The following information should be read in conjunction with the unaudited
consolidated financial statements included herein under "Item 1. Unaudited
Consolidated Financial Statements" and the audited consolidated financial
statements and the notes thereto and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended
FORWARD LOOKING STATEMENTS This Quarterly 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 information, including any earnings guidance, if applicable. 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: •industry cyclicality and seasonality and adverse weather conditions; •challenging economic conditions affecting the nonresidential construction industry; •downturns in the residential new construction and repair and remodeling end markets, or the economy or the availability of consumer credit; •volatility inthe United States ("U.S.") economy and abroad, generally, 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 COVID-19 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; •the effects of manufacturing or assembly realignments; •seasonality of the business and other external factors beyond our control; •commodity price volatility and/or limited availability of raw materials, including steel, PVC resin, glass and aluminum; •our ability to identify and develop relationships with a sufficient number of qualified suppliers and to avoid a significant interruption in our supply chains; •retention and replacement of key personnel; •enforcement and obsolescence of our intellectual property rights; •costs related to compliance with, violations of or liabilities under environmental, health and safety laws; •changes in building codes and standards; •competitive activity and pricing pressure in our industry; •our ability to make strategic acquisitions accretive to earnings; •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; 31 -------------------------------------------------------------------------------- •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; •increases in labor costs, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers; •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; •the cost and difficulty associated with integrating and combining acquired businesses; •volatility of the Company's stock price; •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; •our substantial indebtedness and our ability to incur substantially more indebtedness; •limitations that our debt agreements place on our ability to engage in certain business and financial transactions; •our ability to obtain financing on acceptable terms; •downgrades of our credit ratings; •the effect of increased interest rates on our ability to service our debt; and •other risks detailed under the caption "Risk Factors" in this Quarterly Report on Form 10-Q, and in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "2019 Form 10-K"), and other filings we make with theSEC . 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 this report and the 2019 Form 10-K, and other risks described in documents subsequently filed by the Company from time to time with theSEC . 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. OVERVIEWCornerstone Building Brands, Inc. (together with its subsidiaries, unless the context requires otherwise, the "Company," "Cornerstone,"we," "us" or "our") is a leading North American integrated manufacturer of external building products for the residential, repair & remodel, and commercial construction industries. We design, engineer, manufacture and market external building products through our three operating segments, Windows, Siding, and Commercial. In our Windows segment, our principal products include vinyl, aluminum-clad vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors inthe United States andCanada . We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. Our national manufacturing footprint combined with the breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling). In our Siding segment, our principal products include vinyl siding and skirting, steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter coil, aluminum gutters, aluminum and steel roofing accessories, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl railing, and stone veneer inthe United States andCanada . Our national manufacturing footprint combined with the breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling). 32 -------------------------------------------------------------------------------- In our Commercial segment, we manufacture and distribute extensive lines of metal products for the nonresidential construction market under multiple brand names through a nationwide network of plants and distribution centers. We 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 commercial and construction applications, servicing both internal and external customers. We sell our products for both new construction and repair and retrofit applications. The Company's current fiscal quarters are based on a four-four-five week calendar with periods ending on the Saturday of the last week in the quarter except forDecember 31st which will always be the year-end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior fiscal quarters. We assess performance across our operating segments by analyzing and evaluating, among other indicators, gross profit and operating income, as well as whether each segment has achieved its projected sales goals. In assessing our overall financial performance, we regard growth in earnings, as the key indicator of shareholder value. Impact of COVID-19 Overview InMarch 2020 , theWorld Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. The impact of the COVID-19 pandemic has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, "stay-at-home" orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. The pandemic has resulted, and may continue to result, in significant economic disruption that has and may likely continue to adversely affect our business. While we are unable to predict the duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, or liquidity, we believe it is important to describe in the following sections the impact of COVID-19 has had on our business, how our response to the pandemic is progressing, and how our results and financial condition may change going forward. Health and Safety From the earliest signs of the outbreak, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers. We enacted rigorous safety measures in all of our sites, including facility cleaning at all locations, implementing social distancing protocols, requiring working from home for those employees that do not need to be physically present on the manufacturing floor to perform their work, suspending unnecessary travel, enhancing employee communications, implementing temperature check plans at the entrances to our facilities, and providing masks and other protective equipment to those employees who must be physically present. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine certain procedures to be in the best interests of our employees, customers, partners and suppliers. Operations As a result of the COVID-19 pandemic, federal, state and international authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as limits on gatherings, quarantine or shelter-in-place mandates, and business shutdowns. We have important manufacturing operations in theU.S. ,Canada , andMexico which have been affected by the outbreak with increased absenteeism creating operating inefficiencies. Measures providing for business shutdowns generally exclude certain essential services such as construction, and those essential services commonly include critical infrastructure and the businesses that support that critical infrastructure. While the majority of our facilities currently remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers, vendors and suppliers. For example, we closed our NorthBrunswick Windows facility inNew Jersey duringApril 2020 and reopened it in early May given the outbreak in the Northeast and ourPeachtree City, Georgia Windows facility was also closed for a few weeks in April for extensive cleaning. Substantially all production requirements were effectively shifted to other window manufacturing plants duringApril 2020 to meet customer demand. While federal and state measures may be modified or extended, we currently expect that our manufacturing facilities will remain operational. However, any deterioration in the pandemic in our manufacturing facilities or their local communities or any federal, state, or local limits on construction manufacturing facilities could have a negative impact on our operations in the future. 33 --------------------------------------------------------------------------------
Supply
We have not currently experienced any significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic. However, certain of our suppliers have faced difficulties maintaining operations in light of federal and state ordered restrictions and shelter-in-place mandates. Although we regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations. To mitigate the risk of any potential supply interruptions from the COVID-19 pandemic, we continue to monitor our critical suppliers operational and financial performance. Demand The outbreak has significantly increased economic and demand uncertainty. While during the three months endedApril 4, 2020 , we experienced stable demand across the Company, we expect our business will most likely be negatively impacted during the second and third quarters of 2020. According to theU.S. Census Bureau , March national housing starts declined month over month by 22.3% with the Northeast declining 42.5% month over month. Our Commercial business typically lags new construction performance by 18-24 months, though the timing of the anticipated negative impact of our future financial performance is uncertain. Cost Reductions and Liquidity In light of the COVID-19 pandemic, the Company has implemented a range of actions aimed at reducing costs and preserving liquidity. These actions include the closure of ourAmbridge, Pennsylvania Commercial facility, limiting travel costs, voluntary severance program, an additional workforce reduction, 2,100 furloughs, a hiring freeze, a deferral of annual wage raises, and reducing discretionary and non-essential expenses such as consulting expenses. The Company will continue to evaluate further ways to rationalize facilities and manage costs in line with reduced net sales levels as the impact of COVID-19 develops for the remainder of 2020. Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on our future results, we believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet, such as increasing our borrowings under our ABL Facility to$415.0 million and borrowings under our Cash Flow Revolver to$115.0 million , leave us well-positioned to manage our business through this crisis as it continues to unfold. In addition to the ABL Facility and Cash Flow Revolver borrowings, we have reduced our anticipated capital expenditures by$30.0 million projected for 2020 to focus our expenditures on key strategic initiatives such as automation and critical maintenance items. Based on these cumulative actions and our current projections, we believe our existing balances of domestic cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this national emergency, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows for future periods. In addition, see Part II-Item 1A, "Risk Factors," included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic. Kleary Acquisition OnMarch 2, 2020 , the Company acquired 100% of the issued and outstanding shares of the common stock ofKleary Masonry, Inc. ("Kleary") for total consideration of$40.0 million . The transaction was financed with cash on hand and through borrowings under the Company's asset-based revolving credit facility. Kleary primarily services residential customers with manufactured stone installations and commercial customers with manufactured wall installations in theSacramento, California area. Kleary's results are reported within the Siding business segment. Environmental Stoneworks Acquisition OnJanuary 12, 2019 , the Company entered into a Unit Purchase Agreement (the "Purchase Agreement") withEnvironmental Materials, LLC , aDelaware limited liability company ("ESW"), the Members ofEnvironmental Materials, LLC (the "Sellers") andCharles P. Gallagher andWayne C. Kocourek , solely in their capacity as the Seller Representative (as defined in the Purchase Agreement), pursuant to which, onFebruary 20, 2019 , the Company's wholly-owned subsidiary,Ply Gem Industries, Inc. , purchased from the Sellers 100% of the outstanding limited liability company interests of Environmental Stoneworks (the "Environmental Stoneworks Acquisition") for total consideration of$182.6 million , subject to post-closing adjustments. The transaction was financed through borrowings under the Company's asset-based revolving credit facility. 34 -------------------------------------------------------------------------------- Three Months EndedApril 4, 2020 Consolidated sales increased by approximately 4.6% during the three months endedApril 4, 2020 as compared to the three months endedMarch 30, 2019 . The improvement from the prior year was due to better price and mix across each of our business segments and volume from four additional ship days in the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 . We had three additional ship days from the timing of our fiscal calendar as well as an additional day due to theleap year occurring during the three months endedApril 4, 2020 . The Company's gross profit percentage for the three months endedApril 4, 2020 was 20.7% as compared to 17.5% for the three months endedMarch 30, 2019 . The 320 basis point increase in gross profit percentage can be partially attributed to approximately$16.2 million in additional costs of goods sold related to the fair value premium of the Ply Gem and ESW inventory on the respective acquisition dates that negatively impacted gross profit margins during the three months endedMarch 30, 2019 . In addition, we achieved favorable price and mix coupled with lower material costs which enabled margin expansion during the three months endedApril 4, 2020 . The Company's selling, general, and administrative expenses increased a marginal 30 basis points during the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 . The Company's restructuring and impairment costs increased$10.4 million during the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 primarily due to severance costs as part of our ongoing efforts to rationalize operational and organizational structures. Our acquisition costs decreased 65.5% as our Merger related activities begin to decrease, with only the Kleary acquisition occurring during the three months endedApril 4, 2020 . The Company recognized a non-cash goodwill impairment of$503.2 million during the three months endedApril 4, 2020 as a result of COVID-19 pandemic and the resulting impact on our market valuation and the near-term economic uncertainties associated with the pandemic. Industry Conditions Residential (Siding and Windows) 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 nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales normally are lower in the first and fourth quarters of each fiscal year compared to the second and third quarters because of unfavorable weather conditions for construction and typical business planning cycles affecting construction. 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. For the three months endedApril 4, 2020 , we evaluatedU.S. Census Bureau single family housing starts in the period fromSeptember 2019 toDecember 2019 to assess the demand impacts for our products for the three months endedApril 4, 2020 noting that single family housing starts increased 7.2% on a lag effected basis due to favorable demand conditions. We also examine where these single-family housing starts occur geographically as the Northeast, which decreased 16.6%, and Midwest, which decreased 6.5%, are significant vinyl siding concentrated areas relative to the South which increased 19.1% and the West which was flat. ForCanada , we evaluate the Canada Mortgage and Housing Corporate statistics which showed housing starts increasing 7.1% for the first quarter compared to 2019. In addition to new construction, we also evaluate the repair and remodeling market to assess residential market conditions by evaluating the Leading Indicator of Remodeling Activity ("LIRA"). For the first quarter of 2020, LIRA reflected that the trailing 12 months of remodeling activity increased 5.2% from 2019. 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 first quarter of 2020, the VSI reported that siding units increased 5.1% for the industry. Overall, our Siding segment, including stone, is weighted to the repair and remodeling market with approximately 49% of our net sales being attributed to repair and remodeling with the remaining 51% 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 remodeling market. Overall, our Windows segment is relatively balanced with approximately 55% of our net sales attributed to new construction with the remaining 45% attributed to the repair and remodeling market. 35 --------------------------------------------------------------------------------
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 material costs 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 normally are lower in the first and fourth quarters of each fiscal year compared to the second and third quarters because of unfavorable weather conditions for construction and typical business planning cycles affecting construction. According toDodge Data & Analytics ("Dodge"), low-rise nonresidential construction starts, as measured in square feet and comprising buildings of up to five stories, were down approximately 9% during the first three months of 2020 as compared to the same period in 2019. 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. 36 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources to the segment and assess the performance of the segment. We have three operating segments: (i) Windows, (ii) Siding, and (iii) Commercial. Our operating segments operate in the commercial and residential new construction, and repair & remodel construction markets. Sales and earnings are influenced by general economic conditions, the level of residential and nonresidential construction activity, commodity costs, such as steel, aluminum, and PVC, other input costs such as labor and freight, and the availability and terms of financing available for construction. The operating segments follow the same accounting policies used for our consolidated financial statements. 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 include share-based compensation expenses, acquisition costs and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense and other income (expense). See Note 19 - Segment Information in the notes to the unaudited consolidated financial statements for more information on our segments. The following table represents sales and operating income (loss) attributable to these operating segments for the periods indicated (in thousands):
Three Months Ended
April 4, March 30, 2020 % 2019 % Net sales: Windows$ 448,450 40.3$ 421,594 39.6 Siding 241,043 21.6 218,277 20.5 Commercial 424,318 38.1 424,961 39.9 Total net sales$ 1,113,811 100.0$ 1,064,832 100.0 Operating loss: Windows$ (313,190) $ (4,319) Siding (168,867) (11,654) Commercial(1) 16,841 24,310 Corporate(1) (35,575) (35,702) Total operating loss (500,791) (27,365) Unallocated other expense, net (59,296) (56,549) Loss before taxes$ (560,087) $ (83,914)
(1)Commercial operating income for the three months ended
37 -------------------------------------------------------------------------------- THREE MONTHS ENDEDAPRIL 4, 2020 COMPARED TO THREE MONTHS ENDEDMARCH 30, 2019 Windows Three Months Ended (Amounts in thousands) April 4, 2020 March 30, 2019 Statement of operations data: Net sales$ 448,450 100.0 %$ 421,594 100.0 % Gross profit 74,001 16.5 % 62,340 14.8 % SG&A expenses (including acquisition costs) 45,847 10.2 % 49,413 11.7 % Amortization of intangible assets 20,354 4.5 % 17,246 4.1 % Goodwill impairment 320,990 71.6 % - - % Operating loss (313,190) (69.8) % (4,319) (1.0) % Net sales for the three months endedApril 4, 2020 were$448.5 million compared to$421.6 million for the three months endedMarch 30, 2019 , an increase of$26.9 million or 6.4%. The net sales increase can be primarily attributed to having four additional ship days in the three months endedApril 4, 2020 in relation to the prior year period due to the timing of the Company's fiscal calendar as well as favorable price/mix. Our net sales for theU.S. and Canadian markets were approximately$411.8 million and$36.7 million , respectively, for the three months endedApril 4, 2020 compared to$387.1 million and$34.5 million , respectively, for the three months endedMarch 30, 2019 . The 6.4% net sales increase for theU.S. was consistent with the 7.2% increase in housing starts and the 5.2% LIRA increase for the first quarter of 2020. The Canadian net sales increase of 6.4% was consistent with the housing industry increase supported by theCMHC . For the three months endedApril 4, 2020 , foreign currency negatively impacted our net sales by$0.5 million . Gross profit for the three months endedApril 4, 2020 was$74.0 million , an increase of$11.7 million or 18.7% from the$62.3 million for the three months endedMarch 30, 2019 . The gross profit increase can be attributed to the 6.4% net sales increase combined with favorable price and mix combined with synergy and cost-out initiatives. We announced price increases for our products inJanuary 2020 of 5-8% which favorably impacted our average selling prices by 4.9% for the three months endedApril 4, 2020 . Our principal raw materials for Windows are PVC resin, aluminum, and glass. For the three months endedApril 4, 2020 , PVC resin and glass material costs increased while aluminum (Midwest Ingot) costs decreased compared to the three months endedMarch 30, 2019 . We pass along increases in raw material input costs to our customers but normally there is a lag period of approximately 90-120 days between the impact of higher raw material costs and customer pricing actions. In addition to raw material costs, we closely monitor labor and freight costs. Labor costs have trended higher recently given the shortage of manufacturing labor personnel and wage inflation pressure. For the three months endedApril 4, 2020 , foreign currency negatively impacted our gross profit by$0.1 million . As a percentage of net sales, our gross profit percentage increased 170 basis points from 14.8% for the three months endedMarch 30, 2019 to 16.5% for the three months endedApril 4, 2020 . The increase can be attributed to our net sales increase and favorable price and mix which enabled our gross profit percentage to expand in relation to the prior year. In addition, we continue to invest in automation projects within the Windows segment in an effort to increase operating and manufacturing efficiencies. Selling, general, and administrative expenses were$45.8 million for the three months endedApril 4, 2020 compared to$49.4 million for the three months endedMarch 30, 2019 for a decrease of$3.6 million or 7.2%. The SG&A expense decrease can be predominantly attributed to lower management incentive compensation expenses of$1.0 million , lower sales and marketing expenses despite the net sales increase of$1.2 million , lower legal expenses of$1.2 million , and lower travel and entertainment expenses of$0.1 million . As a percentage of net sales, SG&A expenses were 10.2% for the three months endedApril 4, 2020 relative to 11.7% for the three months endedMarch 30, 2019 . The 150 basis point decrease can be attributed to lower management incentive compensation expense, lower sales and marketing expenses, and lower legal expenses in relation to the prior year. Amortization expense for the three months endedApril 4, 2020 increased$3.1 million or 18.0% to$20.4 million compared to$17.2 million for the three months endedMarch 30, 2019 . The increase relates to the finalization of our fair value increases for intangible assets in connection with the merger with Ply Gem and resulting impact on amortization.Goodwill impairment for the three months endedApril 4, 2020 was$321.0 million as a result of the COVID-19 pandemic, which decreased Windows' discounted cash flow projections as a result of the likelyU.S. economic recession, high unemployment, and lower consumer confidence. 38 --------------------------------------------------------------------------------
Siding
Three Months Ended (Amounts in thousands) April 4, 2020 March 30, 2019 Statement of operations data: Net sales$ 241,043 100.0 %$ 218,277 100.0 % Gross profit 59,042 24.5 % 33,176 15.2 % SG&A expenses (including acquisition costs) 29,372 12.2 % 23,444 10.7 % Amortization of intangible assets 21,763 9.0 % 21,386 9.8 % Goodwill impairment 176,774 73.3 % - - % Operating loss (168,867) (70.1) % (11,654) (5.3) % Net sales for the three months endedApril 4, 2020 were$241.0 million compared to$218.3 million for the three months endedMarch 30, 2019 , an increase of$22.8 million or 10.4%. The three months endedApril 4, 2020 include net sales of$48.3 million for the Environmental Stonework's ("ESW") acquisition which occurred onFebruary 20, 2019 and the Kleary Masonry ("Kleary") acquisition which occurred onMarch 2, 2020 and$29.7 million for the three months endedMarch 30, 2019 . Excluding the ESW and Kleary acquisitions, net sales would have increased$4.1 million or 2.2% for the three months endedApril 4, 2020 . The net sales increase can be primarily attributed to having four additional ship days in the three months endedApril 4, 2020 in relation to the prior year period due to the timing of the Company's fiscal calendar as well as favorable price/mix. The net sales increase can also be attributed to the 5.2% LIRA increase as well as the 7.2% increase in housing starts. Our siding unit sales decreased 4.3% in theU.S. compared to the VSI which illustrated that total siding unit sales increased 5.1% during the first quarter. The decrease in unit sales relative to market resulted from our focus on maintaining price discipline in the competitive landscape. Our net sales for theU.S. and Canadian markets were approximately$228.1 million and$13.0 million , respectively, for the three months endedApril 4, 2020 compared to$206.9 million and$11.3 million , respectively for the three months endedMarch 30, 2019 . For the three months endedApril 4, 2020 , foreign currency negatively impacted our net sales by$0.4 million . Gross profit for the three months endedApril 4, 2020 was$59.0 million an increase of$25.9 million or 78.0% from the$33.2 million for the three months endedMarch 30, 2019 . The three months endedApril 4, 2020 include gross profit for the ESW (acquiredFebruary 20, 2019 ) and Kleary (acquiredMarch 2, 2020 ) of$9.2 million and$4.5 million for the three months endedMarch 30, 2019 . In addition to the ESW and Kleary acquisitions, gross profit for the three months endedMarch 30, 2019 was negatively impacted by$14.4 million for the non-cash inventory fair value step-up associated with the merger with Ply Gem and by$1.9 million for the non-cash inventory step-up associated with the ESW acquisition. Excluding the ESW and Kleary acquisitions as well as the inventory step-ups, gross profit would have increased$4.9 million or 10.9% for the three months endedApril 4, 2020 . Our gross profit increased as a result of favorable pricing and material costs for the three months endedApril 4, 2020 . Our principal raw materials within Siding are PVC resin and aluminum. For the three months endedApril 4, 2020 , PVC resin increased while aluminum (Midwest Ingot) costs decreased compared to the three months endedMarch 30, 2019 . We historically pass along increases in raw material input costs to our customers but normally there is a lag period of approximately 90-120 days between the impact of higher raw material costs and customer pricing actions. In addition to raw material costs, we closely monitor labor and freight costs. Labor costs have trended higher recently given the shortage of manufacturing labor personnel and wage inflation pressure. For the three months endedApril 4, 2020 , foreign currency negatively impacted our gross profit by$0.1 million . As a percentage of net sales, our gross profit percentage was 25.9% for the three months endedApril 4, 2020 , excluding ESW and Kleary and the fair value step-ups compared to 23.8% for the three months endedMarch 30, 2019 . The 210 basis point increase resulted from improved price and mix and favorable material costs. We remain committed to lowering costs during the COVID-19 pandemic and will continue to explore cost take-out initiatives creating a lean culture. Selling, general, and administrative expenses were$29.4 million for the three months endedApril 4, 2020 including$9.3 million of SG&A expenses attributed to ESW and Kleary compared to$23.4 million of SG&A expenses for the three months endedMarch 30, 2019 which included$4.0 million of SG&A expenses attributed to ESW. Excluding the impact of the ESW and Kleary acquisitions, SG&A expenses increased$0.7 million or 3.3% consistent with the 2.2% net sales increase specifically for sales and marketing related expenses. As a percentage of net sales excluding the impact of the ESW and Kleary acquisitions, SG&A expenses were consistent at 10.4% for the three months endedApril 4, 2020 compared to 10.3% for the three months endedMarch 30, 2019 . 39 -------------------------------------------------------------------------------- Amortization expense for the three months endedApril 4, 2020 was$18.2 million or 9.4% of net sales relative to$20.0 million and 10.6% for the three months endedMarch 30, 2019 excluding the impact of ESW and Kleary. The decrease relates to the finalization of our fair value increases for intangible assets in connection with the merger with Ply Gem and ESW acquisition and resulting impact on amortization.Goodwill impairment for the three months endedApril 4, 2020 was$176.8 million as a result of the COVID-19 pandemic, which decreased Siding's discounted cash flow projections as a result of the likelyU.S. economic recession, high unemployment, and lower consumer confidence. Commercial Three Months Ended (Amounts in thousands) April 4, 2020 March 30, 2019
Statement of operations data: Net sales$ 424,318 100.0 % 424,961 100.0 % Gross profit 97,844 23.1 % 90,401 21.3 % SG&A expenses (including acquisition costs) 72,852 17.2 % 63,260 14.9 % Amortization of intangible assets 2,744 0.6 % 2,831 0.7 % Goodwill impairment 5,407 1.3 % - - % Operating income 16,841 4.0 % 24,310 5.7 % Net sales decreased$0.6 million or 0.2% for the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 due to a slight decline in tonnage demand that was partially offset by an increase in average selling price driven by product mix and pricing discipline in a declining steel price environment. The decline in volumes was the result of management of product and customer portfolio within our Metal Coil Coating division partially offset by increasing demand and market share within ourEngineered Building Systems division. Gross profit increased$7.4 million or 8.2% for the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 . As a percentage of net sales, gross profit increased 180 basis points due to pricing discipline as we saw a slight increase in average selling price per ton while benefiting from declining steel costs that drove a significant year over year decline in material cost per ton. Selling, general, and administrative expenses increased$9.6 million or 15.2% for the three months endedApril 4, 2020 compared to the three months endedMarch 30, 2019 primarily due to$11.7 million of restructuring and impairment charges recorded during the three months endedApril 4, 2020 compared to$0.9 million of restructuring and impairment charges recorded during the three months endedMarch 30, 2019 . Amortization expense for the three months endedApril 4, 2020 was$2.7 million or 0.6% of net sales consistent with amortization expense of$2.8 million or 0.7% of net sales for the three months endedMarch 30, 2019 .Goodwill impairment for the three months endedApril 4, 2020 was$5.4 million as a result of the COVID-19 pandemic which decreased our metal coil coating reporting unit's discounted cash flow projections as a result of the likelyU.S. economic recession, high unemployment, and lower consumer confidence. 40 --------------------------------------------------------------------------------
Unallocated Operating Earnings (Losses), Interest, and Provision (Benefit) for Income Taxes
Three Months Ended (Amounts in thousands) April 4, 2020 March 30, 2019 Statement of operations data: SG&A expenses$ (30,650) $ (31,269) Acquisition related expenses (4,925) (4,433) Operating loss (35,575) (35,702) Interest expense (54,835) (58,286) Interest income 338 215 Currency translation gain (loss) (4,137) 1,177 Other income (expense), net (662) 345 Income tax benefit (18,014) (23,897) Unallocated 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 three months endedApril 4, 2020 decreased by$0.1 million or 0.4% compared to the three months endedMarch 30, 2019 due primarily to various professional fees and legal costs. Interest expense decreased to$54.8 million for the three months endedApril 4, 2020 compared to$58.3 million for the three months endedMarch 30, 2019 . The interest expense decrease is primarily due to declining interest rates in fiscal 2020 which impacted the floating rate Term Loan Facility. Foreign exchange gain (loss) for the three months endedApril 4, 2020 was a$4.1 million loss compared to a gain of$1.2 million for the three months endedMarch 30, 2019 , due to exchange rate fluctuations in the Canadian dollar and Mexican peso relative to theU.S. dollar. Consolidated provision (benefit) for income taxes was a benefit of$18.0 million for the three months endedApril 4, 2020 compared to a benefit of$23.9 million for the three months endedMarch 30, 2019 . The effective tax rate for the three months endedApril 4, 2020 was 3.2% compared to 28.5% for the three months endedMarch 30, 2019 . The change in the effective tax rate was primarily driven by the continuing effects associated with the enactment of theU.S. Tax Cuts and Jobs Act and the goodwill impairment recorded during the three months endedApril 4, 2020 . 41 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES General Our cash, cash equivalents and restricted cash increased from$102.3 million as ofDecember 31, 2019 to$483.6 million as ofApril 4, 2020 . The following table summarizes our consolidated cash flows for the three months endedApril 4, 2020 andMarch 30, 2019 (in thousands):
Three Months Ended
April 4, 2020 March 30, 2019 Net cash used in operating activities$ (2,224) $ (48,722) Net cash used in investing activities (67,424) (209,608) Net cash provided by financing activities 453,268 213,439 Effect of exchange rate changes on cash and cash equivalents (2,302) 911
Net increase (decrease) in cash, cash equivalents and restricted cash
381,318 (43,980)
Cash, cash equivalents and restricted cash at beginning of period 102,307
147,607
Cash, cash equivalents and restricted cash at end of period
Operating Activities Our business is both seasonal and cyclical and cash flows from operating activities may fluctuate during the year and from year-to-year due to economic conditions. We rely on cash as well as short-term borrowings, when needed, to meet cyclical and seasonal increases in working capital needs. These needs generally rise during periods of increased economic activity or due to higher levels of inventory and accounts receivable. During economic slowdowns, working capital needs generally decrease as a result of the reduction of inventories and accounts receivable. Working capital needs also fluctuate based on raw material prices. Net cash used in operating activities was$2.2 million during the three months endedApril 4, 2020 compared to net cash used in operating activities of$48.7 million for the three months endedMarch 30, 2019 . The change in cash flow used in operations is due to an improvement in collection on accounts receivable in the first quarter of 2020 compared to the first quarter of 2019 combined with a reduction in income taxes paid in three months endedApril 4, 2020 , and normal seasonal trends in the timing of working capital. Net cash provided by accounts receivable was$20.5 million for the three months endedApril 4, 2020 compared to$43.6 million used in accounts receivable for the three months endedMarch 30, 2019 . There was$25.2 million provided by the Commercial business during the three months endedApril 4, 2020 which primarily drove this change period over period. The remaining changes in accounts receivable period over period relates to seasonal trends in working capital and timing of collections. Our days sales outstanding as ofApril 4, 2020 andMarch 30, 2019 were 38.5 days and 39.9 days, respectively. For the three months endedApril 4, 2020 , the change in cash flows relating to inventory was a decrease of$20.7 million compared to an increase of$16.7 million for the three months endedMarch 30, 2019 . We experienced a$9.4 million cash flow increase in inventory in the Commercial segment as a result of strategic purchasing during our seasonally slower months and decreasing material costs that was partially combined with a$30.2 million inventory cash flow decrease in the Windows and Siding segments during the three months endedApril 4, 2020 . Our days inventory on-hand improved to 47.4 days as ofApril 4, 2020 as compared to 59.2 days as ofMarch 30, 2019 due to strategic purchasing and lower material costs. Net cash provided by accounts payable for the three months endedApril 4, 2020 was$12.5 million compared to net cash used in accounts payable of$7.2 million for the three months endedMarch 30, 2019 . Our vendor payments can significantly fluctuate based on the timing of disbursements, inventory purchases and vendor payment terms. Our days payable outstanding as ofApril 4, 2020 decreased to 21.1 days from 23.6 days as ofMarch 30, 2019 . Investing Activities Net cash used in investing activities was$67.4 million during the three months endedApril 4, 2020 compared to$209.6 million used in investing activities during the three months endedMarch 30, 2019 . During the three months endedApril 4, 2020 , we paid approximately$39.9 million (net of cash acquired) for the acquisition of Kleary and we used$27.6 million for capital expenditures. In the three months endedMarch 30, 2019 , we paid approximately$182.4 million , net of cash acquired, for the acquisition of ESW and used$27.2 million for capital expenditures. 42 -------------------------------------------------------------------------------- Financing Activities Net cash provided by financing activities was$453.3 million in the three months endedApril 4, 2020 compared to$213.4 million provided by financing activities in the three months endedMarch 30, 2019 . During the three months endedApril 4, 2020 , we borrowed$40.0 million on our Current ABL Facility to finance the acquisition of Kleary, borrowed an additional$305.0 million on our Current ABL Facility and$115.0 million on our Current Cash Flow Revolver to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic, paid$6.4 million on quarterly installments on our Current Term Loan and used$0.3 million for the purchases of shares that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of share-based compensation. During the three months endedMarch 30, 2019 , we borrowed$220.0 million under our Current ABL facility, a portion of which was used to finance the Environmental Stoneworks Acquisition, paid a$6.4 million nominal quarterly installment on our Current Term Loan and used$0.2 million for the purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units. We invest our excess cash in various overnight investments which are issued or guaranteed by theU.S. federal government. Debt Our outstanding indebtedness will mature in 2023 (Current ABL Facility and Current Cash Flow Revolver), 2025 (Current Term Loan Facility), and 2026 (8.00% Senior Notes). We may not be successful in refinancing, extending the maturity or otherwise amending the terms of such indebtedness 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. The Current Term Loan Facility provides for an aggregate principal amount of$2,560.0 million . We have also entered into certain interest rate swap agreements to reduce our variable interest rate risk. The Current ABL Credit Agreement provides for an asset-based revolving credit facility which allows aggregate maximum borrowings by the ABL borrowers of up to$611.0 million . As set forth in the Current ABL Credit Agreement, extensions of credit under the Current ABL Facility are subject to a monthly borrowing base 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. Availability under the Current ABL Facility will be reduced by issuance of letters of credit as well as any borrowings outstanding thereunder. As ofApril 4, 2020 , we had an aggregate principal amount of$3,692.2 million of outstanding indebtedness, comprising$415.0 million of borrowings under the Current ABL Facility,$2,517.2 million of borrowings under our Current Term Loan Facility,$115.0 million of borrowings under the Current Cash Flow Revolver and$645.0 million of 8.00% Senior Notes outstanding. Our excess availability under the Current ABL Facility was$118.0 million as ofApril 4, 2020 . In addition, standby letters of credit totaling approximately$29.0 million were outstanding but undrawn under the ABL Facility. For additional information, see Note 14 - Long-Term Debt and Note 17 - Fair Value of Financial Instruments and Fair Value Measurement in the notes to the unaudited consolidated financial statements. Cash Flow 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. Beyond cash generated from operations,$118.0 million is available with our Current ABL Facility atApril 4, 2020 ,$0.0 million is available with our Current Cash Flow Revolver and we have an unrestricted cash balance of$475.7 million as ofApril 4, 2020 . We expect to contribute$5.2 million to the defined benefit plans and$0.8 million to the postretirement medical and life insurance plans in the year endingDecember 31, 2020 . We expect that cash generated from operations and our availability under the ABL Credit Facility 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 2020 and expansion when needed. 43 -------------------------------------------------------------------------------- Our corporate strategy evaluates 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 business lines. The consummation of these transactions could require substantial cash payments and/or issuance of additional debt. From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase programs. OnOctober 10, 2017 andMarch 7, 2018 , we announced that our Board of Directors authorized new stock repurchase programs for the repurchase of up to an aggregate of$50.0 million and an additional$50.0 million , respectively, of our outstanding Common Stock for a cumulative total of$100.0 million . Under these repurchase programs, we are 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 the programs. During the three months endedApril 4, 2020 , there were no repurchases under the stock repurchase programs. As ofApril 4, 2020 , approximately$55.6 million remained available for stock repurchases, all under the programs announced onOctober 10, 2017 andMarch 7, 2018 . 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 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. OFF-BALANCE SHEET ARRANGEMENTS As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofApril 4, 2020 , we were not involved in any material unconsolidated SPE transactions. CONTRACTUAL OBLIGATIONS Our contractual obligations principally includes obligations associated with our outstanding indebtedness, operating lease obligations and inventory purchase commitments. Contractual obligations did not materially change during the three months endedApril 4, 2020 , except for debt activity as disclosed in Note 14 - Long-Term Debt in the notes to the unaudited consolidated financial statements and in Liquidity and Capital Resources - Financing Activities, and lease activity as disclosed in Note 9 - Leases in the notes to the unaudited consolidated financial statements. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies include those that pertain to revenue recognition, insurance accruals, share-based compensation, income taxes, accounting for acquisitions, intangible assets and goodwill, allowance for doubtful accounts, inventory valuation, property, plant and equipment valuation and contingencies, which are described in Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . We adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as ofJanuary 1, 2020 . ASU 2016-13 requires an entity to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. See Note 2 - Accounting Pronouncements in the notes to the unaudited consolidated financial statements for a description of the impact of the adoption of ASU 2016-13. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 - Accounting Pronouncements in the notes to the unaudited consolidated financial statements for information on recent accounting pronouncements. 44
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