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:
•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, and steel;
•our ability to identify and develop relationships with a sufficient number of
qualified suppliers and to avoid a significant interruption in our supply
chains;
•increasing difficulty in credit or financing availability of consumers or
builders;
•increase in inflationary activity;
•ability to successfully achieve price increases;
•success of automation initiatives;
•successful integration of our acquired businesses;
•ability to recruit and retain employees;
•volatility in the United States ("U.S.") and international economies and in the
credit markets;
•the severity, duration and spread of the COVID-19 pandemic, as well as actions
that may be taken by the Company or governmental authorities to contain COVID-19
or to treat its impact;
•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•the effects of manufacturing or assembly realignments;
•retention and replacement of key personnel;
•enforcement and obsolescence of our intellectual property rights;
•costs related to compliance with, violations of or liabilities under
environmental, health and safety laws;
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•changes in building codes and standards;
•competitive activity and pricing pressure in our industry;
•our ability to make strategic acquisitions accretive to earnings and
dispositions at favorable prices and terms;
•our ability to fund acquisitions using available liquidity;
•our ability to carry out our restructuring plans and to fully realize the
expected cost savings;
•global climate change, including legal, regulatory or market responses thereto;
•breaches of our information system security measures;
•damage to our computer infrastructure and software systems;
•necessary maintenance or replacements to our enterprise resource planning
technologies;
•potential personal injury, property damage or product liability claims or other
types of litigation;
•compliance with certain laws related to our international business operations;
•increases in labor costs, potential labor disputes, union organizing activity
and work stoppages at our facilities or the facilities of our suppliers;
•significant changes in factors and assumptions used to measure certain of our
defined benefit plan obligations and the effect of actual investment returns on
pension assets;
•the cost and difficulty associated with integrating and combining acquired
businesses;
•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;
•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 ended December 31, 2020 (the "2020 Form 10-K"), and other filings we
make with the SEC .
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 2020 Form 10-K, and other risks described in
documents subsequently filed by the Company from time to time with the SEC . 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.
OVERVIEW
Cornerstone Building Brands, Inc. is the largest manufacturer of exterior
building products in North America . The Company serves residential and
commercial customers across new construction and the repair and 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
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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 leading 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 in North
America .
At Cornerstone Building Brands , corporate stewardship is a responsibility that
is deeply embedded. 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 remodel demand and the
availability and cost of financing for construction projects. Our sales normally
are lower in the first and fourth fiscal quarters of each year compared to the
second and third fiscal quarters because of unfavorable weather conditions for
construction and typical business planning cycles affecting construction.
Markets We Serve
Our products are available across several large and attractive end markets,
including residential new construction, 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 that the ongoing 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 an overall decrease in customer demand across all our markets
during 2020 as the COVID-19 pandemic caused temporary closures of non-life
sustaining businesses and delayed construction activity. Throughout this
pandemic, the Company has been adhering to mandates and other guidance from
local governments and health authorities as well as taken extraordinary measures
and invested significantly in practices to protect the health and safety of our
employees and our communities. During 2020, the Company quickly implemented a
range of actions aimed at reducing costs and preserving liquidity. These actions
included plant closures, 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, availability
under our revolving credit facilities, 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. 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.
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RESULTS OF OPERATIONS
The following table represents key results of operations on a consolidated basis
for the periods indicated:
Three Months Ended Six Months Ended
July 3, July 4, $ July 3, July 4, $
(Amounts in thousands) 2021 2020
change % change 2021 2020 change % change
Net sales $ 1,400,121 $ 1,084,936 315,185 29.1 % $ 2,667,153 $ 2,198,747 468,406 21.3 %
Gross profit 311,728 254,731 56,997 22.4 % 571,457 485,618 85,839 17.7 %
% of net sales 22.3 % 23.5 % 21.4 % 22.1 %
Selling, general and administrative
expenses 163,518 134,371 29,147 21.7 % 316,686 299,325 17,361 5.8 %
% of net sales 11.7 % 12.4 % 11.9 % 13.6 %
Restructuring and impairment charges,
net 4,652 15,411 (10,759) (69.8) % 6,490 29,246 (22,756) (77.8) %
Strategic development and acquisition
related costs (61) 784 (845) (107.8) % 3,252 5,641 (2,389) (42.4) %
Interest expense 47,458 52,384 (4,926) (9.4) % 103,957 107,219 (3,262) (3.0) %
Net income (loss) 8,927 26,899 (17,972) (66.8) % 7,272 (515,174) 522,446 (101.4) %
Net sales - Consolidated net sales for the three and six months ended July 3,
2021 increased by approximately 29.1% and 21.3%, respectively, as compared to
the same period last year. The net sales growth was driven by improved volume of
13.4% and price actions in response to rising commodity costs and other
inflationary impacts. Strong demand for residential products sold through the
Windows and Siding segments was 18.2% higher than last year, while demand for
non-residential improved approximately 3.6%.
For the first half of 2021, net sales grew 21.3% as compared to the same period
last year with approximately 55% of the increase driven by strong demand within
the Windows and Siding segments coupled with higher price realization.
Gross profit % of net sales - The Company's gross profit percentage was 22.3%
and 21.4% for the three and six months ended July 3, 2021 , respectively, which
was a 120 and 70 basis point decline over the three and six months ended July 4,
2020 , respectively. As a result of the quick pace of recovery experienced across
many end-markets, there has been a rapid rise in raw materials and many other
manufacturing input costs. While we have responded by remaining disciplined with
price leadership, the timing delay between when costs were incurred and when the
price increase was realized compressed margins. Additionally, the pace and
length of time we remain in an inflationary environment can have the effect of
reducing gross profit margins. We remain focused on structurally improving our
highly variable cost structure with cost savings initiatives. Also contributing
to the lower gross profit as a % of net sales are higher manufacturing costs
incurred to serve customers. These costs include increased freight, labor, and
maintenance expenses.
Selling, general, and administrative expenses increased 21.7% and 5.8% during
the three and six months ended July 3, 2021 , respectively, compared to the three
and six months ended July 4, 2020 . The increase was primarily driven by return
of near-term costs, such as variable compensation, IT and professional services,
to support market recovery and further growth. Additionally, selling, general,
and administrative expenses at July 4, 2020 included near-term cost savings
initiatives executed in response to the COVID-19 pandemic.
Restructuring and impairment charges, net decreased $10.8 million and $22.8
million during the three and six months ended July 3, 2021 , respectively,
compared to the three and six months ended July 4, 2020 , primarily due to
completion of operational and organizational actions taken in response to the
COVID-19 pandemic.
Strategic development and acquisition related costs decreased $0.8 million and
$2.4 million during the three and six months ended July 3, 2021 , respectively,
compared to the three and six months ended July 4, 2020 , due to the timing of
these activities, primarily acquisition related.
Interest expense decreased $4.9 million or 9.4% and $3.3 million or 3.0% in the
three and six months ended July 3, 2021 , respectively, as compared to the three
and six months ended July 4, 2020 , primarily as a result of the 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 a benefit of $1.1 million
and $0.3 million for the three and six months ended July 3, 2021 , respectively,
compared to a benefit of $17.3 million and $35.3 million for the three and six
months ended July 4, 2020 , respectively. The effective tax rate for the three
and six months ended July 3, 2021 was (13.5)% and (3.9)%, respectively, compared
to (181.2)% and 6.4% for the three and six months ended July 4, 2020 ,
respectively. The change
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in the effective tax rate was primarily driven by the improved financial results
for the three and six months ended July 3, 2021 , in addition to the impact
associated with the goodwill impairment recorded during the three months ended
April 4, 2020 .
Net income (loss) was $8.9 million or $0.07 per diluted share and $7.3 million
or $0.06 per diluted share for the three and six months ended July 3, 2021 ,
respectively.
We continue to experience positive momentum from residential single-family and
repair and remodel end-markets due to demand and historic backlog levels. Single
family housing starts were on a historic pace before construction delays and
stoppage due to the COVID-19 pandemic. Housing starts have rebounded above prior
levels and are expected to grow for the next couple of years. We are
experiencing historic backlog levels from the improving non-residential
end-markets as the Architecture Billings Index ("ABI") increases. In the current
marketplace, we continue to face significant raw material and labor inflation.
Segment Results of Operations
We report our segment information in the same way management internally
organizes the business in assessing performance and making decisions regarding
allocation of resources in accordance with ASC 280, Segment Reporting. We have
determined that we have three reportable segments, organized and managed
principally by the different industry sectors they serve. While the segments
often operate using shared infrastructure, each reportable segment is managed to
address specific customer needs in these diverse market sectors. We report all
other business activities in Corporate and unallocated costs. Corporate assets
consist primarily of cash, investments, prepaid expenses, current and deferred
taxes and property, plant and equipment associated with our headquarters in
Cary, North Carolina and office in Houston, Texas . These items (and income and
expenses related to these items) are not allocated to the operating segments.
Corporate unallocated expenses primarily include share-based compensation
expenses, restructuring charges, acquisition costs, and other expenses related
to executive, legal, finance, tax, treasury, human resources, information
technology and strategic sourcing, and corporate travel expenses. Additional
unallocated amounts primarily include non-operating items such as interest
income, interest expense 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; acquisition costs; non-cash charges;
goodwill impairment; share-based compensation expense; non-cash foreign exchange
transaction/translation (income) loss; other non-cash items; and other items.
The presentation of segment results below includes a reconciliation of the
changes for each segment reported in accordance with U.S. GAAP to a pro forma
basis to allow investors and the Company to meaningfully evaluate the percentage
change on a comparable basis from period to period. The pro forma financial
information is based on the historical information of Cornerstone, Prime Windows
LLC ("Prime Windows"), which the Company acquired on April 30, 2021 , and Kleary
Masonry, Inc. ("Kleary"), which the Company acquired on March 2, 2020 . 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 and Kleary acquisitions
or any integration costs. Pro forma balances are not necessarily indicative of
operating results had the Prime Windows and Kleary acquisitions occurred on
January 1, 2020 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 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 with U.S. GAAP. We have included reconciliations of
these non-GAAP financial measures to the most directly comparable financial
measures calculated and provided in accordance with U.S. GAAP.
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The following tables presents a comparison of net sales as reported to pro-forma
net sales for Cornerstone as if the Prime Windows and Kleary acquisitions had
occurred on January 1, 2020 :
Three months ended July 3, 2021 Three months ended July 4, 2020
(Amounts in thousands) Reported Acquisitions Pro Forma Reported Acquisitions Pro Forma
Net Sales
Windows $ 579,744 $ 6,175 $ 585,919 $ 428,275 $ 13,606 $ 441,881
Siding 362,187 - 362,187 285,249 - 285,249
Commercial 458,190 - 458,190 371,412 - 371,412
Total Net Sales $ 1,400,121 $ 6,175 $ 1,406,296 $ 1,084,936 $ 13,606 $ 1,098,542
Six Months Ended July 3, 2021 Six months ended July 04, 2020
Reported Acquisitions Pro Forma Reported Acquisitions Pro Forma
Net Sales
Windows $ 1,107,007 $ 23,936 $ 1,130,943 $ 876,725 $ 27,146 $ 903,871
Siding 678,578 - 678,578 526,292 8,358 534,650
Commercial 881,568 - 881,568 795,730 - 795,730
Total Net Sales $ 2,667,153 $ 23,936 $ 2,691,089 $ 2,198,747 $ 35,504 $ 2,234,251
The following tables reconcile Adjusted EBITDA and pro forma Adjusted EBITDA to
operating income (loss) for the periods indicated.
Consolidated
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(Amounts in thousands) 2021 2020 2021 2020
Net sales $ 1,400,121 $
1,084,936
Impact of Prime Windows and Kleary acquisitions(1) 6,175 13,606 23,936 35,504 Pro forma net sales$ 1,406,296 $
1,098,542
Operating income (loss), GAAP$ 96,810 $ 58,925 $ 152,018 $ (441,866) Restructuring and impairment charges, net 4,652 15,411 6,490 29,403 Strategic development and acquisition related costs (61) 784 3,252 5,641 Goodwill impairment - - - 503,171 Depreciation and amortization 73,286 70,711 145,901 140,480 Other (2) 14,616 13,288 20,792 18,501 Adjusted EBITDA 189,303 159,119 328,453 255,330 Impact of Prime Windows and Kleary acquisitions(1) 876 1,583 2,903 4,528 Pro Forma Adjusted EBITDA$ 190,179 $
160,702
Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales 13.5 % 14.6 % 12.3 % 11.6 % (1)Reflects the net sales and Adjusted EBITDA of Kleary for the periodJanuary 1, 2020 toMarch 1, 2020 and Prime Windows for the periodsJanuary 1, 2020 toJuly 4, 2020 andJanuary 1, 2021 toApril 29, 2021 . (2)Primarily includes$5.3 million and$8.6 million of share based compensation for the three and six months endedJuly 3, 2021 , respectively, and$5.2 million and$8.5 million for the three and six months endedJuly 4, 2020 , respectively;$8.6 million and$11.6 million in costs for the three and six months endedJuly 3, 2021 , respectively, associated with debt refinancing transactions; and$0.2 million and$(0.4) million of COVID-19 related costs for the three and six months endedJuly 3, 2021 , respectively, and$6.8 million and$8.0 million for the three and six months endedJuly 4, 2020 , respectively. Operating income (loss) for the three months endedJuly 3, 2021 increased to$96.8 million of operating income as compared to$58.9 million for the three months endedJuly 4, 2020 , primarily due to strong residential demand and price actions 39 -------------------------------------------------------------------------------- offsetting inflationary impacts, partially reduced by higher manufacturing costs incurred to serve customers and higher SG&A expense primarily driven by return of near-term costs. Restructuring and impairment charges were also lower versus prior year periods. Operating income for the six months endedJuly 3, 2021 increased to$152.0 million as compared to an operating loss of$441.9 million in the six months endedJuly 4, 2020 primarily as a result of a goodwill impairment of$503.2 million in the comparable period. Pro forma Adjusted EBITDA for the three months endedJuly 3, 2021 was$190.2 million or 13.5% of pro forma net sales, a decrease of 110 basis points from the pro forma period a year ago. On a year-to-date basis, pro forma Adjusted EBITDA as a percentage of pro forma net sales increased 70 basis points versus the comparable period. The improvement was driven by strong residential demand and price actions offsetting inflationary impacts partially reduced by higher manufacturing costs incurred to serve customers. For the first half of 2021, pro forma Adjusted EBITDA was$331.4 million , 12.3% of pro forma net sales, which increased 70 basis points over the same pro forma period a year ago. Windows Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (Amounts in thousands) 2021 2020 2021 2020 Net Sales$ 579,744 $ 428,275 $ 1,107,007 $ 876,725 Impact of Prime Windows acquisition(1) 6,175 13,606 23,936 27,146 Pro forma net sales$ 585,919 $ 441,881
Operating income (loss), GAAP$ 38,783 $ 23,101 $ 68,145 $ (290,089) Restructuring and impairment charges, net 23 4,184 955 5,650 Strategic development and acquisition related costs 1,314 - 1,314 16 Goodwill impairment - - - 320,990 Depreciation and amortization 32,174 30,182 62,972 60,035 Other 13 3,179 (74) 4,892 Adjusted EBITDA$ 72,307 $ 60,646 $ 133,312 $ 101,494 Impact of Prime Windows acquisition(1) 876 1,583 2,903 2,659 Pro Forma Adjusted EBITDA$ 73,183 $ 62,229
Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales 12.5 % 14.1 % 12.0 % 11.5 % (1)Reflects the net sales and Adjusted EBITDA of Prime Windows for the periodsJanuary 1, 2020 toJuly 4, 2020 andJanuary 1, 2021 toApril 29, 2021 . Pro forma net sales for the three and six months endedJuly 3, 2021 were 32.6% and 25.1% higher, respectively, than pro forma net sales in the same period a year ago. Strong volumes across all sales channels drove increased volume of 22.5% coupled with disciplined price actions in response to rising commodity costs and other inflationary impacts. Operating income (loss) for the three months endedJuly 3, 2021 increased to$38.8 million of operating income as compared to operating income of$23.1 million for the three months endedJuly 4, 2020 , primarily due to volume leverage coupled with favorable price, net of inflation. Operating income for the six months endedJuly 3, 2021 increased to$68.1 million as compared to an operating loss of$290.1 million for the six months endedJuly 4, 2020 , primarily due to a goodwill impairment in the comparable period. Pro forma Adjusted EBITDA for the three months endedJuly 3, 2021 was$73.2 million or 12.5% of pro forma net sales, a decrease of 160 basis points from the pro forma period a year ago. Pro forma Adjusted EBITDA increased 17.6% over prior year quarter, primarily due to increased volume of 47.2% and favorable price, net of commodity and other inflation impacts, partially offset by increased manufacturing costs to serve customers and inefficiencies caused by labor shortages. On a year-to-date basis, pro forma net sales increased 25.1%, and pro forma Adjusted EBITDA margin increased 50 basis points. 40 -------------------------------------------------------------------------------- Siding Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (Amounts in thousands) 2021 2020 2021 2020 Net Sales$ 362,187 $ 285,249 $ 678,578 $ 526,292 Impact of Kleary acquisition(1) - - - 8,358 Pro forma net sales$ 362,187 $ 285,249
Operating income (loss), GAAP$ 53,383 $ 30,638 $ 80,911 $ (138,229) Restructuring and impairment charges, net 13 2,524 154 3,615 Strategic development and acquisition related costs (3,167) 955 (2,844) 976 Goodwill impairment - - - 176,774 Depreciation and amortization 29,209 28,514 58,357 56,521 Other - 642 (19) 350 Adjusted EBITDA 79,438 63,273$ 136,559 $ 100,007 Impact of Kleary acquisition(1) - - - 1,869 Pro Forma Adjusted EBITDA$ 79,438 $ 63,273 $ 136,559 $ 101,876 Adjusted EBITDA as a % of Net Sales 21.9 % 22.2 % 20.1 % 19.0 % Pro Forma Adjusted EBITDA as a % of Pro Forma Net Sales 21.9 % 22.2 % 20.1 % 19.1 % (1)Reflects the net sales and Adjusted EBITDA of Kleary for the periodJanuary 1, 2020 toMarch 1, 2020 . Net sales for the three and six months endedJuly 3, 2021 were 27.0% and 26.9% higher than the net sales and pro forma net sales, respectively, in the same period a year ago. Rapid recovery of residential demand coupled with rising raw material costs resulted in favorable price/mix of approximately 15% versus prior year. Additionally, strong order momentum in the wholesale and retail channels drove a 12% volume increase in net sales. Operating income (loss) for the three months endedJuly 3, 2021 increased to$53.4 million of operating income, as compared to operating income of$30.6 million for the three months endedJuly 4, 2020 , primarily due to increased volume leverage from strong demand coupled with price actions offsetting inflationary impacts from commodities and other manufacturing costs partially offset by higher freight charges and return of near-term costs in SG&A. Operating income for the six months endedJuly 3, 2021 increased to$80.9 million , as compared to an operating loss of$138.2 million for the six months endedJuly 4, 2020 , primarily due to a goodwill impairment in the comparable period. Adjusted EBITDA for the three months endedJuly 3, 2021 was$79.4 million or 21.9% of net sales, an increase of 25.5%, primarily due to increased volume of 20.1% and favorable price, net of commodity and other inflation impacts, partially offset by increased manufacturing costs to serve customers. On a year-to-date basis, net sales increased 26.9%, and Adjusted EBITDA1 margin increased 100 basis points. Commercial Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (Amounts in thousands) 2021 2020 2021 2020 Net Sales$ 458,190 $ 371,412
Operating income, GAAP$ 53,330 $ 36,664 $ 94,915 $ 53,505 Restructuring and impairment charges, net 2,374 7,364 3,046 19,069 Strategic development and acquisition related costs 774 (149) 832 (254) Goodwill impairment - - - 5,407 Depreciation and amortization 10,643 11,020 22,003 21,921 Other 385 1,632 128 2,859 Adjusted EBITDA$ 67,506 $ 56,531 $ 120,924 $ 102,507 Adjusted EBITDA as a % of Net Sales 14.7 % 15.2 % 13.7 % 12.9 % 41
-------------------------------------------------------------------------------- Net sales for the three and six months endedJuly 3, 2021 were 23.4% and 10.8% higher than the same period a year ago, respectively, driven by disciplined price actions to mitigate rising steel costs. This combined with an increase in volume of 3.6% and flat volume of 0.1% respectively during the three and six months endedJuly 3, 2021 driven by strong demand despite supply constraints. Operating income for the three months endedJuly 3, 2021 increased$16.7 million or 45.5% compared to the three months endedJuly 4, 2020 , primarily due to realization of price actions taken to offset rising steel and other manufacturing costs coupled with higher volume from positive end-market demand offsetting return of near-term costs and manufacturing inefficiencies as a result of supply constraints. Operating income for the six months endedJuly 3, 2021 increased$41.4 million or 77.4% compared to the six months endedJuly 4, 2020 , due to lower selling, general and administrative expenses, and lower restructuring and impairment charges, improved manufacturing efficiencies and structural cost,$5.4 million of a goodwill impairment incurred in the comparable period, favorable price/mix, net of inflation. Adjusted EBITDA for the three months endedJuly 3, 2021 was$67.5 million or 14.7% of net sales, a decrease of 50 basis points from the same period a year ago primarily due to favorable price, net of commodity and other inflation impacts, partially offset by manufacturing inefficiencies caused by material constraints and labor shortages. On a year-to-date basis, net sales increased 10.8%, and Adjusted EBITDA margin increased 80 basis points. Unallocated Operating Losses Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (Amounts in thousands) 2021 2020 2021 2020 Statement of operations data: SG&A expenses$ (47,669) $ (31,484) $ (88,003) $ (62,134) Acquisition related expenses (1,017) 6 (3,950) (4,919) Operating loss (48,686) (31,478)$ (91,953) $ (67,053) Unallocated operating losses include items that are not directly attributed to or allocated to our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the three months endedJuly 3, 2021 increased by$17.2 million or 55% compared to the three months endedJuly 4, 2020 , and increased by$24.9 million or 37.1% compared to the six months endedJuly 4, 2020 . The change is due primarily to the return of near-term expenses such as bonus and commission costs. Unallocated operating loss includes$5.3 million and$5.2 million of share-based compensation expense for the three months endedJuly 3, 2021 andJuly 4, 2020 , respectively, and$8.6 million and$8.5 million for the six months endedJuly 3, 2021 andJuly 4, 2020 , respectively. 42 -------------------------------------------------------------------------------- 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. We typically invest our excess cash in various overnight investments that are issued or guaranteed by theU.S. federal government. Our cash, cash equivalents and restricted cash decreased from$680.5 million as ofDecember 31, 2020 to$95.2 million as ofJuly 3, 2021 . The following table summarizes our consolidated cash flows for the six months endedJuly 3, 2021 andJuly 4, 2020 (in thousands): Six Months Ended July 3, July 4, 2021 2020 Net cash provided by (used in) operating activities$ (11,721) $ 66,962 Net cash used in investing activities (141,311) (89,336) Net cash provided by (used in) financing activities (431,363) 410,295 Effect of exchange rate changes on cash and cash equivalents (881) (508)
Net increase (decrease) in cash, cash equivalents and restricted cash
(585,276) 387,413
Cash, cash equivalents and restricted cash at beginning of period 680,478
102,307
Cash, cash equivalents and restricted cash at end of period
Operating Activities The Company used cash in operating activities during the six months endedJuly 3, 2021 to invest in working capital items to support strong market demand. The following table shows the impact of working capital items on cash during the six months endedJuly 3, 2021 andJuly 4, 2020 , respectively (in thousands): Six Months Ended July 3, July 4, 2021 2020 $ Change Net cash (used in) provided by: Accounts receivable$ (119,813) $ (24,844) $ (94,969) Inventories (176,077) 36,872 (212,949) Accounts payable 73,627 (7,818) 81,445 Net cash (used in) provided by working capital items$ (222,263) $ 4,210 $ (226,473) The use of cash for working capital between periods was due to robust market demand across the segments coupled with aggressive price actions in response to rising commodity costs and other inflationary impacts. See the Consolidated Statements of Cash Flows in the unaudited consolidated financial statements for additional information. Investing Activities Net cash used in investing activities was$141.3 million during the six months endedJuly 3, 2021 compared to$89.3 million used in investing activities during the six months endedJuly 4, 2020 . During the six months endedJuly 3, 2021 , we paid approximately$94.4 million toward acquisitions and we used$47.6 million for capital expenditures. In the six months endedJuly 4, 2020 , we paid approximately$41.8 million , net of cash acquired, for the acquisition of Kleary and used$47.6 million for capital expenditures. Financing Activities Net cash used in financing activities was$431.4 million during the six months endedJuly 3, 2021 compared to$410.3 million provided by financing activities in the six months endedJuly 4, 2020 . During the six months endedJuly 3, 2021 , we borrowed an additional$108.4 million on our Current Term Loan Facility, borrowed$160.0 million on our Current ABL Facility, paid$670.8 million to redeem the 8.00% Senior Notes and paid quarterly installments of$12.9 million on the Current Term Loan Facility. 43 -------------------------------------------------------------------------------- During the six months endedJuly 4, 2020 , we borrowed$40.0 million on our Current ABL Facility to finance the acquisition of Kleary, borrowed an additional$305.0 million on our Current ABL Facility and repaid$30.0 million of that amount, and$115.0 million on our Current Cash Flow Revolver to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic, paid$12.8 million on quarterly installments on our Current Term Loan Facility and used$6.4 million to repurchase shares of our outstanding common stock under our stock repurchase programs. Debt Below is a reconciliation of the Company's net debt (in thousands) as of the dates indicated. Management considers net debt to be more representative of the Company's financial position than total debt due to the amount of cash and cash equivalents held by the Company and the ability to utilize such cash and cash equivalents to reduce debt if needed. July 3,
2021 2020
Asset-based revolving credit facility due
-
Term loan facility dueApril 2028 2,593,500
2,497,967
Cash flow revolver dueApril 2026 -
-
8.00% senior notes dueApril 2026 -
645,000
6.125% senior notes dueJanuary 2029 500,000
500,000
Total Debt 3,253,500
3,642,967
Less: Cash and cash equivalents 88,978 674,255 Net Debt$ 3,164,522 $ 2,968,712 OnApril 15, 2021 , the Company fully redeemed its$645 million aggregate principal amount of 8.00% Senior Notes using available cash from the balance sheet and net proceeds from its extended and upsized senior term loan facility. The Company successfully upsized and extended the maturity of its$2,492 million senior term loan facility due 2025 in the form of$2,600 million in Tranche B term loans dueApril 12, 2028 . Additionally, the Company amended and refinanced its senior cash flow based and asset-based revolving credit facilities, extending the maturities toApril 12, 2026 . In connection with the new Tranche B term loans, the Company also terminated existing two interest rate swaps and entered into two new swaps maturing inApril 2026 on an aggregate notional value of$1.5 billion . The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment. We may not be successful in refinancing, extending the maturity or otherwise amending the terms of our outstanding indebtedness in the future because of market conditions, disruptions in the debt markets, our financial performance or other reasons. Furthermore, the terms of any refinancing, extension or amendment may not be as favorable as the current terms of our indebtedness. If we are not successful in refinancing our indebtedness or extending its maturity, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure our indebtedness. For additional information, see Note 14 - Long-Term Debt and Note 15 - Derivatives in the notes to the unaudited consolidated financial statements. Additional Liquidity Considerations We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short-term and long-term liquidity requirements, including payment of operating expenses and repayment of debt, we rely primarily on cash from operations. The following table summarizes key liquidity measures under the Current ABL Credit Agreement and the Current Cash Flow Credit Agreement in effect as ofJuly 3, 2021 andDecember 31, 2020 (in thousands): 44 -------------------------------------------------------------------------------- July 3,
2021 2020
Asset-based revolving credit facility due
611,000 Eligible borrowing base 611,000 568,000 Less: Borrowings 160,000 - Less: LCs outstanding and priority payables 47,000
40,000
Net ABL availability 404,000
528,000
Plus: Cash flow revolver dueApril 2026 115,000
115,000
Plus: Cash and cash equivalents 88,978 674,255 Total Liquidity$ 607,978 $ 1,317,255 We expect to contribute$3.2 million to the defined benefit plans and$0.7 million to the postretirement medical and life insurance plans in the year endingDecember 31, 2021 . OnApril 15, 2021 , the Company fully redeemed its$645 million aggregate principal amount of 8.00% Senior Notes using available cash from the balance sheet and net proceeds from its extended and upsized senior term loan facility, which reduced total liquidity. We expect that cash generated from operations and our availability under the ABL Credit Facility and Current Cash Flow Revolver will be sufficient to provide us the ability to fund our operations and to provide the increased working capital necessary to support our strategy and fund planned capital expenditures for fiscal 2021 and expansion when needed. The Company expects total capital expenditures to be approximately 2.0% to 2.5% of net sales during fiscal 2021. Consistent with our growth strategy, we evaluate potential acquisitions that would provide additional synergies in our Windows, Siding and Commercial segments. From time to time, we may enter into letters of intent or agreements to acquire assets or companies in these business lines. The consummation of these transactions could require substantial cash payments and/or issuance of additional debt. OnApril 30, 2021 , the Company acquired Prime Windows. Prime Windows serves residential new construction and repair and remodel markets with energy efficient vinyl window and door products from two manufacturing facilities inthe United States , expanding our manufacturing capabilities and creating new opportunities for us in theWestern United States . This acquisition was funded through borrowings under the Company's existing credit facilities. OnJuly 30, 2021 , the Company entered into an agreement to acquireCascade Windows . We expect the transaction to close during the third quarter of 2021, subject to regulatory approval and the satisfaction of customary closing conditions.Cascade Windows serves the residential new construction and repair and remodel markets with energy efficient vinyl window and door products from various manufacturing facilities inthe United States , expanding our manufacturing capabilities and creating new opportunities for us in theWestern United States . We anticipate funding the acquisition with cash available on the balance sheet. We also evaluate from time-to-time possible dispositions of assets or businesses when such assets or businesses are no longer core to our operations and do not fit into our long-term strategy. OnJune 7, 2021 , the Company announced that it has entered into a definitive agreement to sell its insulated metal panels ("IMP") business toNucor Insulated Panel Group Inc and certain of its subsidiaries (collectively, "Nucor") in a cash transaction for$1 billion . The IMP transaction includes products sold under the Metl-Span and CENTRIA brands. OnJuly 27, 2021 , the Company announced that it has entered into a definitive agreement to sell its roll-up sheet door business to Janus International Group, Inc. ("Janus") in a cash transaction for$168 million . The roll-up sheet door transaction includes products sold under the DBCI brand. Both transactions are expected to close in the second-half of 2021, subject to regulatory approval and other customary closing conditions. The Company expects post-tax proceeds of approximately$875 million from these transactions to be used to pay down a portion of its secured credit facilities, invest in organic growth and efficiency projects, and make strategic acquisitions. From time to time, we have used available funds to repurchase shares of our common stock under our stock repurchase programs. OnMarch 7, 2018 , we announced that our Board of Directors authorized a new stock repurchase program for the repurchase of up to an aggregate of$50.0 million of our outstanding Common Stock. Under this repurchase 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 program. During the six months endedJuly 3, 2021 , there were no stock repurchases under the stock repurchase program. As ofJuly 3, 2021 , 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 45 -------------------------------------------------------------------------------- restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of share-based compensation. We may from time to time take steps to reduce our debt or otherwise improve our financial position. These actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt and raising additional capital. The amount of prepayments or the amount of debt that may be refinanced, repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding on our consolidated balance sheets. OFF-BALANCE SHEET ARRANGEMENTS As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofJuly 3, 2021 , we were not involved in any material unconsolidated SPE transactions. CONTRACTUAL OBLIGATIONS Our contractual obligations principally include obligations associated with our outstanding indebtedness, operating lease obligations and inventory purchase commitments. Contractual obligations did not materially change during the six months endedJuly 3, 2021 , except for debt related activities as disclosed in Note 14 - Long-Term Debt in the notes to the unaudited consolidated financial statements and in Liquidity and Capital Resources - Financing Activities, and lease activity as disclosed in Note 9 - Leases in the notes to the unaudited consolidated financial statements. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies include those that pertain to accounting for acquisitions, intangible assets and goodwill; warranty; and income taxes, which are described in Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 - Accounting Pronouncements in the notes to the unaudited consolidated financial statements for information on recent accounting pronouncements. 46
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