CORNERSTONE BUILDING BRANDS, INC. 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 statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. These risks, uncertainties and other factors include, but are not limited to: •our ability to complete the proposed CD&R Merger and the proposed Coil Coatings Transaction on the terms and timeline anticipated, or at all, and the effect of the announcement, pendency and completion of the CD&R Merger and the Coil Coatings Transaction on our ability to maintain relationships with customers and other third parties, on management's attention to ongoing business concerns, and other risks and uncertainties related to the proposed CD&R Merger and the Coil Coatings Transaction that may affect future results;
•industry cyclicality;
•seasonality of the business and adverse weather conditions;
•challenging economic conditions affecting the residential, non-residential and repair and remodeling construction industry and markets;
•commodity price volatility and/or limited availability of raw materials, including polyvinyl chloride ("PVC") resin, glass, aluminum, natural gas, and steel due to supply chain disruptions;
•our ability to identify and develop relationships with a sufficient number of qualified suppliers to mitigate risk in the event a significant supplier experiences a significant production or supply chain interruption;
•the increasing difficulty of consumers and builders in obtaining credit or financing;
•increase in the macroeconomic inflationary environment;
•ability to successfully achieve price increases to offset cost increases;
•ability to successfully implement operational efficiency initiatives, including automation;
•ability to successfully integrate our acquired businesses;
•ability to attract and retain employees, including through various initiatives and actions;
•volatility in
•the severity, duration and spread of the COVID-19 pandemic, as well as actions that may be taken by the Company or governmental authorities to contain the COVID-19 pandemic or to treat its impact and the resulting impact on supply chain and labor pressures;
•macroeconomic uncertainty and market volatility resulting from geopolitical
concerns, including
35
--------------------------------------------------------------------------------•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•our ability to retain and replace 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;
•competitive activity and pricing pressure in our industry;
•our ability to make strategic acquisitions accretive to earnings and dispositions at favorable prices and terms;
•our ability to fund operations, provide increased working capital necessary to support our strategy and acquisitions using available liquidity;
•our ability to carry out our restructuring plans and to fully realize the expected cost savings;
•global climate change, including compliance with new laws or regulations relating thereto;
•breaches of our information system security measures;
•damage to our computer infrastructure and software systems;
•necessary maintenance or replacements to our enterprise resource planning technologies;
•potential personal injury, property damage or product liability claims or other types of litigation, including stockholder litigation related to the proposed CD&R Merger;
•compliance with certain laws related to our international business operations;
•increases in labor costs, labor market pressures, 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;
•ability to compete effectively against competitors with substitutable products;
•additional costs from new regulations which relate to the utilization or manufacturing of our products or services, including changes in building codes and standards;
•our ability to realize the anticipated benefits of acquisitions and dispositions and to use the proceeds from dispositions;
•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;
•exchange rate fluctuations;
•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, 2021 (the "2021 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 2021 Form 10-K, and other risks described in documents subsequently filed by the 36 -------------------------------------------------------------------------------- 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. 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 22,000 employees at manufacturing, distribution and office locations primarily inNorth America . 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.
CD&R Merger Agreement
OnMarch 5, 2022 , the Company entered into an Agreement and Plan of Merger (the "CD&R Merger Agreement"), by and amongCamelot Return Intermediate Holdings, LLC ("Parent"),Camelot Return Merger Sub, Inc. ("Merger Sub"). Parent and Merger Sub are subsidiaries of investment funds managed by Clayton, Dubilier & Rice ("CD&R"). Upon the terms and subject to the conditions of the CD&R Merger Agreement, among other things, Merger Sub will merge with and into the Company (the "CD&R Merger"). As a result of the CD&R Merger, the Company will cease to be publicly-traded, and investment funds managed by CD&R will become the indirect owner of all of the Company's outstanding shares of common stock that it does not already own. The proposed transaction has been approved by a special committee of independent directors of the Company's board of directors (the "Special Committee") previously formed to evaluate and consider any potential or actual proposal from CD&R. The board of directors of the Company, acting on the Special Committee's recommendation, resolved unanimously to recommend that the stockholders of the Company vote to adopt and approve the CD&R Merger Agreement. The CD&R Merger is expected to close in the second or third quarter of 2022, subject to customary closing conditions. The waiting period under the Hart-Scott-Rodino Act of 1976, as amended, applicable to the proposed CD&R transaction expired onApril 18, 2022 . The transaction is subject to approval by holders of a majority of the shares not owned by CD&R and its affiliates. Additional information about the CD&R Merger Agreement and the CD&R Merger will be set forth in the Company's Definitive Proxy Statement on Schedule 14A/that will be filed with theSEC . 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 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. We believe our business is well-positioned to benefit from broader societal and population trends favoring suburban regions, as employment and living preferences shift towards such regions.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 37 -------------------------------------------------------------------------------- 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. 38 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table represents key results of operations on a consolidated basis
for the periods indicated:
Three Months Ended
April 2, April 3, $ %
(Amounts in thousands) 2022 2021 change change
Net sales $ 1,566,838 $ 1,267,032 299,806 23.7 %
Gross profit 333,907 259,729 74,178 28.6 %
% of net sales 21.3 % 20.5 %
Selling, general and administrative expenses 176,536 153,168 23,368 15.3 %
% of net sales 11.3 % 12.1 %
Restructuring and impairment charges, net 831 1,838 (1,007) (54.8) %
Strategic development and acquisition related
costs 4,791 3,313 1,478 44.6 %
Interest expense 44,106 56,499 (12,393) (21.9) %
Provision for income taxes 34,366 792 33,574 4,239.1 %
Net income (loss) 102,283 (1,655) 103,938 (6,280.2) %
Net sales - Consolidated net sales for the three months ended April 2, 2022
increased by approximately 23.7%, as compared to the same period last year. The
net sales growth was primarily-driven by favorable price actions across all
segments in response to rising commodity costs and other inflationary impacts
coupled with $45.1 million impact from strategic acquisitions net of
divestitures from portfolio optimization actions.
Gross profit % of net sales - The Company's gross profit percentage was 21.3%
for the three months ended April 2, 2022 , which was a 80 basis point increase
over the three months ended April 3, 2021 . The improvement in gross profit as a
% of net sales was driven by strong price mix net of inflation and the net
effect of acquisitions and divestitures made during the second half of 2021.
Selling, general, and administrative expenses increased 15.3% during the three
months ended April 2, 2022 compared to the three months ended April 3, 2021 . The
increase was primarily driven by sales commissions and other variable
compensation programs related to financial growth measures, increased wages and
marketing related professional services to support market recovery and further
growth.
Restructuring and impairment charges, net decreased
Strategic development and acquisition related costs increased$1.5 million during the three months endedApril 2, 2022 compared to the three months endedApril 3, 2021 , primarily related to increased strategic development activity in the current period partially offset by lower litigation costs from theVoigt lawsuit than the prior year comparable period. Interest expense decreased$12.4 million or 21.9% during the three months endedApril 2, 2022 as compared to the three months endedApril 3, 2021 primarily as a result of the actions taken in second quarter of 2021 (redemption of the$645 million 8.00% Senior Notes coupled with the refinancing of the Current Term Loan Facility). Consolidated provision (benefit) for income taxes was an expense of$34.4 million for the three months endedApril 2, 2022 compared to an expense of$0.8 million for the three months endedApril 3, 2021 . The change in the provision was primarily driven by an increase in pre-tax book income for the three months endedApril 2, 2022 . Segment Results of Operations We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280, Segment Reporting. We have determined that we have three reportable segments, organized and managed principally by the different industry sectors they serve. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment associated with our headquarters 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, gain on legal settlements, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and 39 --------------------------------------------------------------------------------
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 legal settlements; share-based compensation expense; non-cash gain (loss) on foreign currency transactions; 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 ofPrime Windows LLC ("Prime Windows"), which the Company acquired onApril 30, 2021 ;Cascade Windows, Inc. ("Cascade Windows"), which the Company acquired onAugust 20, 2021 ; the insulated metals panels ("IMP") and the roll-up sheet doors ("DBCI") businesses, which the Company divested onAugust 9, 2021 andAugust 18, 2021 , respectively, andUnion Corrugating Company Holdings, Inc. ("UCC"), which the Company acquired onDecember 3, 2021 . 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 Prime Windows,Cascade Windows and UCC acquisitions; or any integration costs; and from the IMP and DBCI divestitures. Pro forma balances are not necessarily indicative of operating results had the Prime Windows,Cascade Windows and UCC acquisitions and the IMP and DBCI divestitures occurred onJanuary 1, 2021 or of future results.
See Note 20 - Segment Information in the notes to the unaudited 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. The following tables present a comparison of net sales as reported to pro forma net sales forCornerstone Building Brands as if the Prime Windows,Cascade Windows and UCC acquisitions, and the IMP and DBCI divestitures had each occurred onJanuary 1, 2021 rather than the respective date referenced above for each transaction: Three Months Ended April 2, 2022 Three Months Ended April 3, 2021 Acquisitions and Acquisitions and (Amounts in thousands) Reported Divestitures Pro Forma Reported Divestitures Pro Forma Net Sales Windows$ 702,110 $ -$ 702,110 $ 527,263 $ 58,421 $ 585,684 Siding 332,990 - 332,990 316,391 - 316,391 Commercial 531,738 - 531,738 423,378 (36,439) 386,939 Total Net Sales$ 1,566,838 $ -$ 1,566,838 $ 1,267,032 $ 21,982 $ 1,289,014 40
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