2022 is incorporated by reference herein.approval.
Item 14. Principal Accounting Fees and Services.
The information under the caption “Audit Committee and Auditors — Our Independent Registered Public Accounting Firm and Audit Fees”Fees
Grant Thornton LLP has served as our independent registered public accountant since Fiscal 2019. In January 2024, the Audit Committee approved the appointment of Deloitte & Touche LLP to replace Grant Thornton LLP as our independent registered public accountant effective upon the filing of this Annual Report.
The following is a description of the professional services performed and the fees billed by Grant Thornton LLP (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Audit fees(1) | $ | 2,634 | | | $ | 3,753 | |
Audit-related fees(2) | — | | | 95 | |
Tax fees(3) | — | | | 90 | |
| Total | $ | 2,634 | | | $ | 3,938 | |
(1) Audit fees consisted of fees and expenses billed by Grant Thornton associated with the annual audit of our annual financial statements, review of the financial statements contained in our definitive proxy statementquarterly reports on Form 10-Q and assistance regarding other SEC filings. In addition, the audit fees billed in 2023 included incremental fees for required audit procedures that resulted from the consummation of the Merger.
(2) Fees for audit-related services billed in 2022 consisted of services pertaining to our annual meeting$710 million senior secured notes offering in July 2022.
(3) Tax advice fees encompass a variety of stockholderspermissible tax services, primarily including tax advice related to federal and state income tax compliance.
Grant Thornton LLP did not perform any tax or other services that impaired their independence in 2023 or 2022.
Pre-Approval Policies and Procedures for Audit and Non-Audit Services
The Audit Committee has developed policies and procedures concerning its pre-approval of the performance of audit and non-audit services for us by Grant Thornton LLP. These policies and procedures provide that the Audit Committee shall have the sole authority to pre-approve all audit, audit-related and non-audit or tax services (including the fees and terms thereof) to be held on May 19, 2022performed for us by Grant Thornton LLP, subject to the de minimis exception for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee before the completion of the audit. In pre-approving all audit services and permitted non-audit services, the Audit Committee or a delegated member must consider whether the provision of such services is incorporated by reference herein.compatible with maintaining the independence of Grant Thornton LLP and its status as our independent auditors.
The Audit Committee must specifically preapprove the terms of Grant Thornton LLP’s annual audit services engagement. The Audit Committee may, pursuant to its pre-approval policy and Section 10(i)(3) of the Exchange Act, delegate to one or more of its members the authority to consider and pre-approve between quarterly meetings of the Audit Committee management proposals for the engagement of Grant Thornton LLP to perform audit and non-audit services for annual fees of up to an aggregate of $100,000 (or such greater amount as authorized by the Audit Committee), provided that those pre-approvals are presented to the entire Audit Committee at its next regularly scheduled meeting. Management proposals arising between quarterly Audit Committee meetings are presented for pre-approval to the Chair of the Audit Committee, and in the event of the Chair’s unavailability, to another member of the Audit Committee.
All of the services performed by Grant Thornton LLP in 2023 were approved in advance by the Audit Committee pursuant to the foregoing pre-approval policy and procedures. Additionally, during 2023, Grant Thornton LLP did not provide any services prohibited by the Sarbanes-Oxley Act of 2002.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)The following documents are filed as a part of this report:
1.consolidated financial statementsConsolidated Financial Statements (see Item 8).
2.consolidatedAll financial statement schedules.
All schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statementsConsolidated Financial Statements or notesNotes thereto.
3.Exhibits.
Index to Exhibits | | | | | | | | |
| 2.1 | | Indemnification Agreement, dated as of October 20, 2009,April 12, 2018, by and between the Company, NCI Group,Pisces Parent, LLC, Ply Gem Industries, Inc., Robertson-Ceco II Corporation,Atrium Windows and Doors, Inc., CD&R Pisces Holdings, L.P., Clayton, Dubilier & Rice Fund VIII,X, L.P., CD&R FriendsClayton, Dubilier & FamilyRice Fund VIII, L.P.X-A.L.P., and Clayton, Dubilier & Rice, Inc.LLC (filed as Exhibit 2.32.1 to the Company's CurrentCompany’s Annual Report on Form 8-K dated October 26, 200910-K for the year ended December 31, 2022 and incorporated by reference herein) |
| 2.2 | | |
| 2.3 | | |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | Form of certificate representing shares of NCI’s common stock (filed as Exhibit 1 to the Company’s registration statement on Form 8-A filed with the SEC on July 20, 1998 and incorporated by reference herein) |
4.2 | | |
4.34.2 | | |
4.44.3 | | |
4.54.4 | | |
4.64.5 | | |
4.74.6 | | |
4.84.7 | | |
4.94.8 | | |
4.104.9 | | |
| | | | | | | | |
*4.114.10 | | Ninth Supplemental Indenture, dated as of June 29, 2021, among the subsidiaries listed on Schedule 1 thereto, each a subsidiary guarantor, the Company, and each then-existing subsidiary guarantor under the indenture, and Wilmington Trust, National Association, as trustee (filed as Exhibit 4.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated by reference herein) |
| | | | | | | | |
*4.124.11 | | |
4.13 | | Stockholders Agreement, dated November 16, 2018, by and among NCI Building Systems, Inc., Clayton, Dubilier & Rice Fund VIII, L.P., CD&R Friends & Family Fund VIII, L.P., CD&R Pisces Holdings, L.P., Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (filed as Exhibit 10.14.12 to the Company’s CurrentAnnual Report on Form 8-K dated November 20, 201810-K for the year ended December 31, 2021 and incorporated by reference herein) |
4.144.12 | | Registration Rights Agreement,Eleventh Supplemental Indenture, dated November 16, 2018, byas of April 22, 2022, among Metal Coaters, LLC, the Company and among NCI Building Systems, Inc., Clayton, Dubilier & Rice Fund VIII, L.P., CD&R Friends & Family Fund VIII, L.P., CD&R Pisces Holdings, L.P., Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC, AIC Finance Partnership, L.P.Wilmington Trust, National Association, as trustee (filed as Exhibit 10.24.12 to the Company’s CurrentAnnual Report on Form 8-K dated November 20, 201810-K for the year ended December 31, 2022 and incorporated by reference herein) |
4.154.13 | | DescriptionTwelfth Supplemental Indenture, dated as of Cornerstone Building Brands, Inc. SecuritiesJuly 25, 2022, among the subsidiary listed on Schedule 1 thereto, the Company, each then-existing subsidiary guarantor under the Indenture referred to therein, and Wilmington Trust, National Association, as trustee (filed as Exhibit 4.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 20202022 and incorporated by reference herein) |
| 4.14 | | |
| 4.15 | | |
| 4.16 | | |
| 4.17 | | |
| 4.18 | | |
| 4.19 | | |
| †10.1 | | |
| †10.2 | | |
| †10.3 | | |
| †10.4 | | |
†10.5 | | |
†10.610.5 | | |
†10.710.6 | | |
| †10.8 | | |
| 10.9 | | Cash Flow Credit Agreement, dated as of April 12, 2018, by and among the Company (as successor by merger to Ply Gem Midco, Inc.), as borrower, Camelot return Intermediate Holdings, LLC, the several banks and other financial institutions from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 20, 2018 and incorporated by reference herein) |
| 10.10 | | |
| 10.11 | | |
| | | | | | | | |
| 10.14 | | |
| 10.15 | | |
10.1510.16 | | |
10.1610.17 | | |
10.1710.18 | | |
| 10.19 | | |
| 10.20 | | ABL Credit Agreement, dated as of April 12, 2018,by and among the Company (as successor by merger to Ply Gem Midco, Inc.), as parent borrower, Camelot Return Intermediate Holdings, LLC, the subsidiary borrowers from time to time party thereto, the several banks and other financial institutions from time to time party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent (filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K dated November 20, 2018 and incorporated by reference herein) |
10.1810.21 | | |
10.1910.22 | | Amendment No. 2 to ABL Credit Agreement, dated as of October 15, 2018,by and among the Company (as successor by merger to Ply Gem Midco, Inc.), the subsidiary borrowers party thereto, the incremental lender party thereto and UBS AG, Stamford Branch, as administrative agent, collateral agent and swingline lender (filed as Exhibit 10.10 to the Company’s Current Report on Form 8-K dated November 20, 2018 and incorporated by reference herein) |
10.2010.23 | | |
10.2110.24 | | Amendment No. 4 to ABL Credit Agreement, dated as of November 16, 2018, by and among the Company (as successor by merger to Ply Gem Midco, Inc.), the subsidiary borrowers party thereto, the incremental lenders party thereto and UBS AG, Stamford Branch, as administrative agent, collateral agent and swingline lender (filed as Exhibit 10.12 to the Company’s Current Report on Form 8-K dated November 20, 2018 and incorporated by reference herein) |
10.2210.25 | | |
10.2310.26 | | Amendment No. 6 to ABL Credit Agreement, dated as of April 15, 2021, by and among Cornerstone Building Brands, Inc.,the Company, the subsidiary borrowers party thereto, the several banks and other financial institutions party thereto party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent (filed as Exhibit 10.15 to the Company’s Current Report on Form 8-K dated April 21, 2021 and incorporated by reference herein) |
10.2410.27 | | |
| | | | | | | | |
| 10.28 | | |
10.2510.29 | | |
10.2610.30 | | |
†10.27 †10.31 | | |
†10.28 | | |
| | | | | | | | |
†10.29 | | |
†10.3010.32 | | |
†10.31 | | |
†10.32 | | |
†10.33 | | |
†10.34 | | |
†10.3510.33 | | |
†10.36 | | |
| †10.34 | | |
| 10.35 | | |
| *†10.36 | | |
| *†10.37 | | |
| *21.1 | | |
*23.1 | | |
*24.1 | | |
| *31.1 | | |
| *31.2 | | |
| **32.1 | | |
| **32.2 | | |
| *101.INS | | Inline XBRL Instance Document |
| *101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| *101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| *101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| *101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document |
| *101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| | | | | |
| * | Filed herewith |
| ** | Furnished herewith |
| † | Management contracts or compensatory plans or arrangements |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| CORNERSTONE BUILDING BRANDS, INC. |
| | |
| Date: February 23, 2024 | By: | /s/ Rose Lee |
| | Rose Lee |
| | President and Chief Executive Officer |
Date: March 1, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated per Form 10-K.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ Rose Lee | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 1, 2022February 23, 2024 |
| Rose Lee | | | |
| /s/ Jeffrey S. Lee | | Executive Vice President and Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) | | March 1, 2022February 23, 2024 |
| Jeffrey S. Lee | | | |
| /s/ Wayne F. Irmiter | | Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | | February 23, 2024 |
| Wayne F. Irmiter | | | |
| * | | Executive Chairman of the Board | | March 1, 2022 |
James S. Metcalf | | |
* | | Director | | March 1, 2022February 23, 2024 |
| Kathleen J. Affeldt | | | |
| * | | Director | | March 1, 2022February 23, 2024 |
George L. BallNaomi Garlick | | | |
| * | | Director | | March 1, 2022 |
Gary L. Forbes | | |
* | | Director | | March 1, 2022 |
John J. Holland | | |
* | | Director | | March 1, 2022 |
William E. Jackson | | |
* | | Director | | March 1, 2022February 23, 2024 |
| Wilbert W. James, Jr. | | | |
| * | | Director | | March 1, 2022February 23, 2024 |
| Daniel C. Janki | | | |
| * | | Director | | March 1, 2022February 23, 2024 |
| John Krenicki, Jr. | | | |
| * | | Director | | March 1, 2022February 23, 2024 |
| Timothy J. O’Brien | | | |
| * | | Director | | March 1, 2022 |
Judith Reinsdorf | | |
* | | Director | | March 1, 2022February 23, 2024 |
| Nathan K. Sleeper | | | |
| * | | Director | | March 1, 2022February 23, 2024 |
Jonathan L. ZrebiecTyler Young | | | |
| | | | | |
| *By: | /s/ Rose Lee |
| Rose Lee,
Attorney-in-Fact |
