NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 1 —Basis of Presentation
Description of Business
Cornerstone Building Brands, Inc. (“Cornerstone Building Brands” or, collectively with its subsidiaries, unless the context requires otherwise, the “Company”) is a holding company incorporated in Delaware. The Company is the largest exterior building products manufacturer by sales in North America and serves residential and commercial customers across new construction and the repair and remodel end markets. The Company is organized in three reportable segments, which we have renamed as follows: Aperture Solutions, Surface Solutions and Shelter Solutions.
Organization and Ownership Structure
On July 25, 2022 and pursuant to an Agreement and Plan of Merger dated March 5, 2022 (the “Merger Agreement”) by and among the Company, Camelot Return Intermediate Holdings, LLC (“Camelot Parent”), and Camelot Return Merger Sub, Inc. (“Merger Sub”), investments funds managed by Clayton, Dubilier and Rice, LLC (“CD&R”) became the indirect owners of all the issued and outstanding shares of common stock of Cornerstone Building Brands. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “Merger”), with the Company surviving the Merger as a subsidiary of Camelot Parent (the “Surviving Corporation”). At the effective time of the Merger (the “Effective Time”), the Company became a privately held company and its shares were no longer traded on the New York Stock Exchange.
At the Effective Time, in accordance with the terms and conditions set forth in the Merger Agreement, each share of Company common stock outstanding immediately prior to the Effective Time of the Merger (other than (i) shares of Company common stock that were cancelled or converted into shares of common stock of the Surviving Corporation in accordance with the Merger Agreement and (ii) shares of Company common stock held by stockholders of the Company (other than CD&R, certain investment funds managed by CD&R and other affiliates of CD&R that held shares of Company common stock) who did not vote in favor of the Merger Agreement or the Merger and who have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware), was converted into the right to receive cash in an amount equal to $24.65 in cash per share, without interest and subject to any required withholding taxes.
On July 25, 2022, the Company amended its Certificate of Incorporation to authorize 1,000 shares of common stock, par value of $0.01. Each share of common stock will have one vote and all shares of common stock vote together as a single class.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements have been prepared with the Company's accounting policies and on the same basis as those financial statements included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2022 and should be read in conjunction with those Consolidated Financial Statements and the Notes thereto. Certain disclosures normally included in the Company’s Consolidated Financial Statements prepared in accordance with U.S. GAAP have been omitted on a basis consistent with the rules and regulations of the SEC.
The accompanying Condensed Consolidated Financial Statements include the accounts and operations of the Company and its majority-owned subsidiaries and all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. All intercompany accounts and transactions have been eliminated in consolidation. Through application of pushdown accounting, the Company’s Condensed Consolidated Financial Statements are presented as Predecessor for periods prior to the Merger and Successor for subsequent periods. The Company has reclassified certain prior year amounts to conform to the current year’s presentation. The results reported in these Condensed Consolidated Financial Statements should not be regarded as necessarily indicative of results that may be expected for the entire year.
Note 2 — Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Condensed Consolidated Financial Statements and accompanying notes. These estimates include, but are not limited to: establishing the allowance for expected credit losses; allowance for obsolete inventory; the impairment of goodwill and intangible assets; establishing useful lives for and evaluating the recovery of long-lived assets; recognizing the fair value of assets acquired and liabilities assumed in business combinations; accounting for rebates and product warranties; the valuation and expensing for share-based compensation; certain assumptions made in accounting for pension benefits; accounting for contingencies and uncertainties and accounting for income taxes. Actual results may differ from the estimates used in preparing the Condensed Consolidated Financial Statements.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents consists of instruments with an original maturity of three months or less. As of April 1, 2023, the Company’s cash and cash equivalents were only invested in cash.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that total the amounts shown in the Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | |
| Successor |
| | April 1,
2023 | | December 31,
2022 |
| Cash and cash equivalents | $ | 379,231 | | | $ | 553,551 | |
Other current assets - Restricted cash(1) | 463 | | | 463 | |
| Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 379,694 | | | $ | 554,014 | |
(1) Restricted cash primarily relates to indemnification agreements and is included in other current assets in the Condensed Consolidated Balance Sheets.
Accounts Receivable, Net
The Company reports accounts receivable net of an allowance for expected credit losses. The Company establishes provisions for expected credit losses based on the Company’s assessment of the collectability of amounts owed to the Company by its customers. In establishing the allowance, the Company considers changes in the financial position of a customer, age of the accounts receivable balances, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with its customers. The Company’s allowance for expected credit losses was $2.9 million at April 1, 2023 and was $2.1 million at December 31, 2022.
Fair Value Measurements
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of April 1, 2023 and December 31, 2022 given the instruments relatively short maturities. The carrying amounts of the indebtedness under revolving credit facilities approximate fair value as the interest rates are variable and reflective of market rates. Fair values for our other debt instruments are measured using Level 1 and Level 2 inputs. U.S. GAAP, requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the reference rate transition. The amendments in these ASUs are elective, apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of rate reform. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, that deferred the sunset date of Topic 848 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company is evaluating the impact of electing to apply the amendments.
Note 3 — Merger
CD&R Merger Transaction
On July 25, 2022, Merger Sub merged with and into the Company, with the Company surviving the Merger as a subsidiary of Camelot Parent. CD&R previously held 61.9 million shares of the Company immediately prior to the Merger. As a result of the Merger, CD&R became the indirect owners of all of the issued and outstanding shares of Company common stock that CD&R did not already own.
The Merger was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair market value at the date of the Merger.
The Merger was funded in part with proceeds from the following issuances:
•$300.0 million aggregate principal amount term loan facility, due August 2028;
•$710.0 million of 8.750% Senior Secured Notes due August 2028;
•$564.4 million of cash from the Company;
•$464.4 million aggregate principal amount of 2.99% senior payment-in-kind notes due 2029 that were issued by Camelot Return Parent, LLC (“Camelot Return Parent”), an indirect parent of the Company, and are held by Arawak X, L.P. (“Arawak X”), an affiliate of CD&R; and
•$195.0 million from preferred shares of Camelot Return Parent.
Neither the Company nor any of its subsidiaries is a guarantor of or is obligated to make any payments related to the 2.99% senior payment-in-kind notes due 2029 issued by Camelot Return Parent.
The calculation of the total consideration paid is as follows:
| | | | | |
| Consideration |
| Common shares purchased | 65,613,349 | |
| Common share closing price | $ | 24.65 | |
| Merger consideration, common shares purchased | $ | 1,617,369 | |
Effective settlement of pre-existing relationships (1) | 128,721 | |
| Total merger consideration | 1,746,090 | |
Fair value of common shares previously held by CD&R and other adjustments(2) | 1,526,591 | |
| Total equity value | $ | 3,272,681 | |
(1) Consists mainly of employee share-based compensation awards that were outstanding at that time the Merger was consummated.
(2) Consists of 61.9 million common shares, with shares rolled over or acquired by Camelot Parent.
The following table summarizes the fair value of net assets acquired:
| | | | | |
| Fair Value |
| Merger consideration | $ | 1,746,090 | |
| Fair value of common shares previously held by CD&R and other adjustments | 1,526,591 | |
| Total equity value | $ | 3,272,681 | |
| |
| Cash and cash equivalent | $ | 1,087,586 | |
| Accounts receivable | 794,341 | |
| Inventories | 768,827 | |
| Property, plant and equipment | 581,617 | |
| Lease right-of-use assets | 252,262 | |
| Goodwill | 1,694,848 | |
| Intangible assets | 2,610,685 | |
| Other assets | 120,543 | |
| Total assets acquired | 7,910,709 | |
| Accounts payable | 329,896 | |
| Accrued liabilities | 624,497 | |
| Long-term debt | 2,467,210 | |
| Long-term lease liabilities | 252,262 | |
| Deferred income tax liabilities | 678,627 | |
| Other liabilities | 285,536 | |
| Total liabilities assumed | 4,638,028 | |
| Net assets acquired | $ | 3,272,681 | |
The above purchase price allocation is based upon provisional information and is subject to revision during the measurement period (up to one year from the date of the Merger) as additional information concerning valuations is obtained. During the measurement period, as the Company obtains new information regarding facts and circumstances that existed as of the date of the Merger that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise the provisional purchase price allocation and may include, but not limited to, adjustments pertaining to intangible assets acquired, property, plant and equipment acquired and tax liabilities assumed. The effect of measurement period adjustments on the estimated fair value elements will be reflected as if the adjustments had been made as of the date of the Merger. Residual amounts will be allocated to goodwill.
As part of pushdown accounting, the Company recorded the provisional goodwill and it has been allocated to reporting units expected to benefit from the business combination. The goodwill is mainly attributable to costs savings in manufacturing productivity; freight and logistics; procurement; and other operating costs, as well as operational improvements in recent acquisitions to be achieved subsequent to the Merger. The goodwill recorded is not deductible for income tax purposes.
The Company identified intangible assets for customer relationships and trade names and other. Intangible assets are amortized on a straight-line basis over their expected useful lives. The provisional fair value and weighted average estimated useful life of identifiable intangible assets consists of the following:
| | | | | | | | | | | |
| Fair Value | | Weighted Average Useful Life
(in years) |
| Customer relationships | $ | 2,088,548 | | | 13 |
| Trade names and other | 522,137 | | | 13 |
| Total | $ | 2,610,685 | | | |
The Company incurred transaction costs of $29.4 million associated with the Merger, of which $0.7 million was recognized in the period from July 25, 2022 through December 31, 2022 and $28.7 million was recognized in the period from January 1, 2022
through July 24, 2022. These costs are included in selling, general and administrative expenses on the Condensed Consolidated Statements of (Loss) Income.
Unaudited Pro Forma Financial Information
Had the Merger occurred at the beginning of 2022, unaudited pro forma revenues and net income for the three months ended April 1, 2023 and April 2, 2022 would not have been materially different than the amounts reported as the pro forma adjustments would primarily reflect the amortization of intangibles and depreciation of property, plant and equipment that received a step up in basis and the cost to finance the transaction, net of the related tax effects. The unaudited supplemental pro forma financial information would not give effect to the potential impact of current financial conditions, operating efficiencies or cost savings that may result from the Merger or any integration costs. Unaudited pro forma balances would not necessarily be indicative of operating results had the Merger occurred on January 1, 2022 or of future results.
Note 4 — Inventories
The following table sets forth the components of inventories: | | | | | | | | | | | |
| Successor |
| | April 1, 2023 | | December 31, 2022 |
| Raw materials | $ | 323,980 | | | $ | 312,380 | |
| Work in process | 68,480 | | | 67,424 | |
| Finished goods | 179,427 | | | 172,024 | |
| Total inventories | $ | 571,887 | | | $ | 551,828 | |
Note 5 — Goodwill and Intangible Assets
Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Aperture
Solutions | | Surface
Solutions | | Shelter
Solutions | | Total |
| Balance, December 31, 2022 (Successor) | $ | 624,009 | | | $ | 790,452 | | | $ | 274,087 | | | $ | 1,688,548 | |
Measurement period adjustments(1) | 1,254 | | | — | | | — | | | 1,254 | |
| Currency translation | 427 | | | 320 | | | — | | | 747 | |
| Balance, April 1, 2023 (Successor) | $ | 625,690 | | | $ | 790,772 | | | $ | 274,087 | | | $ | 1,690,549 | |
(1) Measurement period adjustments have been recorded as the Company has obtained additional information since the preliminary purchase price allocation of the assets and liabilities acquired in connection with the Merger.
Intangible Assets, Net
The following table sets forth the major components of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Life (Years) | | Weighted Average Amortization Period (Years) | | Cost | | Accumulated Amortization | | Net Carrying Value |
As of April 1, 2023(1) (Successor) | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | |
| Trademarks, trade names and other | | 13 | | | 13 | | $ | 522,137 | | | $ | (27,894) | | | $ | 494,243 | |
| Customer lists and relationships | | 13 | | | 13 | | 2,088,548 | | | (111,575) | | | 1,976,973 | |
| Total intangible assets | | | | | | | $ | 2,610,685 | | | $ | (139,469) | | | $ | 2,471,216 | |
| | | | | | | | | | | |
As of December 31, 2022(1) (Successor) | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | |
| Trademarks, trade names and other | | 13 | | | 13 | | $ | 522,137 | | | $ | (18,332) | | | $ | 503,805 | |
| Customer lists and relationships | | 13 | | | 13 | | 2,088,548 | | | (73,330) | | | 2,015,218 | |
| Total intangible assets | | | | | | | $ | 2,610,685 | | | $ | (91,662) | | | $ | 2,519,023 | |
(1) In connection with the Merger, the Company recorded a provisional intangible asset fair value. The fair value is based on preliminary information and subject to revision during the measurement period.
Intangible assets are amortized on a straight-line basis. Amortization expense related to intangible assets was $47.9 million for the three months ended April 1, 2023 and $49.0 million for the three months ended April 2, 2022.
Note 6 — Product Warranties
The following table sets forth the changes in the carrying amount of product warranties liability:
| | | | | | | | | | | | | | | |
| Successor | | | Predecessor | |
| | Three Months Ended
April 1, 2023 | | | Three Months Ended
April 2, 2022 | |
| Balance, beginning of period | $ | 202,463 | | | | $ | 218,356 | | |
| Warranties sold | 324 | | | | 390 | | |
| Revenue recognized | (612) | | | | (606) | | |
| Expense | 12,501 | | | | 10,817 | | |
| Settlements | (11,292) | | | | (8,481) | | |
| Balance, end of period | $ | 203,384 | | | | $ | 220,476 | | |
| Reflected as: | | | | | |
| Current liabilities – Rebates, warranties and other customer-related liabilities | $ | 26,936 | | | | $ | 29,944 | | |
| Noncurrent liabilities – Other long-term liabilities | 176,448 | | | | 190,532 | | |
| Total product warranty liability | $ | 203,384 | | | | $ | 220,476 | | |
Note 7 – Long-Term Debt
The following table sets forth the components of long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| | | April 1, 2023 | | December 31, 2022 |
| Effective Interest Rate | | Principal Outstanding | | Unamortized Fair Value Adjustment(1) | | Unamortized Discount and Issuance Costs | | Carrying Amount | | Principal Outstanding | | Unamortized Fair Value Adjustment(1) | | Unamortized Discount and Issuance Costs | | Carrying Amount |
| Term loan facility, due April 2028 | 8.57 | % | | $ | 2,548,000 | | | $ | (335,240) | | | $ | — | | | $ | 2,212,760 | | | $ | 2,554,500 | | | $ | (348,769) | | | $ | — | | | $ | 2,205,731 | |
| Term loan facility, due August 2028 | 9.69 | % | | 300,000 | | | — | | | (20,780) | | | 279,220 | | | 300,000 | | | — | | | (21,538) | | | 278,462 | |
6.125% Senior Notes, due January 2029 | 12.16 | % | | 343,866 | | | (101,445) | | | — | | | 242,421 | | | 365,541 | | | (111,524) | | | — | | | 254,017 | |
8.750% Senior Secured Notes, due August 2028 | 10.61 | % | | 710,000 | | | — | | | (50,714) | | | 659,286 | | | 710,000 | | | — | | | (52,622) | | | 657,378 | |
| Total long-term debt | | | $ | 3,901,866 | | | $ | (436,685) | | | $ | (71,494) | | | $ | 3,393,687 | | | $ | 3,930,041 | | | $ | (460,293) | | | $ | (74,160) | | | $ | 3,395,588 | |
| Reflected as: | | | | | | | | | | | | | | | | | |
| Current liabilities - Current portion of long-term debt | | $ | 29,000 | | | | | | | | | $ | 29,000 | |
| Non-current liabilities - Long-term debt | | 3,364,687 | | | | | | | | | 3,366,588 | |
| Total long-term debt | | | | | | | | | $ | 3,393,687 | | | | | | | | | $ | 3,395,588 | |
| Fair value - Senior notes - Level 1 | | | | | | | | | $ | 904,809 | | | | | | | | | $ | 907,993 | |
| Fair value - Term loans - Level 2 | | | | | | | | | 2,562,460 | | | | | | | | | 2,580,000 | |
| Total fair value | | | | | | | | | $ | 3,467,269 | | | | | | | | | $ | 3,487,993 | |
(1) On July 25, 2022, as a result of the pushdown accounting related to the Merger, the carrying values of the term loan facility due April 2028 and the 6.125% senior notes were adjusted to fair value.
Revolving Credit Facilities
The following table sets forth the Company’s availability under its credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| April 1, 2023 | | December 31, 2022 |
| Available | | Borrowings | | Letters of Credit and Priority Payables | | Available | | Borrowings | | Letters of Credit and Priority Payables |
| Asset-based lending facility | $ | 850,000 | | | $ | — | | | $ | 47,000 | | | $ | 850,000 | | | $ | — | | | $ | 48,000 | |
Cash flow revolver(1) | 115,000 | | | — | | | — | | | 115,000 | | | — | | | — | |
| First-in-last-out tranche asset-based lending facility | 95,000 | | | — | | | — | | | 95,000 | | | — | | | — | |
| Total | $ | 1,060,000 | | | $ | — | | | $ | 47,000 | | | $ | 1,060,000 | | | $ | — | | | $ | 48,000 | |
(1) Cash flow revolver commitments of $23.0 million matured in April 2023 and $92.0 million will mature in April 2026.
Term Loan Facility due April 2028 and Cash Flow Revolver
In April 2018, Ply Gem Midco, Inc. (“Ply Gem Midco”) entered into a Cash Flow Agreement (as amended from time to time, the “Cash Flow Credit Agreement”), which provides for (i) a term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $2,600.0 million, issued with a discount of 0.5% and (ii) a cash flow-based revolving credit facility (the “Cash Flow Revolver”) of up to $115.0 million. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Borrower (as defined in the Cash Flow Credit Agreement) under the Term Loan Facility and Cash Flow Revolver (together the “Cash Flow Facilities”). On April 11, 2023, the Company amended the Cash Flow Credit Agreement to replace the adjusted LIBOR rate with the Secured Overnight Financing Rate (“SOFR”) rate.
The 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. The Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) a Term SOFR rate with a credit spread adjustment of 0.10% (subject to a floor of 0.50%) plus an applicable margin of 3.25% per annum or (ii) an alternate base rate plus an applicable margin of 2.25% per annum.
Loans outstanding under the Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) a Daily Simple SOFR rate or a Term SOFR rate with (only in the case of Term SOFR rate borrowings with an interest period greater than one month) a credit spread adjustment of 0.10% (subject to a floor of 0.00%) plus an applicable margin ranging from 2.50% to 3.00% per annum depending on the Company’s secured leverage ratio or (ii) an alternate base rate plus an applicable margin ranging from 1.50% to 2.00% per annum depending on the Company’s secured leverage ratio. There are no amortization payments under the Cash Flow Revolver. Additionally, unused commitments under the Cash Flow Revolver are subject to a fee ranging from 0.25% to 0.50% per annum depending on the Company’s secured leverage ratio.
Subject to certain exceptions, the Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (i) certain asset sales, (ii) certain debt offerings and (iii) certain insurance recovery and condemnation events; and
•50% of annual excess cash flow (as defined in the Cash Flow Credit Agreement), subject to reduction to 25% and 0% if specified secured leverage ratio targets are met to the extent that the amount of such excess cash flow exceeds $10.0 million. No payments were required in 2022 under the year 2021 excess cash flow calculation.
Both the Term Loan Facility and Cash Flow Revolver may be prepaid at the Company’s option at any time without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.
ABL Facility due July 2027
On April 12, 2018, Ply Gem Midco entered into an ABL Credit Agreement (as amended from time to time, the “ABL Credit Agreement”), which provides for (a) an asset-based revolving credit facility of up to $850.0 million (amended from time to time the “ABL Facility”), a portion of which is (i) available to United States (“U.S.”) borrowers and (ii) available to U.S. and Canadian borrowers. In connection with the consummation of the Ply Gem merger, the Company and Ply Gem Midco entered into a joinder agreement in which the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the ABL Facility, and (b) a first-in-last-out tranche asset-based revolving credit facility of up to $95.0 million (the “ABL FILO Facility”) available to U.S. borrowers.
Borrowing availability under the ABL Facility and the ABL FILO Facility (collectively, the “ABL Facilities”) is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.
Loans outstanding under the ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
Loans outstanding under the ABL FILO Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 2.25% to 2.75% per annum depending on the average daily excess availability under the ABL FILO Facility or (ii) an alternate base rate plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL FILO Facility. Additionally, unused commitments under the ABL FILO Facility are subject to a 0.25% per annum fee.
Side Car Term Loan Facility due August 2028
On July 25, 2022, the Company entered into a Term Loan Credit Agreement (as amended from time to time, the “Side Car Term Loan Credit Agreement”) which provides for a term loan facility (the “Side Car Term Loan Facility”) in an original aggregate principal amount of $300.0 million. The Side Car Term Loan Credit Agreement will mature on August 1, 2028.
Loans outstanding under the Side Car Term Loan Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) a term SOFR rate plus 5.625% (subject to a SOFR floor of 0.50%) or (ii) an alternate base rate
plus 4.625%. Borrowings under the Side Term Loan Credit Agreement amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount.
The Side Car Term Loan Facility may be prepaid at the Company’s option at any time, subject to certain prepayment premiums if prepaid prior to August 1, 2026.
6.125% Senior Notes due January 2029
On September 24, 2020, the Company issued $500.0 million in aggregate principal amount of 6.125% Senior Notes due January 2029 (the “6.125% Senior Notes”). The 6.125% Senior Notes bear interest at 6.125% per annum and will mature on January 15, 2029. Interest is payable semi-annually in arrears on January 15 and July 15.
The 6.125% Senior Notes are unsecured senior indebtedness and are effectively subordinated to all of the Company’s existing and future senior secured indebtedness, including indebtedness under the Term Loan Facility, the Cash Flow Revolver, the Side Car Term Loan Facility, the 8.750% Senior Secured Notes and the ABL Facilities, and are senior in right of payment to future subordinated indebtedness of the Company.
The Company may redeem the 6.125% Senior Secured Notes in whole or in part at any time subject to certain prepayment premiums if the 6.125% Senior Secured Notes were to be redeemed prior to September 15, 2023.
Repurchase of 6.125% Senior Notes
The Company repurchased an aggregate principal amount of $21.7 million of 6.125% Senior Notes for $15.5 million in cash during the three months ended April 1, 2023. The repurchases, which resulted in the write-off of associated unamortized debt discount and deferred financing costs, resulted in a loss totaling $0.6 million, recognized as a loss on extinguishment of debt in the Condensed Consolidated Statements of Income.
8.750% Senior Secured Notes due August 2028
On July 25, 2022, the Company issued $710.0 million in aggregate principal amount of 8.750% Senior Secured Notes due August 2028 (the “8.750% Senior Secured Notes”). The 8.750% Senior Secured Notes bear interest at 8.750% per annum and will mature on August 1, 2028. Interest is payable semi-annually in arrears on January 15 and July 15 of each year.
The 8.750% Senior Secured Notes are secured senior indebtedness and rank equal in right of payment with all existing and future senior indebtedness, and are senior in right of payment to all existing and future subordinated indebtedness of the Company, including the 6.125% Senior Notes.
The Company may redeem the 8.750% Senior Secured Notes in whole or in part at any time subject to certain prepayment premiums if the 8.750% Senior Secured Notes were to be redeemed prior to August 1, 2026.
Other Information
The obligations under the Company’s debt agreements are generally guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions. In addition, the obligations of the Canadian borrowers under the ABL Facility are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions. In addition, the obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are guaranteed by Camelot Parent, which guarantee is non-recourse and limited to the equity interests of the Company. The obligations under the Cash Flow Credit Agreement, the ABL Credit Agreement, the Side Car Term Loan Facility and the Company’s various secured notes are also secured by a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor and in the capital stock of the Company, subject to certain exceptions and subject to priority of security interests provided therein.
Covenant Compliance
The ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days. The Cash Flow Credit Agreement includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
The Company’s debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. The Company is in compliance with all of its covenants as of April 1, 2023.
Interest Rate Swaps
The Company uses certain interest rate swaps to manage a portion of the interest rate risk on its term loans. The following table sets forth the terms of the Company’s interest rate swap agreements:
| | | | | | | | | | | |
| May 2019 Swap(1) | | April 2021 Swaps |
| Notional amount | $ | 500,000 | | | $ | 1,000,000 | |
| Forecasted term loan interest payments being hedged | 1-month LIBOR | | 1-month LIBOR |
| LIBOR floor (per annum - matches floor in hedged item) | 0.00 | % | | 0.50 | % |
Fixed rate paid on $500,000 and $1,500,000 notional amounts | 2.1680 | % | | 2.0340 | % |
Fixed rate received on $(500,000) notional amount | n/a | | (2.1680) | % |
| Origination date | July 12, 2019 | | April 15, 2021 |
| Maturity - Fixed rate paid | July 12, 2023 | | April 15, 2026 |
| Maturity - Fixed rate received | n/a | | July 12, 2023 |
| Fair value at April 1, 2023: | | | |
| Other current assets | $ | 3,969 | | | $ | — | |
| Other assets, net | $ | — | | | $ | 78,119 | |
| Other current liabilities | $ | — | | | $ | 3,969 | |
| Fair value at December 31, 2022: | | | |
| Other current assets | $ | 7,000 | | | $ | — | |
| Other assets, net | $ | — | | | $ | 95,361 | |
| Other current liabilities | $ | — | | | $ | 7,000 | |
Level in fair value hierarchy(2) | Level 2 | | Level 2 |
(1)The May 2019 swap was de-designated from cash flow hedge accounting in April 2021.
(2)Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market-based LIBOR yield curves. These interest rate swaps are classified within Level 2 of the fair value hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Note 8 — Accumulated Other Comprehensive Income
The following tables sets forth the change in accumulated other comprehensive income (loss) attributable to the Company by each component of accumulated other comprehensive income, net of applicable income taxes:
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Derivative Instruments | | Unrecognized Gain (Loss) on Retirement Benefits | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance, December 31, 2022 (Successor) | $ | (6,789) | | | $ | 40,962 | | | $ | 336 | | | $ | 34,509 | |
| Other comprehensive loss | (963) | | | (10,892) | | | — | | | (11,855) | |
| Balance, April 1, 2023 (Successor) | $ | (7,752) | | | $ | 30,070 | | | $ | 336 | | | $ | 22,654 | |
| | | | | | | |
| | | | | | | |
| Balance, December 31, 2021 (Predecessor) | $ | 22,741 | | | $ | (23,407) | | | $ | (4,946) | | | $ | (5,612) | |
| Other comprehensive income | 4,784 | | | 67,984 | | | — | | | 72,768 | |
| Balance, April 2, 2022 (Predecessor) | $ | 27,525 | | | $ | 44,577 | | | $ | (4,946) | | | $ | 67,156 | |
Note 9— Share-Based Compensation
Merger Transaction
Prior to July 24, 2022, under its long-term stock incentive plan, the Company had several share-based compensation award types, including stock options, restricted stock units and performance share unit awards (collectively, the “Pre-Merger Awards”). In connection with the Merger, outstanding vested stock option awards were canceled and converted to the right to receive a fixed amount of cash equal to the intrinsic value of the awards and were paid in August 2022. Performance share units (“PSUs”) granted to certain key, non-executive employees in March 2021 were paid in cash in September 2022 with the applicable total shareholder return metric determined using a per share price equal to the Merger Consideration and the EBITDA-based metric determined based on target performance.
Resulting from the Merger, unvested restricted stock units were cancelled and converted into a contingent contractual right to receive a payment in cash equal to the Merger consideration per award and unvested stock options were cancelled and converted into a contingent contractual right to receive a payment in cash equal to the intrinsic value of the awards, subject to the same vesting conditions as the original awards.
Resulting from the Merger, unvested PSUs that were granted to key employees and executives in March 2020 and to executives in March 2021 were cancelled and converted into a contingent contractual right to receive a cash payment from the Company equal to the product of the number of PSUs earned under the terms of the applicable award agreement, with the applicable total stockholder return metric determined using a per share price equal to the Merger consideration and the EBITDA-based metric determined based on actual performance as of the end of the three-year performance period applicable to such PSUs. PSUs granted in March 2020 vested and were paid out in cash during the three months ended April 1, 2023. PSUs granted in March 2021 to executives are expected to be paid out in cash in the first quarter of 2024. The Pre-Merger Awards are accounted for under ASC Topic 710.
As of April 1, 2023, the Company has liabilities of $14.9 million classified within employee-related liabilities on its Condensed Consolidated Balance Sheet related to the Pre-Merger Awards that will be settled in cash. For the three months ended April 1, 2023, the Company paid out $89.5 million of cash to settle Pre-Merger Awards, which mainly related to those PSUs granted in March 2020 and vested in March 2023.
Incentive Units
Beginning in the fourth quarter of 2022, pursuant to an incentive unit grant agreement, certain participants were granted incentive units in Camelot Return Ultimate, L.P. (the “Partnership”). The incentive units provide the holder with the opportunity to receive, upon certain vesting events and subject to Partnership repurchase rights and conditions, a return based upon the appreciation of the Partnership’s equity value from the date of grant. The incentive units vest over a five-year period on a straight-line basis. For the three months ended April 1, 2023, the Company granted 27 thousand incentive units at an average grant date fair value of $49.76 per incentive unit.
Compensation Expense
For the three months ended April 1, 2023, the Company recognized $2.5 million of expense from incentive units and a gain of $4.8 million from the Pre-Merger Awards. The gain recognized on the Pre-Merger Awards during the three months ended April 1, 2023 related to the Company updating its vesting expectations for certain PSU awards which have a range of payouts based on an EBITDA-based metric.
As of April 1, 2023, the Company estimates that unrecognized expense is expected to be recognized over a weighted-average period of 4.3 years totaling $46.5 million, of which $9.5 million relates to Pre-Merger Awards and $37.0 million relates to incentive units.
Note 10 — Income Taxes
The effective tax rate was 23.0% for the three months ended April 1, 2023 and 25.1% for the three months ended April 2, 2022.
For the Predecessor and Successor periods, the Company’s effective tax rate includes state income taxes, foreign tax rate differentials and changes in the valuation allowance.
Note 11 — Reportable Segment and Geographical Information
The Company is organized in three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions, which operate principally in the U.S. with limited operations in Canada.
•The Aperture Solutions reportable segment offers a broad line of windows and doors at multiple price-points for residential new construction and repair and remodel end markets in the U.S. and Canada. Its main products include vinyl, aluminum, wood-composite and aluminum clad-wood windows and patio doors, as well as steel, wood-composite and fiberglass entry doors.
•The Surface Solutions reportable segment offers a broad suite of surface solutions products and accessories at multiple price-points for the residential new construction and repair and remodel end markets as well as stone installation services. Its main products include vinyl siding and accessories, cellular polyvinyl chloride trim, vinyl fencing and railing, stone veneer and gutter protection products.
•The Shelter Solutions reportable segment designs, engineers, manufactures and distributes extensive lines of metal products for the low-rise commercial construction market under multiple brand names and through a nationwide network of manufacturing plants and distribution centers. The Company defines low-rise commercial construction as building applications of up to five stories.
Management monitors the operations results of its reportable segments separately for purposes of making decisions about resources and evaluating performance. Management evaluates performance on the basis of segment earnings before interest, income taxes, depreciation and amortization (“Adjusted reportable segment EBITDA”).
Corporate operating expenses are not allocated to reportable segments. Corporate and Other consists specifically of corporate operating expenses that are generally not allocated to reportable segments, related-party management fees, and other items that are not assigned or allocated to reportable segments. Any intercompany revenues or expenses are eliminated in consolidation.
The following table sets forth net sales, Adjusted reportable segment EBITDA and a reconciliation to income before income taxes:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Successor | | | Predecessor |
| | | | | | | Three Months Ended
April 1, 2023 | | | Three Months Ended
April 2, 2022 |
| Net sales: | | | | | | | | | |
| Aperture Solutions | | | | | | $ | 604,569 | | | | $ | 702,110 | |
| Surface Solutions | | | | | | 268,591 | | | | 332,990 | |
| Shelter Solutions | | | | | | 405,928 | | | | 531,738 | |
| Total net sales | | | | | | $ | 1,279,088 | | | | $ | 1,566,838 | |
| Adjusted reportable segment EBITDA: | | | | | | | | | |
| Aperture Solutions | | | | | | $ | 64,793 | | | | $ | 82,379 | |
| Surface Solutions | | | | | | 26,307 | | | | 56,472 | |
| Shelter Solutions | | | | | | 83,414 | | | | 89,568 | |
| Total reportable adjusted segment EBITDA | | | | | | 174,514 | | | | 228,419 | |
| Corporate and other | | | | | | (47,792) | | | | 24,829 | |
| Depreciation and amortization | | | | | | (72,662) | | | | (73,932) | |
| Interest expense | | | | | | (94,111) | | | | (44,106) | |
| Foreign exchange gain | | | | | | 2,017 | | | | 1,444 | |
| Loss on extinguishment of debt | | | | | | (563) | | | | — | |
| Other income, net | | | | | | 1,173 | | | | (5) | |
| (Loss) income before income taxes | | | | | | $ | (37,424) | | | | $ | 136,649 | |
The following table sets forth net sales disaggregated by reportable segment: | | | | | | | | | | | | | | | | | | | |
| | | | | | Successor | | | Predecessor |
| | | | | | Three Months Ended
April 1, 2023 | | | Three Months Ended
April 2, 2022 |
| Aperture Solutions: | | | | | | | | | |
| Vinyl windows | | | | | | $ | 567,193 | | | | $ | 657,796 | |
| Aluminum windows and other | | | | | | 37,376 | | | | 44,314 | |
| Total | | | | | | $ | 604,569 | | | | $ | 702,110 | |
| Surface Solutions: | | | | | | | | | |
| Vinyl siding | | | | | | $ | 132,185 | | | | $ | 161,200 | |
| Metal siding | | | | | | 60,437 | | | | 73,702 | |
| Injection molded siding | | | | | | 12,486 | | | | 18,773 | |
| Stone | | | | | | 18,019 | | | | 20,322 | |
| Stone veneer installation and other | | | | | | 45,464 | | | | 58,993 | |
| Total | | | | | | $ | 268,591 | | | | $ | 332,990 | |
| Shelter Solutions: | | | | | | | | | |
| Metal building products | | | | | | $ | 405,928 | | | | $ | 476,458 | |
| Metal coil coating | | | | | | — | | | | 55,280 | |
| Total | | | | | | $ | 405,928 | | | | $ | 531,738 | |
| Total net sales | | | | | | $ | 1,279,088 | | | | $ | 1,566,838 | |
Note 12 — Commitments and Contingencies
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company may become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, intellectual property, securities, personal injury, property damage, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Environmental
The Company’s operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of its employees and the end-users of its products; regulate the materials used in its products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could impact the Company's current and future operations.
The Company believes it is in material compliance with all applicable laws and regulations and has recorded a liability of $8.8 million at April 1, 2023 and December 31, 2022.
Litigation
The Company is a party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company is also included in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines or penalties and other costs in substantial amounts and are described below.
Stockholder Litigation
In January 2023, purported former stockholders filed two separate complaints challenging the fairness of the CD&R Merger. The complaints are captioned Firefighters’ Pension System of the City of Kansas City, Missouri Trust and Gary D. Voigt v. Affeldt et al., C.A. No. 2023-0091-JTL (Del. Ch.) and Whitebark Value Partners LP and Robert Garfield v. Clayton Dubilier & Rice, LLC et al., C.A. No. 2023-0092-JTL (Del. Ch.). In both complaints, the plaintiffs allege that CD&R and its affiliates controlled the Company prior to the transaction and that certain directors and officers of the Company, as well as CD&R and its affiliates, breached their fiduciary duties and engaged in conduct resulting in a sale of the Cornerstone Building Brands public stockholders’ shares to CD&R at an unfair price. The plaintiffs seek unspecified monetary damages, attorneys’ fees, expenses, and costs. The court consolidated the two cases, and on May 3, 2023, selected Whitebark Value Partners LP as lead plaintiff. The Company does not believe these claims have merit and intend to vigorously defend against them. The Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. The Company does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on its financial condition, although the outcome could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.
Note 13 — Earnings Per Common Share
Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding. Diluted income per common share, if applicable, considers the dilutive effect of common stock equivalents. The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per common share is as follows:
| | | | | | | |
| | | | Predecessor |
| | | | Three Months Ended
April 2, 2022 |
| Numerator for Basic and Diluted Earnings Per Common Share | | | |
| Net income applicable to common shares | | | $ | 101,526 | |
| Denominator for Basic and Diluted Earnings Per Common Share: | | | |
| Weighted average basic number of common shares outstanding | | | 127,129 | |
| Common stock equivalents: | | | |
| Employee stock options | | | 1,337 | |
| Weighted average diluted number of common shares outstanding | | | 128,466 | |
| | | |
| Basic earnings per common share | | | $ | 0.80 | |
| Diluted earnings per common share | | | $ | 0.79 | |
| | | |
Incentive plan securities excluded from dilution(1) | | | 72 | |
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
The Company calculates earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are “participating securities” and, therefore, these participating securities are treated as a separate class in computing earnings per share. The calculation of earnings per share presented here excludes the income attributable to unvested restricted stock units related to our Incentive Plan from the numerator and excludes the dilutive impact of those shares from the denominator. Awards subject to the achievement of performance conditions or market conditions for which such conditions had been met at the end of any of the periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
Earnings per common share is not presented for the Successor period as the Company’s common stock is no longer publicly traded either on a stock exchange or in the over-the-counter market.
Note 14 — Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information:
| | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended
April 1, 2023 | | | Three Months Ended
April 2, 2022 |
| Supplemental cash flow information: | | | | |
| Interest paid, net of amounts capitalized | $ | 89,062 | | | | $ | 45,879 | |
| Income taxes paid | $ | 1,521 | | | | $ | 1,562 | |
CORNERSTONE BUILDING BRANDS, INC.