CORNERSTONE BUILDING BRANDS, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
RECENT DEVELOPMENTS
At
(“CD&R”) has submitted a non-binding proposal to acquire all of the outstanding common shares of the Company that CD&R does not already own for a purchase price of
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.
COMPANY OVERVIEW
Cornerstone Building Brands, Inc. is the largest manufacturer of exterior building products inNorth America . The Company serves residential and commercial customers across new construction and the repair & remodel markets. Our mission is to be relentlessly committed to our customers and to create great building solutions that enable communities to grow and thrive. We have developed 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 inNorth America . AtCornerstone 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 lower in the first and fourth fiscal quarters of each year compared to the second and third fiscal quarters because of unfavorable weather conditions 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 select
segments of the low-rise non-residential construction market, such as
distribution, warehouse, healthcare and educational facilities in suburban
regions; however, 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-
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positioned to benefit from broader societal and demographic trends favoring suburban areas, as employment and living preferences shift to these areas.
Cornerstone Building Brands is deeply committed 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 impact of the pandemic on our future consolidated results of operations is uncertain. During 2020, the Company quickly implemented a range of actions aimed at reducing costs and preserving liquidity. These actions included the closure of ourAmbridge, Pennsylvania Commercial facility andCorona, 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 arising 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 extent of the COVID-19 pandemic's impact on our financial condition, results of operations and cash flows.
Significant Business Developments
Our significant business development activities in 2021 include the: (i) acquisition ofPrime Windows LLC (April 2021 ), (ii) divestitures of our IMP and DBCI businesses (August 2021 ), (iii) acquisition ofCascade Windows, Inc. (August 2021 ), and (iv) acquisition ofUnion Corrugating Company Holding, Inc. (December 2021 ). In addition, inApril 2021 , we amended our cash flow credit and ABL credit agreements. See Note 4 - Acquisitions, Note 5 - Divestitures and Note 13 - Long Term Debt, in the notes to the consolidated financial statements 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 90 to 120 days after the start of the home, therefore, there is a lag between the timing of the single-family housing start date and the time in which our products are installed on a home. From an industry perspective, we evaluate the new construction environment by reviewing theU.S. Census Bureau single family housing start statistics to assess the performance of the new construction market for a normal period. We evaluatedU.S. Census Bureau single family housing starts for the year endedDecember 31, 2021 as compared toDecember 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. ForCanada , we evaluate the Canada Mortgage and Housing Corporate statistics, which showed housing starts increased by 25% for the year endedDecember 31, 2021 compared to 2020. 32 -------------------------------------------------------------------------------- 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 byU.S. Census Bureau : [[Image Removed: cnr-20211231_g3.jpg]] 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 endedDecember 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 theVinyl Siding Institute ("VSI"), a third party which summarizes vinyl siding unit sales for the industry. For the year endedDecember 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.
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The graph below shows the annual non-residential new construction starts, measured in square feet, since 1982, compiled and reported by
[[Image Removed: cnr-20211231_g4.jpg]]
Current market estimates continue to show recovery across the nonresidential construction markets from the 2020 dip, returning above 2019 levels. According toDodge 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 theAmerican 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. 34 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
This section of the Form 10-K generally discusses 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 can 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 endedDecember 31, 2020 .
The following table represents the main results of operations on a consolidated basis for the periods indicated:
Year Ended
(Amounts in thousands) 2021 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) % Net sales - Consolidated net sales for the year endedDecember 31, 2021 increased by approximately 20.9%, as compared to the year endedDecember 31, 2020 . The increase was primarily due to favorable price actions taken in all segments to offset commodity inflation, higher volume mainly from increased demand in 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). Gross profit % of net sales - The Company's gross profit percentage was 21.5% for the year endedDecember 31, 2021 , which was a 120 basis point decrease from the year endedDecember 31, 2020 . The manufacturing inefficiencies and higher costs 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 positive price mix net of inflation. Selling, general, and administrative expenses increased 12.1% during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The return of near-term costs, such as variable compensation, professional services, and sales commissions drove the higher selling, general, and administrative expenses atDecember 31, 2021 as compared toDecember 31, 2020 . Restructuring and impairment charges, net decreased$7.9 million during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , primarily due to asset impairments in 2021 which were lower in total than the restructuring charges taken in 2020 in response to the COVID-19 pandemic.
Increased costs related to strategic development and acquisitions
Interest charges decreased
Consolidated provision (benefit) for income taxes was an expense of$236.0 million for the year endedDecember 31, 2021 compared to an expense of$5.6 million for the year endedDecember 31, 2020 . The effective tax rate for the year endedDecember 31, 2021 was 26.2% compared to 1.2% for the year endedDecember 31, 2020 . The change in the effective tax rate was primarily driven by the divestitures and improved financial results for the year endedDecember 31, 2021 , and the impact associated with the goodwill impairment recorded during the year endedDecember 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 the gain on sales from the divestitures in 2021 and the impact of the goodwill impairment in 2020). 35 --------------------------------------------------------------------------------
Segment operating results
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 inCary, North Carolina and office inHouston, 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 withU.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 ofCornerstone Building Brands , which includes historical information ofKleary Masonry, Inc. ("Kleary"), which the Company acquired onMarch 2, 2020 ;Prime Windows LLC ("Prime Windows"), which the Company acquired onApril 30, 2021 ;Cascade Windows, Inc. ("Cascade Windows"), which the Company acquired onAugust 20, 2021 ; and the insulated metals panels ("IMP") and the roll-up sheet doors ("DBCI") businesses, which the Company divested onAugust 9, 2021 andAugust 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 andCascade 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 andCascade Windows acquisitions and the IMP and DBCI divestitures occurred onJanuary 1, 2020 or of future results. UCC, which was acquired onDecember 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 withU.S. GAAP. We have included reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and provided in accordance withU.S. GAAP. 36 -------------------------------------------------------------------------------- The following tables present a comparison of net sales as reported to pro forma net sales forCornerstone Building Brands as if theCascade Windows , Prime Windows and Kleary acquisitions, and IMP and DBCI divestitures had each occurred onJanuary 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 Acquisitions and Acquisitions and Reported Divestitures Pro Forma Reported 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 profit (loss) for the periods indicated.
Consolidated
Year Ended
December 31, December 31,
(Amounts in thousands) 2021 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 fromJanuary 1, 2020 of the net sales and Adjusted EBITDA of Kleary throughMarch 1, 2020 , Prime Windows throughApril 29, 2021 andCascade Windows throughAugust 19, 2021 ; and reflects the impact fromJanuary 1, 2020 of the divestitures of IMP and DBCI through the divestiture dates ofAugust 9, 2021 andAugust 18, 2021 , respectively.
(2)Composed mainly of
associated with debt refinancing operations; and
Pro forma net sales for the year endedDecember 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 . 37 -------------------------------------------------------------------------------- Operating income (loss) for the year endedDecember 31, 2021 increased to$1,137.2 million income as compared to an operating loss of$266.5 million in the year endedDecember 31, 2020 primarily as a result of the gain on the sales of the IMP and DBCI businesses of$831.3 million in 2021 and the goodwill impairment of$503.2 million in the comparable period. Pro forma Adjusted EBITDA for 2021 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 million and higher demand of$85 million , mostly from the rapid recovery in the residential end markets. Partially reducing these favorable impacts were 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$93 million . SG&A costs were$69 million higher than the same pro forma period last year primarily due to the return of near-term costs, such as variable compensation, professional services, and sales commissions. Windows Year Ended December 31, December 31, (Amounts in thousands) 2021 2020 Net sales$ 2,322,277 $ 1,889,625 Impact of acquisitions(1) 132,141 206,639 Pro forma net sales $
2,454,418
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 % (1)Reflects the impact of the net sales and Adjusted EBITDA ofPrime Windows LLC throughApril 29, 2021 andCascade Windows Inc. throughAugust 19, 2021 as if the acquisitions had occurred onJanuary 1, 2020 . Pro forma net sales for the year endedDecember 31, 2021 were 17.1% higher compared to the year endedDecember 31, 2020 due to 9.0% from disciplined 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 theU.S. andCanada . Operating income (loss) for the year endedDecember 31, 2021 was$100.7 million of operating income as compared to an operating loss of$223.6 million in the year endedDecember 31, 2020 primarily 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 endedDecember 31, 2020 . Positive price mix net of inflation of$22.8 million 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$61.3 38 --------------------------------------------------------------------------------
million. General and administrative expenses were
Siding
Year Ended
December 31, December 31,
(Amounts in thousands) 2021 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 net sales and adjusted EBITDA of
Net sales for the year endedDecember 31, 2021 were 18.6% higher compared to the pro forma net sales for the year endedDecember 31, 2020 . The rapid recovery 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 of approximately 15.1% versus the pro forma prior year. Operating income for the year endedDecember 31, 2021 increased to$137.8 million as compared to an operating loss of$(61.9) million for the year endedDecember 31, 2020 primarily due to a goodwill impairment of$176.8 million in the year endedDecember 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 endedDecember 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. 39 --------------------------------------------------------------------------------
Commercial
Year Ended
December 31, December 31,
(Amounts in thousands) 2021 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 ofAugust 9, 2021 andAugust 18, 2021 , respectively, as if the divestitures had occurred onJanuary 1, 2020 . Pro forma net sales for the year endedDecember 31, 2021 were higher by 37.6% compared to the year endedDecember 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 atDecember 31, 2021 are$21.9 million of net sales fromUnion Corrugating Company Holdings, Inc. ("UCC") from the acquisition date onDecember 3, 2021 . The UCC acquisition furthers our presence in the high-growth residential metal roofing market. Operating income for the year endedDecember 31, 2021 increased$944.7 million compared to year endedDecember 31, 2020 primarily due to the gain on the sales of the IMP and DBCI businesses as a result of strategic portfolio rationalization actions to accelerate long-term value creation. Excluding the gain on the sales in 2021 and the goodwill impairment in 2020, operating income of$273.1 million increased 65.5% primarily from the realization of price actions taken to offset rising steel 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. Included in operating income atDecember 31, 2021 is$1.8 million from UCC from the acquisition date. 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 endedDecember 31, 2020 . Included in pro forma EBITDA atDecember 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$13.6 million . Unallocated Operating Loss Year Ended December 31, December 31, (Amounts in thousands) 2021 2020 Statement of operations data: SG&A expenses$ (180,817) $ (131,087)
Costs related to strategic development and acquisitions (24,770)
(9,429) Operating loss$ (205,587) $ (140,516) 40
-------------------------------------------------------------------------------- Unallocated (Corporate expenses) operating losses 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 endedDecember 31, 2021 increased by$65.1 million or 46.3% compared to the year endedDecember 31, 2020 . The change is primarily due to the increase in strategic development expenses as well as debt issuance costs 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 endedDecember 31, 2021 and 2020, respectively.
CASH AND CAPITAL RESOURCES
General
Our ongoing principal source of funds is cash generated from operations, supplemented by borrowings against our asset-based lending and revolving credit facility, as necessary. We typically invest our excess cash in various overnight investments that are issued or guaranteed by theU.S. federal government. Our cash, cash equivalents and restricted cash decreased from$680.5 million as ofDecember 31, 2020 to$396.7 million as ofDecember 31, 2021 . The following table summarizes our consolidated cash flows for fiscal 2021 and 2020 (in thousands): Year EndedDecember 31 ,December 31, 2021 2020
Net cash provided by (used in) operating activities
$ 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 changes in exchange rates 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 the beginning of the period
680,478 102,307
Cash, cash equivalents and restricted cash, end of period
$ 680,478 Operating Activities
The Company used cash in operating activities during the year ended
The following table presents the impact of working capital items on cash in fiscal years 2021 and 2020, respectively (in thousands):
Year Ended
December 31, December 31,
2021 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
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
Cash provided by investing activities was$549.5 million during fiscal 2021 compared 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 41 --------------------------------------------------------------------------------
cash acquired) for the acquisition of Kleary, used
Fundraising 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 dueJanuary 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 atDecember 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$6.4 million to repurchase shares of our outstanding common stock under our stock repurchase programs.Equity Investment OnAugust 25, 2020 , the Company filed a shelf registration statement on Form S-3, declared effective by theSEC onSeptember 2, 2020 , registering the resale of shares of the Company's common stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company's common stock held by theCD&R Fund VIII Investor Group and theGolden Gate Investor Group .
AT
Debt
Below is a reconciliation of the Company's net debt (in thousands). Management
considers net debt to be more representative of the Company's financial position
than total debt due to the amount of cash and cash equivalents held by the
Company and the ability to utilize cash and cash equivalents to reduce debt if
needed.
Year Ended
December 31 , December 31,
2021 2020
Asset-backed revolving credit facility
2,580,500
2,497,967
Cash flow revolver dueApril 2026 -
–
8.00% senior notes dueApril 2026 -
645,000
6.125% senior notes dueJanuary 2029 500,000
500,000
Total Debt 3,080,500
3,642,967
Less: cash and cash equivalents 394,447 674,255 Net Debt$ 2,686,053 $ 2,968,712 OnApril 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 dueApril 12, 2028 . Additionally, the Company amended and refinanced its senior cash flow based and asset-based revolving credit facilities, extending the maturities toApril 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 inApril 2026 on an aggregate notional value of$1.5 billion . The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment. We may not be successful in refinancing, extending the maturity or otherwise amending the terms of our outstanding indebtedness in the future because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries 42 -------------------------------------------------------------------------------- could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness.
For more information, see Note 13 – Long-term debt and Note 14 – Derivatives in the notes to the consolidated financial statements.
Additional Liquidity Considerations
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. The following table summarizes key liquidity measures under the Current ABL Credit Agreement and the Current Cash Flow Credit Agreement in effect as ofDecember 31, 2021 and 2020 (in thousands): Year Ended December 31, December 31, 2021 2020 Asset-based revolving credit facility due April 2026$ 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 dueApril 2026 115,000
115,000
Plus: cash and cash equivalents 394,447 674,255 Total Liquidity$ 1,075,447 $ 1,317,255 OnApril 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. OnApril 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 inthe United States , expanding our manufacturing capabilities and creating new opportunities for us in theWestern United States . This acquisition was funded through borrowings under the Company's existing credit facilities. OnAugust 20, 2021 , the Company acquiredCascade 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 inthe United States , expanding our manufacturing capabilities and creating new opportunities for us in theWestern United States . This acquisition was funded with cash available on the balance sheet. OnDecember 3, 2021 , the Company acquiredUnion Corrugating Company Holdings, Inc. ("UCC"). UCC provides metal roofing, roofing components and accessories from locations primarily in the Central andEastern 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. OnAugust 9, 2021 , the Company completed the sale of its insulated metal panels ("IMP") business toNucor 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. OnAugust 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. 43 -------------------------------------------------------------------------------- From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase program. OnMarch 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 ofDecember 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. We may from time to time take steps to reduce our debt or otherwise improve our financial position. These actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital. The amount of prepayments or the amount of debt that may be refinanced, repurchased or otherwise retired, if any, 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 the debt, and we would continue to reflect the debt as outstanding on our consolidated balance sheets.
CONTINGENT LIABILITIES AND COMMITMENTS
Our insurance carriers require us to secure standby letters of credit as a collateral requirement for our projected exposure to future period claims growth and loss development, including IBNR claims. For all insurance carriers, the total standby letters of credit are approximately$31.9 million and$27.2 million atDecember 31, 2021 and 2020, respectively.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets 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 significant accounting policies are disclosed in Note 2 to 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 base our estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Accounting for acquisitions, intangible assets and 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. The Company has approximately$1,358.1 million of goodwill as ofDecember 31, 2021 , of which approximately$541.2 million pertains to our Windows segment,$655.1 million pertains to our Siding segment, and$161.8 million pertains to our Commercial 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 affect the fair value of our assets and result in a non-cash impairment charge. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant sustained negative industry or economic trends, such as 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 44 -------------------------------------------------------------------------------- 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 value that is below the carrying value, which may result in an impairment of goodwill. We completed our annual goodwill impairment test as ofOctober 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 to 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 ofOctober 3, 2021 . A summary of the key assumptions utilized in the goodwill impairment analysis atOctober 3, 2021 , as it relates to the fair values and the sensitivities for these assumptions follows: As of October 3, 2021 Engineered Building Metal Windows Siding Systems 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$ 58,698 $ 118,932 $ 26,843 $ 28,149 1% decrease in the terminal year growth Estimated fair value change in the event of a$ 124,389 $ 226,792 $ 50,247 $ 44,064 1% decrease in the discount rate Estimated fair value change in the event of a n/a n/a$ 6,627 $ 4,402
1% reduction in the control premium
Overall, we use the same key assumptions to prepare the forward-looking financial information used in the discounted cash flow test for reporting units. However, each reporting unit is affected differently by industry trends, how market factors influence the expected performance of reporting units, competition, and other unique business factors as mentioned above. (in thousands)
As ofOctober 3, 2021 Estimated Windows reporting unit fair value increase in the event of a $ 8,920
10% increase in the weighting of the market multiple method Estimated increase in the fair value of the Siding reporting unit in the event of
34,190
10% increase in the weighting of the market multiples method
2,480
increase in the event of a 10% increase in the weighting of the market multiples method Increase in the estimated fair value of the metallic components reporting unit in the
6,530
case of a 10% increase in the weight of the stock market multiples method
The Company's annual goodwill impairment tests performed as ofOctober 3, 2021 indicated no impairment. The Company's estimate of the fair value of its Windows, Siding,Engineered Building Systems , and Metal Components reporting units exceeded their carrying values by approximately 19%, 41%, 444%, and 172%, respectively.
We make no warranty that: (1) valuation multiples will not decrease, (2) discount rates will not increase, or (3) earnings, carrying values, or projected earnings and cash flows of our operating units will not decrease. We will continue to analyze changes to these assumptions in future periods. We will continue to assess goodwill in future periods and
45 --------------------------------------------------------------------------------
future declines in residential housing and renovation markets and non-residential 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. The Company's warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company's warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized. Income 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 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 establish 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. Our provision for income taxes reflects a combination of income earned and taxed in the variousU.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 ofDecember 31, 2021 , the$41.7 million net operating loss carryforward included$20.8 million forU.S federal losses,$13.3 million forU.S. state losses and$7.6 million for foreign losses. The state net operating loss carryforwards began to expire in 2021, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 – Accounting pronouncements in the notes to the consolidated financial statements for information on recent accounting pronouncements.
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