BUSINESS 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; (iii) implementing a capital allocation framework balanced between a focus on opportunistic investment in high return initiatives and continued debt repayment; and (iv) operating every part of our business with an ongoing commitment to sustainability. 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 #1 manufacturer of vinyl windows, vinyl siding, insulated metal panels, 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 20,000 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 sustainable 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 retrofit 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. OnNovember 16, 2018 , the Company changed its fiscal year end from a 52/53 week year with the Company's fiscal year end on the Sunday closest toOctober 31 to a fiscal year of the 12-month period ofJanuary 1 to December 31 . The Company elected to change its fiscal year end in connection with the Merger to align the fiscal year end. 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-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 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 32 -------------------------------------------------------------------------------- businesses. We experienced an approximately 5.6% decline in consolidated net sales for the year endedDecember 31, 2020 as compared to the prior year. 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. As ofDecember 31, 2020 , all of our manufacturing facilities were operational. Throughout this pandemic, the Company has been adhering to mandates and other guidance from local governments and health authorities, including theWorld Health Organization and theCenters for Disease Control and Prevention . The Company has taken extraordinary measures and invested significantly in practices to protect employees and reduce the risk of spreading the virus, while continuing to operate where permitted and to the extent possible. These actions include additional cleaning of our facilities, staggering crews, incorporating visual cues to reinforce social distancing, providing face coverings and gloves, as well as implementing daily health validation at our manufacturing and office facilities. We expect to continue to incur costs to maintain these precautionary measures for the foreseeable future. The health and safety of our employees and our communities is our highest priority. 6.125% Senior Notes dueJanuary 2029 OnSeptember 24, 2020 , the Company issued$500.0 million in aggregate principal amount of 6.125% Senior Notes dueJanuary 2029 ("the 6.125% Senior Notes"). The 6.125% Senior Notes were issued pursuant to an eighth supplemental indenture dated asSeptember 24, 2020 , by and among the Company, the subsidiary guarantors listed on the signature pages thereto andWilmington Trust, National Association , as trustee (together with the Indenture dated as ofApril 12, 2018 , and as supplemented from time to time, the "2020 Indenture"). Proceeds from the 6.125% Senior Notes were used to repay outstanding amounts under the Company's Current ABL Facility and Current Cash Flow Revolver. The 6.125% Senior Notes bear interest at 6.125% per annum and will mature onJanuary 15, 2029 . Interest is payable semi-annually in arrears onJanuary 15 andJuly 15 . Kleary Acquisition OnMarch 2, 2020 , the Company acquiredKleary Masonry, Inc. ("Kleary") for$40 million 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. The acquisition of Kleary expands our value-added, turnkey stone veneer solutions we offer to our customers, enabling us to strengthen our position in the fastest-growing segment of the residential cladding market. The addition of Kleary brings opportunities across our builder and contractor networks, in particular the potential to cross-sell our stone cladding and installed services into our commercial buildings business. Kleary's results are reported within the Siding segment. Environmental Stoneworks Acquisition OnFebruary 20, 2019 , the Company acquiredEnvironmental Materials, LLC ("Environmental Stoneworks" or "ESW") for$183 million through borrowings under the Company's asset-based revolving credit facility. The acquisition of Environmental Stoneworks, when combined with our existing stone businesses, positions our organization as a market leader in stone veneer. As one of the fastest growing categories of exterior cladding materials, it allows us to better serve our residential customers. ESW's results are reported within the Siding segment. Merger with Ply Gem OnJuly 17, 2018 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") withPly Gem Parent, LLC ("Ply Gem"), and for certain limited purposes as set forthin the Merger Agreement, Clayton, Dubilier & Rice, LLC ("CD&R"), pursuant to which, at the closing of the merger, Ply Gem would be merged with and into the Company, with the Company continuing its existence as a corporation organized under the laws of theState of Delaware (the "Merger"). The Merger was consummated onNovember 16, 2018 pursuant to the Merger Agreement. OnNovember 16, 2018 , in connection with the consummation of the Merger, the Company assumed (i) the obligations ofPly Gem Midco , a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the 33 -------------------------------------------------------------------------------- Current Cash Flow Credit Agreement (as defined below), (ii) the obligations ofPly Gem Midco as parent borrower under the Current ABL Credit Agreement (as defined below) and (iii) the obligations ofPly Gem Midco as issuer under the 2018 Indenture (as defined below). OnApril 12, 2018 ,Ply Gem Midco entered into a Cash Flow Credit Agreement (the "Current Cash Flow Credit Agreement"), by and amongPly Gem Midco ,JPMorgan Chase Bank, N.A ., as administrative agent and collateral agent (the "Cash Flow Agent"), and the several banks and other financial institutions from time to time party thereto. As ofNovember 16, 2018 , immediately prior to the Merger, the Current Cash Flow Credit Agreement provided for (i) a term loan facility (the "Current Term Loan Facility") in an original aggregate principal amount of$1,755.0 million and (ii) a cash flow-based revolving credit facility (the "Current Cash Flow Revolver" and together with the Current Term Loan Facility, the "Current Cash Flow Facilities") of up to$115.0 million . OnNovember 16, 2018 ,Ply Gem Midco entered into a lender joinder agreement, by and amongPly Gem Midco , the additional commitment lender party thereto and the Cash Flow Agent, which amended the Current Cash Flow Credit Agreement in order to, among other things, increase the aggregate principal amount of the Current Term Loan Facility by$805.0 million (the "Incremental Term Loans"). OnNovember 16, 2018 , in connection with the consummation of the Merger, the Company andPly Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities. The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Current Term Loan Facility onApril 12, 2025 . There are no amortization payments under the Current Cash Flow Revolver, and all borrowings under the Current Cash Flow Revolver mature onApril 12, 2023 . OnApril 12, 2018 ,Ply Gem Midco and certain subsidiaries ofPly Gem Midco entered into an ABL Credit Agreement (the "Current ABL Credit Agreement"), by and amongPly Gem Midco , the subsidiary borrowers from time to time party thereto, UBS AG,Stamford Branch , as administrative agent and collateral agent (the "ABL Agent"), and the several banks and other financial institutions from time to time party thereto, which provided for an asset-based revolving credit facility (the "Current ABL Facility") of up to$360.0 million , consisting of (i)$285.0 million available toU.S. borrowers (subject toU.S. borrowing base availability) (the "ABLU.S. Facility") and (ii)$75.0 million available to bothU.S. borrowers and Canadian borrowers (subject toU.S. borrowing base and Canadian borrowing base availability) (the "ABL Canadian Facility"). OnOctober 15, 2018 ,Ply Gem Midco entered into Amendment No. 2 to the Current ABL Credit Agreement, by and amongPly Gem Midco , the incremental lender party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by$36.0 million to$396.0 million overall, and with the (x) ABLU.S. Facility being increased from$285.0 million to$313.5 million and (y) the ABL Canadian Facility being increased from$75.0 million to$82.5 million . OnNovember 16, 2018 ,Ply Gem Midco entered into Amendment No. 4 to the Current ABL Credit Agreement, by and amongPly Gem Midco , the incremental lenders party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by$215.0 million (the "Incremental ABL Commitments") to$611.0 million overall, and with the (x) ABLU.S. Facility being increased from$313.5 million to approximately$483.7 million and (y) the ABL Canadian Facility being increased from$82.5 million to approximately$127.3 million . OnNovember 16, 2018 , in connection with the consummation of the Merger, the Company andPly Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and the Company became the Parent Borrower (as defined in the Current ABL Credit Agreement) under the Current ABL Facility. The Company and, at the Company's option, certain of the Company's subsidiaries are the borrowers under the Current ABL Facility. As ofNovember 16, 2018 , and following consummation of the Merger, (a)Ply Gem Industries, Inc. ,Atrium Windows and Doors, Inc. ,NCI Group, Inc. andRobertson-Ceco II Corporation wereU.S. subsidiary borrowers under the Current ABL Facility, and (b)Gienow Canada Inc. ,Mitten Inc. ,North Star Manufacturing (London) Ltd. andRobertson Building Systems Limited were Canadian borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature onApril 12, 2023 . OnApril 12, 2018 ,Ply Gem Midco issued$645.0 million aggregate principal amount of 8.00% Senior Notes due 2026 (the "8.00% Senior Notes"). The 8.00% Senior Notes were issued pursuant to a first supplemental indenture and an Indenture, each dated as ofApril 12, 2018 (collectively, and as supplemented from time to time, the "2018 Indenture"), by and amongPly Gem Midco , as issuer, the subsidiary guarantors from time to time party thereto andWilmington Trust, National Association , as trustee. OnNovember 16, 2018 , in connection with the consummation of the Merger, the Company entered into a supplemental indenture and assumed the obligations ofPly Gem Midco as issuer under the 2018 Indenture and the 8.00% Senior Notes. The 8.00% Senior Notes bear interest at 8.00% per annum and will mature onApril 15, 2026 . Interest is payable semi-annually in arrears onApril 15 andOctober 15 . 34 -------------------------------------------------------------------------------- Industry Conditions 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, 2020 as compared toDecember 31, 2019 to assess the demand impacts for our products, noting that single family housing starts increased by 9.2% on a lag effected basis due to overall economic conditions specifically for new construction. We also examine where these single-family housing starts occur geographically as the Northeast, which increased 1.6%, and Midwest, which increased 6.4%, are significant vinyl siding concentrated areas relative to the South and the West. ForCanada , we evaluate the Canada Mortgage and Housing Corporate statistics, which showed housing starts increased by 4.8% for the year endedDecember 31, 2020 compared to 2019. The graph below shows the seasonally adjusted annual single family residential new construction starts as of each year end since 1968 as compiled and reported byU.S. Census Bureau : [[Image Removed: cnr-20201231_g3.jpg]] 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 year endedDecember 31, 2020 , LIRA reflected that the trailing 12 months of remodeling activity increased 3.5% 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 year endedDecember 31, 2020 , the VSI reported that siding units increased 3.8% for the industry. Overall, our Siding segment, including stone, is weighted to the repair and remodeling market with approximately 52% of our net sales being attributed to repair and remodeling with the remaining 48% 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 50% of our net sales attributed to new construction with the remaining 50% 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 steel relative to other building materials, the level of nonresidential construction activity, roof repair and retrofit demand and the availability and cost of financing for construction projects. Our sales in the Commercial segment normally are lower in the first half of each fiscal year compared to the second half because of unfavorable weather conditions for construction and typical business planning cycles affecting construction. The nonresidential construction industry is highly sensitive to national and regional macroeconomic conditions. Following a significant downturn in 2008 and 2009, the current recovery of low-rise construction has been uneven and slow. The COVID-19 pandemic interrupted some signs of steady growth in recent years. We believe that the nonresidential construction industry will return to mid-cycle levels of activity over the next several years. The graph below shows the annual nonresidential new construction starts, measured in square feet, since 1968 as compiled and reported byDodge Data & Analytics, Inc. ("Dodge"): [[Image Removed: cnr-20201231_g4.jpg]] Current market estimates continue to show uneven activity across the nonresidential construction markets. According to Dodge, low-rise nonresidential construction starts, as measured in square feet and comprising buildings of up to five stories, contracted approximately 17% in 2020 as compared to 2019, while our volumes declined approximately 14%, primarily caused by lower demand because of the COVID-19 pandemic. Products within our addressable market grew at a rate slower than other alternative products within the low-rise nonresidential market. 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 This section of the Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-over-year comparisons between fiscal 2020 and fiscal 2019. Discussions of fiscal 2018 items and year-over-year comparisons between fiscal 2019 and fiscal 2018 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, 2019 . The following table represents key results of operations on a consolidated basis for the periods indicated: Fiscal Year Ended
(Amounts in thousands) 2020 2019 $ change % change Net sales$ 4,617,369 $ 4,889,747 $ (272,378) (5.6) % Gross profit 1,050,320 1,088,419 (38,099) (3.5) % % of net sales 22.7 % 22.3 % Selling, general and administrative expenses 579,200 627,861 (48,661) (7.8) % % of net sales 12.5 % 12.8 % Restructuring and impairment charges, net 34,120 18,060 16,060 88.9 % Strategic development and acquisition related costs 19,341 50,185 (30,844) (61.5) % Interest expense 213,610 229,262 (15,652) (6.8) % Net income (loss) (482,778) (15,390) (467,388) 3,037.0 % Net sales - Consolidated net sales for the year endedDecember 31, 2020 decreased by approximately 5.6%, as compared to the year endedDecember 31, 2019 . The decrease was primarily due to lower market demand across all segments as a result of the COVID-19 pandemic. Gross profit % of net sales - The Company's gross profit percentage was 22.7% for the year endedDecember 31, 2020 , which was a 40 basis point improvement over the year endedDecember 31, 2019 . Our disciplined focus on price leadership, aligning variable costs with volume, and structurally reducing fixed costs as a result of our culture of operational excellence coupled with lower raw material costs, primarily metal input costs, drove the improved gross profit as a percentage of net sales results. Selling, general, and administrative expenses decreased 7.8% during the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 . Effective management of near-term costs coupled with structural cost savings initiatives drove the lower selling, general, and administrative expenses atDecember 31, 2020 as compared toDecember 31, 2019 . Restructuring and impairment charges, net increased$16.1 million during the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , primarily due to severance costs as part of our ongoing efforts to rationalize operational and organizational structures and actions taken in response to the COVID-19 pandemic. Strategic development and acquisition related costs decreased$30.8 million , during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 as our merger-related activities have decreased. Interest expense decreased$15.7 million or 6.8% in 2020, primarily as a result of declining interest rates in fiscal 2020, which impacted the Current Term Loan Facility. Consolidated provision (benefit) for income taxes was an expense of$5.6 million for the year endedDecember 31, 2020 compared to an expense of$4.8 million for the year endedDecember 31, 2019 . The effective tax rate for the year endedDecember 31, 2020 was 1.2% compared to 45.0% for the year endedDecember 31, 2019 . The change in the effective tax rate was primarily driven by the continuing effects associated with the enactment of the CARES Act and the impact associated with the goodwill impairment recorded during the year endedDecember 31, 2020 . Net Income (loss) - Net loss was$482.8 million or$3.84 per diluted share, including a non-cash, pre-tax goodwill impairment accounting adjustment of$503.2 million . Effective execution of our priorities, which include maintaining cost discipline, strengthening price leadership, driving operational excellence and investing in growth opportunities delivered improved profitability in 2020 when excluding the impact of the goodwill impairment charge. 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 37 -------------------------------------------------------------------------------- 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 and other income (expense). One of the primary measurements used by management to measure the financial performance of each segment is Adjusted EBITDA. 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; non-cash charges of purchase price allocated to inventories; goodwill impairment; share-based compensation expense; non-cash foreign exchange transaction/translation (income) loss; other non-cash items; and other items. The presentation below includes a reconciliation of the changes to the results 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 of Cornerstone, Environmental Stoneworks and Kleary. 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 Environmental Stoneworks and Kleary acquisitions or any integration costs. Pro forma balances are not necessarily indicative of operating results had the Environmental Stoneworks and Kleary acquisitions occurred onJanuary 1, 2019 or of future results. See Note 20 - 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 Exchange Act and in accordance with Regulation G. 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 presents a comparison of net sales as reported to pro-forma net sales for Cornerstone as if the Environmental Stoneworks and Kleary acquisitions had occurred onJanuary 1, 2019 : Year Ended December 31, 2020 Year Ended December 31, 2019 Reported Acquisitions (1) Pro Forma Reported Acquisitions (2) Pro Forma Net Sales Windows$ 1,889,625 $ -$ 1,889,625 $ 1,930,447 $ -$ 1,930,447 Siding 1,141,946 8,358 1,150,304 1,111,407 59,464 1,170,871 Commercial 1,585,798 - 1,585,798 1,847,893 - 1,847,893 Total Net Sales$ 4,617,369 $ 8,358$ 4,625,727 $ 4,889,747 $ 59,464$ 4,949,211
(1)Acquisitions reflect the estimated impact for Kleary. (2)Acquisitions reflect the estimated impact for Environmental Stoneworks and Kleary.
38 -------------------------------------------------------------------------------- The following tables reconcile Adjusted EBITDA and pro forma Adjusted EBITDA to operating income (loss) for the periods indicated. Consolidated Year Ended December 31, December 31, (Amounts in thousands) 2020 2019 Operating income (loss), GAAP$ (266,506) $ 214,736 Restructuring and impairment charges, net 34,277 18,060 Strategic development and acquisition related costs 19,341 50,185 Goodwill impairment 503,171 - Depreciation and amortization 284,602 263,764 Other (1) 31,919 36,812 Adjusted EBITDA 606,804 583,557 Impact of Environmental Stoneworks and Kleary acquisitions(2) 1,869 9,626 Pro forma Adjusted EBITDA$ 608,673 $ 593,183 Pro forma Adjusted EBITDA as a % of pro forma net sales 13.2 % 12.0 % (1)Primarily consists of$17.1 million and$14.1 million of share based compensation expense for the years endedDecember 31, 2020 and 2019, respectively,$12.5 million of COVID-19 related costs for year endedDecember 31, 2020 and$16.2 million of a non-cash charge of purchase price allocated to inventories for the year endedDecember 31, 2019 . (2)Reflects the Adjusted EBITDA of Environmental Stoneworks for the periodJanuary 1, 2019 to the acquisition date ofFebruary 20, 2019 and Kleary for the periodJanuary 1, 2019 to the acquisition date ofMarch 2, 2020 . Operating income (loss) for the year endedDecember 31, 2020 decreased to a$266.5 million loss as compared to operating income of$214.7 million in the year endedDecember 31, 2019 primarily as a result of a goodwill impairment of$503.2 million . Pro forma Adjusted EBITDA for 2020 was$608.7 million or 13.2% of pro forma net sales, an improvement of 2.6% or 120 basis points from the same pro forma period a year ago. The improvement was due to effective near-term expense management, structural cost reductions, and price/mix, net of inflation partially offset by the impacts from lower demand and shift in product mix as a result of the COVID-19 pandemic. These results represent the seventh consecutive year over year Adjusted EBITDA margin expansion and record level of earnings for the Company. Windows Year Ended December 31, December 31,
(Amounts in thousands) 2020 2019 Net sales$ 1,889,625 $ 1,930,447 Operating income (loss), GAAP$ (223,646) $ 92,538 Restructuring and impairment charges, net 7,499 1,865 Strategic development and acquisition related costs 16 19,947 Goodwill impairment 320,990 - Depreciation and amortization 121,519 94,737 Other 7,338 2,604 Adjusted EBITDA$ 233,716 $ 211,691 Adjusted EBITDA as a % of net sales 12.4 % 11.0 % Net sales for the year endedDecember 31, 2020 were 2.1% lower compared to the year endedDecember 31, 2019 due to the lower demand from the market impacts of the COVID-19 pandemic more than offsetting favorable price/mix 39 -------------------------------------------------------------------------------- implemented at the beginning of the year. While our business was deemed an essential activity, delays in construction activity driven by temporary closures of non-life sustaining businesses and stay-at-home orders occurred. Operating income (loss) for the year endedDecember 31, 2020 decreased to a$223.6 million loss as compared to operating income of$92.5 million in the year endedDecember 31, 2019 primarily due to a goodwill impairment of$321.0 million in the year endedDecember 31, 2020 . Adjusted EBITDA was$233.7 million or 12.4% as a percent of net sales, a 140 basis point improvement over the year endedDecember 31, 2019 . The Windows segment has delivered seven consecutive quarters of year over year Adjusted EBITDA margin expansion. Margin expansion over prior year was a result of the quick and effective management of price and mix, near-term expenses and acceleration of our strategy to improve our highly variable cost structure, despite the challenges in our end-markets caused by the COVID-19 pandemic. Siding Year Ended December 31, December 31, (Amounts in thousands) 2020 2019 Net sales$ 1,141,946 $ 1,111,407 Impact of Environmental Stoneworks and Kleary acquisitions(1) 8,358 59,464 Pro forma net sales 1,150,304 1,170,871 Operating income (loss), GAAP$ (61,930) $ 66,273 Restructuring and impairment charges, net 2,966 8,761 Strategic development and acquisition related costs 10,158 - Goodwill impairment 176,774 - Depreciation and amortization 113,737 121,004 Other (523) 15,578 Adjusted EBITDA 241,182 211,616 Impact of Environmental Stoneworks and Kleary acquisitions(1) 1,869 9,626 Pro forma Adjusted EBITDA$ 243,051 $ 221,242 Adjusted EBITDA as a % of net sales 21.1 % 19.0 % Pro forma Adjusted EBITDA as a % of pro forma net sales 21.1 % 18.9 % (1)Reflects the Adjusted EBITDA of Environmental Stoneworks for the periodJanuary 1, 2019 to the acquisition date ofFebruary 20, 2019 and Kleary for the periodJanuary 1, 2019 to the acquisition date ofMarch 2, 2020 . Pro forma net sales for the year endedDecember 31, 2020 were 1.8% lower compared to the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , delays in construction activity driven by temporary closures of non-life sustaining businesses and stay-at-home orders from the COVID-19 pandemic resulted in lower volume of approximately$20 million . Operating income (loss) for the year endedDecember 31, 2020 decreased to a$61.9 million loss as compared to operating income of$66.3 million in the year endedDecember 31, 2019 primarily due to a goodwill impairment of$176.8 million in the year endedDecember 31, 2020 . Pro Forma Adjusted EBITDA was$243.1 million or 21.1% as a percent of pro forma net sales, a 220 basis point improvement over the year endedDecember 31, 2019 . Margin expansion over prior year was a result of the quick and effective management of near-term expenses and acceleration of our strategy to improve our highly variable cost structure, despite the challenges in our end-markets caused by the COVID-19 pandemic. Additionally, lower raw material costs were a contributing factor. The Siding segment has delivered seven consecutive quarters of year over year Adjusted EBITDA margin expansion. 40 --------------------------------------------------------------------------------
Commercial Year Ended December 31, December 31, (Amounts in thousands) 2020 2019 Net Sales$ 1,585,798 $ 1,847,893 Operating income, GAAP$ 159,586 $ 201,073 Restructuring and impairment charges, net 20,270 2,790 Strategic development and acquisition related costs (262) 10,534 Goodwill impairment 5,407 - Depreciation and amortization 45,213 44,550 Other 4,346 3,389 Adjusted EBITDA$ 234,560 $ 262,336 Adjusted EBITDA as a % of net sales 14.8 % 14.2 % Net sales for the year endedDecember 31, 2020 were 14.2% lower compared to the year endedDecember 31, 2019 due to 8.7% lower demand from delayed construction activity from the COVID-19 pandemic and 5.5% lower price/mix from the impact of declining raw material costs on price and shift in product mix. We have a broad and diversified set of product offerings that serve low rise non-residential applications, but demand for higher margin products weakened as customer capital spending was affected by the uncertainties related to the COVID-19 pandemic. Operating income of$159.6 million was 20.6% lower as compared to$201.1 million in the year endedDecember 31, 2019 primarily due to the impacts of the COVID-19 pandemic discussed above. Adjusted EBITDA was$234.6 million or 14.8% as a percent of net sales, a 60 basis point improvement over the year endedDecember 31, 2019 . The Commercial segment has delivered seven consecutive quarters of year over year Adjusted EBITDA margin expansion. Lower volumes and unfavorable shifts in product mix of approximately$26 million were more than offset by successful execution of cost reduction initiatives, facility rationalizations, organizational simplification and near-term expense control. Additionally, effective management of price impacts from declining steel costs resulted in a minor impact to the Company. Unallocated Operating Earnings (Losses), Interest, and Provision (Benefit) for Income Taxes Year Ended December 31, December 31, (Amounts in thousands) 2020 2019 Statement of operations data: SG&A expenses$ (131,087) $
(125,281)
Acquisition related expenses (9,429) (19,867) Operating loss$ (140,516) $ (145,148) 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, 2020 decreased by$4.6 million or 3.2% compared to the year endedDecember 31, 2019 . The change in the period is due primarily to reductions in management incentive cost and workforce as well as management of near-term expenses, such as various professional fees as we managed the uncertainties of the COVID-19 pandemic. Unallocated operating loss includes$17.1 million and$14.1 million of share-based compensation expense for the years endedDecember 31, 2020 and 2019, respectively. 41 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES General Our principal source of funds is cash generated from operations, supplemented by borrowings against our asset-based lending and revolving credit facility. Our cash, cash equivalents and restricted cash increased from$102.3 million as ofDecember 31, 2019 to$680.5 million as ofDecember 31, 2020 . The following table summarizes our consolidated cash flows for fiscal 2020 and 2019 (in thousands): Fiscal Year Ended December 31, December 31, 2020 2019 Net cash provided by operating activities$ 308,417 $ 229,608 Net cash used in investing activities (120,123) (294,758) Net cash provided by financing activities 389,655 17,540 Effect of exchange rate changes on cash and cash equivalents 222 2,310
Net increase (decrease) in cash, cash equivalents and restricted cash
578,171 (45,300)
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 The Company generated strong cash flow in 2020, with cash flow from operations of$308.4 million , a cash generation improvement of$78.8 million over 2019. The improvement was primarily driven by lower cash interest expenses, net cash tax benefits from the CARES Act and other COVID-19 related government stimulus programs, and changes in accrued expenses offset by investment in working capital to support growing demand. The following table shows the impact of working capital items on cash during 2020 and 2019, respectively (in thousands): Fiscal Year Ended December 31, December 31, 2020 2019 $ Change Net cash (used in) provided by: Accounts receivable$ (61,976) $ (38,242) $ (23,734) Inventories 7,927 91,822 (83,895) Accounts payable 4,663 (21,141) 25,804 Net cash (used in) provided by working capital items$ (49,386) $ 32,439 $ (81,825) The use of cash for working capital between fiscal years was due to inventories and accounts receivable, partially offset by accounts payable. The decrease in cash provided by accounts receivable and inventory was primarily driven by the rapid recovery in residential end-markets from the COVID-19 pandemic in the second half of the year. Refer to the Consolidated Statements of Cash Flows in the Consolidated Financial Statements for additional information. Investing Activities Cash used in investing activities was$120.1 million during fiscal 2020 compared to$294.8 million used during fiscal 2019. During fiscal 2020, we paid approximately$41.8 million (net of cash acquired) for the acquisition of Kleary and we used$81.9 million for capital expenditures. During fiscal 2019, we paid approximately$179.2 million , net of cash acquired, for the acquisition of Environmental Stoneworks. and we used$121.1 million for capital expenditures. Financing Activities Cash provided by financing activities was$389.7 million in fiscal 2020 compared to$17.5 million provided by financing activities in fiscal 2019. 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 Current ABL Facility to finance the acquisition of Kleary, borrowed an additional$305.0 million on our Current ABL Facility, repaid all outstanding balances on our Current ABL Facility, and borrowed and repaid$115.0 million on our Current Cash Flow Revolver. Proceeds from the offering of the 6.125% Senior Notes were used to pay down the Current ABL Facility and Current Cash Flow Revolver balances. Additionally, during fiscal 2020, we paid quarterly installments totaling$25.6 million on the Current Term Loan Facility, used$1.6 million for the purchases of shares that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting 42 -------------------------------------------------------------------------------- of share-based compensation and used$6.4 million to repurchase shares of our outstanding common stock under our stock repurchase programs. During fiscal 2019, we borrowed$200.0 million to finance the ESW Acquisition and repaid$130.0 million of that amount, paid$25.6 million on quarterly installments on our Current Term Loan Facility, made a$24.9 million payment on the tax receivable agreement and used$1.9 million for the purchases of shares related to restricted stock that were withheld to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock awards and units. We invest our excess cash in various overnight investments which are issued or guaranteed by the federal government.Equity Investment OnAugust 25, 2020 , the Company filed a shelf registration statement on Form S-3, declared effective by theSEC onSeptember 2, 2020 , registering the resale of shares of the Company's common stock held by CD&R Pisces. The Company had previously registered the resale of shares of the Company's common stock held by theCD&R Fund VIII Investor Group and theGolden Gate Investor Group . AtDecember 31, 2020 and 2019, theCD&R Investor Group owned approximately 49.4% and 49.1%, respectively, of the outstanding shares of our Common Stock. Debt Below is a reconciliation of the Company's net debt (in thousands). Management considers net debt to be more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed. Fiscal Year Ended December 31, December 31, 2020 2019
Asset-based revolving credit facility due
2,497,967
2,523,587
Cash flow revolver dueApril 2023 -
-
8.00% senior notes dueApril 2026 645,000
645,000
6.125% senior notes dueJanuary 2029 500,000
-
Total Debt 3,642,967
3,238,587
Less: cash and cash equivalents 674,255 98,386 Net Debt$ 2,968,712 $ 3,140,201 Our outstanding indebtedness will mature in 2023 (Current ABL Facility and Current Cash Flow Revolver), 2025 (Current Term Loan Facility), 2026 (8.00% Senior Notes) and 2029 (6.125% 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 the Current ABL 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 ofDecember 31, 2020 , we had an aggregate principal amount of$3,643.0 million of outstanding indebtedness, comprising of$2,498.0 million of borrowings under our Current Term Loan Facility,$645.0 million of 8.00% Senior Notes outstanding and$500.0 million of 6.125% Senior Notes outstanding. Our excess availability under the Current ABL Facility was$528.2 million as ofDecember 31, 2020 . In addition, standby letters of credit related to certain insurance policies totaling approximately$35.4 million were outstanding but undrawn under the ABL Facility. For additional information, see Note 12 - Long-Term Debt in the notes to the consolidated financial statements. 43 -------------------------------------------------------------------------------- Additional Liquidity Considerations We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. The following table summarizes key liquidity measures under the Current ABL Credit Agreement and the Current Cash Flow Credit Agreement in effect as ofDecember 31, 2020 andDecember 31, 2019 (in thousands): Fiscal Year Ended December 31, December 31, 2020 2019 Asset-based revolving credit facility due April 2023$ 611,000 $ 611,000 Eligible borrowing base 568,000 531,000 Less: borrowings - 70,000 Less: LCs outstanding and priority payables 40,000
35,000
Net ABL availability 528,000
426,000
Plus: Cash flow revolver dueApril 2023 115,000
115,000
Plus: cash and cash equivalents 674,255 98,386 Total Liquidity$ 1,317,255 $ 639,386 We expect to contribute$3.2 million to the defined benefit plans and$0.7 million to postretirement medical and life insurance plans in fiscal 2021. 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 2021 and expansion when needed. The Company expects total capital expenditures to be approximately 2.5% of net sales during fiscal 2021. 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 fiscal 2020, we repurchased 1.1 million shares for$6.4 million under the stock repurchase programs. As ofDecember 31, 2020 , approximately$49.1 million remained available for stock repurchases under the program announced onMarch 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 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. 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"), 44 -------------------------------------------------------------------------------- which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofDecember 31, 2020 , we were not involved in any unconsolidated SPE transactions. CONTRACTUAL OBLIGATIONS The following table shows our contractual obligations as ofDecember 31, 2020 (in thousands):
Payments due by period
Less than More than Contractual Obligation Total 1 year 1 - 3 years 3 - 5 years 5 years Total debt(1)$ 3,642,967 $ 25,600
1,042,964 179,368 355,738 351,740 156,118 Operating leases 319,363 84,927 111,737 58,105 64,594 Projected pension obligations(3) 68,053 7,246 14,384 13,904 32,519 Purchase obligations(4) 24,409 24,213 196 - - Total contractual obligations$ 5,097,756 $ 321,354 $ 533,255 $ 474,949 $ 3,768,198 (1)Reflects amounts outstanding under the Current Term Loan Facility, the 8.00% Senior Notes and the 6.125% Senior Notes, and excludes any amounts potentially due under the excess cash flow provisions within the Current Term Loan Facility. No amounts were drawn on the Current ABL Facility as ofDecember 31, 2020 . See "Liquidity and Capital Resources-Debt" for more information on our indebtedness. (2)Interest payments were calculated based on rates in effect atDecember 31, 2020 for variable rate obligations. (3)Amounts represent our estimate of the minimum funding requirements as determined by government regulations. Amounts are subject to change based on numerous assumptions, including the performance of the assets in the plans and bond rates. Includes obligations with respect to the Company's Defined Benefit Plans and the other post-employment benefit ("OPEB") Plan. (4)Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. These obligations are related primarily to inventory purchase contracts. 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 which includes IBNR claims. For all insurance carriers, the total standby letters of credit are approximately$35.4 million and$9.0 million atDecember 31, 2020 andDecember 31, 2019 , respectively. CRITICAL ACCOUNTING POLICIES 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$1,194.7 million of goodwill as ofDecember 31, 2020 , of which approximately$397.0 million pertains to our Windows segment,$654.8 million pertains to our Siding segment, and$142.9 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 45 -------------------------------------------------------------------------------- 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 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. As a result of the decline in the Company's market valuation and near-term economic uncertainties related to the COVID-19 pandemic, during the first quarter of fiscal 2020, the Company determined that an interim goodwill impairment test was necessary. The Company determined that deterioration in discount rates and market multiples during the three months endedApril 4, 2020 from the COVID-19 driven economic uncertainty when combined with lower forecasted discounted cash flows, decreased the fair values of the Company's reporting units. The Company performed an impairment evaluation by comparing the fair market value of its reporting units, as determined using an equally weighted discounted cash flow model and market approach, to its carrying value. It was determined that the Siding, Windows and Metal Coil Coating reporting units' carrying value each exceeded their fair value. As a result of this analysis, the Company recorded a goodwill impairment charge of approximately$321.0 million for the Windows reporting unit,$176.8 million for the Siding reporting unit, and$5.4 million (fully impaired) for the Metal Coil Coating reporting unit (which is within the Commercial segment). We completed our annual goodwill impairment test as ofOctober 4, 2020 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 4, 2020 . 46 -------------------------------------------------------------------------------- A summary of the key assumptions utilized in the goodwill impairment analysis atOctober 4, 2020 , as it relates to the fair values and the sensitivities for these assumptions follows: As of October 4, 2020 Engineered Building Metal Insulated Windows Siding Systems Components Metal Panels Assumptions: Income Approach: Terminal growth rate 3.5 % 3.0 % 3.0 % 3.0 % 3.0 % Discount rate 15.0 % 11.5 % 14.5 % 13.0 % 13.0 % Market approach: Control premiums 0.0 % 0.0 % 5.0 % 5.0 % 5.0 % Sensitivities
(in thousands)
Estimated fair value decrease in the
$ 22,300 $ 25,700 event of a 1% decrease in the terminal year growth Estimated fair value decrease in the$ 244,700 $ 137,100 $ 43,600 $ 36,500 $ 44,700 event of a 1% decrease in the discount rate Estimated fair value decrease in the n/a n/a$ 3,700 $ 3,100 $ 3,800 event of a 1% decrease in the control premium
Overall, we utilize the same key assumptions in preparing the prospective financial information utilized in the discounted cash flow test for the reporting units. However, each reporting unit is impacted differently by industry trends, how market factors are influencing the reporting units' expected performance, competition, and other unique business factors as mentioned above. (in thousands)
As ofOctober 4, 2020 Estimated Windows reporting unit fair value increase (decrease) in the $
(10,500)
event of a 10% increase in the weighting of the market multiples method Estimated Siding reporting unit fair value increase (decrease) in the $
19,150
event of a 10% increase in the weighting of the market multiples
method
(500)
increase (decrease) in the event of a 10% increase in the weighting of the market multiples method Estimated Metal Components reporting unit fair value increase $
(900)
(decrease) in the event of a 10% increase in the weighting of the market multiples method Estimated Insulated Metal Panels reporting unit fair value increase $
(6,200)
(decrease) in the event of a 10% increase in the weighting of the market multiples method
The Company's annual goodwill impairment tests performed as ofOctober 4, 2020 indicated no impairment. The Company's estimate of the fair value of its Windows, Siding,Engineered Building Systems , Metal Components, and Insulated Metal Panels reporting units exceeded their carrying values by approximately 33%, 29%, 192%, 139%, and 41%, respectively. We provide no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase, or (3) the earnings, book values or projected earnings and cash flows of our reporting units will not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods and future declines in the residential housing and remodeling markets and nonresidential markets as well as good 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 47 -------------------------------------------------------------------------------- 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, 2020 , the$56.3 million net operating loss carryforward included$27.6 million forU.S federal losses,$13.3 million forU.S. state losses and$15.4 million for foreign losses. The state net operating loss carryforwards will begin to expire in 2021, if unused, and the foreign loss carryforward will begin to expire in fiscal 2029, if unused. There are limitations on the utilization of certain net operating losses. As ofDecember 31, 2020 , the Company also had a federal research and development tax credit carryforward of$4.9 million , which will expire beginning in 2027. RECENT ACCOUNTING PRONOUNCEMENTS See Note 3 - Accounting Pronouncements in the notes to the consolidated financial statements for information on recent accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Windows and Siding Businesses We are subject to market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum and glass. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly. We manage the exposure to commodity pricing risk by increasing our selling prices for corresponding material cost increases, continuing to diversify our product mix, strategic buying programs and vendor partnering. The average market price for PVC resin was estimated to have increased approximately 11.0% for the fiscal year endedDecember 31, 2020 as compared to the fiscal year endedDecember 31, 2019 . Commercial Business We are subject to market risk exposure related to volatility in the price of steel. For the fiscal year endedDecember 31, 2020 , material costs (predominantly steel costs) constituted approximately 61% of our Commercial segment cost of sales. Our business is heavily dependent on the price and supply of steel. Our various products are fabricated from steel produced by mills to forms including bars, plates, structural shapes, sheets, hot-rolled coils and galvanized or Galvalume®-coated coils (Galvalume® is a registered trademark ofBIEC International, Inc. ). The steel industry is highly cyclical in nature, and steel prices have been volatile in recent years and may remain volatile in the future. Steel prices are influenced by numerous factors beyond our control, including general economic conditions domestically and internationally, the availability of raw materials, competition, labor costs, freight and transportation costs, production costs, import duties and other trade restrictions. Based on the cyclical nature of the steel industry, we expect steel prices will continue to be volatile. With material costs (predominantly steel costs) accounting for approximately 61% of our Commercial segment's cost of sales for fiscal 2020, a one percent change in the cost of steel could have resulted in a pre-tax impact on cost of sales of approximately$7.3 million for our fiscal year endedDecember 31, 2020 . The impact to our financial results of operations of such an increase would be significantly dependent on the competitive environment and the costs of other alternative building products, which could impact our ability to pass on these higher costs. Impact of Raw Material Prices In the ordinary course of business, we are exposed to the volatility of the costs of our raw materials. Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing process. Generally, we have been able to 48 -------------------------------------------------------------------------------- pass on price increases to our customers. However, a timing effect can result in raw material spread whereby costs can be over- or under-recovered in certain periods. Other Commodity Risks In addition to market risk exposure related to the volatility in the price of steel, we are subject to market risk exposure related to volatility in the price of natural gas. As a result, we occasionally enter into both index-priced and fixed-price contracts for the purchase of natural gas. We have evaluated these contracts to determine whether the contracts are derivative instruments. Certain contracts that meet the criteria for characterization as a derivative instrument may be exempted from hedge accounting treatment as normal purchases and normal sales and, therefore, these forward contracts are not marked to market. AtDecember 31, 2020 , all our contracts for the purchase of natural gas met the scope exemption for normal purchases and normal sales. Interest Rates We are subject to market risk exposure related to changes in interest rates on our Current Cash Flow Facilities and Current ABL Facility, which provides for borrowings of up to$2,675.0 million on the Current Cash Flow Facilities and up to$611.0 million on the Current ABL Facility. These instruments bear interest at an agreed upon percentage point spread from either the prime interest rate or LIBOR. Assuming the Current Cash Flow Revolver is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately$6.7 million per year for the Current Cash Flow Facilities. Assuming the Current ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately$1.5 million per year. The fair value of our Term Loan Credit Facility atDecember 31, 2020 and 2019 was approximately$2,485.5 million and$2,514.9 million , respectively, compared to the face value of$2,498.0 million and$2,523.6 million , respectively. InMay 2019 , we entered into cash flow interest rate swap hedge contracts for$1.5 billion to mitigate the exposure risk of our floating interest rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate payment. AtDecember 31, 2020 , our cash flow hedge contracts had a fair value liability of$75.8 million and is recorded as a non-current liability as ofDecember 31, 2020 in our consolidated balance sheets. See Note 12 - Long-Term Debt in the notes to the consolidated financial statements for more information on the material terms of our long-term debt. Foreign Currency Exchange Rates We are exposed to the effect of exchange rate fluctuations on theU.S. dollar value of foreign currency denominated operating revenue and expenses. The functional currency for ourMexico operations is theU.S. dollar. Adjustments resulting from the remeasurement of the local currency financial statements into theU.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income (loss) in the current period. Net foreign currency remeasurement gains (losses) were$0.2 million ,$0.9 million and$(0.1) million for fiscal 2020 and 2019, and the transition period endedDecember 31, 2018 , respectively. For fiscal 2018, the net foreign currency remeasurement gain (loss) was insignificant. The functional currency for our Canadian operations is the Canadian dollar. Translation adjustments resulting from translating the functional currency financial statements intoU.S. dollar equivalents are reported separately in accumulated other comprehensive income in stockholders' equity. The net foreign currency exchange gains (losses) included in net income (loss) for fiscal 2020, 2019 and 2018, and the transition period endedDecember 31, 2018 , were$1.1 million ,$1.2 million ,$(0.2) million and$(1.6) million , respectively. Net foreign currency translation adjustment, net of tax, and included in other comprehensive income (loss) was$17.3 million ,$3.2 million ,$(0.1) million and$(4.2) million for fiscal 2020, 2019 and 2018, and the transition period endedDecember 31, 2018 , respectively. InDecember 2020 , we entered into forward contracts with a financial institution throughDecember 2021 for$66.0 million at a fixed Canadian dollar rate of 1.2726 to hedge primarily our future inventory purchases inCanada . In the future, we may enter into additional foreign currency hedging contracts, to further mitigate the exposure risk of currency fluctuation against the Canadian dollar and/or the Mexican Peso. Labor Force Risk Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize, and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the residential and nonresidential construction markets continue to recover and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a 49 --------------------------------------------------------------------------------
reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.
50
--------------------------------------------------------------------------------
© Edgar Online, source